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November 14, 2017


OSFI Tightening Link

Tightening the link between efforts at the Office of the Superintendent of Financial Institutions (OSFI) and results in the field will be a priority over the course of the 2017 to 2020 planning period. It says it will continue to devote the majority of its efforts to implementing its core mandate in a way that contributes to public confidence in the Canadian financial system. In addition to its ongoing work, OSFI will focus on improving the consistency of supervisory decisions across like institutions and the timeliness of follow-up of supervisory recommendations. As well, it will strengthen its ability to anticipate and respond to severe but plausible risks to the Canadian financial system by enhancing its prudential guidance so that it will encourage financial institutions to position themselves to operate through periods of stress. This guidance will be on encumbrance limits, solo capital, and the implementation of ‘bail-in’ requirements. Finally, it will reinforce its principles-based guidance and supervision; influence international guidance, standards, and reforms with a view to implementing them in the context of what is best for Canada; and set and meet high standards for managing its own resources.

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MiFID II Impact Less Than Expected

Although some industry experts are projecting that new MiFID II rules will reduce buy-side spending on equity research by as much as 40 per cent, a study from Greenwich Associates finds that the immediate impact will be much less dramatic as European institutional investors plan to cut research budgets by only one per cent in the next 12 months. With MiFID II, regulators are attempting to bring transparency and accountability to the market for investment research. Under the new framework, asset managers and other institutional investors will have to make discrete payments for research, either from their own balance sheets or through new research payment accounts (RPAs). In essence, regulators are trying to ‘unbundle’ research costs from trade allocations to the greatest possible extent. ‘As MiFID II Looms, European Fears Subside’ shows portfolio managers in Europe are planning a one per cent reduction in spending, including both commission-based soft payments and hard payments taken from asset managers’ own P&L. That’s a smaller cut than investors were projecting last year, when participants in the study predicted reductions of six per cent to seven per cent. Institutions plan to reduce their use of investment bank research by two per cent. 

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Session Offers Access To Ideas

Giving access to many stakeholders to the many ideas from start ups and what exists today was the purpose of the Sun Life Financial ‘INSURTECH EXPO,’ says Fred Tavan, global head of the innovation lab, reinsurance, and insurance risk at Sun Life. The event, held in partnership with ‘PlugandPlay’ in Silicon Valley, a global innovation platform which connects startups to corporations, featured 10 startups offering digital technology in areas including client distribution and engagement, early disease detection, artificial intelligence, predictive modelling, and analytics. Its success stories have included Dropbox and PayPal, said R. J. Carver, its director of FinTech. Its Insurtech program was launched in 2016. Jane Wang, CEO of Optimity Inc., said they provide a policyholder engagement platform. Its tools are changing the way insurers interact with clients, syncs with wearable apps, and rewards people for activities. Nudge, said Paul Teshima, its CEO and co-founder, uses artificial intelligence (AI) to understand how relationships are built and nurtured and how to grow right relationships to grow business. Benefits today are operating as they did 30 years ago with proposals generated in Excel and quotes sent and received by eMail, said Jason Andrew, CEO of Limelight Health. Its vision is to deliver the most efficient and compelling quoting system by automating and integrating with the carrier system.

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Smart Beta Allocations Set To Increase

Faced with an increasingly difficult investment environment, a growing number of investors are looking to significantly increase allocations to smart beta strategies, says a survey by Invesco PowerShares. It found that allocation to smart beta strategies was expected to rise to 23 per cent (from the current 13 per cent) over the next three years. The rise was linked to investors dealing with the challenges posed by low yields, scarce value, and shorter investment horizons, it says. Mike Paul, head of Invesco PowerShares in Europe, the Middle East, and Africa, says, “Smart beta is no panacea, but it does have the potential to help with [these] major and emerging challenges.”

