From plan members to plan sponsors to providers, everyone in the industry is talking about decumulation. Even governments are getting in on the action. But what will be the effect of the new products?
“The options will meet the needs of some employers, but we’re not heading for a revolution just yet,” said Marc-Antoine Morin, assistant vice-president and chief product owner of group retirement savings member engagement at Manulife, during a session at Benefits Canada‘s 2020 DC Plan Summit in Montreal in February. “That would require massive legislation change and changes to behaviour so that employees make choices at retirement.”
He provided an overview of the latest products available to plan sponsors following changes at both the federal and provincial levels. “It’s great that we have these products that will lead to better outcomes for our plan members.”
One example — variable benefits — permits the creation of an account that allows decumulation directly from the plan. “The million-dollar question is: How does it compare to a [life income fund]?” asked Morin. “The only real difference is that it requires paperwork. To some extent, it’s a solution in search of a problem; although, if the plan is self-administered — i.e., there’s no provider — it does make sense.”
Morin is more enthused by the federal government’s proposed advanced life deferred annuity. “It’s finally a form of longevity insurance [for DC plans],” he said. “From a financial planning [perspective], it makes so much sense and allows you to defer more taxes. It might also limit [old-age security] claw-back. It fills a real need, but will customers buy it when they are being asked to buy something to get a return in 15 to 20 years?”
The other option put forward in the 2019 federal budget is the variable payment life annuity. While there are still a lot of unknowns, it works like a co-operative of retirees, noted Morin. “Retirees can put a proportion of their money in the pot and an actuary figures out how much to withdraw each year. Income will therefore depend on asset performance and the longevity of your colleagues.”
The main issue with the VPLA option is having a sufficient number of plan members in the co-operative. “At the moment, the plan sponsor needs to own the decumulation program (a retirement income fund or LIF) as the government doesn’t allow pools of pools,” he said. “Maybe we could get to a situation where a service provider could create its own pool of members.”
The other issue comes from the “V” in VPLA. “Variable means it’s subject to change and infers a lack of guarantees. Is it actually a lifetime benefit? If not, it’s hard to see how it’s going to work.”
Read more stories from the 2020 DC Plan Summit.