Longevity Risk and the impact on funding Public Sector pension plans

1. Longevity Risk and the impact on funding Public Sector pension plans Atlantic Connection, Miami, Florida: July 9-11,2014 Marcia Tam-Marks, FSA, Morneau Shepell

2. Outline Introduction Severity of Longevity Risk Aging Populations Birth, fertility, death, life expectancy Mortality Tables Pension Systems & Implications of Aging Populations Aging and Public Pension Systems Mortality case study

3. Severity of Longevity Risk • OECD study January 2012 • Pension Assets approx. US $2,050 trillion • Liabilities > Assets • Private pensions partially funded • Public pensions unfunded • Recent studies estimate: • Each additional year of life expectancy adds 3-5% to pension liabilities

4. Severity of Longevity Risk • Underestimating life expectancy by 1 year would require an additional US$ 685 billion to maintain current funding levels

5. Aging Population What is an aging population? Median age of a population of a country increases due to: Declining birth rates Rising longevity

6. Aging Population Declining birth rates: Crude Birth Rate - the total number of births per 1000 of a population each year Total Fertility Rate - the average number of children that would be born to a woman over her lifetime if: She were to experience the exact current age-specific fertility rates through her lifetime, and She were to survive from birth through the end of her reproductive life

7. Crude Birth Rate

8. Total Fertility Rate

9. Longevity • Life expectancy is the average number of years a person can expect to live, if in the future they experience the current age-specific mortality rates in the population

10. Life Expectancy at Birth Source: UN Dept. of Economics & Social Affairs/ Population Division: World Population Prospects: The 2012 Revision, Volume 1: Comprehensive Tables *WHO – Life Expectancy at age 60 in 2012

11. Life Expectancy • Provides a measure of longevity in a population • Since pensions are payable in old age, life expectancy at birth does not provide a good indication of life expectancy during old age • Selected data shows a 3 to 8 year increase in life expectancy at age 60 compared to that at birth

12. Impact on Populations

13. Impact on Populations

14. Impact on Populations

15. Impact on Populations

16. Impact on Populations

17. Impact on Populations

18. Dependency Ratios

19. Dependency ratios

20. Dependency ratios

21. Dependency ratios

22. Dependency Ratios

23. Impact on Pension Systems • Declining fertility and improving mortality lead to a larger proportion of the population over retirement ages • Lower proportions of the population at working ages – assuming no changes in retirement ages • Increases in old age dependency ratio as fewer workers to pay for retirees

24. Impact on Pension Systems • Depends on how the pension systems are funded: • Public systems tend to be pay as you go • Increased contributions/cash flows to pay for the benefits promised • Private sector systems tend to be pre-funded • Increased scrutiny of methods and assumptions used to value them. May lead to increased contributions as well.

25. Impact on Pension Systems • Systems may be deemed unaffordable: • Changes in public sector systems • Types of private sector plans that are offered to employees

26. Mortality Tables

27. Mortality Tables • Consist of a probability of death at each age • Used in actuarial valuations to project future benefit payments • Generally reflect mortality patterns prior to the valuation date • Standard tables generally do not reflect potential improvements in mortality after the valuation date

28. Mortality Tables used in Practice • Caribbean • PA (90) Tables for Pensioners (UK Tables) • 1994 Group Annuitant Mortality Table (GAM 94) • Canada • 1994 Uninsured Pensioners Table projected to 2020 using scale AA (UP 9420) • 1994 Uninsured Pensioner Mortality Table projected generationally (UP 94G) • Canadian Pensioner Mortality 2014(CPM)

29. Mortality Tables used in Practice • USA • RP 2014 Mortality Tables • RP 2000 Mortality Tables • UK • CMI Tables • http://www.actuaries.org.uk/research-and-resources/pages/cmi-investigations. • SA Pension Plans • PA(90) –old tables

30. Mortality Tables Compared (Males)

31. Mortality Tables Compared (Females)

32. Financial Impact - Male The difference in price is as much as 12% (age 75 CPM2014pu) compared to UP-94

33. Aging & Public Pension Systems

34. Defined benefit Contributory Partially funded Assets < Accrued Liabilities Regular actuarial reviews Defined benefit Non-contributory except Anguilla, Bermuda, USVI Unfunded except Anguilla, Bermuda, USVI Actuarial reviews infrequent, if at all Public Pension Systems Social Security Civil Service

35. Use Present Values Annual cost is the value of future benefits earned in the year Liability determined as PV of accrued benefits Comparison made with current assets Use Future cash flows Annual cost is the amount paid out Projected costs presented as future cash flows compared with projected wage base (SS) or Gov’t revenues (CSP) to get pay-as-you-go rate Accrued liability seldom stated Projecting Future Pension Costs Private Plan Valuations Public Plan Valuations

36. Cost of Civil Service Pensions

37. Cost of Social Security Pensions

38. Cost of Social Security Pensions

39. Reducing Demographic ratio • Increase # Contributors/Tax Payers • Economic growth • Better compliance • Decrease (slow growth of) # of pensioners • Award pension at a later age • Make it harder to qualify

40. Reducing Financial / Replacement Ratio • Increase Avg. Insurable Wage/Taxes Per Person • Economic growth • Increase tax rates, new taxes • Include other forms of income in contribution/tax base • Decrease (slow growth of) Avg. Pension Amount • Reduce initial average new pension amount • Lower accrual rates • Larger early retirement factors • Longer averaging period for salaries/wages • Lower/no pension increases • For CS pensions, partial lump sum conversion rates should use current interest and mortality rates

41. Normal Retirement / Pension Ages

42. Concerns of Aging for Public Plans • Many countries still have retirement ages that were set more than 50 years ago • Most SSSs still offer relatively generous benefits • Most CSPs are still too generous • Many gov’ts do not know the “true” cost of their pension systems • If they knew, meaningful reforms may happen sooner

43. Mortality Case Study

44. Case Study • Pensioner Mortality Study • Previous actuarial valuations showed mortality losses, which was evidence that the assumed mortality table predicted more pensioner deaths than the actual experience • Valuations were based on 100% 1994 GAM Basic tables from the United States

45. Historical Gains and Losses

46. Plan Parameters • Public Sector • Final Average DB Plan • Contributions by ER and EE • Bi-annual indexation • NRD 50 to 65 • Active Liability/Total Liability =54% • Pensioner Liability/Total Liability =42% • Funded ratio < 100%

47. Data • Actual pensioner data and deaths used for the valuation was compiled over a period of seven years (2006 to 2013) • The data was checked for consistency from year to year and with the valuation data • A detailed data reconciliation was prepared and the final data focused on pensioners only and excluded beneficiaries

48. Study Parameters • The actual-to-expected death ratios (“A/E Ratio”) were calculated by comparing actual deaths to expected deaths using the following four common mortality tables: • GAM 94 Static Table • 90% of the GAM 94 Static Table • UP94G Table and • CPM Public projected using Scale B

49. Exposures

50. Pensioner Statistics • Average Monthly Pension $1,700 • Average Pensioner Age 70.7 years