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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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March 15, 2019


Use Of Leverage Legitimate Strategy

The Pension Investment Association of Canada (PIAC) believes leverage is a legitimate strategy which can be managed effectively within a prudent person framework. In its comments on a communique from the Canadian Association of Pension Supervisory Authorities (CAPSA) on the review of leverage use within pension plans, it agrees with CAPSA that the use of leverage is becoming more common within pension plans, with the primary motive to achieve better asset-liability matching while maintaining adequate exposure to return-generating assets in a lower-return environment. However, the use of leverage at the fund level is a newer development as leverage has long been embedded in many underlying portfolio holdings such as equities, real estate, and non-recourse third-party managed funds. Governance, process, and expertise are key considerations. To the extent CAPSA does further work in this area, PIAC recommends it take a principles-based approach to policy development (rather than rules-based) given the varying situations and objectives that arise from plan to plan. As well, it notes Canada lacks policy consistency with pension plans required, in some instances, to incur extra costs and employ sub-optimal structuring to comply with Income Tax Act requirements as they pertain to borrowing. “This is analogous to the situation that existed with respect to the foreign property rule for many years,” it says. However, the use of leverage in pension funds is a complex issue requiring careful consideration and it is worth taking time to get policy right.

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Crypto Asset Platform Input Sought

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are seeking input from the fintech community, market participants, investors, and other stakeholders on how regulatory requirements may be tailored for crypto-asset trading platforms operating in Canada. Its ‘Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms’ outlines a proposed regulatory framework that provides clarity for platforms, greater market integrity, and protection for investors. Louis Morisset, CSA chair and president and CEO of the Autorité des marchés financiers, says, “Platforms have told us that a tailored regulatory framework is welcome as they seek to build consumer confidence and expand their businesses across Canada and globally.” Securities regulators are taking steps to deepen their understanding of this area as digital and crypto assets continue to be a growing area of interest. Platforms, depending on how they operate and the crypto assets they make available for trading, may be subject to securities and/or derivatives regulation. Depending on their structure, they may also introduce novel features that create risks to investors and Canada’s capital markets that may not be fully addressed by the existing regulatory framework. Where securities legislation applies to platforms, the CSA and IIROC are considering a tailored regulatory framework to address these novel features and risks. The consultation paper is available on the websites of CSA members and IIROC. Comments should be submitted by May 15.

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ESG Options Face Headwinds

Despite an uptick in environmental, social, and governance (ESG)-focused conversations in the defined contribution market, ESG-oriented investment options face headwinds to widespread adoption, says Cerulli Associates. It says that fee sensitivity, the notion that ESG investing entails a trade-off in performance, and the regulatory environment in the DC market present barriers to adoption. Its survey data shows plan participants and plan sponsors are generally supportive of ESG-oriented investments in concept. However, plan sponsors ranked environmental and social responsibility among their most important attributes when selecting 401(k) plan investments. Long-term investment performance and cost of investments were the top-ranked attributes. “Data shows that plan sponsors care about ESG factors, but they place a greater emphasis on performance and price,” says Dan Cook, a research analyst in the retirement practice at Cerulli. Guidance issued by the U.S. Department of Labor (DOL) in 2018 raises an important point related to ESG investing in a DC plan context, he says. “ESG investments must be prudent options for all plan participants, not a select group or sub-segment.”

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Disability Management Scholarships Offered

WorkSafeBC and the Pacific Coast University for Workplace Health Sciences (PCU-WHS) are sponsoring a scholarship initiative designed to encourage and support students pursuing a career in disability management. The two-year pilot project commits up to $150,000 per year to allow a maximum of 25 students with the relevant prerequisites to transfer into the Bachelor of Disability Management degree program at PCU-WHS. Each student will be awarded $6,000, covering most of the tuition costs for each year of the two-year program. “These scholarships will ultimately help workers who’ve been injured access highly trained and qualified professionals to support their transition back to employment,” says Lee Loftus, vice-chair of WorkSafeBC’s board of directors. “Effective return-to-work programs are critical to maintaining an injured worker’s physical, mental, and financial health.” Students will be eligible for the scholarship after completing a two-year diploma or other prerequisites in a range of disciplines, but preferably in human resources, occupational health and safety, healthcare, social work, or business. Disability-management professionals collaborate with workers, employers, unions, health care providers, and workers’ compensation boards to maintain injured workers’ connections to their workplaces during recovery and facilitate their safe, early return to work.

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Employers Help With Investment

U.S. employers are becoming more helpful to employees when it comes to providing investment assistance, says a survey from the Plan Sponsor Council of America (PSCA). Its ‘61st Annual Survey of Profit Sharing and 401(k) Plans’ finds that tools like managed accounts and target-date funds continue to gain ground, with more than a third of companies now offering investment advice to participants. In addition to these, automatic features/qualified default investment alternatives and personalized investment advice from professionals are also offered. Results of the survey show that the use of professionally managed investments continues to rise, with nearly 40 per cent of plans offering the service, up from 39 per cent the previous survey and from 32 per cent from 10 years prior.

