The biggest question for many aging Canadians is how to fund their retirement – and how much they can spend each year to ensure they don’t run out of cash as they age.Nuthawut Somsuk/iStockPhoto / Getty Images
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It’s been three years since Purpose Investments Inc. launched longevity products to help ensure investors don’t run out of money in retirement, and almost two years since Guardian Capital LP released its own “modern tontine” funds. Yet, it’s taking time for the products to gain traction with investors and advisors alike.
The biggest question for many aging Canadians is how to fund their retirement – and how much they can spend each year to ensure they don’t run out of cash as they age. But there are unknown factors as part of that calculation; no one knows how long they might live, or how markets might perform over that timeframe.
Until recently, there had been little innovation in the Canadian market for longevity products beyond annuities, which are a contract with a life insurance company in which the beneficiary pays a lump sum upfront for guaranteed monthly income until death.
That changed on June 1, 2021, when Purpose Investments launched Purpose Longevity Pension Fund, a mutual fund that aims to provide investors with income for life. It has an accumulation class for those younger than 65 who are still saving for retirement and decumulation classes for various age cohorts older than 65 that provide monthly income. While the monthly payments – targeted at about 6.15 per cent of invested capital annually – are expected to rise, they’re not guaranteed and can decline.
When someone invested in the fund dies, their estate gets the initial contribution minus the total amount in income payments they received. (Those who redeem also get their initial investment minus income payments.) The investment gains stay in the fund to top up monthly payments for everyone else.
The fund has about 500 investors in all classes and almost $20-million in assets under management, according to Fraser Stark, president of Purpose’s longevity retirement platform, and it’s up 7 per cent on an annualized basis.
“We knew this fund was going to take time to catch on given how innovative it is, so it’s not a strategy we expected people to pour money into right away,” he explains.
The firm continues to educate advisors and investors about the fund and how it fits into portfolios. Many investors are putting $200,000 to $500,000 in the fund, he says, which for some is around one-third of their total portfolio. “It’s great to see people put more confidence in this product, in this strategy,” Mr. Stark says.
To boost advisor knowledge about longevity risk and the products, Mr. Stark says Purpose Investments is working on a tool to help advisors “connect the financial planning conversation with the portfolio construction conversation.” The tool will help advisors plug in certain information and financial goals, and create a model portfolio that includes longevity products.
Guardian Capital LP launched its longevity products in September 2022. GuardPath Modern Tontine 2042 Trust aims to provide financial security to investors as it pays out lump sums to surviving unitholders in 20 years based on compound growth and the pooling of survivorship credits. Those who die or redeem early leave a portion of their assets in the pool based on how long they were invested.
GuardPath Managed Decumulation 2042 Fund is designed to provide consistent cash flow to investors over 20 years. The Hybrid Tontine Series combines features of both strategies by offering income and payouts to surviving unitholders when the fund matures.
Sta/The Globe and Mail
A spokesperson for Guardian Capital says the Modern Tontine fund has assets under management of $1.6-million, while the Decumulation Fund has $1.2-million in AUM. Advisors and investors aren’t that familiar with the products yet, but as more boomers enter their retirement years, the need for this type of product will grow.
Moshe Milevsky, a finance professor at York University’s Schulich School of Business and chief retirement architect in collaboration with Guardian Capital, says longevity products are complex and it takes time for investors and advisors – who may not see the value of spending time on this issue – to understand them.
While the products have sold, he says, “they haven’t been as successful as I thought they would be a few years ago, and part of it is the learning curve. We might live a long time and that’s going to be expensive. But how much, exactly, of this sort of product do I need in my portfolio? I think that’s where we still need to do a lot of work.”
Jason Pereira, partner, senior financial planner and portfolio manager with Woodgate Financial Inc. in Toronto, says he understands the need for Canadians, particularly those without a gold-plated defined-benefit pension plan, to hedge against longevity risk with their investments. But the challenge is determining what percentage of a client’s portfolio needs to be invested in longevity products depending on myriad factors. As a result, he hasn’t used these products much in his clients’ portfolios.
“The reality is there is no current framework for how much of these [products] you should include in a portfolio and there’s no uniformity to the design,” Mr. Pereira says. He adds that he’s hoping financial planning software will advance to incorporate the issue of longevity.
The other hurdle is many investors don’t want to part with a large sum or portion of their investment portfolio to invest in longevity products. And many advisors or investors aren’t familiar with these products.
“The Canadian market, in general, has an abysmal understanding of longevity risk,” Mr. Pereira adds.
Canada is “lagging” in the availability and variety of retirement and longevity products compared with other countries such as Australia, the Netherlands and the U.S., Mr. Milevsky says. In the U.S., investors can also purchase these products monthly, as they do for other insurance, which is more palatable than paying a large lump sum.
The other issue is many Canadian advisors are compensated based on a percentage of a client’s portfolio, which doesn’t work well as retirees enter the decumulation phase of investing during which they’re drawing down their investments instead of increasing them, he says, adding that more advisors should be compensated on an hourly basis, like many other professionals.
Saving more is not the way to manage longevity risk, Mr. Milevsky says. “The way to manage longevity risk is to hedge it and diversify, and those are just some of the reasons why it’s taking time for these [investment products] to catch on, but eventually they will, like any financial innovation.”
Advisors and their clients also need to get used to the idea that investors should spend all the money they’ve put aside for their retirement, not just live off the income it produces and leave a pot of money at the end for their kids or charity, Mr. Milevsky says. “You were supposed to live off the whole thing, not just the income. You eat the whole tree, not just the apples.”
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