Canadian participants in defined contribution plans have few options after retirement that take advantage of pooling for investments and risk, according to an Association of Canadian Pension Management white paper issued Monday.
The paper, “Decumulation, The Next Critical Frontier: Improvements for Defined Contribution and Capital Accumulation Plans,” said life income funds and registered retirement income funds, the most used Canadian post-retirement investment vehicles under the country's tax law, do not pool investment and longevity risk; do not realize economies of scale to reduce administrative and investment costs; and do not offer simple investment menus with limited choice and appropriate defaults.
Life income funds and registered retirement income funds are the two tax-deferred plans where participants can roll over DC assets. Taxes are paid in both upon withdrawals; LIFs have provincial restrictions on withdrawals that require them to have a balance until the investor reaches age 90; RRIFs have no withdrawal limits.
Canadian DC plan participants who have financial guidance, options and protections during the accumulation phase lose those at retirement as they enter the decumulation phase, the paper said. Retirees in those plans are left to estimate their own lifespan and plan their own withdrawals during that time period and, the paper said, are ill prepared to do so.
The paper recommends that DC plan sponsors, service providers, regulators and governments develop best-practice decumulation guides, including provisions for investment advice. It also suggests that provincial and federal legislation be changed to allow for deferred annuitization after age 71, when DC participants are required to withdraw assets from plans, and for longevity risk pooling.
“We believe that the decumulation challenges facing current and future retirees are significant and this issue should be a priority for governments as well as the entire retirement income industry,” Michel Jalbert, chairman of the ACPM board of directors, said in a news release accompanying the white paper. “Moreover, financial literacy will be a key ingredient to our future financial success.”
ACPM said 1.1 million Canadians participate in DC plans. According to Statistics Canada, the current market value of assets held on behalf of DC plan members is C$67 billion ($50.2 billion).
The white paper is available on the association's website.
