Government Seeks Lower Drug Prices
The federal government is planning the most significant suite of changes in over two decades to protect Canadians from excessive drug prices. As a key part of its plan, the government is proposing changes to the way patented drug prices are regulated in Canada. Through amending the ‘Patented Medicines Regulations’ to change the list of countries used for price comparison, the government will be in a better position to take advantage of lower drug prices in other countries and consider value for money and affordability when setting the bar on excessive pricing. Canada’s patented drug prices are the third highest among countries in the Organisation for Economic Co-operation and Development (OECD). OECD median prices are, on average, 22 per cent below those in Canada. To help inform the development of these regulatory improvements, Health Canada is currently seeking input. This online consultation will run to June 28.
Life Expectancy Higher
Assumed life expectancy with the Canadian Institute of Actuaries (CIA) draft ‘Task Force Report on Mortality Improvement’ combined with the base mortality table CPM2014 is about one per cent to 1½ per cent higher than the life expectancy calculated using the more common CPM-B scale, for both males and females, says a Morneau Shepell ‘News & Views.’ The impact on pension values would be about 0.5 per cent. Using the new scale would result in a similar increase in the value of plan liabilities. This means that sponsors of pension plans that are not fully funded on a going-concern basis could see an increase in their amortization payments and in their current service contributions. A similar impact could also be expected on liabilities and current service cost for accounting purposes if the new scale is also considered the best estimate on that basis. However, for the time being, the new scale would not be used to calculate transfer values payable upon member termination since the assumptions used for these calculations are prescribed and based on CIA recommendations.
Plan Solvency Improves
The median solvency ratio for defined benefit pension plans is 93 per cent, compared to 91 per cent as at December 31, 2016, says the Financial Services Commission of Ontario (FSCO) ‘Quarterly Update on Estimated Solvency Funded Status of Defined Benefit Plans in Ontario’ as at March 31. The two per cent increase in the estimated median solvency ratio since December 31 is attributable to robust first-quarter 2017 model pension fund investment returns that led to a one per cent increase in the ratio and a reduction in solvency liabilities due to an increase in commuted value interest rates which resulted in a one per cent increase in the ratio. The solvency ratio of 93 per cent at the end of the first quarter of 2017 continued the upward trend that began in late 2016. The last time solvency ratios reached these levels was in early 2014, when they peaked to 93 per cent, falling quickly thereafter. It also found 63 per cent of plans had a solvency ratio between 85 per cent and 100 per cent and 22 per cent of plans had a solvency ratio greater than 100 per cent.
ETF Edge Over Hedge Funds Widens
The global ETF/ETP industry with US$3.913 trillion in assets at the end of the first quarter of 2017 was US$847 billion larger than the global hedge fund industry which had assets of US$3.066 trillion, says ETFGI. The assets invested in the global ETF/ETP industry have continued to grow faster than assets in the global hedge fund industry since the end of the second quarter of 2015 when they first surpassed the assets in the global hedge fund. Although the assets in ETFs were larger than the assets invested in hedge funds, the hedge fund industry remains larger than the ETF industry based on number of funds: 8,216 hedge funds versus 6,771 ETFs/ETPs.
Hendershot Joins Mercer
Kevin Hendershot is a principal and client manager in the Toronto, ON, office of Mercer Canada. He brings more than 23 years of cross-industry work experience in professional services and enterprise sales, including previous client management roles at Accenture, Allstream, and Microsoft.
