Longevity risk an increasing concern
In recent years, Canadian DB plan sponsors have increased their focus on risk management and, while investment risk may be their biggest concern, longevity risk isn’t far behind, says Simmons.
“Over the last 40 years, the assumptions that a typical pension plan has been using to estimate how long their plan members are going to live have changed a number of times. The result has been, for a typical pension plan, a 25 to 30 per cent increase in liabilities.”
Two examples of Canadian DB pension plans transferring their longevity risk through annuity buy-ins are BCE Inc.’s $5-billion transfer to Sun Life in 2015, followed by a $35-million transaction between Canadian Bank Note Co. Ltd. and the Canada Life Assurance Co. in 2016.
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Robust asset gains in 2020 raised funded ratios to pre-global financial crisis levels.
Robust investment returns helped boost the aggregate funded percentage of all US multiemployer pension plans to 88% at the end of 2020, from 85% a year earlier the highest since before the global financial crisis at the end of 2007 according to consulting and actuarial firm Milliman.
The strong performance came despite a turbulent year of market volatility due to the impact of the COVID-19 pandemic. The volatility caused those same plans’ funded ratio to plunge to 72% during the first quarter of the year, which was the largest quarterly drop in funded percentage since 2007. That was followed by a rebound to 82% in the second quarter, which was the largest quarterly increase in funded percentage since 2007.