It just has to be good enough Words to that effect were uttered by Brnic Van Wyk as he described how it had approached adding a decumulation option for retired members
It just has to be good enough Words to that effect were uttered by Brnic Van Wyk, head of asset liability management at the Australian Retirement Trust, at the ‘Providing Lifetime Income in a DC-Plan World’ session, sponsored by Purpose Investments, the National Institute on Ageing, CAAT Pensions, and KPA Advisory, as he described how it had approached adding a decumulation option for retired members.
Scared And Frugal
Part of the issue in Australia was that retirement drawdown accounts had statutory minimum age-based rates that created income tax that increased with age. As a result, people were scared and frugal. “They died with most of their money left behind,” he said, and had no confidence in the system to provide a sustainable rate of income.
So Australia set out to build a lifetime pension product. To do so, it decided what was important, what it could do, and what was good enough that could be done in a year.
Comparing Canada to Australia, we see in the ‘2022 Mercer CFA Institute Global Pension Index,’ Australia ranked higher, sixth, to Canada’s 13th. However, the index is focused on inputs rather than outputs, accumulation, not decumulation.
Of course, only recently has attention been paid to decumulation, which many now consider perhaps more important than accumulation. We are seeing some action on it. Saskatchewan has introduced legislation to giving employers the ability to offer new solutions that lessen the risk of retirees from defined contribution plans outliving their savings. The private sector, Purpose, for example, is now offering a longevity solution and we understand that the CAAT pension plan is working on a solution for its members.
Here at Benefits and Pensions Monitor, we started talking about decumulation in 2015. It was the topic of our first Meetings & Events session.
And while it is heartening to see more focus on the decumulation challenge, we fear, like everything else in the Canadian pension system, that efforts to provide these options will be made cumbersome and unappealing for plan sponsors and members.
In this country, we don’t seem to accept ‘good enough’ as a solution. Our regulators prefer to strive to make everything perfect, no matter how unwieldly.
Consider, the variable payment life annuities (VPLA) scheme. Announced in the 2019 federal budget, many ‒ such as Jason Vary, president of Actuarial Solutions ‒ see this as a perfect decumulation option. Unfortunately, it is only available to the lucky few members of the largest DC plans in Canada. Vary suggests it would be much better if other financial institutions, insurers, and even large pension funds were permitted to setup VPLA pools which could accept transfers from anyone’s registered funds.
Another Option
Pooled registered pension plans (PRPPs) are another option. The Association of Canadian Pension Management’s ‘Decumulation 2.0: Converting Retirement Savings to Lifetime Income – A Prescription to Help Canadians Navigate their Retirement Income Needs’ white paper suggests legislative changes be made to allow for the possibility of decumulation-only PRPPs.
Clearly, possible solutions exist. Australia’s system does rank higher than ours showing ‘good enough’ can work.