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BMO Among Most Ethical

BMO Financial Group has been recognized by the Ethisphere Institute as one of the ‘2019 World’s Most Ethical Companies.’ The recognition underscores the bank’s commitment to values-based leadership and ethical business practices. Central to its approach to fostering an ethical culture is its commitment to acting responsibly and being a powerful tool for promoting social good. “The trust between a bank and its customers is at the core of our relationship. It is our most valuable asset and at BMO we’ve been building it for more than 200 years,” says Darryl White, chief executive officer of BMO Financial Group. “We constantly strive to strengthen our relationships by meeting the highest standards of ethical behaviour, as we work together with our customers to achieve their financial objectives, and – with all of our stakeholders – build a more sustainable future.” Ethisphere says the 2019 honorees profoundly illustrate how companies continue to be the driving force for improving communities, building capable and empowered workforces, and fostering corporate cultures focused on ethics and a strong sense of purpose.

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Brookfield Acquires Portion Of Oaktree

Brookfield Asset Management will acquire about 62 per cent of Oaktree Capital Group’s business. Upon closing, Oaktree will become a private company, according to a filing with the U.S. SEC. Both Brookfield and Oaktree will continue to operate their respective businesses independently. The two companies together will have about $475 billion in assets under management. Oaktree is a global alternative investment management firm.

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Frishman Joins Morneau Shepell

Zev Frishman is senior strategic advisor at Morneau Shepell Asset & Risk Management. He joined the firm in 2016 as chief investment officer from Open Access where he was executive vice-president and chief investment officer. Additionally, he was a member of the Ontario Teachers’ Pension Plan investment team for 18 years.

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Pension Plans Examined

The CPBI Quebec Region’s ‘Pension Plans Level 1’ will look at all aspects of the management and administration of pension plans. Sessions will look at design and operation, responsibilities of the pension committee, and beneficiary designation. It takes place March 21 and 22 in Montreal, QC. For information, visit: Pension Plans

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March 14, 2019


Nova Scotia Protects DB Plans

The use of reserve accounts, the removal on limits on the use of letters of credit, and allowing for the discharge of liability for annuity buyouts that would let employees move their pension assets to insurance companies are among the measures being proposed to help manage and protect defined benefit pension plans in Nova Scotia. Karen Casey, its finance minister, says the goal is to help DB plans remain solvent by providing more flexibility and stability for employers and transparency and protection of existing benefits for employees. The reserve account provision would allow employers to create a separate account that they contribute to only. These would ensure that the plan has adequate assets should it wind up with the remaining assets returned to the employer if the plan is wound up and all obligations including those to its members are satisfied. With the annuity purchase discharge provision, the employer can give a one-time lump sum to an insurance company who would then distribute monthly payments to the employee. This is popular with employees because insurance companies are highly regulated and have their own insurance, which is another level of protection for individuals. About 92,000 Nova Scotians currently belong to about 132 DB pension plans registered in the province. The legislative changes under the Pension Benefits Act are expected to be proclaimed and take effect in the fall. The changes do not apply to the pension plans for teachers, civil servants, and members of the legislature whose pensions are regulated under separate pieces of legislation.

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Pharmacare Heads Labour Priorities

Universal national pharmacare and pensions and retirement security are the top two issues the federal government must address in the 2019 budget, says the Canadian Labour Congress. Its list of 10 priorities are required to provide what it calls a “fairness budget” that meets the needs of workers and their families. When calling on the government for a national pharmacare plan, it says the budget must outline the federal government’s plan and budget future expenditures to implement a universal, single-payer pharmacare program in Canada. Universal pharmacare won’t just ensure everyone has access to the life-saving medications they need, it will save households and employers billions of dollars as Canada is the only developed country in the world with a universal public healthcare system that does not include universal coverage for prescription drugs. As a result, more than 3.6 million Canadians cannot afford to fill their prescriptions and Canadians pay the third highest drug prices in the world. As well, with high-profile bankruptcies such as Sears leaving without the pension protection they had been promised, the federal government must take steps to ensure that workers who have paid for pensions throughout their working lifetime are not penalized if their employer enters insolvency. The government has many options for ending this injustice, it says, and budget 2019 should take steps to reform federal bankruptcy laws to ensure that plan members and retirees are protected, introduce mandatory pension insurance to look after pensions and benefits in bankruptcy, and implement better monitoring and regulation of companies that sponsor underfunded defined benefit pension plans.

