Longevity may not have a single solution, but can annuities help?

The generation that lost access to defined benefit (DB) pension plans is in the midst of retiring. According to Statistics Canada, roughly 41 per cent of Canadian employees in 1991 had a DB plan. Today that number sits closer to 25 per cent. In that same period, life expectancy at birth has risen from 77.78 to 81.65. Life expectancy for those who make it to age 65 has risen from 82.91 to 85.85. Canadians are living longer, but they’re going into their golden years without the guaranteed income that once supported the retirements of their parents and grandparents.

Rohit Thomas, President & CEO of BMO Insurance in Toronto, sees that problem clearly. He adds that longevity introduces the risk of higher costs late in life as people become more likely to have complex healthcare needs. Canadians, he explains, are facing longevity risks that had been transferred to them from their employer sponsored pension plans, putting the onus on them and on their advisors to make an income plan that they won’t outlive.

“I see this as an opportunity. I think the challenge is an opportunity to look at the structures, look at the products that can help with that decumulation. And I think there's an opportunity to refine how we look at the needs of Canadians and customers as they go through ages 65 to 75, and 75 to 85,” Thomas says. “I think of it as an opportunity to think about retirement income, settling your estate and looking at the products that can help there. It’s another area for advisors to provide advice on, an area that most [clients] would not be as familiar with.”

Annuities as a part of the solution

Annuities, to Thomas, are part of the solution to longevity risk. He’s quick to say they’re only a piece of the puzzle, but these insurance solutions that trade off immediate liquidity for guaranteed income are one way for clients to purchase peace of mind through the decumulation cycle. He has already seen how moments of market difficulty or instability create a desire for annuities among clients. During the 2022 bear market, as interest rates rose and the 60/40 portfolio failed to deliver, annuity sales were up.

Now that we’re in the midst of a bull run, he sees less of an appetite for immediate annuities investment. While public markets are roaring, Thomas says that advisors should be educating their clients about annuities, talking about how they’ve changed, how different guarantee terms work, and how they can help control for market volatility when it does emerge.

That education, he says, should come with a continued discussion about longevity risk. Despite years of educational efforts on the subject, Thomas says he’s seen fewer Canadians than he would expect express meaningful awareness of longevity risk. He attributes that largely to stellar markets.

Communicating annuities’ costs, technical details, utility

Key to how advisors educate on retirement longevity risk is an understanding of the technical details in annuities. That begins with a conversation about their inherent liquidity trade off. By giving up immediate liquidity for guaranteed income, Canadians are assuming that they will live a long time and potentially risking some of their capacity to react to major changes in circumstance. Thomas acknowledges that risk, which is why he positions annuities as a piece of the retirement puzzle, used in conjunction with other income sources and other invested assets that can help manage a client’s risk tolerance.

Thomas notes, too, that unlike many other insurance products like segregated funds, there are no enhanced disclosure requirements around total cost reporting for annuities.

More fundamentally, Thomas believes that any recommendation of annuities should be considered in the context of holistic financial planning. These products could fit into the estate planning, decumulation, and wealth transfer work that so many advisors are doing for their clients now.

“Understanding that as you live longer, there's more probability for health issues to come up. How do you sort of deal with those health issues? Long term care, Alzheimer's, all those things which unfortunately are a byproduct of an aging population or us living longer. How do you sort of mitigate or account for that or have products that can help you through those scenarios?,” Thomas asks. “I always look at this as exactly what advisors do is understanding holistic planning, providing advice at different stages of that career. And this is an important area that we're starting to see continued, you know, as the population ages, as retirees become a very important segment of the market.”