Larissa Dundon values her independence. After quitting her corporate gig five years ago to launch her own communications firm, she can’t imagine ever returning to a nine-to-five. Not even a coveted defined-benefit pension is enough of a lure.
“I have way more potential earning power, and I control where I want to go,” said the 37-year-old Vancouverite. “The payoff of having a pension isn’t worth it.” She saves for retirement in her registered retirement savings plan and tax-free savings account and considers herself fortunate that her husband has a pension.
But, she said, if someone offered her better retirement security that wouldn’t compromise her freedom as a small-business owner, she certainly wouldn’t say no. “If I had a standard amount coming in every month, I could supplement it and budget around that base.”
Experts say a recent change in federal pension rules suggests a way of giving Ms. Dundon and other Canadians like her access to reliable lifetime income in retirement, but they note that the new regulations will have to be greatly loosened before most people see any benefit.
The change came last year, when Ottawa passed budget legislation that allows people with defined-contribution pension plans and pooled registered pension plans to participate in what are known as variable payment life annuities (VPLAs). Though it will take some time for VPLAs to become available, the option will allow some retirees to exchange some or all of their retirement savings for monthly income.
When someone purchases a VPLA, their funds are pooled with those of other participants and invested in a combination of stocks and bonds. VPLAs are intended to be similar to DB pensions, with an important difference: While a DB pension provides a guarantee of the same monthly amount until the holder’s death, a VPLA payout can vary annually depending on investment performance.
Participants also benefit from something called longevity risk pooling: As retirees die, their funds remain in the VPLA, protecting the monthly income of those who live to advanced ages. That can pay major dividends in the long run.
According to a 2017 report from the U.S.-based Society of Actuaries, retirees with access to longevity risk pooling need 15 to 25 per cent less savings to achieve equivalent retirement security to what they could manage on their own.
VPLAs were created to address a major retirement-security gap. As DB pension membership declined from more than 30 per cent of private sector workers in the 1970s to roughly 10 per cent currently, Canadians increasingly saved through workplace DC pension plans or individual savings plans, meaning they have largely been left to manage their money on their own in retirement.
Experts say allowing VPLAs is a good first step, but that they aren’t viable in their current form and eligibility for them should be extended to all registered savings plans. DC plans represent just one-tenth of the $1.5-trillion Canadians have accumulated in individual retirement savings, and less than 7 per cent of working Canadians have them, according to Statistics Canada.
Given the membership scale needed for participants to enjoy the benefits of longevity risk pooling, VPLAs would be feasible only for the largest DC plans.
“We really need a cross-plan construct that would say, you can have access to a VPLA-like pension but you don’t have to belong to a specific employer – you could be from any employer or self-employed,” said Barbara Sanders, an associate professor at Simon Fraser University. She co-authored a November paper published by the Global Risk Institute and the National Institute on Ageing that advocated for what it called “dynamic pension pools.”
“We’d like to see large pools across plans, across provinces – the more people the better, from an actuarial standpoint … because then we can provide the most efficient lifetime pension.”
The Canadian Life and Health Insurance Association made a similar ask in its 2022 prebudget submission to the House of Commons finance committee. It called on the government to expand the option to all registered savings plans and lift liquidity requirements on tax-free savings accounts to allow those accounts to hold life annuities like VPLAs.
Stephen Frank, the association’s president and chief executive officer, said doing so would also give more retirees access to institutional, professional money management, which is cheaper and more sophisticated than the products they can get in the retail market.
Both Mr. Frank and Bonnie-Jeanne MacDonald, the director of research for financial security at the National Institute on Ageing and a co-author of the dynamic pension pools report, said the government appears open to broadening the list of eligible accounts.
There is some debate about who should administer dynamic pension pools. Mr. Frank said the CLHIA wants them managed exclusively by insurers, which are federally regulated and have capital and reserve requirements that ensure retirees receive pensions as promised.
But Ms. MacDonald pointed out these arrangements wouldn’t have the same payment guarantees as annuities, which leaves room for a range of providers, including large employers or groups of employers, insurers, professional associations or even provinces.
Orla Cousineau, executive director of pensions at the University of British Columbia, said trust in the university’s DC plan is the primary reason so many retirees have kept their assets there, including in its VPLA. The plan has had a VPLA since its inception in 1967. (When Ottawa changed the Income Tax Act in 1988 to prevent DC plans from offering fixed annuities, UBC’s plan was grandfathered.)
The VPLA has remained a popular option over the plan’s life, Ms. Cousineau said, particularly for retirees close to age 70. Plan members can opt in at any time in their retirement, and can put funds from their individual RRSPs toward it. In 2020, 24 of 122 new retirees transferred funds into the VPLA.
“It gives them the best of both worlds,” she said. “They have a flexible income option as well as an annuity, where they have longevity protection.”
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