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March 22, 2019


Quebec Addresses Labour Shortage

Québec will invest $1.7 billion within five years to, among other things, increase the labour pool. Its Budget 2019-2020 will address the shortage of workers in the province which is due its aging population and beneficial economic situation. In this context, the government is taking action to bolster labour market participation by experienced workers and immigrants. To leverage the experience of its workers, the age of eligibility for the tax credit for career extension is being lowered to 60. In addition, businesses will be entitled to a reduction in payroll taxes for workers aged 60 and over in order to foster the retention of experienced workers. A total of $730 million will be invested over the next five years to foster better labour market integration of immigrants throughout Québec.

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Benefit Plan Customization Coming

Just 12 per cent of Canadian employers are currently differentiating their benefit programs for recruitment and retention. However, this is projected to change considerably over the next three years when nearly three-quarters (72 per cent) expect to do so, starting with customizing benefits for critical workforce segments, says Willis Towers Watson’s ‘ Best Practices Survey.’ “Plan sponsors are quickly realizing the power in using their health and wellbeing strategies to differentiate themselves from competitors,” says Wendy Poirier, managing director and health innovation leader at Willis Towers Watson. “They’re taking steps to gain this competitive advantage by integrating physical and emotional health, and social and financial wellbeing programs into their total rewards programs, while clearly recognizing the value of benefits to meet their talent and prospects’ evolving needs.” In tandem with offering more compelling benefits, employers are looking to provide more flexibility and decision-making support to enhance their plan members’ experience. The study found 60 per cent of employers now offer flexible benefits, but this is set to rise to 78 per cent by 2020. By then, almost two-thirds (60 per cent) expect their employees will be customizing which benefits and options to purchase with their employer-provided benefit dollars, up from 43 per cent today. At the same time, 41 per cent of survey respondents plan to make workforce perks ‒ such as child care services, volunteer time off, onsite conveniences, or concierge services ‒ a core part of their employee value proposition, compared to 21 per cent today. Although only 29 per cent of respondents currently have a companywide mental health strategy, 85 per cent expect to have an action plan in place by 2020. Other improvements that survey respondents expect to implement include measuring and monitoring workforce stress and its causes and offering training and coaching to managers specifically to identify emotional health issues, stress, and life events that impact work performance. Over two-thirds of respondents plan to include wellbeing as part of their organization’s corporate social responsibility strategy and mission.

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Best Active Managers Outperform Passive

The best active equity managers have delivered as much as six times the returns of benchmarks that passive funds track over a 20-year period, says research from the multi-manager team at BMO Global Asset Management. It found that the average active fund has outperformed the average passive fund in three out of the five Lipper Global sectors, where comparison is made possible by the passive funds having had a 20-year track record. Over a 20-year period, the average active fund outperformed the average passive fund in the U.S., UK, and Asia. Funds investing in global emerging markets and sterling corporate bonds were excluded from the analysis as there were no passive funds on offer in these two sectors 20 years ago. In the U.S., the best performing active fund outperformed the average passive fund by a multiple of 6.3 times; in the UK, it was 5.9 times; and in Asia, it was 2.9 times. The lowest dispersion of returns was the equity Europe sector, with a dispersion of 2.6 per cent between top and bottom. Factors that are influential on performance include the choice of index benchmark, manager charges, dividend policy, gearing, currency hedging, and tracking methodology, it says.

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Budget Moves To Protect Pensions

Pharmacare, protection of worker pensions during solvency proceedings, and accessibility to high costs for rare diseases are among the areas the federal government have promised to look at in its 2019 budget. In the article ‘Federal Liberals Address Pension Issues And Pharmacare’ at the Benefits and Pensions Monitor website, Simon Laxson, of Willis Towers Watson, shares his observations about the last Liberal budget before the next federal election.

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Policy-makers Need To Get Ahead Of Digital Future

The next generation of financial advice requires sweeping change as advisors and regulators adapt to a digital future, says a report from the C.D. Howe Institute. ‘Next-Gen Financial Advice: Digital Innovation and Canada’s Policymakers’ recommends policymakers get out ahead of the coming transformation in financial advice by clearing regulatory hurdles to change. With firms dealing with a looming perfect storm of fee compression, shifting demographics, unrelenting regulatory changes, and an erosion in the number of human advisors as baby boomers retire, it says in this context, technology should be viewed as a saviour, rather than a threat. It calls on policymakers to take the lead and get in front of the innovations in order to understand their full implications by moving swiftly towards open banking and improving on the benchmark set in Europe; breaking down regulatory silos to allow data mobility in furtherance of stronger client outcomes; updating advisor proficiencies for a new normal where technical skills are automated and behavioural skills are required; and de-risking the decision to innovate for start-ups and incumbents alike. The next generation of financial advice will see human advisors complemented by digital collaboration through technology, it says.

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Canadian Investment Abroad Increases

Since 2013, the amount invested by Canadians abroad has increased 73.7 per cent while the amount invested by foreigners in Canada has declined by 55 per cent, says a study by the Fraser Institute. “Investment by foreign companies and individuals is vital to increasing productivity and improving living standards for Canadian workers, so when the level of investment drops, Canadians suffer,” says Steven Globerman, Fraser Institute senior fellow and author of ‘Canadian Foreign Direct Investment: Recent Patterns and Interpretation.’ It finds that, from 1990 to 2014, the average annual investment by foreigners in Canada ‒ known as inward foreign direct investment or FDI ‒ measured as a share of the Canadian economy was markedly higher than the United States and the OECD. However, from 2014 to 2017, Canada’s level of foreign investment declined while it increased substantially in the U.S. and the OECD more broadly. The drop in foreign investment affected multiple sectors in Canada including manufacturing and utilities. “When you see less money coming in from foreigners at the same time Canadians are increasingly investing abroad, it’s a strong indication that Canada is not a good place to invest,” Globerman says. “Unfortunately for Canadian workers, Canada has become a less attractive location for direct foreign investment.”

