New innovations are emerging to address the shortcomings of the “poor cousins” among employer-sponsored pension plans – defined-contribution (DC) plans and Group RRSPs. Unlike defined-benefit (DB) plans, they do not provide retirement income for life but instead focus on the accumulation phase. It’s time to put the “pension” back in these plans, which are known as capital accumulation plans (CAPs).With over $1.5 trillion in assets, the growing prevalence of membership in DC pensions specifically and the continued growth of contributions to them (nearly doubling the pace of growth of contributions to DB programs) makes it even more important to improve retirement plan outcomes from CAPs over the next decade. This improvement will depend critically on meeting the challenges of the decumulation phase – that is, once employees stop accumulating and start drawing down.This Commentary examines the challenges of decumulation for employees, current practices and options, as well as proposed new options. We believe the time is right for regulators, program sponsors and industry stakeholders to embrace what seems to have been lost along the way: DC and Group RRSP programs are not primarily about accumulating capital; rather, they have always been intended to – and, in fact, can – provide working Canadians with lifetime retirement income…when done right.However, saving and investing on autopilot during the accumulation portion of their retirement journeys has left participants ill-prepared to deal with the exceedingly challenging requirements of restructuring their assets at the point of retirement when they seek a lifetime of retirement income.Currently, Canadians have three options to draw down income from their CAP assets at retirement.1. An investment account with withdrawal options, such as LIFs for locked-in assets originating from DC pensions, or RRIFs for unlocked assets originating from Group RRSPs. Critically, they do not provide any guarantees or longevity protection; consequently, there is a risk that assets might be depleted prematurely.2. Variable benefits accounts within DC registered pension plans that allow for gradual income withdrawals on a similar basis to LIFs, but that take advantage of the scale and legal structure of DC pension plans.3. Annuities sold by insurance companies. These are the only vehicles broadly available today that provide income guarantees and longevity protection. These products, however, are often viewed as expensive and inflexible and are purchased by relatively few retirees today.In 2021, the Canadian Income Tax Act and regulations were amended to permit two new vehicles: Variable Payment Life Annuities (VPLAs) and Advanced Life Deferred Annuities (ALDAs). If adopted in pension legislation and by the industry, these new vehicles could significantly enhance the options available.A VPLA fund within a DC pension plan converts the account balance of a retiring employee who elects this option into a monthly pension payable for the remainder of the retiree’s lifetime, based on assumptions about investment and mortality experience. The retiree’s monthly pension amount is variable in that it is adjusted periodically to reflect the actual mortality and investment experience of the pool of retired employees who elect the VPLA option.An ALDA also provides a guaranteed lifetime annuity, but payment from the ALDA can begin as late as the end of the year the individual turns age 85. No more than 25 percent of the individual’s DC account balance can be used to purchase an ALDA. In addition, no more than $150,000 (indexed to inflation) in aggregate from all of an individual’s registered account balances can be used to purchase an ALDA.One of the main differentiators between large DB plans and most of today’s CAPs is their ability seamlessly to provide lifetime retirement income and, ideally, to pool longevity risk. The adoption of decumulation features inspired by the DB world within CAPs, with or without longevity-pooling features, can have a substantial impact on this shortcoming. These programs can and should deliver lifetime pensions and not just accumulated assets for plan members
