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With guaranteed pensions and high-earning government bonds becoming a relic of the past and the average Canadian living longer, the need for a steady and reliable source of retirement income is more important than ever.

It’s what drove investment industry innovator Som Seif to create the Longevity Pension Fund — a mutual fund that combines the benefit of income generators such as a defined benefit (DB) pension or an insurance annuity with the flexibility of mutual funds.

“Our vision for Longevity stemmed from the challenges facing people near retirement and those in retirement to create their own defined-benefit pension,” says Mr. Seif, founder and chief executive officer of Purpose Investments Inc., the investment fund management company that launched the Longevity Pension Fund.

Mr. Seif didn’t have to look far for inspiration: Both his parents and his mother-in-law transitioned into a comfortable, financially worry-free retirement because they had DB pensions. However, one of his aunts wasn’t able to retire at age 65 as she hoped because she didn’t have the benefit of a corporate pension.

“She worked another five or six years and still works as a consultant today to earn additional income over and above CPP [Canada Pension Plan] and OAS [Old Age Security] to not have to dip into her savings,” he says. “She’s doing a job she loves but she didn’t have a choice. She’s earning income because she has to.”

DB plans were common decades ago but are being steadily replaced by less-generous defined contribution (DC) pensions that don’t provide guaranteed income streams once retired. Also, the majority of Canadians have no pension whatsoever. According to Statistics Canada, 37 per cent of Canadian workers were covered by a registered pension plan in 2017, the latest data available, down from 41 per cent in 1997. Of those, 67 per cent had a DB plan down from about 85 per cent two decades earlier.

The Longevity Pension Fund is designed to fulfil a similar function to a generous corporate or government pension for those without.

“What I saw was people with defined-benefit plans were living happier, in good and bad times, because they knew — just like when they were working — that there is a paycheque coming in no matter how long they live,” Mr. Seif says.

How it works

The Longevity solution is similar to having a DB plan within a mutual fund: Contributors are grouped by age and the assets are pooled by investment and mortality risk. The fund uses the same set of mortality tables used by pension managers and insurance companies to operate DB plans and annuities.

The major difference between Longevity and other retirement income solutions is flexibility: Contributors can redeem their unpaid capital (the initial investment less distributions received to date) in the fund at any time, move it from employer-to-employer like a DC plan, and invest more money at any time they choose.

Then, in retirement, members are grouped by age in three-year brackets — 65 to 67, 68 to 70, and so on. Payments are designed to start at 6.15 per cent annually and increase over time.

Because the payments are predicated on investment returns from the underlying assets, there is a risk they could drop but Purpose has designed the fund to be very conservative in its goals. The fund’s portfolio has a required return of only 3.5 to 4 per cent, meaning it doesn’t need to take on significant market risk to be successful. Keeping investment returns inside the pool when members leave allows Purpose to keep performance targets easily attainable.

With Longevity, people will be happier in retirement because they will know that their money will last as long as they do.

Som Seif, founder and CEO of Purpose Investments Inc.

As with a pension plan pool, some members will get more out of it financially than others simply by living longer, Mr. Seif says.

“By putting large numbers of investors together, it reduces the variability of the collective risk. That’s an important concept of this solution,” he says.

“Basically, you put $500,000 in, you get $30,750 of income back per annum and if you redeem or pass away, you get your unpaid capital back that wasn’t paid out, but any of the returns [on that capital] stay in the pool for the benefit of the remaining investors.”

This innovation enables Longevity to provide the regular distributions of a DB pension plan, while keeping the flexibility and liquidity of a mutual fund. Like most mutual funds, owners can hold this fund in a regular account or a registered retirement plan. It can also be held within a tax-free savings account.

The fund also promises transparency on all investments. It’s designed to provide a stable income stream for life while having access to unpaid capital, either taken voluntarily or at death.

“Some people live longer, some people live shorter, but pooling them together, they get the income certainty required that matches with their individual longevity,” Mr. Seif says.

Providing retirement security

An expected annual distribution return in excess of 6 per cent looks appealing given the unpredictability of equity markets and the inability of bonds and GICs to even keep up with inflation.

“Retirement requires a plan, and the problem is most people don’t have a plan,” he says. Nor do they have the secure income sources enjoyed by previous generations.

The result is a generation of retirees and pre-retirees with very little certainty that their money will last if they live longer than expected or if markets underperform.

“With Longevity, people will be happier in retirement because they will know that their money will last as long as they do.”

Longevity Pension Fund
by Purpose

What it is

The world’s first mutual fund to incorporate longevity risk pooling and provide income for life to retirees.

How it works

The low-fee mutual fund helps investors build savings in their working years, and once each investor is retired, will then pay monthly income for the rest of each investor’s life.

The benefits

The fund offers regular income distributions, like annuities and defined benefit pensions, while generating higher-income payments than traditional products.

The fee

Management fee of 0.60 per cent for the Series F, which is available to investors through their advisors.

Longevity by Purpose Logo

Commissions, trailing commissions, management fees and expenses all may be associated with the Investment fund. Always read the prospectus and talk to your advisor before investing. Investments in mutual funds are not guaranteed, and the fund’s value may change frequently. Income and distribution levels may increase or decrease from time to time and are not guaranteed. Past performance may not be repeated.

This article contains forward-looking statements (“FLS”). FLS include anything other than historical information, including expected returns. FLS depend on future events or conditions, are subject to risks and uncertainties, and are based on numerous assumptions. FLS are not guarantees of future performance - results could differ materially from those set forth in the FLS. The reader is cautioned to consider the FLS carefully, not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed. Purpose specifically disclaims any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Advertising feature produced by Globe Content Studio with Purpose Investments. The Globe’s editorial department was not involved.