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Pension Assets Edge Down

The market value of assets held by Canadian trusteed pension funds edged down 0.7 per cent in the third quarter to just under $1.9 trillion, says Statistics Canada. On a year-over-year basis, the market value of assets grew 7.3 per cent compared with the third quarter of 2017. Investments in real estate reported the largest increase for the second consecutive quarter, up 2.3 per cent to $191.1 billion. Investments in bonds had the largest decline, down 3.1 per cent to $591.4 billion, while the value of stock holdings decreased for the third consecutive quarter, down 0.9 per cent to $569.9 billion. Foreign investments edged down 0.5 per cent in the third quarter to $707.2 billion and accounted for 37.3 per cent of total holdings. Foreign bond investments declined 9.2 per cent to $80.5 billion. Foreign stock holdings decreased one per cent to $344.2 billion. Pension fund revenue edged down 1.3 per cent in the third quarter to $42.6 billion. Investment income led the decline, down 11.3 per cent to $13.2 billion, while total revenue from contributions decreased 8.5 per cent to $14.9 billion. Expenditures increased 0.5 per cent in the third quarter to $24.2 billion. Over 6.2 million Canadian workers belonged to employer-sponsored pension plans in the second quarter.

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60/40 No Longer Enough

A 60/40 allocation to equities and bonds is no longer likely to be enough to offer investors the outcomes and diversification required to reach their long-term objectives making alternative investments increasingly critical to the investor’s portfolio, say investment analysts at the 8th edition of the AIM Summit, taking place on April 7 in Abu Dhabi. Zachary Cefaratti, CEO of Dubai-based Dalma Capital estimates the alternative investment industry currently represents over $10 trillion in assets under management today. He forecasts this “to grow to $14 trillion by 2023. As we enter the late stages of economic and credit cycles, investors increasingly consider alternative investment and uncorrelated assets.” A typically so-called ‘diversified’ portfolio of stocks and bonds has over the last decade been almost in step with the stock market. Alternative investments will typically reduce this correlation and lower the erosion impact of market volatility. This is why they are becoming, for many, a critical part of the mix, but one that has been to date too often overlooked. Raha Moradi, managing partner of the AIM Summit, says: “Alternatives have a valuable place in an investor’s portfolio. A speculator seeks a quick return and is willing to take on risk. But an investor actively tries to minimize risk and does so by mingling together asset classes with low or negative correlations with each other.” 

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Growth, Value Gap Widest In 70 Years

The pricing gap between growth and value stocks is its widest in 70 years, says an AB Bernstein study. And the dynamic of costly stocks getting more expensive and cheap ones getting cheaper is an opportunity to be exploited, it says, as already this year, value has shown some evidence of a comeback. Value as a style tends to perform better than average when there have been extreme troughs in the earnings revisions balance series, particularly six to 12 months following the point of most aggressive downgrades. As a result, over the long haul, value investors come out ahead because, once overlooked stocks get attention, the upside is lucrative. As well, earning downgrades, in particular regarding growth stocks, are rife these days for 2019’s first quarter. The last time value stocks were on top was from the end of the dot-com bubble at the start of the last decade until the 2008 financial crisis.

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Encouragement Keeps Balances In Plans

If defined contribution plans encourage departing employees to keep their balances in their plans for at least a year, there’s a good chance participants will retain their accounts in the plan, says a study by Alight Solutions. It tracked participants in plans for which it is the recordkeeper from 2008 through 2017 and analyzed participants’ behaviour after they decide to retire or take another job. Those who take action to take a withdrawal do it relatively soon after leaving. The percentage of participants taking a distribution ‒ either a cash out or a rollover ‒ within the first year of leaving their employer ranged from 55 per cent to 60 per cent. The percentage of people taking a distribution from their plans between one year and two years after leaving employment ranged from 14 per cent to 16 per cent. As well, retirees are more likely to keep their money in plans if the plans allow installment distributions. Installment distributions are gaining popularity. A previous survey found that 66 per cent allowed automatic installment distributions in 2017, up from 51 per cent in 2007.

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PSP Acquires Student Accommodations

Greystar Real Estate Partners LLC, a global investor, developer, and manager of rental housing – alongside Joint Venture partners, a subsidiary of the Public Sector Pension Investment Board and Allianz Real Estate – has exchanged contracts to acquire a large purpose-built student accommodation asset in the UK’s Shoreditch from Apache Capital Partners. The purchase of the Paul St. East scheme – in the heart of London’s tech quarter and close to Amazon’s east London office – is one of the biggest single-lot transactions in the history of sector in the UK. It reflects the ongoing attractiveness of London where demand for high-quality student accommodation continues to outstrip supply. Apache Capital plans to re-invest funds from the deal into its own build-to-rent pipeline with Moda Living, a national multi-family pipeline with 6,500 apartments across nine cities.

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Shu Joins GroupHEALTH

Han Shu (CPA, CA) is director of finance at GroupHEALTH Benefit Solutions. Based in its Surrey, B.C., head office, she will lead the finance team and oversee and direct the accounting, financial reporting, tax, and treasury functions. Most recently, she was with Deloitte Touche Tohmatsu Limited. 

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Focus Put On Individual

‘Partners in Prevention 2019: Health & Safety Conference & Trade Show’ will focus its attention on the individual – the ‘safety superhero’ who advocates for health and safety in their workplace. Sessions will be featured on millennial management, ‘Cannabis ‒ Six Months In,’ and big data and its future in safety. A mental health in the workplace forum will also be featured. It takes place April 30 and May 1 in Toronto, ON. For information, visit Health & Safety

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