How Do We Pay Better Pensions To More People? Why The Variable Payment Life Annuity May Be Our Best Answer

“William Greenough created the variable payment life annuity in 1952 while CEO of TIAA-CREF, naming his creation the College Retirement Equity Fund (CREF). Fortune magazine described CREF as “the biggest USA development in pensions and insurance since the passage of the Social Security Act in 1935.” “CREF accounts have provided 65% more lifetime income in retirement than taking the industry rule-of-thumb 4% withdrawal rate.” 

Investopedia and TIAA Website

By the mid-1960s, UBC was the last large Canadian university to still have TIAA-CREF as its pension provider. In a 1966 study, three alternatives were proposed: 1. Continue with TIAA-CREF, 2. Create a UBC DC Plan with a minimum benefit feature, 3. Create a UBC DB Plan. Option 2 was chosen, with the variable payment life annuity (VPLA) being the ‘minimum benefit feature’. The VPLA remains uncommon in Canada because federal tax authorities decided in 1988 not to permit accumulated retirement savings to purchase an uninsured annuity, which they deemed the VPLA to be.

The UBC Faculty Pension Plan History1967-2017

“The challenge of converting capital into lifetime income in DC plans is well known, with many plan members underspending their retirement savings as they are uncertain how long their money needs to last. We wanted a solution that would give members confidence to maintain their living standards knowing they will never run out of money. In our research, we came across the Canadian VPLA model, and the ART Lifetime Pension is based on similar principles. It is transparent, easy to understand, and designed to be used alongside social security benefits and traditional drawdown accounts.”

Brnic Van Wyk, Head of Asset Liability ManagementAustralian Retirement Trust

“The ‘Tinbergen Rule’ is the idea that if policy makers have certain goals they want to achieve, they must have an equal number of instruments that they control in order to direct policy towards    achieving those goals.”

Investopedia

Pension Plan Design and The Tinbergen Rule

Dutch economist Jan Tinbergen (1903-1994) became the first Nobel Laureate in Economics (1969) “for  having developed and applied dynamic analytical models of economic processes”. In the course of this work, he formulated ‘The Tinbergen Rule’ defined in the Investopedia quote above. An example of the Rule would be that if policy makers want to achieve the twin goals of full employment and low inflation they will have to use the twin policy instruments of monetary and fiscal policy to achieve them.