DP pools should be available to more retiring Canadians, report says

Millions of baby boomers entering retirement and facing a “$1.5-trillion decumulation disconnect” need better options for reliable income as they age, a new report says.

The report from Ryerson University’s National Institute on Ageing (NIA) and the Global Risk Institute, released Tuesday, said the decline in traditional workplace defined benefit pension plans has left today’s retirees depending much more on personal savings and sub-par retirement saving vehicles.

While many Canadians have responded by upping RRSP contributions and using defined-contribution (DC) benefit plans, leading to $1.5 trillion invested in those vehicles, the report noted some downsides.

Those include a lack of “reliable lifetime income,” given people will have to choose between buying “very unpopular” life annuities or moving their money into personal or locked-in retirement income funds that might require individual decumulation management.

One alternative to this is a dynamic pension (DP) pool, also known as a variable payment life annuity (VPLA).

Yet Canada’s pension framework only allows limited access to such products, the report said, following a move in 2018 by a coalition of pension experts who asked the government to change tax and pension rules.

DP pools (or VPLAs) were positioned as an efficient, risk-sharing vehicle that’s less expensive than traditional annuities but which still offer the professional money management that retirees need.

In June, the federal government passed legislation allowing for DP pools to be created by sponsors of registered DC plans and pooled registered pension plan (PRPP) providers.

However, DC plan assets represent just 10% of the $1.5 trillion of registered individual savings in Canada, the NIA report said, covering less than 7% of working Canadians.

Since that leaves the majority of retirees with registered savings with no access to DP pools — and with the potential stress of running out of or even mismanaging their money — the report suggested that the regulatory framework be revisited once again.

DP pools should be able to take in assets from all types of registered plans, the report argued, and should be offered to a wider group of retirees regardless of employment history.

The NIA report said the most viable way to offer DP pools or VPLAs is through standalone vehicles versus those offered within DC plans or PRPPs, or even within securities products, the report said.

The Canadian Life and Health Insurance Association has lobbied the federal government for broader access to VPLAs. Limiting the annuities to members of large plans disadvantages “those who work for small employers or save through other types of retirement plans,” the association said in a submission before the 2021 federal budget.

Bonnie-Jeanne MacDonald, director of financial security research at the NIA and lead author of the report, said finding a solution is imperative.

“Financial markets, inflation and health expenses are just some of the big unknowns that retirees will need to face over 10, 20, 30 or even 40 years,” she said in a release.

While retirees would have to assess their needs and fully understand DP pools, including how they affect estate planning differently, the vehicles have “a risk-reward profile that is fundamentally different” from other products, said Barbara Sanders, associate professor at Simon Fraser University and a co-author of the report.

The DP pools report was based on a series of interviews conducted with organizations who either already have a DP pool in their pension plan or that were open to adding one. The research also included conversations with pension stakeholders on regulation, plus the use of Statistics Canada data from its 2019 Survey of Financial Security. Access the full DP pools report.