Income for Life: How It’s Possible

When we designed the Longevity Pension Fund, we wanted to find a solution to address the growing issue of income instability for Canadian retirees. To us, a simple solution to this problem involves providing income for life.

With an aging population and life expectancy increasing, we knew we had to provide Canadians with a practical solution. The Longevity Pension Fund’s income-for-life design, with starting distributions targeted at 6.15% for 65-year-olds, might seem too good to be true, but it is a testament to over three years of hard work, innovation, and collaboration with leading retirement and pension experts around the world.

So how did we do it?

1. Reverse Engineer a Pension Fund

To ultimately build the Longevity Pension Fund, we started by reverse engineering how pension funds and insurance companies provide long-term income. Why? There are lifetime income products out there, but some (e.g., defined-benefit pension plans) are not available to everyone and others (e.g., annuities) may not be widely used, either because they’re inflexible (typically the purchase of an annuity is a permanent decision where you no longer have access to your capital once the purchase is made) or because individuals feel like they’re betting against a large insurance company on their own life expectancy.

Consequently, we re-engineered how to deliver lifetime income inside a mutual fund structure so that all Canadians could have access to a defined-benefit pension-like plan where, unlike a typical insurance annuity, the investor can change their mind and redeem at any time.*

2. Assemble a Talented Team of Retirement Experts

Reverse engineering was not an easy feat. We participated in discussions with the Ontario Securities Commission regarding the fund design and answered questions about the innovation and novelty of the structure. Then, we built the actuarial models and structures similar to those at large pension funds.

Every step of the way, key decisions were debated by some of the top minds in the retirement space. We developed the fund in consultation with a group of industry leaders, including international pension expert, Keith Ambachtsheer of KPA Advisory Services Ltd.; Bonnie-Jeanne MacDonald, Director of Financial Security Research at Ryerson University’s National Institute on Ageing; as well as retirement finance author and former Chief Actuary of Morneau Shepell, Fred Vettese.

3. Provide Income for Life through Longevity Risk Pooling

Half of Canadians aged 55+ do not believe their retirement savings will sustain them for the rest of their lives or are unsure if they will.

What makes the fund such a unique solution is that it incorporates the principles of longevity risk pooling into the structure of a mutual fund. To do this, we worked closely with our Custodian and Record Keeping partners to collect and provide the required investor data. Our models also incorporate actuarial assumptions that were reviewed and stress tested by Morneau Shepell.

This strategy was taken to close the retirement savings gap, so that Canadians would no longer have to worry if their income in retirement will last their entire life, however long it is.

Longevity Risk Pooling Explained

Longevity ‘risk pooling’ groups each investor’s individual risk of outliving their income together with other investors in a pool, thereby reducing collective risk. This is the same general concept underpinning pension plans and is cited as the optimal strategy for drawing down wealth in retirement by many retirement scholars.1

In order to appropriately pool longevity risk, the Longevity Pension Fund groups individual investors into cohorts of people roughly the same age—for example, people born from 1954-1956. While the fund’s assets are managed as a single portfolio, distribution rates are set for each cohort independently.

With this risk pooling structure, when an investor passes away and leaves the cohort, they are automatically redeemed at the lesser of either the remaining capital of their initial investment that has not yet been paid out via distributions, or the net asset value (NAV) of their initial investment (if NAV has decreased). The profits from the investor’s initial investment (which we call “longevity credits”) remain in the fund to be distributed to other members of the group as income from the fund income.

It’s this structural design that should enable distribution levels for remaining investors to be raised over time, as more longevity credits are added in the pool.** These longevity credits lower the net required return for the fund to roughly 3.75% to generate the lifetime income rates that we’re targeting.

Essentially, people are leaving the pool faster than dollars are, leaving more dollars per person remaining in the fund. For a sample case study detailing how this would play out, please read here.

Of course, distributions are not guaranteed and could increase or decrease. However, we are confident in this product design and believe we will sustain our target payout rates, as we’ve used conservative assumptions to establish the initial distribution levels.

At the end of the day, our mission with this fund is to give people the stability and confidence to make the most of their post-work years.

We are extremely happy with our solution and proud to be recommended by the Canadian Association of Retired Persons (C.A.R.P.), Canada’s largest advocacy association for older Canadians promoting equitable access to health care, financial security, and freedom from ageism.

If you have more questions about how this is possible, please take a look at our FAQ, and don’t hesitate to reach out to us at contact@retirewithlongevity.com.