This article is part of a new Globe Advisor series, Pensions Unpacked, exploring how workplace pensions fit into retirement strategies, and the technical details and decisions that come with the plans.

The steady decline of defined-benefit (DB) pension plans has led to the creation of new pension models aimed at helping employees save money for retirement and employers seeking to attract and retain staff.

The newer plans fall into the broad category of pooled pensions. Contributors combine their savings to benefit from a wider range of investments at a lower cost than investing on their own, and they potentially share longevity risk, experts say.

Pooled pensions are largely geared to self-employed people or workers at small and medium-sized companies that don’t offer more traditional workplace pensions.

The solutions include those administered by financial institutions on behalf of employers, multi-employer pension plans, variable payment life annuity (VPLA) plans, and the more recent tontine-style mutual funds.

“It has been really interesting to see all the inventive structures over the past several years,” says Barbara Sanders, associate professor at Simon Fraser University, who specializes in pension plan design and risk management. “It’s a way of getting an income foundation in retirement for people who don’t currently have access to it.”

Ms. Sanders argues that pooled pension plans that provide longevity protection are an increasingly important piece of the retirement puzzle as more Canadians are retiring with lump-sum benefits from defined-contribution plans (DC) and looking for ways to convert their savings into reliable income.

As these DC plans mature, Ms. Sanders says there’s a new need to provide solutions, particularly as people live longer and the cost of living increases.

“We need to be as efficient as possible in generating income in retirement, and pooling allows us to do that.”

Pooled registered pension plans

When people think of pooled plans, they often consider the pooled registered pension plan (PRPP), which is sponsored by an employer and managed by one of five licensed insurance companies. The employee’s contributions and the employer’s – if they choose to contribute – are combined in the employee’s account.

PRPPs are overseen by the Office of the Superintendent of Financial Institutions and available only to employees in Yukon, Nunavut, Northwest Territories, Ontario, Nova Scotia, Saskatchewan and British Columbia, as well as to federal employees working in sectors such as banking.

David Bardsley, partner and head of KPMG in Canada’s wealth and asset management advisory division, says the benefit of PRPPs is they can provide more consumer choice than other pension plans, including the ability to move the pension from one provider to another. PRPP members can also adjust their risk to more conservative or higher-risk portfolios.

For those who want an “easy-to-manage pension product,” and who don’t have access to a large-scale pension plan, he says PRPPs offer “the breadth of exposure to the market instead of managing their retirement savings independently.”

As with DC plans, PRPP funds are generally “locked in” until retirement, at which point the individual can set up a withdrawal plan or move the accumulated savings into a locked-in retirement account.

Ms. Sanders says PRPPs don’t yet offer longevity pooling like VPLAs do, “but hopefully they will soon.”

VPLAs, or ‘dynamic’ pensions

Ottawa passed legislation in 2021 that allowed people with DC plans and PRPPs to set up what are known as variable payment life annuities (VPLAs), a solution for those already retired. Funds are pooled with other retired plan members and invested in a portfolio of stocks and bonds. Pension payments are made to members based on the investments’ performance.

VPLAs, which aren’t yet widely available, enable retirees to exchange some or all of their retirement savings for monthly income.

Ms. Sanders and other pension experts prefer to call VPLAs “dynamic” pensions, because they say the term reflects the fluctuation of payments from one year to the next and distances the product from traditional annuities.

She says that, because of longevity pooling, VPLAs give retirees the opportunity to generate more lifetime income than investing in similar assets on their own. That’s because a large enough pool can afford to pay income safely based on the average future lifetime of the group, but planning for only the average life expectancy would be a risky undertaking for an individual.

The downside is any assets committed to a VPLA are left behind when the member dies, she says, so there’s no inheritance.

For those concerned about the potential loss of value if they die early, she notes these pools can be structured to include a death benefit, such as a money-back option in which money can be paid to beneficiaries or the estate.

Multi-employer pension plans

A multi-employer pension plan (MEPP), as the name suggests, allows different organizations to participate in a single pension plan, taking advantage of economies of scale.

Some examples of MEPPs include the Canada-Wide Industrial Pension Plan, the University Pension Plan, which includes five Ontario universities, and the CAAT Pension Plan.

MEPPs allow employees to continue their pension coverage if they work for another employer who participates in the plan, so they’re popular in industries such as construction, nursing, entertainment and retail.

There are both DB and DC MEPPs. Upon retirement, DC plan members are responsible for choosing their own income withdrawal strategies (such as purchasing annuities, transferring assets into another locked-in account, withdrawing their assets gradually, or buying into a VPLA if this option is available). DB pensions are paid by the pension plan. Some MEPPs combine elements of DC and DB plans.

Mutual funds with longevity pooling

A newer addition to the pooled fund space is Longevity Pension Fund, the first “income-for-life” mutual fund launched by Purpose Investments Inc. in 2021. It incorporates longevity risk pooling and aims to provide investors with income for life.

Guardian Capital LP launched its own longevity products in September, 2022, the GuardPath Modern Tontine 2042 Trust and the GuardPath Managed Decumulation 2042 Fund, but those funds are closing later this month.

 

 

 

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