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Traditional Managers Apply Data Science

Traditional asset managers are increasingly applying data science and advanced analytics to investment decision-making, but they aren’t firing portfolio managers, says a McKinsey study. Instead, they’re building capabilities to help their human portfolio managers do a better job at investing, particularly as active managers continue to feel cost-cutting pressures in a shrinking industry. ‘Advanced analytics in asset management: Beyond the buzz’ says data science can pinpoint and correct the mistakes investors are making and focus portfolio managers on problems that only humans can solve. Since the amount of available data has exploded, traditional managers need to determine which quantitative sources to take in. The ability to link a broad set of data sources about an individual or team’s trading history, communication patterns, psychometric attributes, and time-management practices allows firms to identify drivers of performance and behavioural root causes at a more granular and individualized level than previously, says the report. “Managers can then make operational improvements based on these insights.”

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Limits Put On Stock Options

The federal budget proposes limiting the benefit of the employee stock option deduction for high-income individuals employed at large, long-established, mature firms, says McCarthy Tétrault’s ‘2019 Canadian Federal Budget Commentary. – Tax Initiatives.’ In explaining the rationale for the favourable tax treatment afforded to employee stock options under the current rules, Budget 2019 says, “Many smaller, growing companies, such as start-ups, do not have significant profits and may have challenges with cash flow, limiting their ability to provide adequate salaries to hire talented employees. Employee stock options can help such companies attract and retain talented employees by allowing them to provide a form of remuneration linked to the future success of the company.” However, a disproportionate share of the tax benefits arising from the current employee stock option provisions accrues to a very small number of very high income option holders. For example, in 2017, six per cent of stock option claimants – each with a total annual income including stock option benefits of over $1 million – accounted for over $1.3 billion of benefits from the 50 per cent deduction or almost two-thirds of the benefit derived from the 50 per cent deduction. The changes are intended to make the employee stock option tax regime fairer and more equitable for Canadians and to ensure that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand. In light of the proposed stock option changes, in circumstances in which the new rules will likely apply, consideration may be given to the viability of making significant grants of stock options prior to legislative proposals being announced.

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Virtual, Remote Care Launched

Premier Health Group will launch a range of virtual and remote services to be offered to primary care clinics, including nurses, medical office assistants (MOA) and office managers. The initial launch will focus on its current Juno EMR software clients in British Columbia with plans to roll out to other provinces by the end of the second quarter. More and more physicians opting to become hospitalists with higher incomes and no business overhead or administrative headaches and a rising number of family physicians retiring and/or burning out, the lack of business support represents major deterrents to recruiting young doctors to take over private practices. With the program, physicians would focus on formulating diagnoses and treatment plans, while nurses and MOAs oversee routine health maintenance, discuss lifestyle changes, and educate patients on their medical conditions and treatment needs.

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Asia, Distressed Debt Drive Demand

Asian hedge funds and distressed debt strategies will drive investor demand in 2019, says a survey by Deutsche Bank’s hedge fund capital group. The 17th year of the survey of allocators managing or advising on hedge fund assets found investors plan to increase their exposure to hedge funds despite underperformance. An average hedge fund portfolio managed by the survey’s respondents in 2018 returned 1.6 per cent for the year, lower than their full-year average performance target of 7.17 per cent. The shortfall was the largest in seven years. But 46 per cent of respondents still plan to increase their allocation to hedge funds in 2019 even though only 13 per cent met their performance target in 2018, compared with 68 per cent a year earlier. For the first time since 2010, Asian hedge funds have seen the most interest from investors as some 36 per cent of investors are planning to increase exposure to the region in 2019. Distressed debt strategies received $6.5 billion of net inflows on rising interest rates and renewed market volatility in the fourth quarter of 2018, the largest increase in net new capital of all strategies quarter-over-quarter. Allocators that plan to reduce their hedge funds holdings in 2019 plan to boost their private equity allocation.

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Charities Want Global Warming Guidance

A coalition of UK charities wants specific legal guidance on whether charities should adopt investment strategies aligned with the Paris Agreement’s aim of limiting global warming to 1.5°C above pre-industrial levels. An open letter to the Charity Commission from the Royal Society for the Protection of Birds and the Joseph Rowntree Charitable Trust, as well as the National Council for Voluntary Organisations (NCVO) – the umbrella body for civil society organizations – and environmental law firm ClientEarth says the current law is “outdated and insufficient” and warns that there is “a risk that charity trustees misinterpret their duties.” It calls on the Charity Commission and UK attorney general Geoffrey Cox to refer the matter to the Charity Tribunal for an “urgent and definitive” ruling. Any clarification of the law would apply to the £63 billion worth of investments held in total by UK philanthropic organizations. The Charity Commission gives guidance to charities, but is unable to pronounce authoritatively on the nature of the law governing duties of trustees. This is the purpose of the Charity Tribunal. Existing Charity Commission guidance on investing is largely based on the Harries v Church Commissioners for England lawsuit of 1991, when the judge held that charity trustees could make investments guided by ethical considerations rather than simple financial risk and return, if it could be shown that overall financial performance would not be harmed, or if it would be consistent with the charity’s objects. However, there is currently no legal requirement for charities to have a socially responsible investment policy.

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Headquarter Construction Starts

GroupHEALTH Benefit Solutions has broken ground on its new corporate headquarters. GroupHEALTH Place is located in South Surrey, British Columbia, in a growing commercial centre. The building will be four stories tall and boast 55,000 square feet of office space, including state-of-the-art meeting and collaborative workspaces, along with lunch facilities. GroupHEALTH built an administration office in Barrie, Ont., which opened in October 2017.

