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“The moment they get moved out of the (DC) plan, then they are getting retail fees at a much higher cost, and that is really eating into their retirement income. The other point that’s being made with DC is that you have the most savings the moment you are about to retire. And now you are going to be investing the most you ever had in the most expensive options available, with the least guidance.” – Kathryn Bush

 


 

It’s one challenge to accumulate adequate retirement income, quite another to turn those savings into income to keep one through a retirement that can stretch 20 or 30 years due to longevity gains.
Canadians in work environments that provide a defined benefit pension have an easier path to retirement than those with defined contribution schemes, or in many cases no retirement plan at all. With the former, the design is geared towards providing a lifetime stream of adequate income. DC involves decumulation, a word still unfamiliar in spellchecks and, it seems, to policymakers.
Kathryn Bush, a partner at Blake, Cassels & Graydon LLP, and chair of the Association of Canadian Pension Management’s (ACPM) national policy committee, tells ARIA that a lack of decumulation options is a significant problem for Canadians who need to turn savings into income.

With DB, the “whole system is set up to provide you with a pension during retirement. Decumulation is done by the design of the DB plan, and that’s where DC plans have been way behind,” she says.

To that end, the committee, which includes pension and retirement experts from different parts of the industry and Canada, is releasing a white paper on decumulation challenges and solutions. It’s expected to be out in early spring, says Bush.
“The sub-committee’s role was to go out and prepare a review of what was going on with decumulation and what we thought Canada ought to be looking at to improve that process, recognizing that we have DC plans that have been in existence for a period of time. There is now a significant amount of money accumulated and we are starting to see significant decumulation.”
Although there are large plans in Canada that have “sophisticated” decumulation procedures – in Saskatchewan for example, she says, – they are limited in the rest of the country. The paper is an attempt, she adds, to provide an “explanation of what we have, what works and what needs to be done … going forward.
“There are a number of things that need to be done, and there will be different views on how they need to be done … there will need to be a discussion.”
Of particular concern is what happens now when DC members retire, and they are required to move their money out of their plans. That’s driven by existing legislation, says Bush, who adds that if members don’t take a lump sum, the plan sponsor is required to purchase an annuity for them.
Fees in the Canadian DC environment are much less than what they once were, now providing members “good value for their money,” she says, adding they are often less than 100 basis points for most investment funds. However, when members pull their money from the plans, they are subject to much higher fees on the mutual funds they might buy … at times as high as 250 basis points.
“The moment they get moved out of the plan, then they are getting retail fees at a much higher cost, and that is really eating into their retirement income. The other point that’s being made with DC is that you have the most savings the moment you are about to retire. And now you are going to be investing the most you ever had in the most expensive options available, with the least guidance.”
Solutions at play in other countries include annuities, deferred annuities that kick in later in retirement, say 80 or 85, and the ability to remain in a plan after retirement, continuing to benefit from a low-fee structure and plan management. Pension experts such as Robert Brown and Moshe Milevsky have discussed annuities with ARIA, and in a letter to federal Finance Minister Bill Morneau, Kevin Fahey, chair of the Pension Investment Association of Canada (PIAC), details DC decumulation issues, and offering potential solutions.
“While there is significant consideration in the design of DC plans regarding accumulation of retirement assets, there is very little recognition in the pension system of the risk facing the growing number of Canadians relying heavily on DC plans as they approach and move into retirement,” he writes.
“They face both investment and longevity risks that are not easily managed by average citizens who are not actuaries or investment experts. There is a very real risk that many of these Canadians may outlive their retirement assets.”
While regulations governing Canadian Capital Accumulation Plans (CAPs) have “evolved over time,” they continued to reflect the view that these plans are supplementary to DB plans despite the fact DC plans are now the main retirement vehicles for many employees.
To address this situation, Fahey suggest establishing a “new type of qualifying annuity for CAPs, where the amount of payment may be adjusted for changes in expected longevity of the pool of annuitants.” This, he continues will permit the shifting of longevity risk from the provider of the annuity to the “pool of annuitants, which should improve annuity pricing and make such annuities more attractive to CAP members.”
Additionally, the ability to purchase a deferred annuity later in life, instead of limiting deferral to 71 as is now the case, would target longevity concerns, and worries about running out of money.
“The main objective of these proposals is to enable additional options for retiring CAP members,” writes Fahey.
Establishing a regime to keep members inside their DC plans post-retirement, and thereby benefiting from fee and management efficiencies, needn’t be the responsibility of an employer or sponsor, says Bush. Instead, it could present a business opportunity for banks, insurance companies and such.
“There are businesses opportunities that are available and I think there are things like PIAC’s suggestions for more qualifying annuities and rights to purchase deferred annuities that the government could do, and the market will follow quickly if those become available.
Poor decumulation in DC will impact the benefit that individual members receive … it is a very real problem.”

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