Canadian Pension Funds Under-Reserved for Longevity Risk

The report, “Longevity Risk and Protection for Canada,” identified over CAD 1 trillion (about USD 1 trillion) of pension assets and immediate annuity reserves as “at risk” in Canada as of 2010. It recommends that pension plans assess their exposure to longevity risk and decide whether and how to pass this risk on to a third party.

According to a news release, underestimating life expectancy by just one year – a seemingly small miscalculation – can increase a pension fund’s liabilities by up to 5%.

Key findings in the report include:

•  Global pension assets exceed CAD 20 trillion, including about one trillion in Canada;

•  Global reserves backing immediate annuity books of business exceed CAD 637 billion, including about CAD 60 billion in Canada; and

•  The market for longevity risk solutions – including buy-outs, buy-ins, longevity re/insurance, longevity swaps, and longevity bonds – is expected to grow to CAD 180-315 billion in total assets transferred by 2020.

The news release said the above volume of transactions, assuming Canada shared proportionally in the total volume of deals, would imply a notional outstanding amount of around CAD 10-20 billion for longevity risk transferred in Canada over the decade through 2020.