Before changes brought in by the federal government in the late 1980s, a mechanism to protect defined contribution plans against longevity risk used to exist. The University of British Columbia offered an option, known as the variable payment lifetime annuity, for itsplan members that provides a lifetime income. Through grandfathering, the arrangement continues despite the changes.

412: Number of members enrolled
$110 million: Value of the assets

The variable payment life annuity funds are invested in the staff and faculty pension plans’ balanced fund. The balanced fund is one of the five investment choices available to plan members.
Target-asset-mix

The arrangement offers members a choice between a four per cent and a seven per cent annuity, or they can put some money into both options. The original option was the seven per cent annuity, which worked on the notion that that was a reasonable expectation of what the fund would return. So those who put their money in that option could expect a fairly level income over their lifetime (the plan no longer advises members to expect a level income with that option, however, given that the current expectation for returns on the balanced fund is now less than seven per cent).

Read: Variable annuities touted as a ‘good third option’ for DC decumulation

The four per cent option, introduced in 1994, addresses those wanting to see their incomes increase. So if the balanced fund earned six per cent in the past year, those in the four per cent option would get an increase in their pension, while those who took the seven per cent option would get a bit less.

Those participating in the annuity also select a guarantee period for the duration of payments. So if a member chooses a guarantee period of 10 years but dies after nine years, there would be one year left for the beneficiary.

Here’s an example of the difference in monthly annuity payouts, based on a $500,000 balance and a 10-year guarantee period, to someone retiring at age 65 as of June 30, 2016, for payments starting on Aug. 1, 2016:

4%: $2,954.18
7%: $3,820.22

Each year, the plan adjusts the benefits according to members’ survivorship and the investment performance. If fewer retirees than expected have survived, the monthly pension increases. So what did that mean in a year of bad performance in the stock markets, such as 2009, and a good year, such as 2014?

In 2009, the combined adjustment was minus 19.78 per cent for those in the seven per cent option, which resulted in a decrease in the monthly pension that year to $3,860 from $4,812 in 2008 (the numbers assume a 65-year-old who retired on April 1, 1996, with an account balance of $500,000 and who chose a seven per cent annuity payable for life). In 2014, the adjustment was 4.84 per cent, and the monthly pension increased to $4,068 from $3,880 the year before.

Read: University of British Columbia outlines its strategy for decumulation

Information on the variable annuity also shows the impact of choosing the four per cent option. Those who retired on the basis above (with the seven per cent option) in 1996 would be getting roughly the same monthly amount in 2016 that they started with 20 years ago. Those who chose the four per cent option, however, would have started out at $3,207 in 1996 and be receiving $5,681 in 2016.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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