Navigating Retirement

Shifting demographics and the current economic environment have led to uncertainties for Canadians and—as I’ve witnessed quite often—to concerns around outliving savings in retirement. While exploring strategies to address the need for dependable lifetime income solutions, three observations in particular come to light:

1. Innovative and cost-efficient ways to convert retirement savings into lifetime income have been successfully tried and tested globally.
2. Dependable monthly payments for life allow retirees to spend with confidence.
3. Financial security peace of mind that comes with lifetime income presents economic and social benefits to communities.

Shifting Demographics Are Reshaping Canada’s Population

As longevity increases, and fertility decreases, Canada is transitioning into a “super-aged society,” which is defined as 20% or more of the population is age 65 or older. In fact, in the early 2030s, Canada is expected to join other super-aged countries, such as Japan and Germany.

Source: Canadian Institutes of Health Research Institute of Aging; reprinted with permission.

Monthly Payments For Life

Increasing lifespans, combined with a prolonged environment of rising living costs, have impacted Canadians’ confidence in retirement readiness. These economic and demographic conditions bring to the forefront considerations and benefits of lifetime income as a key source of retirement income.

Managing the Fear of Running Out (FORO)

Almost two-thirds of Canadians say they are afraid of running out of money during retirement.¹ Having predictable monthly income that continues for life can help ease this key financial concern. Changing the saver’s mindset to a spender’s is often a challenge when managing a pot of money. On average, across all wealth levels, retirees were found to have 80% of their pre-retirement savings remaining after almost two decades of retirement.² Retirees may be living well below their means to avoid outliving their savings, which impedes retired Canadians from a good quality of life and, more broadly, can dampen economic activity.

Alternatively, a stable monthly income could allow retirees to budget and spend with confidence, as well as have their basic needs met without depleting their savings. Moreover, a steady and predictable income stream could help address a number of challenges faced by a super-aged society, including maintaining economic growth and sustaining a good quality of life for our seniors.

Economic Activity
The ability to spend with confidence generates economic activity within the community. A recent study found that over 80% of funds from defined benefit pensions paid to Ontario retirees and beneficiaries are spent in Ontario. This, in turn, supports local businesses in urban and rural areas, helping to stimulate the economy. Another 15% of Ontario pension payments support federal and provincial government revenue through income and property taxes.

Source: The Conference Board of Canada; reprinted with permission.

Healthy Outcomes and Community Engagement

Economic stability can also help ease the anxiety that comes from financial worries, which impacts both physical and mental health. Access to secure income can provide access to the resources for health management through higher quality nutritious food and medications. This has positive implications for retirees’ health, the national-level utilization of healthcare services and other taxpayer-funded programs.

Retirees with adequate retirement income volunteer in their communities. One of Ontario’s largest pension funds, the Ontario Municipal Employees Retirement System (OMERS), found that its retirees receiving a lifetime pension are 40% more likely to volunteer their time in their communities. This engagement benefits the community and enhances retirees’ sense of purpose and well-being. Volunteering provides social interaction, mental stimulation and a sense of accomplishment, all of which are important to a fulfilling retirement.

Lifetime Income Options and Innovation

With the economic, health and social benefits of predictable monthly income well-documented, how should Canada move forward?

The Organisation for Economic Co-operation and Development (OECD) suggests that “DC pension plans should provide some level of lifetime income as a default³… unless other pension arrangements already provide for sufficient lifetime pension payments.” Various annuity options providing lifetime income are available in the market.

Annuities mitigate a key risk for retirees: longevity risk. They provide an income for a retiree’s lifetime, regardless of how long that will be.

Guaranteed Lifetime Payments
Guaranteed annuities can offer a stable and reliable income stream for retirees. These annuities ensure individuals receive a fixed amount of income each month for the rest of their lives, mitigating the risks associated with outliving one’s savings. A guaranteed amount is payable each month and remains unchanged. Guaranteed annuities also protect against investment risk. Regardless of how the market performs, the amount payable to retirees is not impacted.

