An array of registered retirement investment vehicles approved by the Canadian and provincial governments await those who will be retiring with defined contribution plan assets, but those retirees will need to get up to speed on what each investment option does.
According to the Association of Canadian Pension Management, Toronto, the four options retirees can choose for their defined contribution retirement assets at age 65 are:
- individual life income funds or registered retirement income funds;
- group LIFs/RRIFs;
- annuities; and
- direct DC variable withdrawals.
Life income and registered retirement income funds are the most common choice for DC retirees, according to the ACPM report, “Decumulation, The Next Critical Frontier: Improvements for Defined Contribution and Capital Accumulation Plans,” released March 27. Assets in both the LIF and RRIF are taxed upon withdrawal.
LIFs are locked-in retirement funds, meaning retirees cannot take lump sums from them but instead can take set withdrawals based on federal and provincial limits. RRIFs do not need to exclusively contain assets from a retirement fund and can include assets from individual retirement accounts like registered retirement savings plans. For both funds, retirees at age 71 are required to withdraw a percentage of assets from the plan, with the percentage increasing annually as the retiree gets older.
Individual LIFs and RRIFs can be obtained from insurance companies and financial services firms like banks.
Payouts from RRIFs and LIFs are based on minimum requirements set by the federal government with maximums set by each province, said Idan Shlesinger, Toronto-based senior partner in Morneau Shepell Ltd.'s retirement pension consulting practice and managing partner of Morneau Shepell's capital accumulation plans services practice.
“We see two main approaches to employer-sponsored decumulation,” Mr. Shlesinger said. “The first, and simplest, is to allow for variable payments directly out of a DC plan. The payments are subject to very similar rules as would apply to LIFs, and subject to provincial pension regulation. This can be a simple and seamless process for the plan member, and investments offered can be very similar, or even identical to those in accumulation. The two main weaknesses of this approach are: one, not all provinces permit these payments out of the pension plan, and two, this approach can only accommodate pension money — not registered retirement savings plans (Canadian personal retirement accounts) which are also very popular vehicles.”
The alternate approach, Mr. Shlesinger said, is to register a separate group LIF and/or group RRIF. “The advantage here is that you do not have to deal with jurisdictional issues, and can accept pension and RRSP money. However, the experience is slightly less seamless for members as they must first transfer their money to this vehicle before making income withdrawals – this transfer can be very simple and streamlined, but it is still an extra step. Also, group LIFs and RRIFs must comply with RRSP investment rules which are slightly more restrictive than pension rules.”
John D'Agata, director, pension administration at McGill University, Montreal, said the school offers both group LIFs and RRIFs to retiring participants in the university's C$1.47 billion ($1.1 billion) hybrid defined benefit/defined contribution plan. Both funds require retirees to make the investment decisions on the assets. In McGill's case, the funds offer retirees five similar options from the DC plan; but they aren't exactly the same, he said.
“We try to mimic the investment choices under the pension plan,” Mr. D'Agata said, “but this is where under the law we have to determine what qualifies as an investment for RRIFs and LIFs.”
The McGill plan, begun in 1972, originally used annuities for decumulation, “but we stopped that when liquidity and interest rates became issues; we got more active management as we went on.”
Also, because variable annuities are not allowed in Canada, the nature of fixed annuities can deter retirees who are looking for investments from which they can withdraw more assets when needed, as with health emergencies.
“The issue is, do you want to force people into annuities if they don't want to make that choice? Because of that, there are a number of members who stay in their DC plan” after retirement. “It usually has better investment and record-keeping fees than what's available outside of it, and it has professionals monitoring those investments. But plan sponsors are asking, should they permit that? Is having them stay in the plans in (the plan sponsors') best interest?” said Kathryn Bush, partner at the law firm of Blake, Cassels & Graydon LLP, Toronto, chairwoman of the Association of Canadian Pension Management National Policy Committee and chairwoman of ACPM's decumulation subcommittee.
One area in which Canadian DC plans could improve their post-retirement investment options is by moving to a trusteed plan structure from the current single-provider system that predominates, and to incorporate open architecture in their options, said Matthew Mayer, senior vice president, Northern Trust Canada, Toronto.
But not all agree that open architecture would help, given the lack of investment advice and general knowledge on investments among retirees. “That's a lot of lipstick on a very ugly pig,” said Martin Leclair, vice president, investment and benefits consultant Proteus Performance Management, Toronto. “It's not the investments, it's the knowledge, the understanding. A change in structure won't change those retirement needs. What will change things is planning; what will change things is education. Open architecture is not really helping the plan member retire.”