Retirement | The decumulation challenge

Published on August 1, 2024

By: Caroline Fillion
Manager, Group Insurance Products
Group Benefits and Retirement Solutions
iA Financial Group

As people continue to live and work longer, the challenge of longevity—running out of money too early into retirement—is hanging over many Canadians’ retirement plans.

However, in 2023 in Canada, only 45% of people actually had some sort of plan in place for their retirement, with 53% admitting they don’t know how much money they’ll need to retire, according to CCP Investments.¹

I would argue that part of this uncertainty stems from a change in the last decades in the retirement plan landscape, as employers are opting for capital accumulation plans (CAPs), such as defined contribution plans, over defined benefit (DB) plans.

I observe that this shift is largely driven by the predictability of costs for the plan sponsor, making financial planning more straightforward for them. With DB plans, the retiree has a guaranteed predictable monthly pension income, and the financial risk is assumed by the plan sponsor. The increased participation in capital accumulation plans, however, shifts that burden.

Managing investments and longevity risks

As capital accumulation plans have matured, more employees are reaching retirement with assets accumulated solely in these plans.

I’ve seen that some employees arrive at retirement with a significant amount of money accumulated but are often left on their own to manage their investments and longevity risks. On the other hand, there’s a context in which the aging workforce also becomes a challenge, because some of these workers may not be able to afford to retire and they might stay at work longer.

This situation can lead to decreased productivity over time as employees age—not to mention that financial insecurity can take a toll on employees’ mental health. Obviously, if they worry a lot about their financial security in retirement and don’t have a strong plan in place for their accumulated assets, it can be a burden for employees and impact their performance at work.

An opportunity for plan sponsors

This is where sponsor support comes in. While many plan sponsors are acutely aware of the difficulties that CAP-led employees face in retirement, I see that they’re still hesitant to offer their own decumulation solutions, instead relying solely on their service provider. But how much support should employees receive from their employer? And whose ultimate responsibility is it when it comes to setting up the best retirement plan?

I’ve also seen that there are employees who don’t feel ready to take their retirement, and that they’re actually working longer than anticipated. That’s when the sponsor can offer decumulation support, such as personalized financial advice.

This is where solutions such as iA’s Transit program can come into play. This solution allows retirees to still benefit from having competitive management fees, plus access to certified in-house advisors. And for plan sponsors, fiduciary responsibility moves over. I consider this a complete win-win situation.

With all the new technologies, products and strategies moving into the benefits market, employers need to keep their eye on the ball or risk being left behind.

Planning ahead

Currently, retirees who have assets accumulated in CAPs have two choices. The first is that they can decumulate by themselves and manage their own funds, which means they have to be savvy in how much they chose to withdraw or save.

The other option is to buy an annuity in exchange for a guaranteed income for life, but this isn’t a popular option presently. Many retirees prefer to manage their funds through a life income fund (LIF) or a registered retirement income fund (RRIF).

New option on the horizon

However, recent legislative changes are introducing new products like the variable payment life annuity (VPLA), which offers a pooled approach to investment and mortality risk. Industry groups along with federal and provincial governments are still working towards harmonizing VPLA frameworks across jurisdictions.

With VPLAs, investment and mortality risks are pooled among all retirees in the group. Instead of insuring the risk individually, risk is shared across the group. However, the pension amount can fluctuate based on investment returns and the mortality experience of the pool.

I can see two advantages with VPLAs: they deliver a lifetime retirement income, and the fact that there is no guaranteed amount makes them significantly less expensive than a traditional annuity. The drawback is that you won’t know exactly what that lifetime income will be; it will vary, but you are sure that you will have money until you die.

Diversification is key

As retirement anxieties are currently on the rise in Canada, diversification of retirement plan options seems like the most productive way to hedge retirees’ bets. And I believe success here comes down to a mix of education, communication and forward planning.

¹ Retirement matters to most Canadians, but the path is unclear, survey finds