Population aging, implications for asset values, and impact for pensions plans: An international study

This is the capstone paper from a multi-year research agenda entitled “Population Aging, Implications for Asset Values, and Impact for Pension Plans: An International Study.” In this paper we:

• Outline demographic-economic scenario generators (DESGs) for Canada, the UK, and the US based on the approach developed by Oberoi et al. (2020);

• Identify the sensitivity of asset returns to demographic factors; and

• Illustrate the impact of varying the demographic factors on the finances of pension plans in Canada, the UK, and the US.

The pension plan risk measure that we analyze is based on the run-off of liabilities for current plan members. This is a very long-term measure. Our observations of the results are summarized as follows:

• Asset returns in Canada are quite sensitive to variation in the future path of the demographic ratio;

• Returns in the UK and the US are not very sensitive to variation in this ratio;

• Similarly, variation in the future path of the demographic ratio has a material effect on the finances of the Canadian pension plan, but not for either of the UK or US pension plans; and

• We model a portfolio of country-specific equities and bonds for each of the country-specific pension plans. The risk exposure in the Canadian pension plan to varying future demographic paths could be mitigated by employing a portfolio that includes non-Canadian assets.

The bottom line is that the finances of Canadian pension plans are more exposed to the demographic effect on investment returns (older populations are associated with lower investment returns) than plans in the UK or the US. The reason for this is the differing paths of the demographic ratio in the three countries. In addition, Canadian pension plans may be exposed to the “double whammy” of any plan-specific longevity risk exposure.