Canada’s $1 trillion pension assets may be insufficient, says a new report from Swiss Re, simply because we’re living longer than ever before.
The report, Longevity risk and protection for Canada (PDF) , says that underestimating life expectancy by just one year can push a pension fund’s liabilities up by 5 percent. Life expectancy at birth in the developed world has risen from about 65 years in 1950 to over 75 years today – about one extra year every six years – and is projected to reach about 88 years by the end of the century. In Canada, life expectancy at birth is expected to reach over 90 years by 2100.
While living longer has its benefits, it is a systematic risk, says the report. “It’s undiversifiable.” However, the report notes that the insurance industry can help by assuming some of the risk. Insurance or reinsurance may allow for pension plans and insurers to transfer their risk and indemnify themselves against future, unexpected increases in longevity.
Most of these transactions have taken place in the United Kingdom. But, the report says, pension funds and annuity providers in other countries should mitigate their exposure to increased life expectancy. Canada is one major market which has had – so far – only one longevity transaction.
The scale of the risk involved is usually measured by the size of the assets currently set aside by pension providers to pay tomorrow’s liabilities. According to Swiss Re, by 2020 the market for longevity risk solutions – including buy-outs, buy-ins, longevity re/insurance, longevity swaps, and longevity bonds – could grow to as much as USD $315 billion in total assets transferred.
Kurt Karl, Head of Economic Research and Consulting at Swiss Re says, “Reinsurers are often seen as the natural home for longevity risk, thanks to their ability to accumulate many uncorrelated risks across many countries. For reinsurers with exposure to mortality risk – the financial risk that people die sooner than expected – longevity risk can provide a partial offset.”