Pension plan members’ primary concerns about their golden years are whether they’ve saved enough money to live their dream retirement, whether those funds will last and whether they’ll be able to leave a legacy for their family.
But numerous surveys of Canadians indicate many don’t feel financially literate enough to address those concerns, according to Michael Carter (pictured right), assistant vice-president of product development and sponsor experience for group retirement services at Sun Life Financial Inc., speaking during a session at Benefits Canada’s 2024 Defined Contribution Investment Forum.
“Up to 90 per cent of Canadians are looking for that continued paycheque experience that they had in their working lives. [But] all of this uncertainty results in about one in four really not knowing, at the beginning of retirement, how much can they actually [withdraw].”
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Despite that, just one in 10 Canadians opt into annuities or other guaranteed products due to the inability to access capital, according to Sun Life data.
The company created its new target-age solution to address plan members’ desire for both income predictability and access to capital when they need it, said Anne Meloche (pictured left), head of institutional business at Sun Life Global Investments, noting that existing solutions on the market, including the new dynamic pensions (formerly known as variable payment life annuities), advanced life deferred annuities and tontines provided a guaranteed income for plan members, but no ability to draw on their funds.
The target-age solution is modelled after the target-date fund, she said. In a TDF, plan members select their retirement age and the portfolio manager de-risks the fund up until that date; in the target-age solution, plan members would input their “maturity age” and the solution will calculate an appropriate annual withdrawal and take care of investment selection.
“It’s a fully automated solution that overlays a [life income fund] and [registered retirement income fund] and the solution will optimize the depletion of assets over a pre-determined period that runs from retirement age up to maturity age,” said Meloche.
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Every year, the solution recalculates the optimal annual payment, based on the remaining funds, the underlying portfolio’s performance and any withdrawals or deposits the plan member made during the previous year. The target-age solution also factors in LIF and RRIF minimum and maximum withdrawals.
Plan members have access to the full account balance at all times and can update their maturity age as they get older.
Between 12 and 18 per cent of people 60 years and older live with mild cognitive impairment and, as they age, they may not be able to make retirement income decisions. Sun Life accounted for that possibility, said Meloche, by allowing plan members to convert their remaining account balance to a dynamic pension or an annuity at any time, if they start to notice a difference in their cognition.
According to Sun Life simulations, the target-age solution is able to provide a similar income to a dynamic pension or annuity while still giving plan members access to their capital. In the simulated case of a 65-year-old retiree with a maturity year of 90, the median possible annual payment was 104 per cent of the first year’s payment. The median lowest payment over those 25 years was 89 per cent of the first year’s payment and the median highest was 122 per cent.
Read more coverage of the 2024 DC Investment Forum.