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Smaller Funds Outperform With Real Estate

The private real estate industry has seen a long-term trend of capital concentration at the top end of the market with vehicles of $1 billion or more in size accounting for approximately half of the total capital raised for the industry since 2013, although they represent less than 10 per cent of funds closed. However, Preqin’s ‘November 2017 Real Estate Spotlight’ shows despite bigger funds attracting large amounts of investor capital, smaller funds of $500 million or less have generated higher average returns and are consistently outperforming mid-size and larger funds. This is true both when assessing performance by vintage year and when judging returns over a given horizon. Additionally, smaller vehicles were more likely to have IRRs in the top quartile of their cohort compared to larger funds, it says. However, although smaller funds post higher average returns, they do so with greater volatility and a greater spread of performance, while larger funds demonstrate relatively lower risk/return profiles.

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REITs Best-performing Asset Class

REITs were the best-performing asset class over an 18-year period while hedge funds were the second worst, says a study by pension research firm CEM Benchmarking, sponsored by Nareit. ‘Asset Allocation and Fund Performance of Defined Benefit Pension Funds in the United States Between 1998-2015’ showed listed equity REITs outperformed all other 11 assets in the study, generating average annual net total returns of 11.4 per cent. The hedge fund average annual return was the second-lowest of all assets surveyed, outpacing only U.S. other fixed income, a category that included cash. If cash is excluded, then hedge funds would have been the worst performing asset class with an 18-year arithmetic average annual net return of 5.1 per cent. REIT net returns were boosted by their low fees. Listed equity REITs had the lowest fees, which contributed to their delivering the highest average net return. Private equity had the highest average gross return at 13.1 per cent, but had the second highest average net return of 11.1 per cent because of the impact of expenses. However, pension fund allocations continued to favour hedge funds and remain underweight on listed equity REITs. Hedge fund allocations averaged 1.46 per cent of pension fund portfolios at the start of the study period in 1998 and grew to 8.26 per cent of portfolios in 2015 – a 460 per cent increase. Listed equity REITs were an extremely small allocation in pension plan portfolios in 1998 at 0.36 per cent and the smallest of all allocations in 2015 at 0.73 per cent.

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Ricard Becomes COO

Denis Ricard is chief operation officer (COO) at Industrial Alliance and Financial Services Inc. He will be responsible for its individual and group insurance operations in both Canada and the U.S. These operations include individual insurance annuities, group benefits and retirement services, special market risks, and car dealer services and car loans as well as auto and home insurance operations. He will also lead the company’s digital transformation strategy. Since 1985, he has climbed the ranks from roles such as corporate actuarial analyst and middle manager to chief actuary and senior vice president of business development. He has held the position of executive vice president of individual insurance and annuities since 2015.

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‘Breaking Barriers’ Examined

AIMA Canada will examine ‘Breaking Barriers ‒ A Roadmap to Achieving Gender Diversity in the Alternatives Industry.’ Presented by the AIMA programming and events committee, it will present a high tea and panel featuring Emer McGuckin, managing director in Investor Relations; Amy Baryshnik, a partner at Alignvest Investment Management; Tara Kennedy, director, head of trading for ETFs and automated strategies within the global equity derivatives group at TD Securities; and Ida Khajadourian, director of wealth management and a portfolio manager at Richardson GMP; will discuss women’s advancement and gender diversity in the Canadian alternative investment industry. It takes place November 22 in Toronto, ON. For information, visit Gender Diversity

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November 13, 2017


CPP Assets Grow

The Canada Pension Plan (CPP Fund) ended its second quarter of fiscal 2018 on September 30 with net assets of $328.2 billion, compared with $326.5 billion at the end of the previous quarter. The $1.7 billion net increase in assets for the quarter consisted of $2.3 billion in net income after all Canada Pension Plan Investment Board (CPPIB) costs, less $0.6 billion in net Canada Pension Plan cash outflows. The CPP Fund routinely receives more CPP contributions than required to pay benefits during the first part of the calendar year, partially offset by benefit payments exceeding contributions in the final months. On an annual basis, contributions to the fund continue to exceed outflows. The portfolio achieved 10-year and five-year net nominal returns of 6.9 per cent and 11.8 per cent, respectively, and 0.7 per cent net of all CPPIB costs for the quarter.

