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2021
Industry leadership in focus
Canadians who joined defined contribution plans more than 20 years ago are now reaching retirement, and these savings might be their primary source of income in retirement, says George Turpie, senior vice-president, group retirement savings and investments at Canada Life. In an Up Close interview with Benefits and Pensions Monitor, he says the maturity of the market means that as more people rely on their defined-contribution plan savings for retirement income, the focus is shifting to decumulation as they look for ways to ensure their savings last their lifetimes.
What are some of the options for decumulation?
Registered retirement income funds [RRIFs], life income funds [LIFs], or some variation of a payment from a variable benefits arrangement are the most common options. The rules and regulations for these are very similar, although LIFs and variable benefits from pension plans are subject to maximum payments. Plan members can also buy an annuity that pays a fixed
amount for the rest of their lives, however long those lives are. It’s a good option, although not a very popular one, because of the perceived cost of the annuity and the perceived value they provide.
Is the perception correct?
Some people are reluctant to purchase an annuity because they fear they’ll pass away early and their loved ones will miss out on getting a portion of their savings. It’s true that annuities transfer funds from people who live less-than-average lifespans to those who live longer than the average. This allows the product to guarantee a lifetime income. However, it’s possible to purchase annuities with different levels of guarantees, such as 10 years of payments for a return of principal.
The investments backing an annuity are also quite conservative. Investing in an annuity is essentially investing in a fixed-income instrument, and you’re not benefiting from the returns of a broad investment portfolio. This affects the amount of income that can be guaranteed.
With that said, annuities do have a valid place among decumulation options because they reduce income volatility by providing a fixed stream of payments.
The 2023 federal budget referred to using pooled registered pension plans [PRPPs] as a decumulation option. Does this fit into the spectrum of decumulation solutions?
Yes, it does, but there’s some background context that needs to be considered, and further legislative developments are still needed before PRPPs can be a strong, viable option for more Canadians.
Let’s go back to an earlier federal budget announcement for context. The 2021 federal budget created a framework for variable payment life annuities [VPLAs] to allow pension plans to offer these to their members. I’m quite an advocate for VPLAs because they will help members manage their longevity risk, but still have some investment flexibility, which is a limitation of an annuity.
Structurally, a VPLA is essentially a risk-sharing pool that shares longevity risk among members. For it to be effective, a VPLA needs to have a significant number of members. However, when the VPLA legislation was created, it only allowed pension plans to offer them.
Due to this legislation, if a plan has a group registered retirement savings plan [group RRSP], it’s not able to create a VPLA because it’s not a pension plan. Even if a plan is a pension plan, it needs to be of a large enough size to have the critical mass required for effective risk pooling. Therefore, in current and practical terms, effective VPLAs are limited to very large pension plans.
Fast forward to the recent federal budget, and what the government may be suggesting is that the PRPP framework may now allow members from a group RRSP or smaller pension plans to roll into a PRPP. This could be done by allowing insurance companies, for example, to create a pooled VPLA that would be open to members from any pension plan and group RRSP. It will be important to see pension regulations for PRPPs and VPLAs develop further, as well as consider the needs and perspectives of providers, plan sponsors, and members. For this to be effective, the regulations will need to be sufficiently flexible to allow providers to offer products that will be easy for members to use.
What is the biggest challenge to decumulation?
The biggest decumulation challenge is planning for the uncertainty – not only regarding future economic scenarios, but also uncertainty in terms of how long retirement lasts.
This uncertainty around the decumulation period makes it one of the most complex financial planning issues of our lives. Are you going to live another 10, 20, 30, or 40 years? That uncertainty in the time period can be very significant.
This raises the question of how you are going to stretch a lump sum of money over a period if you don’t know how long it’s going to be. If it’s 30 or 35 years, will it last?
The other big challenge is the uncertainty around the economic environment. We don’t know what’s going to happen with inflation leading up to and into retirement. We don’t know what’s going to happen with investment performance, returns, and volatility. So there are significant
challenges in dealing with the uncertainty of investments and spending patterns.
How can plan members address the economic environment’s uncertainty with their decumulation options?
While it’s not possible to eliminate risks completely, you can mitigate and manage risks by using a mix of decumulation options.
For example, purchasing an annuity reduces the risk of income volatility. However, it may create other risks because you might be getting a fixed payment with no inflation protection.
Another example of decumulation options that help reduce risk are target date and target risk funds. They help members invest in risk-appropriate, well-diversified portfolios for an average person. However, members approaching retirement have different circumstances, so the one-size-fits-all landing spot of a target date or target risk fund may not be appropriate.
