Whose Job Is It to Make VPLA Work?

Variable Payment Life Annuities are much-needed tontine-like retirement products, which are yet to become a reality in Canada. In the April 2023 issue of the Benefits and Pensions Monitor , there is an opinion piece by Greg Hurst , which reflects both political divisions and misunderstandings surrounding implementation of VPLA-based retirement solutions.

The main points of the article can be summarized as follows: instead of trying to revive the Pooled Retirement Pension Plan (PRPP) regulatory regime by making it more palatable to for-profit financial institutions, it's better to create a state-supported public solution, similar to the Saskatchewan Pension Plan.

It is a valid perspective, but Hurst's interpretation is unnecessarily coloured by ideological assumptions. He does not define what a 'better solution' means when it comes to comparing private and public options. Hurst simply discards PRPP on a belief that it was created to somehow further the interests of for-profit financial institutions and to undercut other/better solutions. This is perplexing because the PRPP Act does not require the licensed administrator to be a for-profit institution. A PRPP can be implemented under a trust agreement by non-for-profit institution like a labour union or industry association. Moreover, it takes quite a bit of creativity to demonstrate that the price controls built into the PRPP regime are in the interests of the pro-profit provider.

Hurst continues with an attack on credibility of ACPM (Association of Canadian Pension Management) for its advocacy of changes to the PRPP regulations. Here again, without any discussion on the merits of the ideas, ACPM is cancelled because it advocates the interests of for-profit financial institutions, hence all of its advice in inherently tainted. It is true that ACPM's funding comes mostly from for-profit service providers to pension plans. However, that does not mean that ACPM has no standing in the debate for improvements to the Canadian retirement system, nor that all for-profit institutions have bad ideas or ulterior motives. In fact, the position of the Pension Investment Association of Canada , which is an association of Canadian registered pension plans, is not very different from ACPM's position when it comes to VPLA and PRPP.

Markets for financial service in Canada and elsewhere exist in a public-private partnership. The government licenses providers and controls the level of competition, but it can always take that license away. For most of Canada's history, a state solution was typically used at the initial stage, when the private market was not yet strong enough to provide sufficient access to a financial service. Canadian government annuities were the first form of lifetime income and they existed from 1908 to 1975, when it was deemed that life insurance companies are able to be the sole provider (and perhaps offer a better price for retiring Canadians at the expense of slightly more credit risk). Similarly, Canada Savings Bonds were offered by payroll deduction from 1945 to 2017.

There is a place for a government-sponsored provider of financial services, and that place is not "everywhere". For example, the Saskatchewan Pension Plan is a state-sponsored occupational plan for people who are not in a public or another occupational plan. This is a large province by land mass with a working population of only about 550,000, including over 100,000 covered by provincial government plans. If the government cares about pension coverage, and the low population density makes it unlikely to support an inclusive private solution, it does make sense to create a plan like SPP. It does not mean that a similar solution is necessary for larger markets with greater population density, or with a different earnings profile.

At that same time, the vast majority of Canadians save for retirement through profit-seeking financial institutions. They do need a lifetime income solution (like VPLA). That need is currently unmet, due to many objective reasons. Profit margins are one of the reasons, but not the only one and not even the most important reason. Strict capital requirements for life insurers, rising life longevity (hence longer time collecting annuity payments), low interest rates and adverse selection are all very significant reasons why traditional guaranteed annuities appear overpriced to Canadians.

Saying that all profit-seeking providers are greedy wolfs and have no place in serving Canadians doesn't do justice to the problem at hand. Creating a public solution is always an option, but that is not an easy option and not always the best option in the long term. If we look at the Australian market, which is one of the most developed DC markets in the world, both for-profit and non-for-profit superannuation trusts co-exist and compete, and there is reason to believe that one or the other will completely take over.

It is not an easy task to create a well-functioning public plan administrator, but implementing a public VPLA solution is not just an administrative problem. It is also a business problem, because a government agency would need to take on the job of marketing/advertising the solution, constituent reporting, benchmarking etc. Or else we will never know if the objectives of the plan are being achieved or not.

A public option would need to make many design decisions and there is no guarantee that any of those decisions will be optimal from the viewpoint of retirement outcomes for Canadians. Given how much we don't know about retiree preferences when it comes to tontine-like designs, it would be more reasonable to allow many different designs and let them compete and see who is more successful.

Finally, even if it is deemed that a public option, similar to the UK's NEST, is desirable, it would not be reasonable to bar for-profit institutions from participating in delivering cost-effective lifetime income solutions to Canadians.

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Disclosures: I have no connection with ACPM, and I am a member of SPP.