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Green Bonds Set New Record

The green bond market set a record for quarterly issuance in the third quarter, says Moody’s Investors Service. The global green bond issuance hit record highs in the quarter, pushing the issuance total for 2017 far past the total for the full year of 2016. Issuance was driven by corporates, with $18 billion worth, representing over half (55 per cent) of the quarterly issuance volume. Almost all of the corporate issuance (93 per cent) was rated investment grade.

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Technological Change Inevitable

Technological change is inevitable and one will get left behind if one does not adapt, says Leo de Bever. Speaking at the CPBI Southern Alberta’s ‘Embracing Change and Discovering Opportunity’ session, he was one of a number of speakers who examined areas ranging from fixed income to the evolving fiduciary landscape, says Stian Andersen, of the regional CPBI, in the article Session Explored Discovering Opportunity at the Benefits and Pensions Monitor website.

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Medavie Adds Face ID

Medavie Blue Cross members can now securely access their benefit information by glancing at their iPhone. All of its plan members with the new iPhone X will be able to use Face ID, Apple’s biometric facial authentication service, to login to the Medavie Mobile app. The app currently utilizes the iPhone Touch ID fingerprint recognition for login which has continued to increase in popularity. Medavie Mobile is an all-in-one digital environment for browsing benefit details, checking prescription drug coverage, submitting claims, viewing claim history, finding health professionals in their area who offer ePay, and many more benefits.

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BMO Launches RRSP Accounts

BMO Investments Inc. has launched Series G. The Series G securities, subject to regulatory approval, are for 12 BMO mutual funds. The new funds will be available exclusively through its group registered retirement savings plan (RRSP) accounts.

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Canadian Tire Hikes Dividends

Canadian Tire Corp. raised its quarterly dividend by 38 per cent as it reported its third-quarter profit edged higher. The retailer will begin paying a quarterly dividend of 90 cents per share next year, up from 65 cents per share. It made the move as it reported a profit attributable to shareholders of $176.6 million, or $2.59 per diluted share, in its latest quarter. That compared with a profit attributable to shareholders of $176.4 million, or $2.44 per diluted share, a year ago. Revenue increased to $3.3 billion, up from $3.13 billion a year ago.

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Tracey Has New Role

Darren Tracey is director, sales, at Great-West Life. Most recently, he was manager – group benefits. He has been with the firm since 2000.

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Evolving Landscape Examined

The evolving pension landscape and leveraging emotional intelligence for success will be examined at a CPBI Ontario session. James Fera, a senior legal consultant in the retirement practice at Aon Hewitt, will update pension legislation for 2018. Jillian Kennedy, a partner in Mercer’s wealth business and leader of its defined contribution and financial wellness strategy for Canada, and Dean Sansom, a senior account executive at Great-West Life, discuss the pros and cons of decumulation. Amélie Meilleur, a disability management expert, will explain what all good leaders need to know about emotional intelligence. It takes place November 29 in Ottawa, ON. For information, visit Evolving Landscape

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November 10, 2017


OPTrust Gets Rid Of Tobacco

OPTrust is divesting from the tobacco industry. By the beginning of 2018, it will be divested from all equity and fixed income investments in public companies that derive a majority of their revenue from production or manufacture of tobacco products. “At OPTrust, we prefer to use corporate engagement – the promotion of better business practices – in our investment and ownership practices,” says Hugh O’Reilly, OPTrust president and CEO. “However, there is no such thing as a safe level of consumption of tobacco products. They cause only harm. As a result, investments in tobacco do not align with our responsible investing principles.”

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Connor Named CEO Of Year

Dean A. Connor, president and chief executive officer of Sun Life Financial, is Canada’s Outstanding CEO of the Year for 2017. The award program’s advisory board cited Sun Life Financial’s successful global business strategy under his leadership and vision, including its accelerated growth in seven Asian markets, launch of new wealth and asset management businesses, and number of acquisitions. Its total shareholder return has averaged 28 per cent per year over the past five years ending in 2016 and employee engagement is above benchmarks for global financial services companies.