Alternative Alternatives Examined
‘Alternative to Alternatives ‒ Going beyond RE, PE, and Infrastructure’ will be examined at a Toronto CFA Society session. Antoine Bisson-McLernon, partner and chief executive officer at Fiera Comox Partners; Glenn Smith, managing director and president of Hancock Renewable Energy Group; and Ian Fowler, managing director and co-head of North American private finance – private lending at Barings LLC; will share their views on the present and future landscape of global agriculture, renewable energy, and private lending investing. It takes place May 31 in Toronto, ON. For information, visit Alternative Alternatives
Above Average Growth Predicted
A record 34 per cent of money managers predict above-trend growth and below-trend inflation over the next 12 months, says Bank of America Merrill Lynch‘s monthly fund manager survey. Additionally, a net 56 per cent of investors surveyed believe global profits will improve over the next 12 months, the highest reading in three years and up from a net 50 per cent in April. A net two per cent also believe corporate earnings will rise 10 per cent or more over the next year, the highest reading since July 2011. The survey also found a net 37 per cent of managers believe global equities are overvalued, the highest reading since January 2000, and up from a net 32 per cent in April. Meanwhile, a net 20 per cent of investors think European equities and a net 44 per cent think emerging markets equities are undervalued, compared to a net 19 per cent and 47 per cent, respectively, last month.
External Asset Management Grew
Insurance company assets managed by external money managers in North America grew 10.2 per cent in 2016 and globally by 8.1 per cent, says a report by the Insurance Asset Outsourcing Exchange and Insurance AUM. Low fixed income rates are driving insurers to external managers that can provide more specialized investments such as high-yield fixed income, emerging markets equities and debt, secured loans, structured products, and private debt.
Expense Ratio Downward Trend Continues
The average expense ratios of long-term mutual funds declined in 2016, continuing a 20-year downward trend, says the Investment Company Institute. Investors on average paid 39 per cent less for equity mutual fund expense ratios in 2016 than in 1996. The average expense ratios of equity, bond, and hybrid mutual funds all showed an overall decline, including both active and passive funds. For example, the average expense ratio of active mutual funds in 2016 was 24 per cent less than in 1996. “In recent years, economies of scale and intense competition put downward pressure on fund expense ratios. The fund industry continues to meet investor demand for lower-cost investment options, such as through no-load share classes,” says Sean Collins, ICI’s senior director of industry and financial analysis. “Funds are adapting to a paradigm shift in the industry’s business model ‒ a growing number of investors are paying their investment professionals for investment advice and assistance directly out of their pockets, rather than paying indirectly for advice through funds.”
Integrated Closes Loan
Integrated Asset Management Corp. and its private corporate debt group, IAM Private Debt Group, have closed of a $28 million senior term loan to S.M. Group International Inc. (SMi). The capital raised by SMi will replace current bank facilities and support the company’s ongoing growth. Founded in 1972, SMi is a privately-owned engineering, integration, and construction management company. It focuses on the deployment of safe, sustainable, and high level integrated solutions for various types of infrastructure projects to ensure future generations a better quality of life.
Pratt Speaking At Session
Laura Pratt, national practice leader, organizational health at the Centre for Mental Health in the Workplace at Great-West Life, will share ideas on how Canadian workplaces can and have engaged tools to support psychological health and safety in the workplace at the Benefits and Pensions Monitor Meetings & Events ‘The Realities of Workplace Mental Health’ session. She joins Richard Heinzl, global medical director from WorldCare International Inc., who will examine ‘Future Solutions for Mental Health in the Workplace; and Renee Couture, owner of UC Consulting, who will present solutions as to what can then be done to create a thriving workplace, improving mental health, and, in doing so, reducing benefit costs. It takes place June 6 in Toronto, ON. For information, visit Mental Health Realities
Men Discuss Mental Health
Hansell Consulting Group will present the first annual ‘Men’s Breakfast for Mental Health.’ It is an opportunity to discuss, learn, and share on what is being called a silent crisis: men’s mental health. It takes place June 13 in Burlington, ON. For information, visit Men’s Mental Health
Proper Planning Key To Alternative Allocations
Alternative assets are an essential component for institutional investors looking to diversify from traditional asset classes and enhance risk adjusted returns, says David Rogers, partner, Caledon Capital Management. Speaking at ‘The Lifecycle of an Alternatives Allocation’ seminar held by Blakes, CIBC Mellon, and Caledon, he said investors interested in allocating to alternatives assets need to think about the way they want to build a program and how they want to build it over time. There are several implementation options for institutional investors that include using an in-house team, general consultants, or partnering with a specialist. Each comes with its advantages and challenges and investors may be limited in their choices based on the size of their plan. The elements of the portfolio must also be considered for each alternative type. Elements will include such things as the allocation details, investment strategy, the capital structure, and investment liquidity. Communication at every level and stage is the key to a successful implementation, said Rogers. Upfront planning and communication, together with an annual review of the implementation plan, will impact the long-term success of an alternatives investment program.
