Ontario is consulting on a new pension option, known as a variable life benefit (VLB), that would allow pension plan members to opt for a lifetime monthly benefit geared to investment performance.
The province published a consultation paper on the creation of a legislative and regulatory framework to allow the option (also known as a variable payment life annuity) for certain sorts of pensions, including pooled registered pension plans, defined contribution plans, and plans that allow voluntary contributions.
According to the consultation paper, the new payout option was made possible by changes to federal tax law in 2021, but also requires amendments to provincial pension legislation.
The current options for retirees include transferring their pension money to a locked-in retirement account, purchasing an annuity from an insurer, or leaving their money in their pension fund. The VLB option would allow retirees to invest some or all of their pension holdings in a fund — managed by the plan administrator — that makes monthly payments to members for life.
“These monthly payments would vary depending on the VLB fund’s actual rate of return relative to its expected return, as well as the mortality experience of the members in the VLB fund relative to the assumed life expectancy,” the paper noted.
Plan sponsors would be responsible for the design of the VLB, including its investment strategy, fees and compliance with the provincial legislation. The VLB funds would have to be registered with Ontario’s pension regulator.
“Plan administrators would retain fiduciary responsibility for the VLB, which includes the requirement to adjust benefits to reflect investment returns and mortality experience,” it said.
Under the tax rules, once a retiree purchases a VLB and receives a payment, their assets are locked-in to the fund, however the rules do allow funds to be structured to provide a partial return of capital if the plan member dies before receiving payouts that equal their initial investment.
In the consultation, the government said it is seeking feedback on a framework for VLBs that protects plan members, enables them to make informed decisions about their options, minimizes the regulatory burden, and harmonizes with the rules in other provinces.
The paper noted that fees are particularly important to a VLB, since they represent “a lifelong commitment and the fees charged could impact the amount of the benefit a member receives.”
By contrast, traditional annuities don’t charge annual fees and the benefits are guaranteed — and retirees that manage their own investments can shop around for more competitive fees.
Given the importance of fees, the paper is seeking feedback on regulating those fees.
It also said that effective disclosure to plan members will be “critical.” Consequently, it proposes plan members get upfront disclosure before they buy a VLB, followed by annual disclosure, and would also set disclosure requirements for a pension, or a VLB, that is wound up.
Among other things, the government also wants feedback on the permitted frequency of VLB benefit changes; whether there should be limits on funds’ expected return rates; portability options; and rules around plan/fund termination.
The consultation is set to run until Jan. 10, 2025.