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FSCO Updates ESG Requirement FAQs

Michael Long, senior policy consultant at the Financial Services Commission of Ontario (FSCO), shared some adjustments to the agency’s FAQs on policies and guidelines at the Benefits and Pensions Monitor Meetings & Events session, ‘Pension Investment Trends.’ It has been more than a year and a half since Ontario pensions plans were required to consider including an environmental, social, and governance (ESG) disclosure statement for their statements of investment policies and procedures (SIPPs). The adjustments were made in response to feedback and to make clarifications. Under the ‘IGN 004 – Environmental, Social, and Governance (ESG) Factors,’ the question in FAQ 300 has been reworded with a minor correction to avoid confusion. It now reads, “Does section 78(3) of the Regulation require our plan to adopt an ESG program? Long said the answer remains the same, a “no” with an emphasis on “whether” ESG factors are incorporated. The old FAQ 301 addressed what constitutes ESG incorporation at the plan level. It has been replaced with two statements (FAQ 301.1 and 301.2) on delegation. FAQ 301.1 states, “If the plan administrator leaves the decision as whether to incorporate ESG factors to its managers, without and policy or procedure guidance, it is FSCO’s view that this does not constitute the incorporation of ESG factors in the plan’s investment policies and procedures.” FAQ 301.2 provides examples of actions that constitute incorporating ESG factors at the plan level.

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Impact Investing Needs Size

The ‘a-ha’ moment for James Sorenson came when he realized that business could provide life changing skills for people while being financially viable. The chairman of the Sorenson Impact Foundation told a keynote session at the ‘Social Finance Forum’ that the goal is to do well while doing good. However, the combined efforts of government and philanthropists is not enough to deal with the immense social problems facing the globe. Impact funds provide an opportunity to bring in additional capital. However, it faces constraints. The current profile of impact investors is that they are small niche investors like family officers and high net worth individuals. Enough size needs to be built so that pension funds and institutional investors get interested. And part of the problem there is that there is a shortage of products of a size and quality to attract pension funds.

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Managing Currency Can Protect From Risk

Asset managers have choices to address foreign currency exposure such as passive management or active currency management. Yet, many plans have not developed a currency policy, says Momtchil Pojarliev, deputy head of currencies at BNP Paribas Asset Management. He told the Benefits and Pensions Monitor Meetings & Events session, ‘Pension Investment Trends,’ that every individual plan will have its own objectives when it comes to managing currency, but there are options. One option is to ignore currency, but currency exposure has been a poorly compensated risk. “Plans think they can remove risk by passively hedging,” said Pojarliev. “People think passive hedging is risk free. But there is a drawback. You can have a negative cash flow when the Canadian dollar shows weakness.” Another option is to hedge 100 per cent, but that leads to increased volatility and increased risk. Pojarliev said having some unhedged foreign currency exposure provides diversification. Taking the middle road and applying a 50 per cent hedge ratio may appear to be a “free lunch,” but it also comes with costs. Gains from a declining Canadian dollar are embedded in unrealized positive portfolio returns, but offsetting losses are crystallized as negative cash flows. Active hedging positions reduce volatility and aim to lessen negative cash flows. The hedging portfolio acts as an insurance policy that performs well in periods of Canadian dollar strength and has little impact in periods of Canadian dollar weakness. Managers could also use a 50 per cent passive hedge with currency overlay. Pojarliev said that if you have currency in your portfolio anyway, “why not move to a strategic hedge? If you do, it should be part of your investment policy.” He suggests running simulations to get an idea of what will present the lowest volatility and get an idea of market timing and strategy. He also recommends using internal or external expertise for market views.

