As a Canadian society, we live in interesting times. As the baby-boom wave continues its flow into retirement, and as life expectancies improve, corporate defined-benefit pension plans are decreasingly available to workers, especially in the private sector.
This is important because these DB plans pay a guaranteed monthly pension for life, regardless of how long the worker (and spouse) live. They are being replaced by defined-contribution plans, in which workers save for retirement (often with some employer contributions) or by individual savings vehicles such as Registered Retirement Savings Plans and Tax-Free Saving Accounts.
But these latter methods lack one critical element. They do not pay a lifetime pension income. That is left to the individual worker to manage. That worker has two alternatives: Buy a relatively expensive life annuity about age 65 or withdraw funds on a basis that is meant to last a lifetime but might not or might mean that you have drawn down too conservatively and are living at a standard of living way below what you could afford. The problem is that no individual can accurately predict their own life expectancy.
But there are two proposals buried in the federal budget from March 16 that could go a long way to mitigate these problems.
The first proposal is called an Advanced Life Deferred Annuity. Today, if you have a registered fund, you must start to take income out by the end of the year that you turn 71. With ALDA, you could defer payments to the end of the year you turn 85. You could use up to 25 per cent of your registered retirement holdings for a maximum lifetime dollar value of $250,000. Income tax would not apply until the income is taken.
Why is this good?
For a small part of your retirement savings (depending on the year taken, about 16 per cent) you can buy a deferred-life annuity to start payments at age 85 that will then pay out for life. This means that you have transferred your unknown life-expectancy risk from your shoulders to the life annuity.
It also means that you know how much you can spend from (say) age 65 to 85, as the majority of Canadian couples will have at least one survivor over those years. This allows you to live at a higher standard of living than if you tried to carry the longevity risk on your own shoulders.
The second budget proposal is to permit pooled registered pension plans and defined-contribution plans to provide variable payment life annuities (VPLA) to members directly from the plan. The size of payments could go up or down depending on the investment performance of the fund and on the mortality of the VPLA participants. This variability is what provides the close-to-guaranteed stability of the underlying funds. This is akin to the plan now in place for the UBC faculty as an option when they retire. But it has not been available elsewhere.
If this is legislated, a DC plan participant can, through such a pooled-risk managed fund, have an actual lifetime pension provided at a very low cost. It is not fully guaranteed but, for bigger pools of participants, long-term stability should be highly expected.
Neither of these two actions will be in force quickly. The new legislation must be passed both federally and provincially, since most DC plans are regulated by provincial legislation and regulation.
But these proposals are excellent and deserve the support of all Canadians.
Robert L. Brown, PhD, retired after 39 years as a professor of actuarial science at the University of Waterloo. He lives in Colwood.
