The easiest clients for financial advisors to work with when planning for retirement are those fortunate enough to have a defined-benefit (DB) pension plan, which forms a base of dependable and predictable income during their golden years.
But most Canadians aren’t members of a DB pension plan and must rely on less generous employer-sponsored plans or their own retirement savings.
Thus, generating DB-like returns for those Canadians has meant taking on more market risk for higher returns, urging them to save more or retire later.
Those issues led Purpose Investments to create the Longevity Pension Fund, a mutual fund that offers the benefits of longevity risk pooling of DB pensions to produce a predictable lifetime retirement income stream.
Bradley Cann, vice-president and head of retail sales at Purpose, and Clayton Brown, a retirement income planner with the Longevity Retirement Platform, discuss the unique benefits the Longevity Pension Fund offers for advisors and their clients:
How can advisors use the Longevity Pension Fund to help their clients in retirement and how does it fit with the products they’re using currently?
Bradley Cann: The Longevity Pension Fund is basically a diversification tool for income that gives advisors another arrow in their quiver to help clients build a more successful retirement plan.
Clayton Brown: A traditional investment portfolio is a group of assets from which you are trying to create income and may be drawing down capital, whereas the Longevity Pension Fund follows the approach of a traditional DB pension plan, where the focus is on the income received and not the underlying investments. Payment levels can fluctuate, but the fund is designed to produce income for the rest of the client’s life.
Why use the Longevity Pension Fund? Can’t an advisor help clients generate retirement income by withdrawing a certain percentage from their portfolios each month and adjusting it over time according to the client’s circumstances?
Mr. Cann: The issue with drawing down capital is that the traditional way of doing it is selling underlying investments, which involves taxation issues as well as the variability of investment returns. The Longevity Pension Fund pays you an attractive lifetime income starting at 6.15 per cent for 65-year-olds through monthly distributions, which can go up over time.
The Longevity Pension Fund is the world’s first mutual fund to incorporate longevity risk pooling, like a pension fund, to provide income for life through a flexible and redeemable mutual fund structure available to Canadian retirees.
What clients are best suited for this solution based on factors such as age, net worth, and risk tolerance?
Mr. Cann: There are a range of potential clients, from wealthy people with too much money in their registered retirement saving plan who are concerned about passing some of it to their beneficiaries tax-efficiently, to those who aren’t looking to pass on their wealth. The Longevity Pension Fund was created for anyone who’s looking for a lifetime income stream. It can be used in conjunction with a DB or defined-contribution (DC) pension plan, or someone who’s using an annuity. It fits within virtually all existing retirement plans an advisor might have. Wealthy individuals may put less of their assets in the Longevity Pension Fund, while less affluent people invest more into the fund.
What portion of a client’s portfolio might be appropriate to invest in the Longevity Pension Fund?
Mr. Brown: It needs to be meaningful. Having someone put in 5 or 10 per cent of their assets won’t have a meaningful impact on their financial situation. The nice thing is that people can start with a lower amount and add to it continuously. It’s not just a one-time decision.
Can wealthier clients benefit from the fund and its pooling benefits if they can already live off investment returns without drawing down capital?
Mr. Cann: Yes. It could replace rental or business income after the sale of that asset and retain that income stream, creating a pension or using it to provide an income stream for a family member.
Can’t advisors achieve the benefits of risk pooling for clients using an annuity or similar insurance product?
Mr. Brown: An annuity can provide that benefit, but something like a guaranteed minimum withdrawal benefit product does not. There are some characteristics of those options that may not work for clients. One is that annuities lack the flexibility to change your mind, meaning you’re committed to the contract and, if life circumstances change, you’re stuck. Another would be the costs associated with offering those solutions. Generating a starting income stream of 6.15 per cent is partly possible because of our low fees, along with the risk pooling aspect.
Mr. Cann: Advisors can use annuities, but the yield they produce is much lower than the yield you would get from the Longevity Pension Fund given today’s interest rates.
You mentioned it could be used by clients in a DB plan. How would that fit?
Mr. Cann: Perhaps it might be a smaller portion if the client is more comfortable with her retirement outlook. But given that many pension plans are underfunded, having something like the Longevity Pension Fund will provide more retirement income and certainty.
How can an advisor incorporate this product into a client’s overall retirement plan and goals?
Mr. Cann: The Longevity Pension Fund works for clients who may be looking forward to a comfortable retirement or those worried about not having saved enough. It provides an income stream that, hopefully, will give them added certainty that they will hit their income needs when they retire. The Longevity Pension Fund allows advisors to tie retirement goals to a set income level and be able to achieve both using multiple solutions rather than just one.
Mr. Brown: From an advisor’s perspective as well, the fund provides more peace of mind for your client and allows them to feel more confident that they will have enough to go on those vacations and not outlive their savings.
Commissions, trailing commissions, management fees and expenses all may be associated with the Fund. Investments in the fund are not guaranteed, and the Fund’s value may change frequently. Past performance may not be repeated. Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received.
The content of this article is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security.
This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.
Advertising feature produced by Globe Content Studio with Purpose Investments. The Globe’s editorial department was not involved.