In response to proposed legislation that would introduce the option of variable life benefits in Ontario, the Association of Canadian Pension Management is recommending against regulating plan sponsors to disclose an expected rate of return on contributions made to a variable life benefits fund.

In an open letter to the provincial Ministry of Finance, the ACPM said such a requirement would introduce additional complexity and administrative cost to prepare these return expectations. It could also introduce an element of confusion on the part of retirees thinking there’s some sort of covenant or guarantee attached to that return expectation.

“Instead, illustrations could be provided by the VLB administrator showing the impact of different hurdle rates on the pattern of retirement income. Independent advisors could also guide retirees in the selection of the hurdle rate if multiple ones are offered at the time of pension commencement.”

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Regarding the use of hurdle rates to determine the size of a plan member’s monthly payment, the ACPM said plan sponsors should be encouraged to use a reasonable number of hurdle rates but a ceiling shouldn’t be defined in the legislation, as different investment interest rate environments could result in different reasonable hurdle rate ceilings.

In order for mortality pooling to be successful, only the larger DC pension plans will be in a position to offer VLBs, noted the letter, adding the likely path for most Ontarians without a defined benefit pension plan to variable life benefits is through a pooled registered pension plan.

“We observe that a pool of fewer than 100 lives will exhibit a moderate level of volatility from mortality experience. At 500 retirees and above, the volatility caused by mortality experience quickly reduces and, accordingly, this is likely a reasonable target for a VLB fund.

“Both PRPP legislation and VLB legislation need to have simplicity and clarity in the regulatory environment and harmonization of the legislated minimum standards across jurisdictions, in order to reduce the cost of compliance and increase the odds that sponsors and administrators will consider this new option.”

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