While Canada’s financial industry has been successful in helping people accumulate savings during their working lives, the decumulation phase is a lot more complicated.
One challenge, in particular, facing capital accumulation plan sponsors and members is an ageing population, said Fraser Stark (pictured, right), president of the longevity retirement platform at Purpose Investments Inc., during a session at Benefits Canada‘s 2021 DC Plan Summit.
“If someone is turning 65 today, they actually have a 40 per cent chance of making it to 90. And if you take a couple . . . turning 65, they have over a 50 per cent chance that at least one of them makes it to 90,” he said, noting people are worried whether their retirement savings will last, since they could be in retirement for 10, 30 or even 45 years.
While there are many traditional decumulation solutions available to DC plan sponsors and their members, they have their pros and cons, said Pat Leo (pictured, left), vice-president of longevity retirement solutions at Purpose Investments. “Given the backdrop today, we need to come out with a decumulation solution that will incorporate all of the benefits of the various types of solutions that are out there. Times have changed . . . and so, with that, the decumulation solutions need to evolve.”
Looking at the typical glide path toward retirement, with investable assets growing as plan members age, Leo noted the ideal decumulation solution must include longevity risk pooling so retirees can invest in a way that will provide them with income for life.
“By the time you get to about [age] 76, 77, the solution with longevity risk pooling starts to provide more income and by the time you get to [age] 89, with the balanced fund, you’ve actually run out of money, whereas, with that decumulation solution that includes longevity risk pooling, not only do you have income coming in, but it’s steadily increasing.”
Since target-date funds were introduced in Canada, they’ve become a popular option in DC plans’ investment portfolios, but they aren’t necessarily a decumulation solution, noted Stark. “It’s not helping someone spend down through the asset base, because it’s not pooled. It’s an individual product at the end of the day. And it’s that missing longevity risk pooling that still means the person has to say, ‘Do I plan to make my money last until I’m 99? Until I’m 85? . . . So it’s a great income option, but it isn’t technically a decumulation solution and that’s why we’ve brought product innovation to the market.”
The ultimate decumulation solution for today’s DC plan members is transparent and flexible, easy to access in all Canadian jurisdictions and across different types of plans, noted Leo. “That’s what I feel we really need in the marketplace to ensure every Canadian has the opportunity to decumulate and have peace of mind.”
If longevity pooling and risk management through decumulation solutions is designed properly, not a lot can go wrong, said Stark, though he noted there can still be different outcomes when considering the markets and realized mortality — or the rate at which people end up passing away relative to the expectations in the product’s design.
“For any longevity risk pooled investment fund, it’s critical that conservative assumptions are made in there so that it doesn’t disappoint under normal conditions. There are great questions about adverse selection or selection bias — the idea that products like this are chosen by people on the healthier end of the spectrum — but I think a well-designed product incorporates that.”
As well, when a small number of people are in a product, there’s idiosyncratic risk, added Stark, highlighting the benefits of a product that’s pooled nationally. “When you get those large groups of people, you’re really pooling risk across a broad base of people and that’s how you eliminate that idiosyncratic risk — that there’s chunkiness in the distributions.”
Read more coverage of the 2021 DC Plan Summit.