Longevity risk has been transferred from institutions to individuals, but Sam Febbraro says solutions can still be found
Longevity is a textbook ‘good problem’ for Canadian society, one that financial services professionals now have to solve. Thanks to advances in health care and wide access to health care services, Canadian life expectancy continues to rise. Life expectancy at birth is now 82.16 and life expectancy at age 65 is now 86.15. That feat of longevity now creates a new slew of risks for retirees, namely that they will outlive their retirement savings, especially if they face high health care costs late in life. Those risks are compounded for the 52 per cent of Canadian workers who, according to a recent study by IG, do not have access to any kind of employer-sponsored pension plan. Canadians now need to plan to live off their savings for decades, and many of them need to plan to do that alone.
Sam Febbraro, the President & CEO of Canada Life Investment Management, is working on this problem step by step. Febbraro outlined the range of uncertainties that retirees face as they live longer and highlighted how consistent retirement income and clear decumulation strategies can help manage those uncertainties. He stressed the importance of the advisor in this period, noting that decumulation can be far more complex and challenging than the accumulation phase that precedes retirement.
“I think retirees are facing several key uncertainties. They don't know exactly how long they'll live, what future market returns are going to look like, or even how inflation will affect their purchasing power over time. And taken together, these risks can have a significant impact on retirement security,” Febbraro says. “What we're seeing is that longevity risk has increasingly shifted from the institution to the individual. And retirement planning today requires a much greater focus on generating dependable income and managing risk while over what could be a very long time.”
The risks to manage in decumulation
Previous generations of retirees tended to have greater access to defined benefit (DB) pension plans. Those plans, Febbraro explained, offered guaranteed lifetime income and professional investment management. For the roughly 7 million Canadians who still have access to DB plans according to StatCan, longevity risk is not as much of a factor. Those Canadians have fewer decumulation decisions to make, because they know they’ll receive consistent retirement income that rises with inflation.
Those Canadians without DB plans have far more decisions to make, even if they’ve done a good job building wealth over time. Febbraro believes that advisors play an essential role here, as the industry shifts into managing the complexities of decumulation. Those advisors need to make their clients aware of five areas of risk: longevity risk, market risk, sequence of returns risk, inflation risk, and behavioural risk.
Longevity risk, Febbraro explains, amounts to the chance a retiree outlives their savings. Market risk represents a prolonged period of poor returns. Sequence of returns risk is related, but comes when those market downturns are poorly timed with key moments in retirement. Inflation risk is perennial, but elevated in recent years as the cost of living rises. Finally, there’s behavioural risk which can plague retirees who either become too conservative in retirement or react emotionally during periods of market volatility. Advisors have to manage all those risks as they help clients decumulate.
Solutions for income, stability, confidence
Febbraro says that his team’s focus at Canada Life is in providing solutions that offer three features: sustainable income, reduced volatility, and increased confidence. He cites the example of his firm’s Risk Managed Portfolios, which seek upside capture on capital markets but use a host of risk management techniques like the sale of covered call options to provide monthly distributions and offset market volatility.
There are also a host of older solutions that still provide value for retirees. Annuities, Febbraro notes, can help address longevity risk and provide predictable income, but they work best in tandem with other tools and solutions that retain exposure to market growth or offer liquidity that can safeguard against the unexpected.
In Febbraro’s view, there is no single innovation that solves for all five risks retirees face. Instead, he believes there needs to be a basket of solutions and tools that work together to achieve different retirement objectives. That basket can be complex for advisors to explain, but Febbraro argues that communication and education based on outcome can be the most valuable way for advisors to succeed.
“Retirement planning should be outcome-focused, not product-focused. And I think the industry has been very focused on the product, we should be focused on the outcome,” Febbraro says. “As an industry, we've spent decades helping Canadians save for retirement. Now we need to give the same level of attention to helping them live in retirement. And that means placing greater emphasis on decumulation planning, retirement income strategies, and advice that addresses the real risks retirees face, particularly longevity risks.”