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Evolution Of AI Examined

The recent and future evolution of AI (artificial intelligence) in investment management, sustainable finance and climate risk, and the next chapter of Asia’s growth story will be among the areas explored at the CFA Society Toronto’s ‘2019 Annual Spring Pension Conference.’ It takes place March 28 in Toronto, ON. For information, visit Pension Conference

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Tailoring Benefits Plans To Needs Examined

ICRA Québec will provide a session in English on how to ‘Develop a Benefits Plan Tailored to the Needs of your Business in Quebec.’ Louis-Philippe Corbeil Girard, a group insurance and annuity plans advisor at Gestion Tim Cummings, will discuss how to conceive and implement a benefits plan that fits a company culture, budget, the desired impact in terms of employer branding, and how to use a plan to get a better quality/price ratio. It takes place May 10 in Montreal, QC. For information, visit Tailoring Benefits

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March 21, 2019


Canada’s Growth Weak

The Canadian economy is expected to grow by just 1.4 per cent in 2019, says the Conference Board of Canada, and the federal budget is unlikely to affect the economic outlook. “The weak growth that was evident at the end of 2018 is expected to persist into the first half of 2019. Despite this weak growth, there are reasons to be cautiously optimistic,” says Matthew Stewart, its director of economics. “Job gains and wage growth were strong at the beginning of the year. In addition, the anticipated impact on investment from the measures contained in the federal government’s fall economic statement have yet to materialize.” The ‘Canadian Outlook: Spring 2019 Report’ says consumer spending slowed sharply at the end of last year, but household income growth is expected to pick up substantially this year, thanks to robust job gains and an acceleration in wage growth. However, the housing market will continue to cool this year with a decline forecast in residential investment and falling business confidence as well as weakening global and domestic demand which have held back investment spending recently. Still, business investment is set to improve outside of the resource and residential sector this year. One of the main factors supporting this turnaround is the accelerated depreciation measures, announced in the federal government’s last fall fiscal update, which will allow business to write off 100 per cent of some capital expenditures in a single fiscal year. Improving domestic demand will also help support strong non-energy investment. What will support GDP growth this year is the trade sector. Despite a pullback in energy exports, total exports are expected to gain two per cent this year. With imports remaining essentially flat, the trade sector will support real GDP growth of 1.4 per cent this year. The outlook for next year is much brighter with investment spending forecast to help the economy post growth of two per cent. Given the economic slowdown, it says the Bank of Canada will remain on the sidelines this year with rate hikes not expected until 2020 under the assumption that the economy improves as expected over the second half of this year.

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Steps Protect Worker Pensions

The federal government will propose changes to the Companies’ Creditors Arrangement Act, the Bankruptcy and Insolvency Act, the Canada Business Corporations Act, and the Pension Benefits Standards Act, 1985 to better protect workplace pensions in the event of corporate insolvency. An Eckler ‘Special Notice’ on the proposal made in ‘Federal Budget 2019’ says these measures include amendments to make insolvency proceedings fairer, more transparent, and more accessible for plan members, including empowering the courts to review payments made to executives prior to bankruptcy; requiring higher standards of oversight of corporate behaviour from publicly traded, federally incorporated firms, including disclosure of policies related to workers, pensioners, and executive compensation; protecting employee pensions by clarifying in federal pension law that a plan must still provide the same pension benefits as when it was ongoing even after it is terminated; and allowing defined benefit plans to fully transfer their pension obligations to regulated life insurance companies through the purchase of annuities to improve plan sustainability and to better protect retirees’ pensions from the risk of employer insolvency.

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Alternative Investors Demanding ESG

A growing pool of investors are demanding that alternative asset managers integrate environmental, social, and governance (ESG) considerations into their products as they want their investments to achieve returns while doing good for society and the environment, says the Cerulli Associates’ report, ‘European Alternative Investments 2019: The Evolving Integration of ESG.’ It says alternative managers need to have clear responsible investment (RI) policies, provide full ESG reporting, and employ staff dedicated to ESG. Costs and resource constraints are among the key challenges they face when integrating ESG considerations into their due diligence and monitoring. In addition, many asset owners need help with implementing RI, so managers need to devote resources to assist their clients in this area. In researching the report, Cerulli partnered with the UN-supported Principles for Responsible Investment (PRI) on global surveys of hedge fund managers and asset owners. Around 60 per cent of European hedge fund manager respondents currently integrate ESG into their investment processes and around 40 per cent have engagement and active ownership practices.

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OSFI Streamlines Assessment Process

The Office of the Superintendent of Financial Institutions (OSFI) will streamline the assessment process and eliminate assessments for certain terminated pension plans as of April 1. Amendments to the Assessment of Pension Plans Regulations will enable the superintendent to determine a pension plan’s assessment after the plan has filed its Application for Registration or its Annual Information Return (AIR). OSFI will determine the assessment due and send an invoice to all plans that file on and after April 1. It expects to prepare the invoice approximately 45 days after determining the assessment. The amendments also specify that there is no assessment to be paid if a plan has been terminated for five or more pension plan years or the pension plan is underfunded on the termination date and either the pension plan is a negotiated contribution plan (a multi-employer plan with employer contributions limited to an amount determined by an agreement) or the employer for the plan is bankrupt or insolvent, or undergoing proceedings under the Companies’ Creditors Arrangements Act. Finally, members, survivors, or any other persons who chose to transfer their pension benefit credit out of the plan before or after plan termination are not included as beneficiaries and are not considered for purposes of the assessment calculation. As well, any person for whom the administrator has purchased an annuity as part of the wind-up of a terminated plan is not considered a beneficiary for purposes of the assessment calculation.

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SMEP Limits Proposed

Limits to contributions to specified multi-employer plan (SMEP) for older members are proposed in ‘Federal Budget 2019,’ says a BLG ‘Newsletter.’ A specified multi-employer plan (SMEP) is a type of defined benefit RPP sponsored by a union. Generally, under an RPP, a member cannot accrue pension benefits after the end of the year in which the member reaches 71 years old or, if the member has returned to work for the same or a related employer, is receiving pension payments from the plan. SMEPs currently do not have the same restrictions. Budget 2019 will impose similar limitations on SMEPs. This will apply to contributions made under a collective bargaining agreement entered into after 2019, except in respect of contributions made on or before the date the agreement is entered into.

