For many members of defined contribution
(DC) pension plans such as ours, in-plan retirement income options
are very beneficial, yet they are not common in Canada. Many Canadian DC plans
do not offer in-plan retirement income options which forces members to leave
their plan at retirement and move their accumulated pension funds into the
retail financial markets where management fees and expenses can be
significantly higher than in the DC plan.
In a recent survey, 81% of our members told us it was “very important” to them that
our Plan offers retirement income options. CSS has been offering one or more retirement income options to our
members for close to 50 years and the majority of CSS members starting a retirement
income utilize our in-plan retirement income options. We currently offer two retirement income
options:
1) Monthly pension (fixed monthly income for life); and
2) Variable
Benefit payments1 (periodic withdrawals from your CSS investments).
For more details on each of these options
please visit the Retiring
section of our website.
The survey result and the high proportion
of members starting a retirement income who choose a CSS retirement income
option confirms that CSS members highly value the opportunity to remain in our
plan in retirement. It is therefore very
important for CSS to ensure we can continue to offer these retirement income
options that members want and need. In
this article we will look at recent steps that CSS has undertaken to enhance
our ability to offer the monthly pension option for many years to come.
CSS began offering monthly pensions in the
early 1970s. Today, there are over to 6,600
retirees receiving a monthly pension2 from CSS. Some of the key features of the monthly pension are:
Members know exactly how much they will receive in retirement income each month
Members know that they will receive the monthly pension for as long as they live
Members do not need to take responsibility for investing the funds used to generate their monthly pension
The administrative fees at CSS are very low compared to other options available in the retail market
Issue
One of the key risks that members are able
to avoid3 by taking a monthly pension is the risk of outliving their retirement
funds. With a CSS monthly pension, the
member is assured to receive their monthly “paycheque” from CSS for as long as
they live (and for as long as their spouse lives if the member predeceases
their spouse and a Joint and Last Survivor monthly pension was taken).
Just as members do not know how long they
will live in retirement, CSS does not know how long each individual member will
live in retirement either. However, because
we have almost a half century of experience with the monthly pension product
and because we have a large pool of retirees receiving monthly pensions, the
Plan’s actuary4 is
able to accurately estimate an average lifespan for a typical CSS member who
takes a monthly pension. The actuary is
also able to access statistics on how lifespans of Canadians have changed
(increased) over time to estimate how much we can expect CSS members’ lifespans
to improve over time. The actuary is then able to use all of this information
to determine an appropriate “price” for a CSS monthly pension that allows the
Plan to pay the pension to all members taking this option no matter how long
they live. This works very well so long
as the average lifespan of monthly pension recipients doesn’t increase unexpectedly.
We noted above that members offload their
individual longevity risk – the risk of outliving their retirement assets – by
starting a CSS monthly pension. We also
noted that CSS manages this collective longevity risk through the pricing of our
monthly pensions, which includes a provision for the various expected risks of
managing our monthly pensions program. In other words, we maintain an appropriate Pensions Fund surplus to
manage longevity risk - along with all other risks - associated with operating
an annuity or monthly pensions fund.
One thing that the Plan and its actuary cannot
predict, though, is unexpected improvements or increases in pensioners’ lifespans.
An example of an unexpected improvement would be a major breakthrough in cancer research tomorrow that led to a significant reduction in
cancer-related deaths. While this type of breakthrough would be very welcome,
it would mean that CSS would have to pay monthly pensions to many of our
pensioners for longer than we expected when the pension was originally purchased. If the lifespan improvement was significant,
it could lead to the CSS Pensions Fund being unable to absorb the increased
payments required.
Solution
Over the past number of years, the CSS
Board of Directors and management have been analyzing the above issue and
working with our actuary, the Plan’s regulator, and others to find an option
that eliminates or significantly reduces the Plan’s exposure to the risk of having
to make more monthly pension payments than anticipated due to an unexpected
improvement or increase in pensioner lifespans.
As noted at the beginning of this article,
it is very important to CSS and our members that we are able to offer an
in-plan monthly pension for life. We
therefore sought a solution that would protect our pensioners and protect CSS’
ability to offer monthly pensions to members for many years to come. The solution we settled on is relatively new
in Canada but has been used for many years globally and was deemed the best fit
for the needs of CSS and its pensioners.
The longevity risk insurance policy entered
into with Co-operators transfers the collective longevity risk held by CSS at
April 1, 2019, to Co-operators. CSS pays
a quarterly premium for the insurance coverage from the surplus held in the Pensions
Fund to Co-operators and, in return, should the covered population of monthly
pension recipients see an unexpected improvement in their lifespans,
Co-operators will provide payment of the resulting additional monthly pension
payments.
This is a very important and innovative
initiative undertaken by CSS to both continue to adequately protect our monthly
pensions currently in pay, as well as to allow us to continue offering monthly
pensions to our members who want and need them well into the future.
We appreciate that some of the concepts
covered in this article may seem complex (they are!). Should you have any questions or require any
clarification of topics covered in this article, please do not hesitate to contact our office.