Canada’s pension and tax regulations need to be updated to address the lack of decumulation options for the growing number of Canadians nearing retirement, according to Kevin Fahey, chair of the Pension Investment Association of Canada.
In a letter sent to Finance Minister Bill Morneau this week, Fahey noted that, while the regulations for capital accumulation plans have evolved over time, they still reflect assumptions that these plans are provided as supplements to defined benefit plans rather than in place of them.
“A number of structural changes in the economy challenge that view,” wrote Fahey in the letter. “The rise of high-tech professions, increase in labour mobility, industrial outsourcing and decline of corporate DB plans all point to a future where a great proportion of Canadians will have to rely on a combination of CPP and their CAPs, with no occupational DB benefits.”
To address the issue of decumulation, the Pension Investment Association of Canada is proposing that the government establish a new type of annuity for capital accumulation plans that will allow payments to be adjusted for changes in expected longevity among pools of annuitants.
According to Fahey, inflation-adjusted annuities and escalated and indexed annuities are the only qualifying annuities with unequal payments currently found under the federal Income Tax Act. “These new longevity-adjusted annuities will allow for shifting of the longevity risk from the annuity provider to the pool of annuitants, which should improve annuity pricing and make such annuities more attractive to CAP members,” wrote Fahey.
The association is also recommending a regulation to permit late-life deferred annuities as qualifying investments within capital accumulation plans, up to some limits. Currently, Canadians can only defer annuities to age 71, noted Fahey. But with the continual increase of average life expectancy, late-life deferred annuities will provide greater value to those who expect to live longer, he said, noting that such annuities have been permitted for 401(k) plans in the United States since 2015.
Fahey added that Canadians who buy these annuities at the time of retirement will receive a discounted price compared to if they bought them later at the age of 85.
“As larger cohorts of Canadians will be retiring in the near future, making such lifetime income options available and cost-efficient would not only improve the retirement outcomes and lower the lifetime investment risk, but also reduce the risk of some CAP members outliving their savings and falling onto the safety net provided by OAS and GIS,” he wrote.
*Correction: Story updated to reflect Kevin Fahey’s current role at the Pension Investment Association of Canada. He became chair of the association as of Jan. 1, 2017.