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Evidence-based Formulary Launched

Reformulary Group has launched ‘Cannabis Standard,’ an evidence-based medical cannabis formulary and research platform for patients, employers, and physicians. Available on a subscription basis to patients, it is one-part formulary and one-part research platform. It uses evidence to help patients determine if they are a good candidate for medical cannabis, a class of medicines also referred to as cannabinoid-based medicine (CBD). The platform also works to find the right product for the patient’s specific conditions and symptoms. “Until now, there was an absence of a comprehensive review of evidence around medical cannabis. Patients and physicians did not have access to the necessary information around dosing, strains, and product types,” says Helen Stevenson, Reformulary Group founder and CEO. This program is designed “to help patients make informed decisions and take an active role in building evidence for medical cannabis use,” she says, including being provided with detailed product recommendations and dosing that can help patients start the conversation with their physicians. Patients and physicians are connected through its ‘Note for my Doctor’ feature, an electronic note generated when the patient inputs his/her condition and symptoms. The memo provides detailed information about suitable lines of therapy, dosing, and strains and makes a product recommendation.

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Passive Now Nearly Half Of Market

Passive investing, made up of funds tracking market barometers, has now taken over nearly half the stock market as more investors shun stock-pickers and flock to index funds, says the Bank of America Merrill Lynch. Its data shows market share for passively managed funds has risen to 45 per cent, up a full point from June 2018. This continues a trend over the past decade in which investors have moved to indexing, particularly through exchange traded funds. ETFs generally charge much lower management fees than mutual funds, many of which employ managers to move in and out of stocks in an attempt to outperform the major indexes like the Dow Jones Industrial Average and the S&P 500. ETFs mostly follow the indexes themselves and trade during the day like stocks.

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Macro Debate Questions Resolved

The four questions that have shaped the macro debate this year ‒ Fed tightening, Chinese stimulus, trade tensions, a recession in Europe ‒ have largely been resolved, says the ‘AB Global Economic Outlook March 2019.’ While the jury is still out on Europe, the Fed has become more data dependent, China has increased the pace of stimulus, and the trade dispute has de-escalated. The result has been a major rally in risk assets. However, there’s still reason to be cautious, it says. Global trade continues to decelerate, a reminder that a trade deal will not be a panacea. And it’s not clear that slower growth will generate the sort of excess capacity that would relieve emerging inflation pressures. Moreover, even resolution of the U.S.-China trade war could prove a double-edged sword if Chinese concessions encourage the U.S. to get tougher in trade negotiations with Europe. The resulting outlook is for decent growth and inflation moving sideways the last few months on a core basis, signaling neither increasing dynamism nor a meaningful deterioration.

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Sustainable Managers Get First Mover Advantage

Asset managers that have already established sustainable investment products and reporting could benefit from new EU disclosure rules, says Moody’s. With the European Parliament and EU member states agreeing on disclosure regulation for institutional investors, it says asset managers that had already adopted environmental, social, and corporate governance (ESG) disclosures before the release of the new rules could benefit from first mover advantage. “For assets managers that have the appropriate infrastructure, expertise, and product range, the rules will likely lead to increased inflows into sustainable strategies, given increasing demand for ESG products,” it says, as the new rules would increase investor confidence in the transparency of the ESG market, it said. However, it estimates that asset manager costs could increase by 0.25 per cent to two per cent depending on their ESG capabilities, with margins likely to come under pressure. As well, the need to update product offerings and prospectuses and explain how ESG factors were considered would come with “heavy one-off implementation costs.”

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Acclaim Partners With Shoppers On Mental Health Coaching

Acclaim Ability Management is working with Shoppers Drug Mart to offer one-on-one coaching services for employees with mental health issues who are on short-term disability leave. Employers can choose from two offerings that aim to get employees back to work sooner and lessen the risk of escalation to long-term disability leaves. The coaches are pharmacists, available through Shoppers Drug Mart’s Clinical Health Coaching program. Employees can access their coaches virtually or by phone and the services are available regardless of where employees fill their prescriptions. The coaches screen employees for a number of chronic conditions, which often affect mental health, and give recommendations based on the results; evaluate medication regimens, identify drug therapy problems and recommend solutions; provide counselling on safe and appropriate use of medications, with follow-ups to assess adherence, side effects, and efficacy of those medications; and work with employees to set goals, create action plans, and monitor progress, ultimately enabling them with tools to take control of their health with confidence. The program can also include pharmacogenomic testing, a tool to predict drug response that can be especially impactful in the treatment of mental illness.

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CPPIB Invests In Natural Gas

Williams, a natural gas supplier and producer, will establish a new platform for the optimization of its midstream operations in the western Marcellus and Utica basins in the U.S. through a long-term partnership with the Canada Pension Plan Investment Board (CPPIB). They have entered into a definitive agreement to establish a joint venture that will include Williams’ 100 per cent owned Ohio Valley Midstream system (OV) and 100 per cent of Utica East Ohio Midstream system (UEO). CPPIB will have a 35 per cent ownership stake in the joint venture.

