Decumulation a challenge as retirees struggle with options

A pension industry association is calling on stakeholders to develop a better solution

Decumulation a challenge as retirees struggle with options
As elderly Canadians comprise a bigger percentage of the population than ever, shifting from retirement saving to retirement spending is becoming a greater concern. Upon retirement, the tasks of picking investment options, estimating one’s longevity, and assessing the adequacy of one’s nest egg will be crucial.

Unfortunately, many retirees can’t handle such money-management problems.

“According to a US study, titled The Effects of Conflicted Investment Advice on Retirement Savings … high costs, poor decisions and conflicted advice can produce retirement incomes significantly less than if institutional fees, smart defaults and fiduciary oversight were applied,” said Kathy Bush, chair of the National Policy Committee at the Association of Canadian Pension Management (ACPM), in a piece for the Globe and Mail.

She noted limitations with current decumulation options. According to Bush, retirees may find individual products such as annuities inflexible, expensive, and sensitive to inflation and interest-rate fluctuations. Life-income funds (LIFs) and registered retirement income funds (RRIFs), which act like capital accumulation plans (CAP) in reverse, can be risky because they’re dependent on longevity and investment-return assumptions.

“The Association of Canadian Pension Management (ACPM) believes that CAP sponsors and regulators, service providers and governments need to work together on another solution,” Bush said. She noted that more sophisticated options and processes are available in Australia, Britain, and the US to address some of the current issues.

“As a start, we need to offer retirement-plan designs that provide for managed withdrawals, longevity protection, access to lump sums, inflation protection and default options,” she said. She recommended that they include features that help retirees with investment decisions during the savings phase, such as low cost, limited choice, and clear communications.

Bush also cited limits with advisor- and employer-provided decumulation options. Retirement-income options obtained through advisors provide freedom and flexibility, but they could be expensive. Meanwhile, employers hesitate to provide default decumulation options or retiree assistance unless they have liability protection. “Improving the disclosure of costs and offering employers some liability protection would provide retirees with better choices and improve outcomes,” she said.

Finally, she said group plans would be good to allow retirees to access familiar funds and instruments, pool investment risks, and harness benefits from economies of scale. But such plans should be designed under a regulatory framework that recognizes assets outside government- and employer-sponsored retirement savings — “such as houses, inheritances and personal savings” — and requires longevity protection.

“Our government and financial-services industry have done a tremendous job expanding the use and success of retirement-savings plans,” Bush said. “Where we must improve, however, is in the decumulation of those savings.”

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