Inside a liquid, income-paying strategy for DC members

Amidst the many tensions inherent in the rise of defined contribution pension plans is the difficulty many members have turning their lump sum pension savings into meaningful retirement income. Annuities have long offered a core solution, but come with significant liquidity constraints that may put many plan members off. Add to that the risks of inflation, longevity, and market underperformance which could wholly derail a client’s income strategy. Whether through education gaps, a lack of access to advice, or difficulty navigating the prospect of managing their own investments, many plan members have struggled with the idea of turning their DC plan benefits into consistent retirement income. Oricia Smith believes that Sun Life's new product can help.

Smith is President of SLGI Asset Management Inc., which partnered with Sun Life Group Retirement Services to design a new program called Sun Life MyRetirement Income. The program is built on the back of market research which found that 90 per cent of DC plan members want a regular retirement income but do not want to lock into an annuity. The program functions as what Smith calls a ‘target age fund’ where a member would set their target age of 85, 90, 95, or 100 and receive a monthly income payment until that date. While Smith does not claim this program is a panacea for the retirement concerns of DC plan members, she believes it can contribute to a more secure picture for these retirees.

“I think that with careful preparation and the right resources, it's possible to build a more secure and fulfilling future and retirement and manage longevity the needs of right funding in retirement,” Smith says. “we're focusing on providing Canadians with a diversified mix of financial products, geared to retirement needs.”

MyRetirement Income, Smith explains, offers a somewhat simplified solution that could be added to a payout annuity to solve for the longevity risk that many Canadians are facing. With this program paying out up to that target age, with the option of liquidity, and the annuity paying income from a locked amount of capital, a retiree may be able to balance out their risks and needs. The function, through these income payments, would be to help create a simple spending budget for retirees, akin to their paycheques when they worked, which can help maintain consistent financial habits.

Smith also sees advice fitting into this more multifaceted solution, of which she believes MyRetirement Income is one component. Clear advice around what each of these products provides and how that can contribute to a monthly budget is key to closing some of the existing education gaps around DC plan benefits. Many retirees are concerned they will outlive their savings, and greater clarity through advice can help them understand what they can and can’t spend in retirement.

Underpinning MyRetirement Income is an institutional pooled fund holding equities, bonds, and alternatives. It’s built with the goal of generating adequate returns to last in retirement, Smith says, while also offsetting volatility and retaining some growth exposure to manage inflation. Given the portfolio is designed to persist through retirement, when a member enrols in it Smith says they’re likely starting with a 41 or 42 per cent allocation to equities. That equity allocation may seem somewhat novel for a retiree portfolio, but given the prospect of outliving ones savings or seeing inflation wipe out spending power, Smith says that a growth allocation to equities is a key component of a long-term retirement plan.

While the goal of MyRetirement Income is to provide income payment to members until the age they select, Smith notes that this is not a panacea. The income paid is not guaranteed and the coverage does not extend beyond a member’s chosen target age. It serves as one component of a wider retirement income strategy. Nevertheless, as DC plan sponsors confront the prospect of their members outliving their retirement savings or struggling in the face of inflation, Smith believes that a program like MyRetirement Income is worth introducing.

“Plan Sponsors believe strongly in education and engagement and value resources that help support their plan members,” Smith says. “Sun Life has created Plan Sponsor resources and support to ensure that their members are aware of their retirement income options well in advance of retirement. This will be part of our holistic retirement income approach that wraps tools, education and solutions with expert advice from our Retirement Consultants. All of this will be embedded in the plan member’s journey, so it becomes a natural and seamless transition into retirement.”