While the term decumulation may sound very technical and often leads to confusion among pension plan members, it’s actually quite simple — effectively, it’s the opposite of accumulation.
These two terms make up the typical retirement savings journey — the accumulation phase is the working years when capital accumulation plan members put away their nest eggs, while the decumulation phase is post-retirement when their savings are converted into an income stream.
“I remember when I was first exposed to this word — I thought it was fake and made up,” says Dianne Tamburro, principal of investments and defined contribution at Eckler Ltd. “But it’s now so familiar . . . . It’s that period in which an individual is spending their wealth in retirement that they accumulated in their working years.”
Within the broader concept of decumulation, there are different ways people can draw down their retirement income, including annuities, variable benefits, registered retirement income funds and life income funds.
However, views on decumulation — and particularly who’s responsible for making these options available — has evolved over the years. Traditionally, they’ve been provided by retail financial institutions, with people in workplace pension plans forced to take their savings out of their employer plan and into a RRIF or LIF at a bank or insurance company. In addition, capital accumulation plan sponsors have typically preferred not to extend their fiduciary responsibilities beyond their members’ retirements. “They were happy to just leave it at the end of the term of employment, but really, the tides are changing and sponsors are now recognizing there could be risk by not helping during this stage,” says Tamburro.
Indeed, the call for plan sponsors to offer in-plan decumulation is growing. There are several examples of both long-standing and more recent options across the country, from the University of British Columbia faculty pension plan’s variable payment life annuity to Bell Media Inc.’s pension plan’s variable benefits option.
It’s becoming more crucial, notes Tamburro, because CAPs aren’t new anymore and people are retiring with sizable balances. “They’re now at that stage where they need help in understanding all the options they have and really how to best maximize their savings and make it last as long as possible. And their plan sponsor is a trusted source.”
As views on decumulation evolve, so does the relevant legislation — but not quickly enough for many in the pension industry.
In terms of variable benefits, Ontario was the most recent province to legislate for it — in 2020 — but at the time, it was already available in every other province and jurisdiction in Canada except for New Brunswick and Newfoundland and Labrador.
However, it’s one thing to have the legislation and quite another for the insurers to offer it, says Tamburro. “Not all of them have the capability or desire to offer it because they feel a LIF checks most of the boxes that you get with a variable benefits program.”
Another recent legislative development in the decumulation space is variable payment life annuities, which are essentially a way of providing a consistent payment stream through a DC plan by pooling all of the assets and lives of the participating members. “You get a little bit more of a [defined benefit]-like payment in retirement than just you dealing with a life income fund that you have to manage on your own and figure out how much to withdraw each year,” says Stephanie Kalinowski, a partner in the pensions and employment group at Torys LLP.
However, many organizations in the pension industry have raised the fact that VPLAs are still limited to DC plans, says Tamburro, which really only represent 10 per cent of all CAPs. “It’s a valuable benefit that all plan types should be able to join and to only offer it to the chosen few that actually have a true defined contribution pension plan is disappointing.”
In addition, the government hasn’t yet set the minimum standard rules for VPLAs, despite introducing the concept in its 2019 budget. “We have heard there has been some progress at the federal level on regulations, so if those are released and implemented in the near future, that would be great,” says Kalinowski. “Then, I suspect, other provinces will likely jump on board by adopting those same rules or deferring to the federal regulator.”
An advanced life deferred annuity, which the federal government also introduced in its 2019 budget, allows a CAP member to pre-purchase an annuity with the payments starting no later than the end of the year the individual reaches age 71. For retirement savers, it offers flexibility in drawing down their assets.
“Even if you live longer than you expected, you’ll know you’ll have that, but it doesn’t require you to fork over a whole bunch of money and all of your assets early on in your retirement life,” says Kalinowski.
Regardless of which decumulation options plan sponsors are considering implementing, Tamburro advises they don’t wait until they have the perfect option on day one. “They should take steps to start rolling it out and grow it over time.”
Jennifer Paterson is the editor of Benefits Canada and the Canadian Investment Review.