How to use the Longevity Pension Fund in your client’s portfolio

Purpose Investments’ recent introduction of the Longevity Pension Fund marks the world’s first mutual fund to incorporate longevity risk pooling, like a pension fund, to provide Canadians in retirement an income for life through a flexible and redeemable structure.

Fraser Stark, president of Purpose’s new Longevity Retirement Platform, discusses some of the most pointed questions financial advisors are asking about this new product:

Fraser Stark, president, Longevity Retirement PlatformSUPPLIED

Q: The Longevity Pension Fund focuses on Canadians in the retirement “decumulation” phase. Why this unique approach?

A: More than 1,000 people a day are retiring in Canada and living longer. A decline in defined-benefit (DB) pension plans, which mitigate the risk of outliving your money in retirement, has led to a growing social issue regarding income instability for Canadians. The Longevity Pension Fund functions much like a DB pension plan for investors. Research shows those with DB pension plans are happier in retirement – even if they have less money. Just the knowledge they have a steady paycheque is incredibly liberating.

Don’t advisors already have retirement income solutions for their clients?

There are other ways for advisors to solve longevity risks for clients, but there’s no optimal solution. Annuities are useful, but have limitations; investors are forced to give up a large portion of their life savings to an insurance company with limited or no ability to get the money back or change their minds. From an advisor’s perspective, those investments go ‘off-book.’ Balanced or income funds can be great products, but they don’t offer longevity risk sharing or help investors decumulate assets over time. The Longevity Pension Fund was designed to address all of these points.

The Longevity Pension Fund pays out 6.15 per cent at retirement age, rising up to 7.4 per cent for those in their mid-70s. How were these rates determined and how might they change in the future?

We modelled the fund using life expectancy tables and market-return scenarios with the conservative portfolio we created to invest this fund in. It gave us initial distribution rates for retirement age Canadians, grouped by birth year 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 we have a high degree of confidence payments can be sustained and be raised over time. The distribution level will be reviewed annually, looking at market returns and redemptions that have affected that confidence, and will be adjusted as needed. The fund is designed so that most adjustments should be increases.

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.

How can the distribution rate be higher than the level you aim to generate with the investments? Is that sustainable?

It’s a question we get a lot, especially when people first look at the fund: ‘How can you pay out 6.15 per cent when investing returns are just 3 or 4 per cent?’ That’s the impact of longevity risk pooling – funding returns from people who pass away early or redeem early to people who remain invested the longest. It’s sustainable through the life of a cohort.

What types of clients are most suited to this product?

It’s for anyone who wants to reduce the risk of outliving their assets greatly, which is a lot of people. Some feel they haven’t saved enough for retirement and are trying to take the assets they have and generate the most income annually. For many of them, the Longevity Pension Fund will provide a way to generate a higher income from their investments.

We modelled a scenario using a specific lump-sum in the Longevity Pension Fund versus withdrawing the same income annually from an identical invested investment portfolio. Using median return scenarios, investors deplete their retirement savings by age 89, whereas if they had invested with the Longevity Pension Fund, they will still have a growing income from age 89 on. That’s longevity risk pooling at work.

Another scenario is people looking to replace income from an income-generating asset such as an investment property, business or even a pension they want to turn into a lump sum. The Longevity Pension Fund can be a great way to continue to enjoy a known income stream such as from a business or rental property, hassle-free.

Are there any other reasons why an advisor would want to use this fund?

It shows great client care, as a thoughtfully designed product that solves an objective most clients have. It also allows advisors to accomplish this goal without taking assets off-book and giving up a portion of the financial relationship they have with that client.

The fund also relieves advisors of having to maintain a balanced portfolio and turning that into income, which requires frequent asset sales and rebalancing. With this fund, clients know their money is invested in a multi-asset, very conservative, pension-like strategy. The Longevity Pension Fund is intended to make the advisor’s life simpler.

The Longevity Pension Fund may potentially hold clients’ assets for 40-plus years. What happens if Purpose Investments is no longer around through change in ownership or bankruptcy?

In any future scenario, the fund would still be managed in accordance with its prospectus. The provincial securities regulators also play a role in ensuring that funds continue operations in a smooth manner and that the interests of investors are respected. There is also a third-party custodian of the fund, which takes possession of the financial assets, offering another layer of investor protection.

What support do you offer advisors who want to begin using the Longevity Pension Fund?

Advisor education is a top priority. We offer monthly webinars, investment calculators and client scenario playbooks. Our first of a series of videos is also up on our website and is worth watching. We recognize the fund is complicated relative to the structure of most mutual funds, so we are investing heavily in making sure people understand how it works.

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