Costs Could Climb By 2025
Health benefits costs to employers could climb by 130 per cent by 2025, says Mercer. Announced at its inaugural ‘Future of Healthcare: Evolution to Revolution’ event series, it says the higher costs are expected to be driven by specialty drugs, higher rates of chronic and mental illness, increased benefits fraud, and increased health pooling costs. Along with an increasingly diverse and mobile workforce, this highlights the challenges employers will face as they compete for talent in a challenging healthcare world. However, employers that understand the issues will be able to plan for, and succeed in, the long term. “As costs rise, employers need to step up to remain competitive,” says Brian Lindenberg, partner and leader of Mercer Canada’s health practice. “This means embracing the personalization of benefits enabled by technology, leveraging innovative funding models, and offering more flexible plans in keeping with the needs of a more diverse and ever-changing workforce.”
CRA Clarifies 10 Per Cent Rule
The Canada Revenue Agency (CRA) has clarified its position on the preamble to subparagraph 149(1)(o.2)(iii) of the Income Tax Act as it pertains to pension investment corporations and CRA’s response to Question 42 at the 2007 Canadian Tax Foundation Conference, says an Aon Hewitt ‘Radar.’ Paragraph 149(1)(o.2) of the act exempts certain pension corporations from Part I tax where the relevant conditions listed therein are satisfied. One of these conditions is that a pension investment corporation make no investments other than investments that a pension fund or plan is permitted to make under the Pension Benefits Standards Act, 1985 (PBSA) or a similar law of a province. In general, the PBSA and the pension benefits legislation of certain provinces contain a rule that states that a pension plan cannot invest more than 10 per cent of the pension plan’s assets in any one investment. CRA’s understanding is that the 10 per cent rule is applied at the level of a pension plan and not at the level of a pension corporation. However, since it believes that the wording of the preamble to subparagraph 149(1)(o.2)(iii) of the act is not clear and unambiguous, its view that it is appropriate to interpret this provision in a manner that is consistent with the manner in which the 10 per cent rule is interpreted and applied for purposes of the PBSA and provincial pension benefits legislation. Therefore, the 10 per cent rule will be applied at the pension plan level rather than at the pension corporation level.
Attention Turning Back To Fundamentals
With President Trump’s first 100 days and the French presidential election in the rearview mirror, attention is turning back to fundamentals, says AB’s ‘Global Macro Outlook.’ In recent months, the global economy has moved onto firmer ground and, with policy still highly accommodative, it expects this to continue, forecasting 2.8 per cent global growth both this year and next. With inflation expected to decline (to 2.5 per cent in 2018 from 2.7 per cent this year), this should provide a benign backdrop for global financial markets because developed-market central banks are likely to withdraw extraordinary monetary-policy stimulus very gradually. However, this process is unlikely to be uniform. The U.S. Fed is likely to continue raising rates slowly and adopt a passive approach to normalizing its balance sheet. At the ECB, tapering will probably move onto the agenda in the second half of the year, However, it expect the Bank of Japan to remain broadly committed to its current program. These differences are reflected in its bond yield forecasts, which show Japanese yields anchored close to zero, a modest rise in the U.S., and a more material increase in the euro area, where the disconnect with fair value is wider.