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Risk Management As Enabler Discussed

‘Risk Management as an Enabler of Change’ will be discussed at a Global Risk Institute for Financial Services Series at Rotman session. Rahim Hirji, executive vice-president and chief risk officer at Manulife, is the featured speaker. It takes place April 4 in Toronto, ON. For information, visit Risk Management

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March 20, 2019


Progress Made On Pharmacare

The 2019 Federal Budget continues to progress towards a national pharmacare strategy by focusing on two key challenges, says an Eckler ‘Special Notice.’ It plans to lower the cost of drugs for all Canadians and expand coverage so all Canadians have access to affordable medicine. The budget says brand-name medicine costs in Canada can be 20 per cent higher compared to other advanced countries. Additionally, many prescription drugs in Canada now cost more than $10,000 per year, per patient. To ensure access to affordable drugs for all Canadians, a national drug agency that will build on existing provincial and territorial successes and act as a single evaluator and negotiator for drug prices in Canada will be created. It is expected it could help to lower total drug spend in Canada by $3 billion annually within 10 years. The agency would create a co-ordinated approach to assessing effectiveness of new prescription drugs; negotiate drug prices for all Canadian plans, public and private; and recommend which drugs represent the best value-for-money for Canadians and, in co-operation with provinces, territories, and other partners, identify which drugs could ultimately form the basis for a future national formulary. Part of its work would be to take steps toward the development of a national formulary which would help develop a basis for a consistent approach to formulary listing and patient access across the country. The government also plans a national strategy for high cost drugs for rare diseases: The budget notes that the list prices for high cost drugs for rare diseases (life-threatening, debilitating or serious, and chronic conditions affecting a small number of patients) often exceed $100,000 per patient each year. Additionally, as new therapies enter the market, worldwide sales of high cost drugs for rare diseases are forecast to grow at twice the rate of other drugs. The government proposes to invest up to $1 billion over two years, starting in 2022-23, with up to $500 million per year ongoing to help Canadians with rare diseases access the drugs they need. Eckler’s view is that any success the Canadian drug agency has in reducing drug costs across the country will have a trickle-down impact to private plan sponsors. At this point, with no projected drug plan price reductions or timing of such negotiations, it’s difficult to estimate the possible extent of savings, it says. Similarly, the strategy for addressing high cost drugs is expected to eventually benefit private plan sponsors as well as public drug plans, but not expected to materialize for three to four more years.

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O’Reilly Leaves OPTrust

Hugh O’Reilly has resigned as president and CEO of OPTrust, effective immediately, to pursue other interests. During the four years that he led the organization, many innovative strategies such as member driven investing and OPTrust Select, the first new defined benefit plan in Ontario in a generation, were introduced. Doug Michael, its CFO, will act as interim president and CEO. He has been with OPTrust for over nine years and became the CFO in 2015. A committee has been formed to conduct a search for a permanent president and CEO.

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Fiduciary Responsibility Allows ESG Factor Consideration

The Pension Investment Association of Canada (PIAC) believes, because of the potential for environmental, social, and governance (ESG) factors to have financial impacts on plan investments now and well into the future, it is within the scope of its members’ role as fiduciaries, as currently defined, to consider these in their investment processes. In its response to the International Organization of Pension Supervisors’ (IOPS) request for comments on the development of guidance related to the consideration of ESG factors by pension funds, it says guidance from IOPS affirming that the consideration of ESG factors in the investment process is consistent within a fiduciary framework which encourages pension plans to both consider ESG factors in the investment process and to disclose how ESG is integrated into the management of pension assets. It believes such guidance would be helpful and valuable to pension plan administrators, but would not support guidance if it were overly prescriptive. Therefore, while “we recognize the stated intent of using the word ‘should’ as encouragement to voluntarily adopt and implement guidelines, we suggest revising this to ‘may’ provides a more balanced approach,” it says.

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Budget Would Allow Annuity Deferral

The Federal Budget 2019 would allow retirees to move some savings out of their registered retirement funds to an annuity deferred until age 85 and end the use of individual pension plans (IPPs) to avoid taxes. Tax rules generally require an annuity purchased with registered funds to begin after the annuitant turns 71. The proposal would permit seniors to purchase an advanced life deferred annuity (ALDA) ‒ an annuity whose commencement can be deferred until age 85 ‒ under certain registered plans. The ALDAs would reduce the amount retirees are forced to withdraw annually from a registered retirement income fund (RRIF) or other registered plan thereby preserving savings until later in retirement. The value of the ALDA would not be included in the minimum withdrawal calculation. The ALDAs will apply beginning in the 2020 tax year with qualifying annuity purchases from RRSPs, RRIFs, deferred profit sharing plans, pooled registered pension plans, and defined contribution pension plans. Lifetime limits will be 25 per cent of a specific amount of a qualifying plan. As well, individual pension plans (IPP) can no longer be implemented simply to avoid tax on the commuted value of benefits from another defined benefit plan. It aims to quash planning that seeks to circumvent prescribed transfer limits, specifically where an IPP is established that’s sponsored by a newly incorporated business controlled by the person who has stopped working for their former employer. The tax rules allow for a tax-deferred transfer of all or a portion of the commuted value of the client’s accrued benefits in a defined benefit pension plan. This is accomplished either by transferring the full commuted value to another DB plan sponsored by another employer or by transferring a portion of the commuted value to the client’s RRSP or similar registered plan subject to a prescribed transfer limit (normally about 50 per cent of the client’s commuted value). To prevent an unauthorized full transfer, the government says it will prohibit IPPs from providing retirement benefits for past years of pensionable employment under a DB plan of an employer other than the IPP’s participating employer.

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Fixed Income Investors See Soft Landing

Many fixed income investors expect the economic cycle to end in one to two years, but without significant correction, says research from Invesco. Investors surveyed do not foresee a significant correction in fixed income and instead expect the “rare event of a soft landing with a continued flat yield curve.” With the current economic expansion nearly 10 years old and one of the longest on record, its research found some investors were nervous about its further longevity and were alert for triggers which could end it. Globally, the most common view (49 per cent) was that the end of the cycle is one to two years away (meaning late 2019 through late 2020). However more than a quarter (27 per cent) saw a sooner end, within the next six months to one year. High global debt was cited as the most likely trigger of the next downturn. Nevertheless, they are positioning portfolios for a variety of possibilities with no particular unifying thread although they have been increasing allocations to Chinese fixed income, despite geo-political concerns that frequently cite the U.S.-China trade war. Surprisingly, it is U.S.-based investors that are set to most increase their China bond allocations.

