This article should be of personal interest to retail retirees, current and future, being those of us who – partially or wholly – employ retail financial advisors to assist with RRSP account investments and their ilk.
It is also a sounding to those retail advisors themselves, because as the momentum of activity toward pension and retirement reform builds, the question for those advisors and their clients may very well become …
“Are you getting RRIF’d off?”
This is what I originally entitled this whole article, being the same name as on a standing presentation I’ve been delivering the last couple of years. While that title may seem a bit inflammatory, it is really just a rolling collection of retirement issues to mull over.
Still, RRIF minimum withdrawals are arguably a quarter century stale, and RPP source income has a 10 year headstart on RRIF income (the age 55/65 controversy) for both the pension income tax credit and pension income splitting. Indeed, a conspiracy theorist might intimate that there is a systemic bias favouring RPP retirees over RRIF retirees.
Whether or not that is actually the case presently, the results of the current review of the pension and retirement system will have large and longstanding implications for retirees – retail or otherwise – and inevitably for retail advisor business models.
Retirement income reform momentum
The most recent step (at time of writing) in the progress toward reform is the March 24 Department of Finance news release formally soliciting input by April 30. Details can be found at www.fin.gc.ca/activty/consult/retirement-eng.asp.
Within those details, there is one especially interesting graph illustrating current estimated income replacement by each pillar of the retirement income system, the three traditional pillars being 1) OAS/GIS, 2) CPP and 3) RRIF/RPP.
The model suggests that at low income levels, a large proportion of pre-retirement income will be replaced in the retirement years, with the dominant source of that retirement income being from pillars 1 and 2. Not surprising, as one’s pre-retirement income moves into higher income brackets, less income is projected to be replaced in retirement and pillar 3 emerges as the primary replacement source.
In that light, consider the three types of reforms that we are most likely to see, whether individually or in combination, as this process unfolds:
1. Government-sponsored, voluntary defined contribution pension plans
Individual contributions would be pooled with other contributors, and managed by a central body, possibly paralleling the CPP Board. While contributions would be voluntary, those committed contributions and related returns would be locked in until retirement, at which time benefits could be paid out using familiar defined contribution payout vehicles, including annuities and transfers to locked-in RRIFs.
A potential feature is auto-enrollment (with an opt-out provision) for those without a workplace pension – a kind of negative billing sign-up for one’s retirement savings.
2. Mandatory, defined benefit pension plans
Essentially this is an augmentation of both premium obligations and benefit entitlements under the CPP. Some proponents have suggested as much as doubling CPP pensions, either by increasing the replacement rate from 25% to 50% (of average earnings up to the Year’s Maximum Pensionable Earnings), or by doubling the YMPE itself while holding the replacement rate constant at 25%.
3. Increased flexibility for private-sector, defined-contribution pension plans and increased opportunities for private savings
The most prominent proposal in this category is the idea of private sector providers offering defined contribution pensions that do not require an employment relationship. This would appeal to the many self-employed, and to others who might prefer a private sector option to the voluntary pooled public plan outlined in option #1.
Also on the table are suggestions to perhaps raise contribution limits on RPPs, RRSPs, and even TFSAs, and modify tax deferral rules for RPP payout commencement, RRSP conversions, and those aforementioned RRIF minimum withdrawal factors.
Will retail retirees and advisors be left behind?
With past and prevailing emphasis on RPP source relative to RRIF source, this question begs to be asked. Even so, I ask it facetiously (with hopefulness), as I expect that the many bright minds devoted to these challenges will yield net benefit to all of us in the end. But the end could years or decades away – What about the meanwhile?
CPP enhancements (doubling or otherwise) imply that less low income people will need to supplement retirement income. For middle income and up, there will similarly be less need, and also less cash available for supplementary investment. Across the income spectrum and spanning the coming years, such a forced belt-tightening could bring clarity, resolve and commitment to ‘living within means’, both before and into retirement.
Come to think of it, that sounds an awful lot like the goals of the government’s current financial literacy initiative, and even more generically like classic financial planning.
Hey – a higher income threshold for those with money to invest, less money in the hands of those people, institution-like competitors for that investment money, and generally a more complex environment to navigate – Where does this leave our retail advisor?
It would be speculation to try to connect such disparate dots into a single coherent picture of the future, but at least two key issues come to mind:
- How viable is a generalist approach, particularly one that does not skew to higher income clientele, or is not scaleable to that segment?
- Will commission-based business models, whether transactional or asset-based, need to give way to fee-based advice-centered approaches?
It will be interesting to see how both reform and response play out.