The pension pretender

Hey there, time traveller!
This article was published 28/08/2021 (1856 days ago), so information in it may no longer be current.

A new financial product aims to fill void for many Canadian workers’ retirement finances. That gap being having no workplace pension plan.

Pensions are considered a pillar of retirement finances, particularly defined benefit pensions (DBs) — mostly offered in public sector jobs.

The golden goose of workplace pension, DBs offer steady, guaranteed payments of monthly income for life.

That’s in contrast to most private sector pension plans, typically defined contribution (DC) pensions where the employee and employer contribute over time, and what’s left at retirement is a pool of investments from which to build an income.

Defined contribution plans are generally less desirable. Yet only about 30 per cent of Canadian workers have a DB, Statistics Canada data show. (Even fewer have a DC plan.)

That leaves more than six in 10 workers without a workplace pension — a figure growing with each passing decade.

In turn the financial industry has concocted many products to do what pensions do: provide guaranteed income. Most notably annuities fill this need. These are insurance products in which you turn over a sum of cash to an insurer who then provides a set payment for life.

Variations have evolved over the years, including guaranteed minimum withdrawal benefits (GMWBs). These annuities come with additional benefits from an ability to provide income for a surviving spouse to the opportunity to increase the monthly benefit over time. These riders, as they’re called, don’t come cheap.

In turn the knock against GMWBs are high fees.

Enter Purpose Investments Inc.’s Longevity Pension Fund, marketed at “the World’s First Income-for-Life Mutual Fund”.

It’s low-fee, and “effectively lets people insure against a very long life,” says Fraser Stark, president of the Longevity Retirement Platform at Purpose Investments Inc, which offers this mutual fund product.

At first glance, the fund seems to offer a lot of upside to individuals retiring without a pension. Most notably it offers a potential 6.15 per cent distribution payment, about 1.5 to 2 percentage points more than most GMWBs. As an example, a retiree at age 65 investing $200,000 in the fund would receive about $12,500 per year until death, Stark says.

As mentioned fees are as low, starting at 0.6 per cent per year, a fraction of GMWB product fees (i.e. 2.75 per cent). What’s more, any remaining invested capital is returned to the estate upon death. Investors also can get back their remaining capital if they leave the fund. “Unlike almost any other lifetime income product, there is no difference in treatment between someone choosing to redeem and someone passing away,” Stark says.

So if that individual investing $200,000 dies at age 70, the estate would likely receive $140,000 in remaining capital. Or if that same individual lives, but decides to cash out at 70, the amount of capital returned would also be $140,000.

How Purpose provides this flexibility is what makes the fund unique.

Investors are placed into age cohorts where investment returns — on a balanced portfolio of exchange-traded funds (ETFs) — are locked in as “longevity credits,” Stark says.

So although those who die early or leave the fund get their remaining capital back, the returns on investment remain in the fund, benefiting remaining investors. The upside is these investors could see their monthly guaranteed payment increase. As well, if the fund’s underlying investments do better than the projected (exceeding returns of about 3.5 per cent annually after fees), the monthly benefit could also increase.

Yet the opposite applies should poorer than expected performance occur: the benefit could decrease.

That’s important to understand, say retirement planning experts.

For the pension-less worker, the fund is innovative and potentially useful, says Daryl Diamond, a Winnipeg retirement income planner, and author of Retirement for the Record: Planning Reliable Income for Your Lifetime … to the Soundtrack of Your Life.

“It is encouraging… Purpose is looking for unique and different solutions to address this issue of a lack of defined benefit pension,” says the certified financial planner with Diamond Retirement Planning.

Yet he does have a bone to pick with how it is being marketed.

“If you see ‘pension’ and ‘income for life’, you assume two things,” he says. “One is it provides income for life, and second, with a pension, the value of monthly payments generally doesn’t have the potential to decrease, but those two features are not truly present in this offering.”

Getting past Purpose’s initial pitch, its marketing documents do make clear the distribution amount is not guaranteed. Other key nuances involve the return of capital for investors who leave or die. Diamond points out this amount too could be less than assumed if market returns are less than expected.

Winnipeg portfolio manager Grant White also has similar concerns.

“Another is you don’t have control over your income.” Often retired clients want more income paid from savings earlier in retirement when they are more active, says White, president of Endeavour Wealth Management.

“This program works the opposite where the income seems like it will shoot up toward the end of life.”

That may be attractive for individuals worried about running out of savings. As well, the Purpose fund may appeal to do-it-yourself investors, looking for steady, foundational income to add to guaranteed sources from Canada Pension Plan and Old Age Security, he says.

“It’s an interesting solution, but it’s not a silver bullet by any stretch,” White adds.

As Diamond further notes, investors should consider alternatives before jumping aboard.

“Anyone looking at this needs to be familiar with its limitations,” he adds.

“The bottom line is buyers need to be aware.”