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Social Media Used For Market Research

Institutional investors are now, more than ever, finding market research via social media, says data from Greenwich Associates. “Our data shows that, increasingly, the best way create a trusted brand is by delivering insightful and relevant content through digital media,” says Dan Connell, Greenwich Associates managing director and co-author of ‘Investing in the Digital Age: Media’s Role in the Institutional Investor Engagement Journey.’ The data shows 22 per cent of institutional investors from North America, Europe, and Asia named trust in the brand as the most important factor in selecting an asset manager, compared to 21 per cent who cited the ability to achieve high returns. It found 68 per cent of investors used social media to research asset management firms in 2018, up from 36 per cent in 2015 and 86 per cent of investors say they take action on content they receive, with 41 per cent doing so at least weekly.

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Passive TDFs Dominate DC

Passive target date funds (TDFs) dominate the defined contribution retirement plan market, says Cerulli Associates. It says in the first quarter of this year cost and plan design are the primary drivers of passive TDF flows. It found 89 per cent of DC plan sponsors cite cost as the top factor. Meanwhile, investment management style (active versus passive) ranked significantly lower (19 per cent). In addition, the advent of automatic enrollment in the DC plan market and use of TDFs as qualified default investment alternatives (QDIAs) for most plans provides TDFs with a repeatable source of inflows resulting from each participant’s paycheck. It says during years of roughly flat and negative equity market performance (2015 and 2018, respectively), active TDFs exhibited slightly higher market-assisted growth. The inverse of this scenario is true during years of strong equity market performance (2016 and 2017). “These statistics suggest an increasingly volatile market that could present opportunities for active managers to display their relative value,” Cerulli says.

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Caisse Supports AI Development

The Caisse de dépôt et placement du Québec (CDPQ) has created a fund dedicated to Québec businesses with a proven track record in artificial intelligence. Funded with a $250-million envelope, the CDPQ-AI Fund aims to ramp up growth in businesses whose product offerings are based on the development of AI and to accelerate the commercialization of artificial intelligence solutions. The fund, managed by CDPQ’s venture capital and technology team, will serve technology companies that have developed demonstrably sound business models and shown a capacity for continued strong growth. They will need to have a well-established management team as well as a dedicated team with AI experience.

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Fund Managers Discuss Issues That Concern Them

‘The investment of pension funds: There is no single solution’ is the topic of an ACPM French language event. Five fund managers will each discuss their pension fund and the issues that concern them including the low interest rate environment, less liquid investment allocation, and the impact of new funding rules on their investment policy. The five panelists are Jean-François Pépin, of Hydro-Québec; Serge Germain, of the University of Sherbrooke; Alain Vallée, of the University of Québec; Andrée Mayrand, of the University of Montréal; and Michael Keenan, Bell. It takes place April 4 in Montreal, QC. For information, visit Fund Issues

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March 19, 2019


Institutions Seeking Diverse Alpha Sources

Institutional investors are looking at ways to diversify sources of investment outperformance ‒ alpha ‒ in preparation for a potentially lower return or more volatile market environment, says the ‘Fidelity Global Institutional Investor Survey.’ Looking ahead to 2025, when asked to share their portfolio construction strategies, institutions with $1 billion or more in assets under management generally expect to make the most significant changes to their asset allocation, including increasing investments in active, non-traditional passive, alternatives, and unconstrained strategies and derivatives. It found that institutions are pursuing different portfolio construction approaches in part because of their expectations for the future. Institutional investors said that when considering their investment portfolios, their top concern was a low return environment (21 per cent), closely followed by volatility (17 per cent). Larger institutions expect to decrease passive allocations and increase allocations in active and non-traditional passive, including factor-based, non-cap weighted, or other ‘smart beta’ strategies. Smaller institutions also plan to increasingly use non-traditional passive strategies, but are less likely as a group to shrink traditional passive exposure and increase the use of active strategies. They currently hold higher allocations of actively managed strategies (58 per cent versus 44 per cent of institutions overall). Larger institutions plan to increase private equity and infrastructure allocations more often than smaller institutions. However, institutions of all sizes intend to decrease investments in developed market equity and increase emerging market equity holdings.

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OCIO Industry At Inflection Point

After a decade of robust growth, the outsourced chief investment officer (OCIO) industry is at an inflection point, says research from Cerulli Associates. ‘OCIO at an Inflection Point: Strong Growth Ahead, but Institutions Are Demanding More’ says the industry is expected to continue growing. Driven by institutional investor demand for timelier decision-making, deeper manager due diligence, and greater oversight of portfolio risks, the OCIO model has flourished and investors are broadly satisfied with the model and governance structure. It predicts continued strong growth from approximately $1.1 trillion in U.S. assets under management currently to nearly $1.7 trillion by 2023. However, asset owners are demanding more from providers and conducting replacement searches to ensure the quality and fit of their existing OCIO. Uncertain market conditions could accelerate the movement.

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Court Rules On Life Insurance Policies

The Canadian Life and Health Insurance Association (CLHIA), iA Financial Group, and Manulife Financial Corporation are welcoming a Saskatchewan court ruling that insurance policies are not intended to offer an unlimited investment opportunity. In its decision on Ituna Investment LP, Mosten Investment LP, and Atwater Investment LP litigation, the Saskatchewan Court of Queen’s Bench “unequivocally supports what insurers, their customers, and regulators already know to be true: the purpose of an insurance policy is to protect the lives of the insured and their families.,” says Stephen Frank, CLHIA president and CEO. The court dismissed the plaintiffs’ primary claims against each of Industrial Alliance, Manulife, and BMO Life over a scheme involved investing large amounts of money in insurance policies with the sole objective of earning a return. Specifically, the court held that payments to the contract are “limited to funds paid or invested to pay current and future costs of insurance, related premium taxes, specified administration fees, and the permitted accrual tax-exempt investments.”

