Beware the gender bias in capital accumulation plans

The difference in male and female annuity rates can have a big impact on each gender’s income at retirement. You may wonder why it matters given that almost nobody is buying annuities these days. There’s no question that the high cost of annuities in today’s environment of low interest rates is driving them out of favour, but that’s not the real issue.

The problem is that virtually every income-projection tool in the capital accumulation plan industry uses male annuity rates to estimate future retirement income. From that starting point, a 65-year-old female with $100,000 in retirement savings is in for two surprises. The first is just how little income $100,000 will provide (currently, about $5,700 a year). The second is she’ll receive more than $300 less than her male counterpart.

Why do men get more mileage from their savings? Annuities are paid for life, and with men’s shorter life expectancy, they’re likely to receive fewer payments. Some provinces require the use of unisex tables to calculate the cost of buying an annuity from a defined contribution pension plan. No province requires the use of unisex tables when members use a registered retirement savings plan, deferred profit-sharing plan or non-registered savings to buy an annuity.

Read: Women face gender pension gap

How many plan members (or plan sponsors, for that matter) have the financial savvy to understand that female participants might need to save more — or expect less income — than the projections show, depending on which province they live in and what kind of plan they have?

Lack of financial literacy is partly to blame. But the knowledge gap around male and female annuity rates is symptomatic of a larger challenge with capital accumulation that we’re only just beginning to fully grasp.

Remember when defined contribution plans started taking off? Plan sponsors were thrilled at the prospect of a new retirement plan design that would be easy to communicate and administer. But helping plan members navigate difficult investment markets and the array of financial products available has turned into a far bigger task that anyone expected.

Read: 18% of women understand their retirement investment plan

Having invested countless dollars on self-help financial planning tools and resources, the pension industry is beginning to accept that most plan members simply have no interest in becoming financial planners. There’s growing consensus that the best way to help plan members achieve better outcomes is to take most of the decision-making out of their hands. That’s why there’s increased interest in automatic enrolment and escalation as well as target-date funds as a default investment option.

But we’re still new at this. And, if we truly want to take decision-making out of plan members’ hands, we need to get better at it. Why do we continue to give them guidance based on misleading and unhelpful rules of thumb, such as single-male annuity rates or a 70-per-cent target income replacement ratio?

One big step in the right direction is the living standard replacement ratio. Developed by Bonnie-Jeanne MacDonald of Dalhousie University, it offers a more accurate target replacement ratio by factoring in variables such as family income, marital status, number of children, province of residence, housing costs and health-care coverage.

The sooner we take advantage of this kind of sophisticated modelling, the better the outcomes for plan members.

Read: Low interest rates drive down income replacement levels