Purpose Investments Inc. has a new mutual fund that aims to provide lifetime income to retired Canadians, many of whom are facing retirement without sufficient savings or the security of company pensions.
The Toronto-based fund company launched the Longevity Pension Fund on Tuesday. The fund has characteristics of an annuity or pension plan, with monthly lifetime distributions when investors turn 65.
“This is the first income-for-life solution in a mutual fund structure, and it is revolutionary,” said Purpose Investments CEO and founder Som Seif. “It’s solving a really complex and important problem.”
That problem is an aging population approaching retirement at a time when interest rates are historically low and fewer retirees can rely on defined benefit pension plans.
The fund targets an initial lifetime income payment of 6.15% annually for investors aged 65 to 67, with incremental increases with each age cohort because of their shorter life expectancies, Seif said. For investors aged 74 to 76, for example, the rate is 7.40%.
Purpose plans to gradually increase the distribution across all age groups, though the distribution level is not guaranteed and could go up or down.
The structure is similar to a pension, with investors pooled together and the fund providing the benefit of longevity pooling. The difference, Seif said, is the flexibility of the mutual fund structure that allows investors to redeem and access unpaid capital.
“Once they pass away, or if they redeem, they will only get access to their unpaid capital. That’s where the longevity pooling comes together,” he said. “They’ll leave in the pool, for the benefit of everyone else, any of the returns on their capital.”
Investors receive the lesser of their unpaid capital or the net asset value (NAV) of their investment when they die or redeem their units.
For example, if an investor deposits $500,000 into the fund and receives $200,000 in income distributions before they die or redeem their investment, and their NAV is $315,000, their unpaid capital of $300,000 is redeemed to the investor or their estate, “but the returns on that would stay in the pool for the benefit of everyone else,” Seif said. (If the investment’s NAV had been lower than the unpaid capital, the investor would have received the NAV.)
Pre-retirement investors can purchase accumulation units of the fund and build wealth in the same way they would in any fund before they turn 65, he said. The month after they turn 65, investors are automatically moved, tax-free, into the income-producing decumulation class. If they redeem before switching into the decumulation class, they receive their NAV.
The fund will invest across equities (47%) and fixed income (38%), with some alternatives (15%) and a focus on managing risk, Seif said. The fund allows managers to be conservative with their investment strategy: to generate the targeted 6.15%, they only need to get a 3.1% net return, he said, since the fund keeps the returns generated from investors’ assets when they redeem.
“Because of the way the structure works, we don’t need to generate a very high return,” he said.
Purpose started working with the Ontario Securities Commission more than two years ago to address the novelty of the fund structure. Seif said the fund was ready last year but Purpose held off the launch due to the pandemic.
The fund has a management fee of 0.60% for class D and F shares, and 1.10% for class A.