For some Canadians, the term pension may still conjure images of a secure stash of money guaranteed to ensure a comfortable lifestyle in retirement.
I should know — until joining Benefits Canada in 2020, I counted myself among this group.
Defined benefit pension plans — the epitome of the image described above — still exist, but they’re becoming rarer with each passing year, as more plan sponsors wind up their DB plans and capital accumulation plans increase in popularity.
And while employers have been steadily moving toward defined contribution plans since the 1980s, it’s only been in recent years — as members of these early DC plans have moved into retirement — that plan sponsors have turned their focus to decumulation. Indeed, once someone has saved all that money and retired, how do they allocate it wisely?
In 2019, the federal government first proposed legislation establishing variable payment life annuities, one possible solution to the decumulation challenge. However, before VPLAs become widely available to DC plan members, significant changes to federal and provincial legislation will be required.
In Saskatchewan, there’s been some movement on this front. Last fall, the provincial government introduced legislation that includes provisions for DC plan sponsors to offer VPLAs and advanced life deferred annuities.
A report by the C.D. Howe Institute cited several actions policy-makers can take to improve and simplify access to effective decumulation strategies. These actions include regulatory harmonization of locking in and unlocking rules across jurisdictions to allow a single set of rules to apply to DC assets during retirement, as well as the harmonization of maximum withdrawal rules for life income funds, variable benefit payments and VPLAs, irrespective of the jurisdiction in which the assets are accumulated.
While legislation permitting new decumulation options is a crucial part of the solution, plan sponsors are also in a unique position to support their plan members’ decumulation efforts.
In a white paper, the Association of Canadian Pension Management recommended Canadian pension regulators provide industry guidance that directs CAP sponsors to assist plan members with decumulation through the use of modelling tools and best practices, as well as allowing members to establish retirement income investment plans for each portion of their retirement income stream.
The ACPM also proposed the creation of a “retirement dashboard” that informs retirees of their available sources of retirement income — including government retirement benefits, employer-sponsored retirement programs and individual savings — and the estimated aggregate income from these sources.
There’s also an argument to be made for employers supporting workers through decumulation by increasing their focus on employees’ financial wellness, up to and including retirement. According to a recent survey by the National Institute on Ageing and the Environics Institute for Survey Research, just 35 per cent of Canadians aged 50 and older reported they’re in a position to financially afford to retire, while a slightly larger percentage (37 per cent) said they aren’t and 25 per cent said it’s unclear.
By creating more retirement-ready DC plan members, these statistics could be vastly improved by the time employees just entering the workforce are ready to retire.