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Health App Use Rising

A recent survey by Catalyst Canada found the use of health apps is on the rise with 30 per cent of respondents having one or two health apps on their phone. With this increased comfort and reliance on digital devices, it stands to reason that technology can greatly facilitate wellness in the workplace, too, says Anna Mittag, vice-president of operations at LifeSpeak. In the articleHow Technology Is Boosting Employee Wellness Programs at the Benefits and Pensions Monitor website, she says the reality is that many people are sometimes more comfortable asking questions of Google than a real person, especially when it comes to talking about health and mental wellbeing. For an employer, the cost of not appropriately addressing this is too high to ignore, she says.

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Regulators Worry About Downturn Risk

Global securities regulators are worried about the risks of a market downturn and spillover into the global economy. In a letter to the industry, Ian Russell, president and CEO of Investment Industry Association of Canada (IIAC), says “that the risks of a steep downward adjustment in asset prices, and the feed-back effects on the global economy, are more acute than ever before, reflecting changes in investor behaviour and the vulnerabilities of the underlying global economy.” Weak economic conditions, highlighted by continued high unemployment and a lack of inflation, “increase the risk of triggering a major shock to global markets,” he says. Moreover, global markets remain vulnerable to the effects of economic and geopolitical events. “External shocks could trigger steep declines in asset prices,” he says. “Banks and dealers have limited scope as market-makers to absorb panic selling, particularly by asset managers faced with massive exposure to falling asset prices, accelerating withdrawals of client funds as values plummet, and limited liquidity to avoid major asset sales.” The accelerating collapse in equity values and steep rise in interest rates (as bond prices fall) would quickly reverberate in the real economy, “pole-axing the incipient recovery, with potential for much worse,” he says.

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Data Presents Opportunities And Challenges

Data is a critical focus area for plans and service providers that present opportunities and challenges at the same time, says Tim Rourke, vice-president, segment lead, pensions and asset owners, at CIBC Mellon. Speaking at the Benefits and Pensions Monitor Meetings & Events session, ‘Pension Investment Trends,’ he said access to investment information and innovation are key differentiators and plans must work with custodians that support these changing needs while responding to changing governance and regulatory requirements. While data is important to plans, it can also present challenges, such as cyber security and cyber threats. “Cyber threats are growing in complexity, frequency, and risk,” Rourke said. And it’s not just the plan’s data at risk, but their vendors’, and their vendors’ vendors. “Pension plans need to understand how data is being consumed, manipulated, shared, and protected.” There are data interactions diffused throughout organizations with the same data manipulated by many different people. Meanwhile, the largest asset owners and investment managers are just beginning to tap into the power of data. At the same time, expectations are rising for the user experience. Custodians play a key role and need to work together with pension plans to integrate new innovations. Plans need to look at core capabilities and value add from providers, and see what other funds are doing. Providers must build an effective operating model, provide tools to meet modern-day member and manager expectations, and a strong tech defense layer that deals with data and risk management.

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Efforts Needed To Ensure Impact

This year marks the 10th anniversary of the formalization of the term impact investing, says Rehana Nathoo, of the Case Foundation. During the panel discussion ‘How Impact Investors are Shaking Up Global Markets’ at the ‘Social Investment Forum,’ she said impact investing finds its genesis in the mission investing of the 1960s. Today, it is becoming profitable, but efforts need to be made to make sure it is having an impact. Fran Seegull, of the U.S. Impact Investing Alliance at the Ford Foundation, said to get to the world “we want for our children and grandchildren, we need to invest capital into areas that reflect our values.” There are barriers such as a paucity of protects and it is still hard to raise money. As well, as impact investing moves more into the mainstream, they have to be concerned about the headline risk if companies start using impact as a smokescreen. Lauren Booker Allen, of Omidyar Network, said there have be some positive trends. With the uptick of new players, they can now leverage information from new players which could not be done when they were on their own.

