Is the Longevity Pension Fund a cure for retirement income worries?

Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort. 

The last time Canada’s financial blogoverse deemed a particular product a “game changer” was Vanguard’s Asset Allocation ETFs, announced early in 2018 and since matched by several major competitors in the ETF space.

While it’s a mutual fund rather than an ETF, LPF seems to be a hybrid of traditional annuities and vehicles like Vanguard’s recent Vanguard Retirement Income Portfolio (VRIF/TSX), which “targets,” but does not guarantee, a 4% annual payout. 

Most retirees who lack DB pensions rely on a version of William Bengen’s 4% rule to decide what percentage of a portfolio they can safely withdraw each year without running out of money. As Roberts noted, an annual 6.15% payment at age 65 is a “big step up the retirement funding ladder.” 

Malcolm Hamilton notes that the 6.15% target distribution should not be confused with a 6.15% rate of return: “The targeted return is approximately 3.5% net of fees. Consequently, approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”  

But there is potential to pay more than that as retirees age and mortality credits kick in.  As Seif explains, while the required return on the fund may be 3.5% net, “longevity risk pooling” can make up the difference. Compared to annuities and other similar products, Purpose says the LPF offers the best death value after age 82. 

While Purpose is using a mutual fund structure for this innovative platform, the underlying investments are in Purpose’s own ETFs, which is the company’s forte. The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% emerging markets.

While some investors may be able to replicate that mix in self-managed RRIFs, there’s no escaping the fact that, either way, retirees have to take on more investment risk. “Near-zero returns are hard to live with. Investors may need to expand their portfolio selections from the comfort of 50% equity, 50% fixed-income toward the 70% equity ballpark,” says Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc. “Investors have to expand their vision and Purpose has done that for them. Kudos to them.” 

Terms of use Privacy policy