BMO Insurance president and CEO outlines the annuities that can offer differing risk tolerance
The shifting dynamics of retirement planning has brought longevity risk to the forefront for plan sponsors. And while some employers consider transitioning from defined benefit (DB) plans to defined contribution (DC) plans, the responsibility of managing retirement income has essentially been turned over to individual retirees.
Rohit Thomas, president and CEO at BMO Insurance, underscores the urgent need for plan sponsors to address this challenge by equipping their members with tools and strategies to mitigate longevity risk and rising healthcare costs – tools like annuities.
Thomas is quick to note that for those managing DC plans, the risks extend beyond longevity. “How are you going to balance between market volatility, interest rate risk, equity risk, and longevity risk?” says Thomas, while emphasizing the importance to map out cash flow needs and income sources. This includes understanding how annuities can offer stability.
Annuities provide a guaranteed stream of income, shielding retirees from market fluctuations while ensuring that they don’t outlive their savings. “There is no impact due to markets, no impact due to equity or longevity,” Thomas explains. While annuities offer certainty, they come with trade-offs, noting the biggest drawback is, “once you buy it, you can’t cash out. There are ways to structure the annuity to minimize some of that.”
Notably, features such as guarantee periods or deferred options can mitigate concerns. “We recommend some sort of guaranteed cash flow, it doesn’t have to be the entire portfolio,” he says. According to Thomas, there are three main types of annuities: life annuities, which provide income for life, term-certain annuities, which pay out over a fixed period and can benefit a spouse or other beneficiaries if the retiree passes away; and a deferred annuity, which he compares to an accumulation annuity, highlighting it’s similarity to an insurance GIC, but with the option to annuitize.
“You have insurance benefits that can be done pre-retirement, like a term certain annuity. There's no longevity risk, so that can be used to hit your RRIF minimum. It could be used to fund education for your kids, or various other scenarios. And then, of course a life annuity which is to cover your longevity. Three different products that the insurance industry has for different stages of lifestyle and different risk tolerance,” Thomas explains.
Aside from the main drawback of retirees unable to cash out, Thomas highlights a lack of understanding also prevents retirees from considering annuities. People with DB plans rarely withdraw and include annuities, yet those with DC plans hesitate to buy income guarantees through annuities. That’s why he’s a firm believer of education around insurance products.
This includes educating consumers on the pros and cons of annuities and how they can be integrated into broader retirement strategies. He also warns against auto enrolment in annuities as sponsors should want retirees to understand what they're buying, what the features are and what happens in different scenarios.
Workshops, webinars, case studies, and personalized advice are also among the tools Thomas advocates for improving financial literacy among retirees. “We would lean towards having that sort of advice as you approach retirement, to get all your estates, all your assets established and as members hit different stages of retirement, continuing that education,” says Thomas.
Thomas asserts the need for large-scale communication around retirement planning is critical. “We’re shifting the onus to consumers to manage their RRSPs, income, longevity risk, healthcare costs, and retirement spending,” Thomas noted. “Providing the right tools, support and education around those products is really important, as well as access.”
From an insurance perspective, Thomas believes longevity risk isn’t hard to manage. Rather, the true risk is due to the rate of mortality improvement. Over the last century and certainly, over the last 20 years, there’s been significant improvements in life expectancy, says Thomas. And with people living longer, often in less healthy conditions, the financial burden of chronic care and housing can escalate dramatically.
“A lot of that has been dealt with improvements in cardiac; that's been one of the biggest improvements in terms of increasing life expectancy, says Thomas. “The big variable is, how much of that will continue? What is the pace of mortality improvement? Will there be medical breakthroughs that prevent or reduce the risk of cancer deaths?”
That’s where diversified risk lies for plan sponsors, he says. Additionally, there's also lifestyle choices and environmental factors which also change over time. “They're variables that we have to think about and understand, and that's where we look to have a diverse portfolio to manage those risks.”
