Could this pension solution help Canadian retirees turn their DC savings into a lifetime of low-cost income?

One of the largest defined contribution (DC) pension plans in the world has adopted a made-in-Canada solution, giving members the option to turn their DC savings into what they badly need in retirement: a low-cost lifetime pension income.

Australia’s QSuper – a century-old plan with more than $100-billion (Canadian) in assets – said last month that it will offer its 600,000 members a “ground-breaking” decumulation option. Decumulation is what comes after members leave the workforce, where retirement savings are used to provide retirement income. QSuper designed its lifetime pension income option based on the variable payout life annuity (VPLA) in the University of British Columbia (UBC) faculty pension plan.

Other Canadian pension plans looking to add such an option are out of luck, though. A change in tax policy back in 1988 blocked DC pension plans from providing lifetime payouts to their retiring members by stipulating that such benefits must be provided through annuities purchased from a licensed provider, such as an insurance company. That policy change was meant to prohibit DC plans from making promises about fixed lifetime payments that they may not be able to keep. VPLAs do not actually make such promises, so it seems likely they were swept up in the changes. In any case, UBC’s arrangement was grandfathered, but no new VPLAs have since been allowed.

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