BMO Insurance President and CEO outlines innovations in the annuities space meant to manage Canada's longevity crisis
For all the noise Canada’s pension funds and institutional asset managers make about longevity risk, financial advisors have an arguably higher degree of risk to manage. With a single client family taken in isolation, advisors need to prepare these clients for the increasing likelihood that they will live into their late 80s or 90s. They need to prepare clients to live their dream retirement, while working to ensure they don’t overspend before the onset of high medical bills later in life. It’s a form of risk that requires nuanced and multifaceted solutions, including some historic standbys.
Annuities can offer a useful backstop against longevity. Despite liquidity limitations, the prospect of some degree of retirement income paid by an insurer can offer clients protection against rising longevity and the risks of outliving their savings. Rohit Thomas, President & CEO of BMO Insurance, outlined what annuities can do for retiring clients now, how they’ve been adapted to suit changing demographics, and why advisors may want to look at annuities more closely for their clients.
“The biggest risk from a longevity perspective is the rate of mortality improvement,” Thomas says. “Over the last 100 years, even over the last 20 years, we’ve seen significant improvements in life expectancy. So the big variable is how much that will continue and at what pace. These are variables we have to understand and where we look to a diversified portfolio to manage those risks.”
Key in Thomas’ approach to longevity risk is the nature of spending at different ages. Early in retirement many clients will engage in more expensive activities to live their retirement dreams. As time passes, though, and people get older they may slow down and spend less. The trouble is that even if people are living longer, they’re not always living healthier for longer. As Canadians enter their 80s the likelihood that they will require possibly expensive support like home care or long-term care. Advisors have to plan for the likelihood that their clients will require these services at a time when their savings may already have been depleted by spending earlier in retirement.
Annuities offer a relatively simple solution to this problem. Whether as a term annuity or a life annuity, offering income for a fixed term or for life, these products can offer a degree of cash flow for clients that they might not be able to receive otherwise. Thomas adds, too, that an annuity can protect against market risk which many retirees may be unwilling to take on late in life, despite the growing consensus that some degree of growth exposure is now a necessity in portfolios post-retirement.
The key drawback that most will cite about annuities is their lack of liquidity. Thomas admits that advisors and clients will see the fact that they can’t access their capital until the end of their term as a reason not to purchase the annuity. Thomas argues that annuities can be presented as something like a defined benefit pension plan, an inherently illiquid asset that pays a guaranteed stream of income. Moreover, he sees annuities as one part of Canadians’ retirement savings, supplemented by their CPP and OAS benefits as well as more liquid savings which can be used to cover ad hoc expenses as they emerge.
As they look to manage the ongoing longevity crisis, Thomas and his team are working to educate advisors and clients on the utility of annuities. Much of that work, he says, involves resetting peoples’ understanding of an annuity, positioning the trade-off between liquidity and income as akin to the employer sponsored pension benefits that so many Canadians no longer have access to.
As advisors look for ways to manage their clients longevity risk, in the context of intergenerational wealth transfers and estate planning, Thomas argues that annuities come with one final benefit: they can transfer wealth.
“Any sort of insurance product is a very efficient way to transfer wealth. As advisors are having conversations about estate plannings, they may want to consider annuities, Because if something happens, those funds will be transferred to a client’s beneficiary,” Thomas says. “We’re trying to educate advisors on the estate planning side along with the longevity risk side. We know the average age of our wealth management customers and we want them to think about how they manage their longevity risk and how they manage their estate.”