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Task Force Examines Virtual Care Technology

The Canadian Medical Association (CMA), the Royal College of Physicians and Surgeons of Canada (Royal College), and the College of Family Physicians of Canada (CFPC) are launching a task force to examine virtual care technology and how it can improve access and quality of care for patients from coast-to-coast-to-coast. The task force will identify what regulatory changes are required for physicians to deliver care to patients within and across provincial/territorial boundaries while also addressing its administrative challenges. In addition, the task force will explore how health information can be effectively captured and available to both physicians and patients. “It is time for our policies and regulations to evolve to today’s available technology. Removing barriers can lead to improved access to care for all Canadians,” says Dr. Gigi Osler, president of the CMA. A 2018 Ipsos poll confirmed that seven in 10 Canadians say they would take advantage of virtual physician visits if they were available and nine out of 10 physicians support either a national licensure regime or universal recognition of provincial/territorial licensure. The task force is expected to complete its work by the end of 2019, with recommendations put forth in early 2020.

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Behavioural Finance Offers Potential For Change

The insights of behavioral finance have the potential to help employers, plan sponsors, and plan administrators make changes that can yield a substantial difference in the actions of employees and plan participants, says an International Foundation of Employee Benefit Plans (IFEBP) white paper. ‘Ten Ways Behavioral Finance Can Boost Retirement Security’ says because people are loss-averse, it makes sense to stress what could be gained or lost. On the gain side of the equation, sponsors can tell participants that planning for retirement is how dreams become a reality and that contributing to their retirement plan qualifies them for the company match. On the loss side, they can say that by not contributing, participants are losing out on the match and the reduction in taxes. Sponsors can point out what others are doing right because people tend to want to conform to the social norm. They can accomplish this, for example, by telling participants what percentage of their workforce contribute to the plan. It also says sponsors should encourage individuals to picture their retirement in order to shift their focus from the now to the long term. “Having a personal retirement picture helps people avoid temptations to spend today,” IFEBP says.

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Brexit Uncertainty Muddles Views

Investors should not plan to make any big trades based on their views on Brexit, says Cambridge Associates. Although Brexit day is set for March, Britain still has not solidified its plans for leaving the European Union. Because of this uncertainty, its ‘Brexit’s Crescendo and UK Investors: Tuning Out the Noise’ reports recommends that investors focus more on adequate diversification and liquidity than on making any calls when it comes to whether the UK will ultimately leave the EU. “Because Brexit is a political process with two-way tail risks, it warrants close monitoring, but is not a good foundation for a tactical investment position,” it says. If the UK makes a relatively clean break from the EU and puts in place a new bilateral trade agreement, Brexit’s effects likely won’t be clear for months or even years. The Bank of England has estimated that Brexit negotiations, which have been ongoing since 2016, cost the UK economy two per cent of gross domestic product. Brexit-related risks have also resulted in lower valuations for the British pound and the country’s stocks compared to their historical averages. “Since the Brexit referendum, businesses have put investment plans on ice, the conservative government has continued to shrink the fiscal deficit and the UK economy has become more reliant on increasingly indebted and decreasingly confident British consumers for growth,” it says. All this makes it clear that some of the effects of Brexit – and its potential outcomes – have already been borne out in the UK economy.

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ESG Infrastructure Impact Neutral

Environmental, social, and governance (ESG) scores are not negatively or positively correlated with the financial performance of unlisted infrastructure firms, the EDHECinfra/LTIIA Research Chair study ‘ESG Reporting and Financial Performance: the Case of Infrastructure.’ The study cross-references two databases: the ESG scores computed by GRESB Infrastructure since 2016 and the financial metrics of the EDHECinfra universe. It shows that once the traditional factors that explain returns are taken into account, ESG ratings are not a significant driver of returns or profits. “This paper challenges the oft-reported notion that better ESG ratings should somehow systematically increase or decrease returns. ESG is not a risk factor in infrastructure investment,” says Tim Whittaker, research director at EDHECinfra and co-author of the paper.

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Canada Goes Slow But Steady

Canada’s three points of potential friction are commodities, the U.S., and China. But the domestic economy does not appear to be generating idiosyncratic risks and that’s good news, says the ‘AB Global Economic Outlook March 2019.’ If slow and steady wins the race, it says Canada should be in good shape. The domestic economy appears to be operating at something like a near-term equilibrium with growth and inflation both keeping steady and risks of overheating in property markets having faded significantly. The Bank of Canada still likes to remind the market that only interest rates remain out of line with forecasts; the policy rate is still below what it considers to be neutral. But there is no urgency to move rates higher, absent either domestic pressures or the easing of international risks. For now, that means that the macro picture is one of low-volatility stability.

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PSP In PRS Scheme

Unibail-Rodamco-Westfield has signed a conditional agreement with a wholly-owned subsidiary of the Public Sector Pension Investment Board (PSP Investments) and global real estate company QuadReal Property to form the ‘Cherry Park Partnership.’ It will deliver the development and management of a private rented sector (PRS) residential scheme in the UK, adjacent to Westfield Stratford City in London. It will be one of London’s largest single-site PRS schemes. PSP Investments and QuadReal will each take a 37.5 per cent share in the Cherry Park Partnership, while Unibail-Rodamco-Westfield will retain a 25 per cent share and be appointed as the development and asset manager. Construction work is set to start in the second quarter of 2019, with a phased completion and a delivery expected post-2023. The development will feature approximately 1,200 new homes benefitting from a suite of amenities including a residents’ gym, swimming pool, workspace, and public areas.

