Pension stakeholders call on feds to remove barriers to longevity risk pooling

In a letter proposing measures for the government to enact, the group also offered assistance in making the regulatory and legislative adjustments to facilitate its proposals.

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While actuarial tables may provide some idea of how long people are likely to live, using risk pooling to prepare for the possibility that a senior outlives their income is the logical solution, noted the letter. It also stressed that this solution would be a material benefit to the Canadian economy, as well as the government’s coffers, which are increasingly directed towards provisions for the population’s retirement, such as the coming enhancements to the Canada Pension Plan.

As the group sees it, this type of risk pooling already exists in many forms, including the CPP, the Quebec Pension Plan, old-age security benefits and within defined benefit pension plans. However, as the shift towards defined contribution plans continues, the foundation of existing risk pooling is eroding, the letter noted, making effective decumulation strategies increasingly important. These strategies should encompass two key goals: the provision of withdrawal flexibility in the earlier years of retirement and secure payment continuity during later years, according to the letter.

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Not only do Canadians need a drawdown protocol to provide flexibility, but they also need some kind of protection mechanism that will provide income for as long as they live, noted the letter. It suggested that a retiree should be able to purchase an insurance contract through a registered retirement income fund that would begin a payout at age 85 and continue until death. These arrangements would be available through defined contribution plans, as well as group registered retirement savings plans and tax-free savings accounts, the letter said.

However, due to existing pension and income tax rules, neither the individual nor the collective option to acquire longevity insurance is available to most Canadians today. In 2004, the Income Tax Act was amended to remove the Canada Revenue Agency’s discretion in approving these types of arrangements, effectively blocking employers from setting them up for employees, noted the letter.

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The act also doesn’t allow Canadians to use their registered savings to purchase a deferred life annuity with a benefit commencement date beyond the end of the year they turn 71. This limits the flexibility with which retirees can make arrangements for longevity risk, according to the letter.

Further, the act doesn’t permit the purchase of locked-in life annuities, whether immediate or deferred, within TFSAs. As this savings option grows in popularity, it would be beneficial for retirees to be allowed to make annuity purchases within them, suggested the letter.