CD Howe Institute study says emerging options significantly increase retirement choices
Retirement planning in Canada needs to embrace a broader range of options according to a new study.
With changes to defined-contribution (DC) pension plans and Group Registered Retirement Savings Plans (Group RRSPs) there needs to be a shift away from simply building assets to providing a lifetime income for retirees.
In the CD Howe Institute report, ‘Money for Life: Putting the “Pension” Back in Employee Pension Plans,’ authors Idan Shlesinger, Michelle Loder and Gavin Benjamin state the case for policymakers and industry stakeholders to consider a more comprehensive vision for DC plans and Group RRSPs.
They note that there is growing membership of these workplace pension plans, which have over $1.5 trillion in assets, and call for DC plans to help retirees better meet the challenges of the decumulation period – when they stop building their pension pot and start drawing down on it.
“With so much to be gained, all stakeholders should grasp the opportunity that is before us to enhance our retirement system as well as improve the financial and total wellbeing of Canadians, during both their working years and in retirement,” says Loder.
Options available
The report highlights the three main options open to retirees when they start taking an income from their accumulated capital.
- an investment account with withdrawal options such as life income funds (LIFs) and registered retirement income funds (RRIFs) for assets originating from DC pension plans or Group RRSPs.
- variable benefits accounts within DC registered pension plans that allow for gradual income withdrawals on a similar basis to LIFs, a relatively new option taking advantage of the scale and legal structure of the DC pension plans.
- annuities sold by insurance companies, which have been purchased by relatively few retirees. Individual annuities insure against investment and longevity risk, but the full protection comes at a cost.
The authors acknowledge emerging innovations, notably Variable Payment Life Annuities (VPLAs) and Advanced Life Deferred Annuities (ALDAs).
VPLAs, which pool the investment risk of retired employees within a DC plan and providing a monthly pension based on assumptions about investment and mortality experience and is adjusted periodically to reflect the pool’s actual experience.
Meanwhile, ALDAs pay an annuity which could start as late as the end of the year in which a retiree turns 85. This option is limited to 25% of the individual’s DC account balance and a maximum $150,000 being used to buy an ALDA.
“Many employers already sponsor DC plans for their employees, in which case they already have the infrastructure in place to add features such as variable benefits and VPLAs in an efficient and cost-effective manner,” says Shlesinger. “Employers are also well positioned to advocate for innovation from service providers and for legislative changes that enhance the decumulation landscape in Canada.”
Required action
The report suggests five things that policymakers should do to improve retirement outcomes for Canadians in the next decade:
- Regulatory harmonization of locking in and unlocking rules across jurisdictions to allow a single set of rules to apply to DC assets during retirement, irrespective of the jurisdiction under which the accumulation has taken place.
- The regulatory harmonization of variable benefit payment, variable payment lifetime annuity and LIF maximum withdrawal rules irrespective of the jurisdiction in which the assets have accumulated.
- Legislative and regulatory support for pooled decumulation vehicles that permit transfers of retirement assets including those derived from employer sponsored pension plans, personal RRSPs, etc.
- Specific decumulation guidelines for program sponsors to provide support for the adoption of decumulation frameworks.
- Support and guidance for the provision of decumulation-specific retirement advice for retiring members.