Despite providing the peace of mind retirees desire with income consistency, the proportion of retirement funds invested in these products continues to remain relatively low, often below 10%.⁴

Fixed-income payments do not keep up with rising prices. Furthermore, protection against both longevity and investment risk can come at a premium. Over time, inflation can erode the purchasing power of the annuity payments, reducing their real value and the retiree’s standard of living. For many retirees, the cost of purchasing a guaranteed annuity may be prohibitive, leading them to seek alternative retirement income strategies.

Variable Lifetime Payments
Like guaranteed annuities, variable annuities (variable life benefits) provide income for life. However, there are two key distinctions between them:

1. Longevity risk pooling. Variable life benefits participants share in the pool’s longevity risk. Monthly amounts are adjusted based on how long individuals within the pool live (vis-à-vis expected mortality).
2. Exposure to market returns. Variable life benefits have exposure to capital markets. Monthly amounts can increase (or decrease) based on investment returns (vis-à-vis expected returns).

Variable life benefits allow retirees to continue and maintain equity exposure, while managing the risk of outliving their savings. The variability in monthly pension amounts, which can increase (or decrease), enhances the cost efficiency of this option.

The choice between a guaranteed annuity and a variable one depends on a retiree’s desired balance between the cost of guarantees and the stability of retirement income.

Global Innovation

Variable annuities are an emerging innovation in some countries, but they have been efficiently used in other countries for many years.

Netherlands
Variable Defined Contributions (DC) pensions (as variable life benefits are referred to in the Netherlands) were introduced to the Dutch pension system about 10 years ago⁵ and play a key role in the system’s current overhaul. The pension system in the Netherlands is currently transitioning from Defined Benefit (DB) plans to individual account balances. Members will receive a variable DC pension payable for life⁶ at retirement. Key objectives of the new system are to make pensions for participants more balanced, flexible, personal and transparent.⁷

Australia
Variable lifetime payments are a recent innovation in Australia. Australia’s pension system has been a predominantly DC one for over 30 years. At retirement, minimum amounts are required to be withdrawn from participants’ account balances, and retirees often draw no more than these minimum amounts. “Retirees often see the minimum amounts as guidelines to how much they should be drawing down and do not have the confidence to withdraw more than that for fear of running out of money,” says Brnic Van Wyk, Australia Retirement Trust’s head of asset liability management. In March 2021, the Australian Retirement Trust (QSuper at that time) launched a variable lifetime pension product. “The gap we set out to close,” says Van Wyk, “was helping people convert a pot of money into lifetime income and guiding people as to how much they can draw safely without the fear of running out.” The variable lifetime product acts as a complement to retirees’ DC draw-down accounts. The lifetime income stream can be used to meet retirees’ basic needs, while the DC account is for discretionary spending. Common to much retirees’ feedback when purchasing Australian Retirement Trust’s (ART) lifetime income product was the peace of mind that it provided them, knowing payments will last a lifetime.

Canadian Innovation

Variable life benefits are both an emerging innovation in Canada and a longstanding one. Such benefits were in place long ago under Canadian pension law. Changes to tax law, about 40 years ago, meant that variable life benefits could no longer be offered by registered pension plans. There are few legacy plans that offer variable life benefits, including the University of British Columbia’s pension plan, which serves as a model for ongoing innovation and lifetime income efficiency for its retirees.

I think it’s encouraging to see governments across Canada, including Ontario, moving forward with variable life benefits either through consultation or legislative provisions. In fact, Saskatchewan’s public sector employees will soon have a lifetime income tool in their retirement toolbox with the launch of a variable lifetime pension designed to provide members with dependable monthly payments for life.

Cross country, Canadians have saved over $1.5 trillion in retirement assets.⁸ Innovating to create cost-efficient ways to convert lump sums into lifetime income could empower Canadians to spend during retirement with confidence and peace of mind. Dependable monthly payments for life also present economic and social benefits to communities, which can mitigate challenges we will collectively face as Canada transitions to a “super-aged” society. The good news is innovative and cost-efficient ways to convert retirement savings into lifetime income have been successfully tried and tested globally. I believe Canada can draw on these international examples, as well as build on its own expertise, to sustain a quality of life and standard of living that we want for ourselves and future generations.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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