Factor Investing Attracts Inflows
Factor investing, often referred to as smart beta, attracted over €3.6 billion of inflows at the end of April into ETFs in Europe, says Amundi. The size factor (which refers to companies in the small and mid-cap sector) and value have attracted the largest inflows since January, with over €1.35 billion and €1.34 billion each. In April alone, investors preferred the size factor, which attracted over €288 million of inflows, followed by high dividends with €235 million. Amundi says the figures showed that factor investing “keeps its strong traction with investors.” Overall European ETF market flows at the end of April were over €34 billion, led by equity ETFs with €22.3 billion.
Conference Focuses On Cybersecurity
A new International Foundation of Employee Benefit Plans conference will share the latest in cybersecurity and deterrence of data breaches and provide guidance for internal controls and risk prevention for employee benefit plans and their sensitive information on individuals, members, and dependents. It takes place July 17 to 18 in Chicago, IL. For information, visit Cybersecurity
DB Offers Efficient Solution
The features typically found in modern defined benefit pension plans, like the CAAT Pension Plan, meet Canadians’ desired retirement outcomes and would also provide an efficient, lower-stress, retirement income solution for Canadian employers and employees, says ‘Designing retirement schemes Canadians want: observations from a Modern DB Pension Plan,’ a study by CAAT. The survey also found Canadians are willing to contribute more of their income for features associated with modern DB plans like predictable retirement income that is guaranteed to be paid for life. Young Canadians (18 to 34) are also more willing to contribute for retirement security than is commonly thought although they are more likely to work part-time and contract than in the past. As well, few Canadians have formal retirement strategies even though they place high importance on maintaining their standard of living in retirement and people participating in DB plans reported less retirement-planning stress than those participating in defined contribution plans or group RRSP arrangements.
Canadians Plans Uphold Growth Trend
Building on a strong 2016 annual return of 6.8 per cent, Canadian defined benefit pension plans upheld the positive growth trend in the first quarter of 2017 with returns of 2.9 per cent, says the RBC Investor & Treasury Services All Plan Universe. This marks the fourth straight quarter of growth for Canadian pension plans. “Canadian pension plan returns, led by strength in Canadian and global equities, are off to a good start in 2017; however, vigilance is still required,” says James Rausch, head of client coverage, Canada, RBC Investor & Treasury Services. “While ongoing business investment in Canada could spur growth, asset managers will undoubtedly be focusing on maintaining a diversified portfolio and actively managing their risk exposure in the period ahead given evolving macro-economic and political forces around the world.” Positive global economic conditions in the quarter helped lift global equities in delivering a return of 6.2 per cent, up from three per cent in the fourth quarter of 2016. Canadian equity returns retreated slightly quarter-over-quarter, returning 2.3 per cent, down from 5.7 per cent in the last quarter. Canadian fixed income assets rebounded posting a return of 1.4 per cent, compared to a fourth quarter loss of -3.4 per cent.
CPPIB Partners With IndoSpace
The Canada Pension Plan Investment Board (CPPIB) and IndoSpace, developer of industrial and logistics real estate in India, have created IndoSpace Core, a joint venture that will focus on acquiring and developing modern logistics facilities in India. CPPIB has initially committed approximately US$500 million to the joint venture and will own a significant majority stake. IndoSpace Capital Asia will manage the new entity. IndoSpace Core has committed to acquire 13 well-located industrial and logistics parks totaling approximately 14 million square feet, from current IndoSpace development funds. The assets are prime industrial properties located in the top industrial and logistics hubs in India, including Chennai, Pune, Mumbai, Delhi, and Bangalore.
