Mitigating longevity risk is key to solving the decumulation challenge, said Pat Leo, Purpose Investments Inc.’s vice-president of longevity retirement solutions, during a session at Benefits Canada‘s 2023 DC Plan Summit.
Referring to a recent survey, he noted defined contribution pension plan members were most concerned about market and sequence risks, while underestimating the impact of longevity risk. “They’re concerned about it, but they’re not that concerned about it. In fact, they’re almost pessimistic about how long they’re going to live. Yet when it’s measured, it’s the longevity risk that will be the most critical factor in retirement planning.”
Longevity risk is particularly significant in light of Canada’s ageing demographics, said Leo, noting roughly 500,000 Canadian workers are retiring each year and this trend is expected to continue for another 15 years. “We’ve got about a thousand Canadians turning 65 every day. . . . If you’re not retaining those assets and those assets are leaving [your plan], it’s actually going to impact the remaining members in the plan.”
Also speaking during the session, Fraser Stark, president of the longevity retirement platform at Purpose Investments, outlined how longevity risk pooling can support plan members during the decumulation phase. “Even though the income level is not guaranteed, the income is, in most cases, higher. For accepting some variability, people can expect a higher average outcome.”
He shared an example in which three retirees — each age 65 and with $35 in savings — took different approaches to saving and spending in retirement. “Danielle decides to spend very frugally. She’s really concerned about running out of money, so she passes away and leaves $4 in her estate. Claude, too, is very conservative, so he decides to spend $1 per year. Unfortunately, Claude passes away fairly early and leaves $30 in his estate. And then finally, [there’s] Sophie. She wants to enjoy life, so she decides to spend $2 per year. And unfortunately, she runs out of money.”
When longevity risk pooling is applied to the examples, each retiree is able to spend the same amount of money without depleting their retirement savings. “Danielle is able to spend $2 per year [and] she never runs out of money. Claude, again, passes away early, but he was able to spend $2 per year. And then, finally, Sophie was able to spend her $2 per year and not run out of money. . . . By sharing that pool, everyone was . . . able to increase or maintain their living standard but have enough money for their entire lives.”
Longevity pooling can be introduced to a DC plan through features such as in-plan life income funds and registered retirement income funds, said Stark. And by remaining in a workplace plan, members can take advantage of lower investment fees than an external decumulation vehicle.
“We don’t know how long we’re going to live, so that uncertainty is huge. DB plans are closing, so that [longevity] risk is transferred from the employer to the plan members. Inflation is really a hot topic right now. . . . We need to be able to provide plan members with access to solutions that will make their retirement a lot easier.
“There’s innovation happening in Canada and that’s going to continue and I think that will make plan sponsors’ jobs a lot easier going forward.”
Read more coverage of the 2023 DC Plan Summit.