Defined-contribution pension plans and group RRSPs have become the dominant forms of employer retirement programs, but they’re proving inadequate once plan members reach the decumulation phase, a report from the C.D. Howe Institute says.
Capital accumulation plans (CAPs) such as DC pensions and group RRSPs focus on accumulating assets rather than providing retirement income for life to plan members. That leaves many retirees unprepared for restructuring their assets into income after they retire, the report said.
“We believe the time is right for regulators, program sponsors and industry stakeholders to embrace what seems to have been lost along the way: DC and group RRSP programs are not primarily about accumulating capital; rather, they have always been intended to — and, in fact, can — provide working Canadians with lifetime retirement income…when done right,” the report said.
The C.D. Howe Institute said CAPs should adopt decumulation features similar to defined-benefit plans. One such plan is variable payment life annuities (VPLAs), which pool retired employees’ investment and longevity risk. Using assumptions about investments and mortality, a DC plan can use a VPLA fund to convert a retiring employee’s account balance into a monthly pension. That pension is adjusted periodically based on the pool’s other members.
As of last year, less than 5% of programs administered by the largest insurance companies in Canada offered decumulation options, the report said.
The institute recommended harmonizing pension rules across jurisdictions, especially when it comes to locking-in rules, variable benefits and VPLAs. It also called for legislative and regulatory support for pooled decumulation vehicles that permit transfers from employer-sponsored pension plans, personal RRSPs and other sources.
“The structuring of retirement income for a lifetime from multiple sources of government and public/private sector retirement programs of different types, in combination with personal retirement savings from RRSPs, TFSAs and non-registered assets, is more complicated than it needs to be for retirees and as a consequence poses an impediment to efficient and optimized retirement outcomes,” it said.