Multiple stakeholder groups are praising the 2019 federal budget’s proposal to amend tax rules to allow for late-life and variable annuity structures.
The proposed advanced life deferred annuity would be a qualifying annuity purchase under registered retirement savings plans, registered retirement income funds, including trusts run by these accounts, as well as defined contribution pension plans, among others. It would be an annuity for life, deferred until the recipient turns 85.
“It’s a very important change,” says Roman Kosarenko, senior director of pensions at George Weston Ltd. “It will, for the first time, allow people with DC-type assets to pool their longevity in a more cost-efficient way. Right now, the only means of pooling longevity is through a guaranteed annuity from licensed annuity providers, which isn’t very cost-efficient for a variety of reasons.”
The budget also proposed allowing variable payment life annuities, which would be a new option for DC plan members when they reach decumulation. Current tax rules dictate funds must be transferred to a member’s RRSP or RRIF. With the proposed changes, the funds could go directly into a variable payment life annuity, which would provide payments based on the investment performance of the underlying annuity’s fund and the mortality of its annuitants.
The proposal of the new retirement tools comes after a coalition led by the National Institute on Aging — which includes the Association of Canadian Pension Management, the CARP, the Canadian Institute of Actuaries, the Canadian Life and Health Insurance Association, Common Wealth and the Pension Investment Association of Canada — requested in December 2018 that the federal government make these annuities a reality.
“In 2018, we asked Minister Bill Morneau and the Trudeau government to allow workplace DC plans to offer better pension options to their members — deferred pensions and pooled risk pensions — and they listened,” said Bonnie-Jeanne MacDonald, director of financial security research at the NIA, in a press release. “These measures offer a safer way to turn hard-earned retirement savings into lifetime pensions. At the end of the day, such pensions deliver more secure, predictable income for life, improving seniors’ financial independence and peace of mind.”
The CLHIA also noted industry groups have been asking for these changes for some time. “Permitting individuals to manage their retirement funds, while providing them with an additional option to select a secure, predictable retirement income, makes perfect sense,” said Stephen Frank, CLHIA’s president and chief executive officer.
One concern, however, is provincial pension legislation may need to be adjusted if Canada’s provinces and jurisdictions want to allow VPLAs for provincially regulated pooled registered pensions plans and DC plans, noted EY in its budget analysis.
Changes at the provincial level could take a long time to come through, says Kosarenko. “What’s important to note is that it won’t change things immediately because this is just a tax change.”
He also notes that within the current proposals, VPLAs wouldn’t be an option for people already saving for retirement through an RRSP or RRIF. Given how many Canadians use those types of accounts, he says there needs to be a way for them to take advantage of a similar type of a risk pooling.