Fred Vettese, the chief actuary at consulting firm Morneau Shepell, says that Ontario could and should allow employers with defined contribution (DC) plans to be exempted from participating in the new Ontario Registered Pension Plan (ORPP).
In the latest issue of the Morneau Shepell's Vision newsletter, Vettese notes that the Ontario government only considers defined benefit and target benefit multi-employer plans to be comparable to the ORPP and therefore eligible for exemption, mostly because those two kinds of plans are able pool longevity risk. He argues that, with some legislative changes, DC plans could also be adapted to pool longevity risk at little or no cost.
"What is needed is a decumulation option that pools individual longevity risk among a large number of retirees, provides a reasonable and sustainable level of income and ensures that the remaining assets are invested prudently and cost-effectively," writes Vettese.
In larger DC plans, he suggests this could be accomplished by allowing people to keep their money in the DC fund rather than transferring it out to a Life Income Fund (LIF) or annuity, and the retiree could then draw a monthly income based on the life expectancies of all retired participants. This would eliminate the risk of a retiree outliving his or her income.
"While some rules are needed about how the pooling can be accomplished, there is nothing about this idea that is difficult to implement or even novel," he concludes. "A number of large DC plans are pooling longevity risk now on a grandfathered basis. The average DC plan cannot do it, however, because the enabling legislation and regulations are not in effect in most jurisdictions."