'This now allows you to pair both that accumulation and have an appropriate option that will better enable members to then manage a stream of income,' says CAAT's Evan Howard
The Ontario government recently made the decision to enhance pension options in its latest budget and experts believe it could signal a turning point for Canadian DC pensions.
Despite waiting for regulations from all provinces and for a sector long criticized for focusing heavily on accumulation and ignoring decumulation, this small shift is largely being welcomed.
Evan Howard sees Ontario's decision to include variable life benefits (VLBs) and target benefit plans in the budget as a meaningful step toward modernizing retirement options and aligning regulatory frameworks across Canada. He pointed out that provinces are moving in the same direction following amendments to the Income Tax Act, and that Ontario’s action could help drive national harmonization efforts.
“A variable life benefit allows them to have the option to take all or a portion of what they've saved and convert that into a lifetime income stream on an affordable basis. We're very excited about it, we think it's good for the industry generally,” said Howard, chief pension officer at CAAT Pension Plan.
Howard noted that VLBs are still relatively new in the pension landscape and that delays in adoption were largely due to broader governmental priorities during the pandemic. He highlighted that amendments to the Income Tax Act were made approximately 5 years ago, but progress slowed as provinces focused on managing COVID-related challenges.
Now that Ontario has explicitly included VLBs in its budget, Howard sees this as “a real commitment to move ahead with that. I think that's the important thing; that they are moving ahead with it now."
A DB-like option
VLBs offer a critical improvement to traditional defined contribution plans by addressing a long-standing gap in post-retirement income management. While DC plans have primarily focused on building up savings, he pointed out that “there’s never been any minimal thought towards what happens after retirement.”
But VLBs can change that. Howard asserted that by allowing employers to offer a more complete retirement solution whether administering plans themselves or working with providers like CAAT.
“This now allows you to pair both that accumulation and have an appropriate option that will better enable members to then manage a stream of income,” he said.
As for whether VLBs – also known as variable life payment annuities (VPLAs) – will make it easier for employers to enter the pension space, Louis-Bernard Désilets, partner, pension and Marianne Assaf, partner, DC and savings practice leader at Normandin Beaudry emphasized that the current system already provides accessible entry points through several retirement and savings vehicles, like a group registered savings plan (RSP) or a deferred profit-sharing plan (DPSP).
While VPLAs may not lower the barrier to entry, Assaf acknowledged they add value by expanding retirement planning options for employees, underscoring VPLAs can even act as a gateway to features typically associated with DB pensions without the complexity of establishing a full DB plan.
Désilets explained that VPLAs effectively transform DC savings into a more predictable income stream, which mirrors a DB outcome.
“You’re converting your capital amount into a lifetime pension income,” he said, acknowledging the shift doesn’t just address longevity risk but also offers peace of mind. He pointed out that by securing a base level of guaranteed income to cover essential expenses like housing and transportation, retirees are more empowered to use their remaining savings with confidence.
“It’s not so much about solving the longevity problem as it is about giving confidence to spend your money, knowing that you won’t run out,” said Désilets.
For Deron Waldock, he considers VLBs the the most critical element in Ontario’s pension reforms. The partner, national pensions, benefits and executive compensation group at McCarthy Tétrault noted that the government has been building toward this for some time, pointing to a consultation paper released last November that drew numerous stakeholder submissions.
While DC plans have been attractive to employers due to their simplicity, he believes they fall short in protecting retirees from outliving their savings, notably as the primary focus in DC models has been on accumulating assets, with very little attention paid to how those funds are drawn down in retirement.
He sees VLBs to finally address the decumulation challenge by introducing a mechanism that provides retirees with predictable, lifelong income.
“This will be another tool in the toolbelt that will allow a way to get some predictability and income stream for life, as opposed to just a pot of money that you can outgrow,” he said.
He too, believes the inclusion of VLBs and target benefit plans in Ontario’s pension framework could mark a pivotal evolution for the industry. He acknowledged that traditional DB plans have become increasingly rare outside the public sector due to the financial risks they pose to employers.
“The reality is, there’s too much risk for employers. There’s too much expense and too much financial uncertainty,” he said.
Contrastingly, VLBs and target benefit plans offer a compromise: more stability for retirees without overburdening sponsors. Waldock argued that the switch to DC plans left workers exposed to market volatility and forced many to delay retirement.
“What this does, I think, is brings in some certainty as to when plan members are able to retire, because you know what you're going to get at the outset. And I think that's great for the overall workforce because now there's predictability for employers,” he said.
“They know that they will be able to cycle employees and that older employees will leave when they're not as productive. They can bring younger employers on and fill in the ranks so they can hire with a degree of certainty. It's also great for university graduates who are trying to get into the market to find their first job,” he added.
Meanwhile, Nisha Singh, partner and senior consultant at PBI Actuarial Consultants highlighted unresolved issues such as the continued obligation for multi-employer plans to hold annuity liabilities on their books, even after purchasing annuities, something she hopes will change through ongoing discussions with the Ministry of Finance.
She also sees room for improvement, particularly in extending target benefit plans to single employers. She argued this would provide a better option than group RRSPs or traditional DC plans.
“Yes, defined benefit is your gold standard,” she said, “but when it’s group RRSP, DC, even no plan, we do think this is a better option.”
However, Waldock cautioned that these benefits may only be accessible to larger plans with the infrastructure to manage them. Smaller employers likely won’t have the capacity to offer VLBs, meaning participation may be limited. Still, he sees value in proceeding.
“If it’s good, which it is, and it’s a limited segment, then let’s do it and then go back to the drawing board and find something for [the rest].”
