While there’s more work to be done before lifetime pension pools are widely implemented in North America, employers are increasingly aware of concepts such as variable payment life annuities, says Barbara Sanders, an associate professor at Simon Fraser University.
“It seems that it’s being discussed fairly often. When in industry meetings, it’s certainly a very top-of-mind topic within the [advisor] community. [Lifetime pension pools] are being discussed at meetings with clients now [but] there’s always more that can be learned.”
A new report co-authored by Sanders found there are three main challenges to the implementation of these plans, including a lack of regulatory framework, a lack of efficient and reliable ways to communicate and disclose risk to members and no consensus on optimal pool design elements.
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It also noted when considering pool design, elements such as hurdle rate policy, closed designs versus open designs and the delayed recognition of gains and losses must be considered. However, these factors balance and complement each other, with no single factor being the most important, says Jean-François Bégin, an associate professor at Simon Fraser University and the report’s co-author.
“One thing we try to make clear in the report is that there’s always a trade-off [between these factors] — it’s not like there’s one that’s better than the other. The goal of the report was really to point out the advantages and disadvantages and, at the end of the day, ensure [plan sponsors] make decisions based on their members’ [needs].”
Lifetime pension pools can also help plan sponsors influence the expected benefits path and the variability of that path, such as to keep pace with inflation and to meet the diverse needs of plan members, says Sanders.
While employers are increasingly aware of these plans, communication to plan members remains a challenge, particularly around where lifetime pension pools sit in members’ retirement income mix and the impact of variable income in retirement.
“I think this product is not intended to be your sole source of income and for most Canadians, it isn’t,” she says. “But understanding what that variability actually is and being able to compare products is the really tricky part for employees and [it’s important for plan sponsors] to communicate any risks, particularly the shortfall risk.”
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