As pension regulators move forward with legislation permitting annuity options for certain capital accumulation plans, the Canadian Life and Health Insurance Association is calling on the federal government to make flexible annuities available for registered retirement savings plans, registered retirement income funds and tax-free savings accounts.
In March 2019, the federal budget proposed enabling advanced life deferred annuities for defined contribution plans, RRSPs and RRIFs, among others — but excluded TFSAs. It also proposed making variable annuities available for DC and pooled registered pension plan members.
In a new white paper, the CLHIA called the government’s proposals an “important first step,” but said they’ll fall short without further reforms to retirement savings plans, including making ALDAs available for TFSAs. It also called for expanding proposed tax legislation changes to allow freestanding variable payment life annuities, managed by a service provider, to pool participants from registered plans.
Currently, TFSAs do allow for RRIF-style drawdowns, but legislated liquidity requirements prevent the accounts from holding, or being structured like, life annuities. The CLHIA recommended the federal government allow Canadians to waive the liquidity requirements so they can structure their accounts as an annuity without facing a tax penalty.
“Canadians should be permitted to elect to use their TFSAs to supplement retirement income savings via life annuities in the same tax-effective manner as for individuals who simply draw down TFSA balances as a source of retirement funding,” the paper said.
With regard to VPLAs, the CLHIA said it’s “concerned” the federal government is underestimating the need for scale in order for the option to be viable. It noted a VPLA within a DC plan would need at least 100 participating members to make it economically viable. The insurance industry believes about five per cent of retirees would choose a VPLA per year. Based on that calculation, the CLHIA estimated only plans with 500 retirees per year — or more than 20,000 active members — could support an in-plan VPLA.
“A CLHIA survey of federal and provincial pension regulators indicates there are fewer than 10 DC pension plans with more than 20,000 active participants in existence,” the paper said. “Consequently, the CLHIA believes that these measures, as proposed, effectively prevent six million Canadians, who save through RRSPs and smaller DC plans, from accessing VPLAs.”
In addition, uptake on PRPPs has been much lower than expected, noted the CLHIA. Only five were in existence as of 2018 with a total membership of only 111 individuals. Quebec’s voluntary retirement savings plan — the province’s PRPP equivalent — has been “slightly more successful” due to rules mandating that employers offer employees a VRSP if they don’t have another workplace pension plan.
“No PRPP or VRSP has the necessary scale or asset value to offer a meaningful VPLA option,” the CLHIA said.
The white paper suggested the federal government make it possible for insurance companies, banks, mutual fund companies or benefits consultancies to be able to establish VPLAs that employers could participate in if they don’t have enough retirees to make the annuity viable within their own plan, or want to have it managed by a regulated service provider.
It’s also asking the federal government to move ahead with its draft tax legislation, changes to the Pension Benefits Standards Act and the pooled registered pension plans act in the first year of its mandate and to encourage provinces to make similar changes promptly.