As it turns out, everyone. Managing asset de-accumulation risk in capital accumulation plans was the hot topic of a recent ACPM breakfast, with presentations from Paul Partridge, director, investments marketing, with Manulife Financial and Robert Klosa, director, product development at GRS market development, with Sun Life Financial.

DC plan members must bear the responsibility for myriad risks—inflation, market volatility, longevity and liquidity, to name just a few. But the biggest concern may actually be member behaviour, according to Partridge. “The member can be their own worst enemy,” he said, citing the low balances in most DC plan members’ accounts as a critical issue.

De-accumulation options today
When members do reach the de-accumulation stage, said Partridge, they can choose from two categories of products: cashable guaranteed minimum withdrawal benefits (GMWBs) or non-cashable deferred annuities.

GMWBs provide a guaranteed lifetime income with the potential for higher income later on due to bonus or resets. But one issue is that members have ready access to them. “The member has to be cautious,” he explained. “If you start making withdrawals, you can destroy that guarantee because the product is cashable.” While there isn’t the same withdrawal risk with non-cashable deferred annuities, these products have limited potential for higher income later on, he added.

The U.S. has a broader range of de-accumulation options, Partridge continued, including target-date funds with embedded income, managed payout solutions and in-plan annuities. So why aren’t there more choices here in Canada?

Partridge says it’s due, in part, to product complexity. While certain products may do well in the retail environment—where they are sold with the assistance of an advisor—it’s harder to implement them in the group space, where access to financial advice isn’t always readily available.

And, of course, building innovative products comes with certain risks, such as pricing and sustainability concerns for the insurer. No one wants to create a new product that fails. “If we build it, will they come?” he asked.

The case for annuities
Looking at the role of annuities and hybrid annuity products in the Canadian DC market, Klosa believes annuities are “a very powerful solution” and belong in more portfolios.

So why aren’t more members using them? Klosa described the “annuity paradox”: members want a simple lifetime income product—yet, when given the choice, they don’t tend to choose annuities. “Retirement planning is a human problem, not just a technical problem,” he added.

Emerging options in the annuity area include auto-annuitization (essentially, incorporating dollar-cost averaging into annuities) or combining a long deferred annuity (i.e., longevity insurance) with managed withdrawals. Since the income stream doesn’t start until age 85, a long deferred annuity can be an effective way of ensuring that members don’t run out of money in retirement, he explained. Yet there are challenges in setting a realistic withdrawal rate, as well as tax issues. Plus, he noted, you can’t actually build such a solution in Canada today because members are required to make withdrawals before age 85.

Where’s the innovation?
While it’s clear that new solutions are needed, it’s just not that easy to bring new products to the Canadian market, said Klosa, citing regulatory barriers, insurer capacity and the need to report to shareholders as some of the issues that limit provider innovation. Sometimes, great ideas just can’t be executed, he added.

However, during the Q&A period, Louise Koza, director, HR (total compensation), with Western University, expressed some frustration with the current annuity market in Canada. Due to the size of her plan’s assets, Koza said, it’s difficult to get competitive pricing. “What do we have to come to the table with to do well for our members?” she asked.

Klosa admitted that perhaps the insurance industry needs to explain its pricing better, adding, “I think what we need to do a better job of is getting annuities into the individual investment space.”

In the U.S., he noted, there are annuity brokerages that facilitate the annuity purchase for members. However, the problem is that the member still has to make a choice. “And anytime the member has to choose, it’s hard.”

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Copyright © 2019 Transcontinental Media G.P. Originally published on

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