Investment Approaches Examined
The International Foundation of Employee Benefit Plans’ ‘French Canadian Investment Institute’ will deliver investment management education on the latest investment approaches from industry leaders who are directly involved with managing pension assets. It takes place May 25 in Montreal, QC. For information, visit Investment Management
Funding Reform Among PIAC Achievements
Funding reform and the CAPSA governance guidelines rank among the achievements of the Pension Investment Association of Canada (PIAC) over the last four decades. The ‘Top Ten’ list was delivered David Letterman style at its 40th annual general meeting. It has been a prominent advocate for pension funding reform in recent years with recent success as Quebec has moved to a new going-concern plus funding regime and Ontario is now reviewing the issue. It also pushed CAPSA to take a leading role in harmonizing governance guideline regulations across the country and been a key provider of input and feedback as CAPSA developed its governance guidelines and self-assessment tools over the past 20 years. The ‘Top 10’ are at ‘PIAC Lists Top Achievements’ at the Benefits and Pensions Monitor website.
Income Remains Steady
The gross income replacement level in Eckler’s ‘Capital Accumulation Plan Income Tracker (CAPit)’ has remained steady for almost two years, at 59 per cent for males, and 57 per cent for females. The first quarter trend remained steady for both males and females over the previous quarter. Over this time, investment returns have been volatile and decreases in annuity rates have offset the positive investment returns generated in good times. Low interest rates are expected to continue, creating a new reality for plan sponsors and making it even harder for CAP members to retire. Areas where plan sponsors can help members achieve adequate income replacement levels within the CAP offered are investment options including default options, and monitoring their members’ asset allocation. “In our new reality of low interest rates, it’s crucial that members’ asset allocation aligns with their retirement income needs,” says Janice Holman, principal and DC practice leader. “A plan’s target date fund selection, default fund, and member investment elections can significantly impact the level of retirement income a member can generate.”
Results Positive For Fourth Quarter
The median return of the ‘BNY Mellon Canadian Master Trust Universe’ was +3.11 per cent for the first quarter of 2017, marking the fourth straight quarter of positive results. The one-year return of +11.22 per cent was above the universe’s 10-year annualized return of +5.97 per cent and marked the fourth consecutive quarter of positive one-year performance. “The Canadian plans are off to a healthy start for 2017 with 100 per cent of the plans posting positive results and a median return of +3.11 per cent for the first quarter,” said Catherine Thrasher, managing director, global risk solutions Canada, BNY Mellon Asset Servicing.
Smart Beta Impacts Outperformance
The number of asset managers that beat benchmarks last year is reduced when smart beta benchmarks are used as comparisons, says Lyxor Asset Management. It found that 28 per cent of active funds in Europe beat traditional benchmarks in 2016, this becomes just 13 per cent when smart beta indices are used. The number of outperformers of traditional cap-weighted indices is lower than 2015 when 47 per cent of the active managers beat their benchmarks. Active managers that succeeded in outperforming their benchmark were overweight on the ‘value’ factor at the expense of low-beta, quality, and momentum factors. It also found markets were devoid of meaningful trends in 2016 and instead were dominated by “frequent stylistic rotation from one factor to another.” As well, in the current market environment, which is influenced more by politics than by the economy, it was been difficult for active managers to generate performance and take advantage of changes in trends in 2016.
Hedge Fund Surge Continues
The emerging market hedge fund ‘surge’ continued through April as the industry saw inflows reach new heights, says HFR. Total capital invested in emerging markets hedge funds reached an all-time high of $205.8 billion. This occurred as hedge funds investing in emerging markets saw returns of 5.63 per cent during April, which took the return for the year so far to 22.1 per cent. This was the strongest start to the year on record for the emerging market hedge fund world.
Drug Claim Trends Presented
The Benefits Breakfast Club will be ‘Making the Link: Financial Sustainability and Measuring Outcomes’ at a session where TELUS will present the details of the 2016 drug and health plan claim trends for its block of business. Leaders from the benefits consulting community and TELUS will discuss trends in high cost specialty drugs, the diseases driving benefit costs nationally and by province, and more. It takes place June 9 in Brampton, ON. For information, visit Drug Trends