The introduction of more flexible annuity options for capital accumulation plans and reform to prescription drug coverage are among the recommendations by the Canadian Life and Health Insurance Association for the 2019 federal budget.
In a letter to the Ministry of Finance, the CLHIA highlighted the increasing need for Canadian retirees to convert some or all of the savings accumulated in their defined contribution pension plans, registered retirement savings plans, registered retirement income funds, pooled registered pension plans and tax-free savings accounts into guaranteed lifetime income streams.
The CLHIA suggested annuities payable for life as the most effective way to provide guaranteed incomes. However, it noted requiring Canadians to wait until they retire to choose these options exposes them to significant interest rate risk.
“One way to minimize this risk and increase retirement incomes is to allow gradual annuity purchases prior to the cusp of retirement, even though income payments from those annuities will not start until retirement or later,” stated the letter. “Unfortunately, such ‘laddering’ of ‘deferred annuity’ purchases over several years appears to conflict with current tax and pension law — although such purchases were permitted prior to 1980, and are still permitted in some pension plans.”
Due to increasing life expectancies and low interest rates, the letter also recommended permitting some further flexibility beyond retirement, allowing people in tax-deferred plans to retain control over their investments and exposure to market growth to a later date. “As well, allowing consumers to use part of their tax-deferred savings prior to, for instance, age 65 to provide a guaranteed income starting at age 85 or later may provide significant longevity protection to individuals, and reduce the long-term cost of public income security programs,” noted the letter.
Since many Canadians are using TFSAs to supplement their retirement income, some people may want to exchange TFSA liquidity and residual value on death for higher guaranteed lifetime incomes, according to the CLHIA.
“Allowing Canadians to waive liquidity rights would permit life annuities to be held within TFSAs, efficiently meeting demand for guaranteed lifetime income,” it wrote. ”Such a waiver would not be needed until a holder elects a guaranteed income (at age 55 or later), preserving liquidity until that time. These options would allow individuals within tax-advantaged savings and retirement plans to lock in guaranteed income streams at opportune times while adding no cost to the tax system, since those savings are already exempt from tax reporting until actually paid out of such plans.”
In its letter, the CLHIA also called on the government to work with life and health insurers to reform prescription drug coverage in Canada, helping to improve access to medicine at affordable prices, while protecting workplace benefits plans and ensuring tax dollars are used wisely.
It highlighted three key elements for any reform of the prescription drug system: protecting and enhancing existing benefits plans; providing drug coverage for everyone; and ensuring affordability for consumers and taxpayers.
In terms of providing drug coverage for everyone, the CLHIA recommended federal and provincial governments establish a shared list of the medicines that everyone should be covered for through workplace plans for those who have one, individual plans for those who choose them and by government for those who don’t.
“This list of drugs would be based on scientific evidence and include expensive drugs when needed and drugs for rare disorders,” the letter noted. ”Current government formularies differ between jurisdictions, and exclude many medically appropriate drugs.”
In terms of ensuring drug affordability, the CLHIA said it believes meaningful reductions in prescription drug prices and improving access for all Canadians can be achieved by working within the current system. It referred to the pan-Canadian Pharmaceutical Alliance’s move to bring down costs for public plans.
“However, the current approach only leverages half the buying power of the Canadian market in any negotiation and leaves those Canadians with private insurance, or paying out of pocket, to fend for themselves,” the letter noted.
With that in mind, the CLHIA suggested private plans be included in the pCPA, noting this would allow governments and insurers to negotiate the best prices using the entire Canadian market volume while ensuring all Canadians are treated fairly and pay the same price for the same drug.
The CLHIA also said the industry views the proposed changes to the Patented Medicine Pricing Review Board, published in 2018, are essential for ensuring the affordability of prescription drugs in Canada.
“We believe that the proposed framework strikes an appropriate balance that can contribute to an environment conducive to innovation in the pharmaceutical industry, while controlling the costs of prescription drugs. We would urge the government to move ahead with the PMPRB modernization framework.”