As decumulation solutions become more complex and people deal with high inflation, volatility, and longer life expectancy, they need innovative solutions and options to fit with varying circumstances to be suitable for each individual plan member.
At Canada Life, we’re very conscious of the many financial risks members are exposed to during retirement. That’s why we just launched a new decumulation product ‒ the Canada Life retirement funds. These funds are specifically designed to help members who are nearing or in retirement protect and grow their savings. They do this through a unique mix of underlying components, which help guard against market volatility and inflation and still allow members to participate in the benefits of rising markets. For example, regarding inflation, these funds have specific sleeves that target investment strategies that move in step with inflation – things like real return bonds or real estate.
We built these products with a particular focus on lower-volatility investment selections, but they still offer exposure to equity markets and credit risk premiums to get the growth needed to help retirement savings last longer.
Will plan members be able to pick their risk profile?
The Canada Life retirement funds offer conservative, moderate, and balanced options. Each member is going to have different scenarios, expectations, and other investment assets. They might have a defined benefit plan, they might have income properties, they might have other savings or other plans – or they might have none of those, and these funds will be their primary source of retirement income. With this product, each member can complete an investment personality questionnaire and find a fund that matches their risk tolerance and investment goals in retirement.
If you could wave a magic wand and solve the decumulation challenge, what would you wish for?
The decumulation challenge really starts before retirement. We know many members don’t feel the urgency or have motivation when it comes to making long-term investment decisions to save for retirement.
We know default features like auto enrolment, auto contributions, maximum contributions, and automatically escalating contributions improve participation and outcomes. These features help more members participate, contribute, and maximize their employer contribution match.
If members need to opt into a group plan to save for retirement, that can lead to suboptimal outcomes because of decision inertia – they haven’t got around to signing up yet. But if you can turn that around by requiring members to opt out, this can help ensure that members are getting the most out of their group plan and are able to retire well.
And post-retirement, I’m excited about the possibility and future of VPLAs that we discussed earlier.
Our people-first approach to wealth and wellbeing means we’re trying to create ways to deliver more meaningful outcomes for plan members through retirement. To do this, we need plan designs that better understand member decision- making and reduce complexities.
I think products like the Canada Life retirement funds help put us on the right path. But I know there is even more we can do. So I’m excited about the possibilities and commitments we’re making to help members retire well.
Spotlight
For more than 175 years, our customers across Canada have trusted us to provide for their financial security needs and to deliver on the promises we have made.
Today, Canada Life provides insurance, wealth management, and healthcare benefit products and services in Canada, the United Kingdom, Isle of Man and Germany, and in Ireland through Irish Life.
At Canada Life, we’re focused on improving the financial, physical and mental well-being of Canadians. Our customers across Canada trust us to provide for their financial security needs and to deliver on the promises we make.
That trust is built on the dedication, skill and energy of our employees and advisors and their commitment to our customers and to our communities.
Canada Life is a subsidiary of Great-West Lifeco Inc. and is a member of the Power Corporation group of companies.
Company Profile
1847
YEAR FOUNDED
10,500
NUMBER OF EMPLOYEES
$2.3 million
raised by employees for charitable organizations
12 million
customer relationships
39.6%
reduction in greenhouse gas emissions since 2013
Bio
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Years of Experience
25
Tenure at current position
2017 - Present
BAsed In
Toronto, Ont.
Fast Facts
Gaining international experience and learning about different people and cultures
GEORGE TURPIE
senior vice-president, group retirement savings
and investments at Canada Life
Before becoming CEO of Fundserv, Karen Adams held a variety of leadership roles around the world – and she learned that listening and understanding are key to both providing service and developing talent
Read on
“Even if a plan is a pension plan,
it needs to be of a large enough size to have the critical mass required for effective risk pooling”
george turpie,
canada life
“The biggest decumulation challenge is planning for the uncertainty – not only regarding future economic scenarios, but also uncertainty in terms of how long retirement lasts”
george turpie,
canada life
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2011
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2012
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2021
Milestones
Published 03 Jul 2023
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“The biggest decumulation challenge is planning for the uncertainty – not only regarding future economic scenarios, but also uncertainty in terms of how long retirement lasts”
george turpie,
canada life
“Even if a plan is a pension plan, it needs to be of a large enough size to have the critical mass required for effective risk pooling”
george turpie,
canada life
Published 03 Jul 2023
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Copyright © 1996-2023 KM Business Information Canada Ltd.
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Terms of Use
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Copyright © 1996-2023 KM Business Information Canada Ltd.
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