The Longevity Pension Fund’s announcement set off a flurry of responses, with a mixture of pleasure, curiosity, confusion, and outright contempt and dismissal.
The fund makes use of an fascinating and progressive construction. For a backgrounder on the providing, you may begin with this excellent 2018 publish on MoneySense from Jonathan Chevreau: Why Ottawa must push for tontine-like annuities.
From that publish, referencing a research carried out by retirement skilled and educational, Moshe Milevsky says…
“Whereas a tontine revival may make sense world wide—the pension and longevity tendencies are virtually common—they make explicit sense in Canada. The authors state they “imagine that Canada has a dearth of merchandise for hedging private threat, in comparison with the U.S. market.’ They know of no Canadian insurance coverage firm that gives a real deferred earnings annuity (DIA or ALDA), nor do they provide a variable earnings annuity or equity-indexed annuities with dwelling advantages: all obtainable within the U.S. The closest we’ve got are segregated funds, and so they actually aren’t that nice so far as guaranteeing lifetime earnings.”
All mentioned, the Longevity Pension Fund is not a tontine (name it a contemporary tontine if that makes you cheerful); it’s extra like a pension mannequin that could be a mutual fund. Whereas there are underlying funding belongings, the key sauce is the mortality credit. From the publish on my web site, and an evidence provided by Function CEO Som Seif…
“It’s primarily based on what they name Longevity Threat Pooling. The distinction between the required return on the fund (internet 3.5%) and the earnings paid to buyers (6.15%+) is as a result of when individuals purchase, they get their earnings, however as some individuals redeem/go away earlier, they go away behind within the pool their returns on their invested capital (they get their unpaid capital paid out upon demise or redemption). These returns left behind cut back the overall return required to offer the earnings stream for all buyers.”
Keep tuned. Jonathan Chevreau will likely be again subsequent week with a devoted publish on this new retirement providing.
Whereas there may be extra analysis to do, I’m within the camp that this pension/mutual fund has the potential to be a game-changer for Canadian retirees.