The Liberal government signalled its intention to proceed with annuity measures first proposed in the 2019 federal budget, with funding set aside for tax administration.
The advanced life deferred annuity (ALDA) and variable payment life annuity (VPLA) were cited in the federal government’s 2021 budget, along with other 2019 tax measures, for CRA administrative funding of $10 million in 2021–22 and a total of $41 million through 2026.
ALDAs and VPLAs are “always a standing agenda item” for the Canadian Life and Health Insurance Association (CLHIA), said Noeline Simon, vice-president, taxation, pension and reporting at CLHIA.
“It is something the insurers are interested in,” she said.
The ALDA would allow a client to move some savings out of their registered retirement accounts to an annuity deferred until age 85. (Annuities purchased with registered funds generally begin at age 71.) A purchase cap was set at 25% of the source plan, to a maximum of $150,000.
The product would help manage longevity risk as well as clawback of government benefits like OAS and GIS, and help reduce a client’s annual tax bill.
The 2019 budget also proposed that pooled registered pension plans and defined-contribution plans be allowed to provide VPLAs to members directly from those plans. The VPLA provides payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of annuitants.
The government introduced draft legislation in July 2019 with tax changes to allow for the new annuity measures. The public comment period for the legislation ended in October 2019, but the legislation fell from the agenda with the federal election that fall.
The 2021 budget said the government would take into account the consultations and deliberations that have already taken place.
“[CLHIA] members need more certainty before they can start doing some of the legwork” on these new measures, Simon said, referring to the need for the government to pass legislation and develop regulations.
Now that the budget has been tabled, CHLIA will continue talking with the federal government as well as provincial regulators, “bringing some awareness of where things stand and what needs to be done,” she said.
One concern is limited access to the VPLA.
In a pre-budget submission, CLHIA said the VPLA measures would limit these products to members of large plans, “disadvantaging those who work for small employers or save through other types of retirement plans.”
The government should allow standalone VPLAs for all pool participants of registered retirement plans “to provide the broadest possible access,” the association said.
It also suggested that annuities should be allowed in TFSAs, at least for older Canadians.
While an ALDA first become available in the U.S. in 2014, demand has been “rather dismal,” said Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto, who named the ALDA.
The low uptake may have to do with strong equities performance and low interest rates, he said in an email. “Bear markets are much kinder to ALDAs.”
Further, the trend among all annuity buyers over the last few years has been to pay for additional insurance riders that guarantee payments to survivors and the estate after the annuitant has died.
“In other words, they don’t want pure high-octane longevity insurance,” Milevsky said. “The demand is in the exact opposite direction of ALDAs, with their higher mortality credits,” which get pooled.
Still, Milevsky said he was optimistic that retiring Canadians will eventually realize they can’t finance fixed spending needs during retirement with a fluctuating portfolio.
“When that light bulb goes on, there should be a rush — or at least [a] crawl — to ALDAs,” he said.