Some retirees and those who thought they would be retiring soon have been hit hard by the current financial crunch. Although Canada is better off than most countries and Canadian governments and some regulators have stepped forward to help, there is still more that should be done for individual investors.

Let’s look at what has been done so far for retirees who have purchased segregated funds. Recently, the Office of the Superintendent of Financial Institutions, which regulates banks and federal insurance companies, is changing the rules on minimum capital requirements for segregated funds to help insurance companies better meet their payment obligations.

In addition, Ottawa says it is reviewing the rules for federally regulated company pension plans to ease rules that require companies to top up plans that fall below minimum pension commitments.

Now, the Investment Funds Institute of Canada is recommending to Ottawa that it help individual investors by eliminating — or, at least, suspending during this time of uncertainty — the current RRIF minimum factors.

The current RRIF factors were set in 1993 and are based on data from the previous year. You might remember 1992: interest rates were 9% and inflation dropped to 2% from 3%. The rationale behind establishing the 1993 RRIF factors was to produce a level income from (the previous minimum) age 69 to age 94 with a rate of return equal to 6%.

But, today, interest rates are generally less than 4%, inflation is about 2% and both rates are falling. This, combined with increased longevity, had led IFIC to recommend this past February to government that a new set of RRIF minimum factors be introduced that could provide a level income from age 71 to 96 with a 4% return.

Although that recommendation was rejected, the situation is more acute now than ever. North American markets are down by one-third since the beginning of 2008, meaning seniors had to cash in more of their investments than they expected to meet required withdrawal amounts based on market values at the beginning of the year. Seniors will have to cash in more holdings at an exceptionally low value, further reducing what remains for basic living necessities. Extending the conversion age and/or altering the minimum withdrawal factors is consistent with a February 2008 report from the C.D. Howe Institute. It also called for changes to current measures that “inhibit older Canadians from saving and spending according to their individual needs.” As well, the Canadian Association of Retired Persons has called for a two-year moratorium on mandatory minimum withdrawals. Prime Minister Stephen Harper has said he will review the RRIF rules.

Although the problem is understood and the solution, if accepted, is simple conceptually, the ease of implementation will depend on legislative requirements. Fund companies need to be able to manage the process of holding off on minimums by the start of the year when automated minimum withdrawals start for many seniors. The industry — especially advisors — must be ready even before that to answer questions.

Our industry knows well that the best of intentions can lead to the worst of operational nightmares. Pleased with the success of consultation with government on tax-free savings accounts, however, we are asking Ottawa to work with us to ensure the needs of investors, government and RRIF issuers are met. IE

Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada in Toronto.