Dynamic pension pools can have a significant and positive impact on retirement outcomes if they’re supported by the appropriate legislative changes, said Barbara Sanders, associate professor in statistics and actuarial science at Simon Fraser University, during a session at Benefits Canada‘s 2022 DC Plan Summit.
The University of British Columbia has a dynamic pension pool offering, called a variable payment life annuity. The concept of a VPLA was also introduced in the 2019 federal budget, so hopefully it will soon become a reality across the country, noted Sanders.
Introduced in 1967, UBC’s VPLA allows members to pool their savings — including savings outside of their workplace plan — at retirement. It currently has more than 400 members and two different drawdown options that members can mix and match.
The UBC’s VPLA is based on an older version that was introduced by the Teachers Insurance and Annuity Association of America in 1952. The College Retirement Equities Fund was revolutionary at the time, said Sanders, noting it was the first time retirees were promised a lifetime pension while still being able to invest in equities.
“The CREF is described as a fully participating annuity without guarantees — I think that’s a nice way of saying it’s a dynamic pension pool. What it means is that, whatever the pool’s experience is, . . . it’s shared with the people in the pool [and is] reflected in their pensions. So it’s a participating annuity.”
The roots of the CREF and the UBC’s VPLA lie in tontines, she said, which were a way for governments to raise money in the 17th and 18th centuries. Instead of governments issuing bonds, as they do today, they would issue tontines. “An investor would give some money to the king or to whoever was selling these tontines and, in exchange, they would be promised an income for life — not their own life, but rather the income would continue for as long as a person that they chose was still alive.”
Jumping back to the present time, Sanders highlighted Australia’s QSuper, which is one of the most recent implementations of dynamic pension pools. A year ago, it introduced a lifetime pension option, using the UBC’s VPLA as a template and tweaking it based on learnings from behavioural finance.
The QSuper option kept aspects of the UBC plan, including that it’s an open-ended pool, all cohorts share the risks and get the same adjustments, as well as an annual payout adjustment mechanism, she said, noting it also adopted UBC’s investment structure, which offers no choice to members. “There is one fund and that’s what everyone is invested in the pool. This is very unusual for Australia — they’re all over investment choice, but again simplicity is the name of the game.”
During focus groups, QSuper learned one of the biggest obstacles for members was the fear they wouldn’t get enough value out of it, said Sanders. “In other words, you’re going to put your money into this fund and then you’re going to die a month later and you’re not going to get anywhere close to getting out what you’ve put in.”
The solution was a refund of the initial contribution, adjusted for benefits that were already paid out. “With this simple tweak, they were able to lay people’s fears at rest because this way a member who joins this pool can be assured that they — and their heirs — will get at least out of this pool [what] they had originally put in. It was an expensive tweak — they ended up insuring it because it is a form of death benefit, but it’s a very small cost for the incredible boost it gave them in terms of the willingness of people to enter this product and overcome a very large and significant psychological barrier.”
Recognizing the evolution of these innovative decumulation options, the Organisation for Economic Co-operation and Development is updating its roadmap for good design in DC plans, said Sanders. “They recognize this doesn’t necessarily come from annuities; it can come from . . . collective arrangements for longevity risk pooled among the participants — in other words, dynamic pension pools.”