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My latest MoneySense Retired Money column looks at two longevity-related financial products that the industry may develop after the road to them was paved in the March 2019 federal budget. You can access the full column by clicking on the highlighted headline: A new kind of annuity designed to help Canadian retirees live well, for longer.
Once they are created by the industry, hopefully in the next year, these new products will introduce an element of what finance professor Moshe Milevsky has described as “tontine thinking.” In the most extreme example, a tontine — often depicted in fictional work like the film The Wrong Box — features a pool of money that ultimately goes to the person who outlives everyone else. In other words, everyone chips in some money and the person who outlives the rest gets most of the pot. As you can imagine at its most extreme, this can lead to some nefarious scenarios and skulduggery, which is why you occasionally see tontines dramatized in film, as in The Wrong Box, and also TV, as in at least one episode of the Agatha Christie TV adaption of Miss Marple.
Fortunately, the Budget doesn’t propose something quite as dramatic as classic tontines but get used to the following two acronyms if and when the insurance and pension industries start to develop them: ALDA is an acronym for Advanced Life Deferred Annuity. As of 2020, ALDAs could become an investment option for those currently with money invested in registered plans like RRSPs or RRIFs, Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).
The other type of annuity proposed are Variable Payment Life Annuities (VPLAs), for DC RPPs and PRPPs, which would pool investment risk in groups of at least 10 people. Not quite tontines in the classic academic sense but with the pooling of risk VPLAs certainly have an element of “tontine thinking.”
The budget says a VLPA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VLPA annuitants.” That means – unlike traditional Defined Benefit pensions – payments could fluctuate year over year.
There is precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967.
The budget said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation. But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments.
Up to $150,000 of registered funds can go into an ALDA
An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit you are subject to a penalty tax of 1% per month on the excess portion.
Consider an ALDA if you’re worried you’ll outlive your money
The main reason to consider an ALDA is because you are worried about outliving your money. Before now, annuity payments had to start by no later than the year after you turn 71, like RRIFs. But ALDA payments can be deferred as late as the year you turn 85.
As Milevsky points out, “With ALDA, you don’t have to defer (start income) all the way at age 85, but rather up to age 85. So, you can delay to 75 or 80, if that suits your plans and preferences. 85 might sound extreme to many. I personally purchased an ALDA (in the US, since I’m a dual citizen) delayed to age 80.”
Milevsky, who has written entire books on tontines, won’t go so far as to describe ALDAs or VLPAs as tontines, a term that in any case is unlikely to be adopted by the financial industry. He says the ALDA in the budget guarantees an income starting at some advanced age and is backed by an insurance company with capital and reserves. By contrast, “A tontine requires absolutely no insurance company or entity to back up or guarantee payments. The risk is absorbed by the pool or syndicate.”
“Time will tell if these things (ALDA and VLPA) ever get off the ground, but the Canadian runway has now been paved. Time will tell” what kind of cars the industry develops, Milevsky says. He notes the budget bill hasn’t passed yet but “ultimately sponsoring companies will have to step up to the plate and start offering these plans. Only once those pricing details are available, can anyone judge whether they are good or bad.”