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Robo Advisor Use Examined

‘Robo Advisors & ETFs – The Next Generation for Group Retirement & Savings Plans’ is the focus of a CPBI Southern Alberta event. Brian McClennon, CEO and president of Link Investment Management, will discuss how robo advisors and exchange traded funds (ETFs) are finding their way into the group retirement and savings plan marketplace, providing intuitive solutions for plan sponsors and participants. It takes place April 25 in Calgary, AB. For information, visit Robo Advisors

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March 18, 2019


Global Debt Headwind To Grow

Global debt is now US$100 trillion higher than just before the financial crisis and more than three times global gross domestic product (GDP), presenting a headwind to growth and making the financial system vulnerable, says Carolyn A. Wilkins, senior deputy governor of the Bank of Canada. In remarks to UBC’s Vancouver School of Economics and CFA Society Vancouver, she highlighted trouble spots of particular concern arising from elevated household, government, and corporate debt in different places around the world. “Whether you are a homeowner or a businessperson, you know first-hand that high leverage can leave you in a vulnerable financial position,” Wilkins said. “It’s no different for economies.” However, safeguards have been put in place and, in some cases, strengthened since the global financial crisis. The Basel III reforms mean that globally active banks are better capitalized, hold more liquid assets, and run their businesses with less leverage. China has embarked on more stringent regulation and supervision of its financial sector. As well, continued economic growth and sound macroeconomic policies will make public debt loads more sustainable. “The global financial system is in a better place than it was in 2007 in many ways,” Wilkins said. “That said, more needs to be done to further reduce the downside risks.” At the top of her list was finding a long-lasting resolution to the current trade war given that “the conflict is threatening growth around the world right now.”

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Fixed Income Factors Impact Return

Failing to use factor investing techniques for investment grade bond allocations can cost investors potential return, says a study from Amundi. It found that since the 2008 financial crisis, the behaviour of the euro-denominated investment grade corporate bond market could be explained by a number of risk factors. These include both traditional factors – duration, spread, and liquidity risk – and alternative risk factors such as value and momentum. Over the period 2003 to 2018, the behaviour of the investment grade corporate bond market was better explained by risk factors than by traditional capital asset pricing models. The effect was more marked since 2009. The study concluded that, by failing to consider these alternative factors, an investor would not capture certain components of potential return in the investment grade corporate bond market. A factor-based approach should result in a portfolio with more moderate performance in periods of strong market growth, but with more resilience in periods of sharp market declines than a portfolio managed in a more traditional way, it says. While factor investing is now a common approach for equities, it is still in its infancy in the bond universe.

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One-third Looking For New Job

Only 34.7 per cent of workers plan to look for a new job in 2019, down from 74 per cent in 2018 report, says a survey by Achievers, an employee engagement platform provider. What is surprising is that it found 70.1 per cent do not consider themselves “very engaged.” While this may seem like a positive trend, it says this actually indicates a major workplace complacency conundrum. For example, 18.6 per cent of over North American respondents haven’t even decided if they’ll look for a new job yet. Natalie Baumgartner, its chief workforce scientist, says, “Employee engagement is arguably one of the hardest business challenges, as it’s so individualized and constantly changing. What struck me in the data is how differently each respondent prioritized their work experience and the huge opportunity to improve employee listening to understand engagement at an individual level.” Key takeaways from the 2019 report 31.6 per cent say their engagement is average and they are open to new opportunities. Just 20.8 per cent consider themselves “very engaged,” while 16.3 per cent are fully disengaged and 31.3 per cent are “engaged, but feel my company could do more to improve employee experience.” The main reason they would change jobs, however, were financial in nature – ‘a pay raise’ (54.2 per cent), ‘career advancement’ (37.8 per cent), and ‘better corporate benefits’ (20.7 percent). It concludes this means the employee experience needs to be prioritized by senior leadership which can be done by making a commitment to improving company culture and employee experience.

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Next FAANG Hiding In Private Markets

Investor capital has flowed into the biggest public names in tech for the better part of the past 15 years, as investors rode the FAANGs to the top of equity markets. However, Maria Pacella, senior vice-president, private equity and portfolio manager of PenderFund Capital Management Ltd., believes that while so much of the focus in the tech space is placed on the big publicly traded companies, the next FAANG stock could be hiding in private markets, specifically in the health-tech space. She says rising costs in the healthcare sector, among other factors, have driven the industry to turn to technology to develop new solutions to old problems. In fact, the convergence of health and tech has become one of the fastest growing subsets of the technology sector. In these industries, leaders do not want to make public technologies that are still in development, which is largely why they remain private. As well, tech and health companies find that regulation is binding and the requirement to publish quarterly results distracts management from long-term issues. These sectors remain relatively underserved by investors, she says. While many of these tech and health companies are relatively small and likely have yet to go public, there is an increasing demand for new innovations in health and bio-tech which is creating huge growth potential for them.

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No Systemic Problems Identified

The ‘Group disability insurance cross-sectional analysis report’ from the Autorité des marchés financiers (AMF) ‒ the regulatory and oversight body for Québec’s financial sector ‒ did not reveal any systemic problems with the way group disability insurance was being managed. It found some good practices were observed, while others will need to be upgraded by insurers in a continuous improvement environment. Through this initiative, the AMF sought to develop a more detailed overall picture of usual insurance industry practices in the province relating to the handling of group disability insurance claims. The AMF obtained the co-operation of the 10 largest insurers in Québec, which account for close to 90 per cent of the province’s group disability insurance market. The AMF determined that it was appropriate to further clarify expected FTC good practices by means of recommendations, some of which are inspired by good practices it observed among certain insurers. It will follow up with the insurers by obtaining action plans from them and ensuring the practical implementation of the proposed corrective actions. The insurers must provide the AMF with their action plans by June 30.

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Plan Consolidation Examined

In light of the recent trend towards plan consolidation, including the possibility of single-employer plan mergers with jointly sponsored pension plans, the ACPM Ontario Regional Council will provide an opportunity to get the inside track on various aspects of plan consolidation. ‘360⁰ Review: Plan Consolidation’ will feature Chris Kautzky, managing director at Aon Hewitt Investment Management Inc.; Eric Menzer, global head of pension and fiduciary solutions at Manulife Asset Management; and Rachel Arbour, assistant vice-president, plan services, at HOOPP. They will share their experiences with respect to selecting the right approach to consolidation, getting member buy-in, and navigating the regulatory landscape. It takes place April 3 in Toronto, ON. For information, visit Plan Consolidation

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