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Directive Prompts Research Cost Unbundling

The majority of money managers with business across the globe plan to unbundle research costs globally for fixed income, currency and commodities, and execution fees, says a survey by the International Capital Market Association. It questioned participants on their intentions regarding the unbundling of FICC research as a result of new rules under the Markets in Financial Instruments Directive II which is effective January 3. It requires all financial firms with business in the European Union or with clients in the EU to disclose research costs as a distinct line item. The survey of money managers, private banks, pension funds, and other investors found 61 per cent of firms plan to unbundle their research costs globally, while 31 per cent plan to pay for research in non-EU jurisdictions only for EU clients. The remaining eight per cent plan to segregate the EU and non-EU businesses. It says these intentions show the “growing international effect these European rules will have.”

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Asian Landscape Vibrant

Asia ex-Japan’s institutional landscape is vibrant, with total investable and outsourced assets rising over the past few years, says a report from Cerulli Associates. This uptrend will likely continue as institutions diversify their assets and seek investment expertise in specialized areas, says ‘Institutional Asset Management in Asia 2017: Keeping Up With Institutions’ Growing Sophistication.’ In 2016, Asian institutions outsourced 14.2 per cent of their assets, a percentage that rose from 11 per cent in 2012 and which Cerulli forecasts will edge up to 18 per cent by 2021. Future outsourcing opportunities will likely come from markets with diverse institutional investors that increasingly need to diversify their portfolios and achieve stable, if not higher, returns. China is the most notable in this respect, with its retirement and insurance segments expected to lead future opportunities. Across Asia, competition for institutional assets is keen. In Taiwan, for instance, competition for mandates from its pension funds can be intense, with tough beauty parades and fee pressures. Peer rivalry is also high in relatively smaller markets in which numerous asset managers have an onshore presence, such as Singapore and Hong Kong. In Singapore, for example, manager searches by statutory boards and other small institutions over the past year have typically attracted more than 10 applicants vying for just one or a handful of mandates. To stand out from the crowd to win and keep institutional assets, managers need to show strong performance, investment specialization or strength, strong client servicing or having someone on the ground, and getting into investment consultants’ good books.

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PE And VC Returns Positive

Private equity (PE) and venture capital (VC) managers in developed markets outside the U.S. returned 4.2 per cent in first quarter of 2017, while PE and VC managers in emerging markets posted four per cent returns in the same quarter, says Cambridge Associates. Its Global ex US Developed Markets PE/VC Index underperformed comparable public market indexes in the first quarter of the year. The MSCI EAFE index, which measures public equity performance in developed markets outside the U.S., returned 7.2 per cent for the quarter, 300 basis points (bps) higher than the Cambridge benchmark. “Distributions to private equity and venture capital investors in developed markets outside the U.S. in the first quarter of 2017 outpaced capital calls by over 2.5 times,” says Andrea Auerbach, head of global private investments at Cambridge. Its Emerging Markets PE/VC Index also produced lower returns than the comparable public market index, the MSCI Emerging Markets Index, which returned 11.5 per cent in the quarter, over 700 bps higher than private investment managers in the region. Over longer timeframes, both private investment benchmarks outperformed the public indexes. “Private investment managers in emerging markets underperformed comparable public markets in Q1 of 2017, but over longer time periods, emerging market private equity and venture capital have far outperformed public markets in the region,” says Vish Ramaswami, managing director at Cambridge.

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Gauthier Joins CIBC

Jean Gauthier (CFA) is managing director, head of global fixed income, at CIBC Asset Management. He joins the firm from the Ontario Teachers’ Pension Plan where he was a portfolio manager, fixed income and alternative investments. Prior to that, he was a vice-president and senior portfolio manager at State Street Global Advisors.

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Blockchain Potential Examined

‘The Potential of Blockchain and Fintech for Businesses’ will be the focus of an Economic Club of Canada panel discussion. Alan Wunsche, CEO and co-founder of TokenFunder and Blockchain Canada; Dubie Cunningham, vice-president, enterprise innovation, digital banking at Scotiabank; and Greg Wolfond, CEO of SecureKey; will examine how firms utilize blockchain and fintech to increase client services, technological support, and impact business financial systems. It takes place November 16 in Toronto, ON. For information, visit Blockchain And Fintech

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November 9, 2017


Poos Seeks Retirement Products

John Poos is looking for products that address the needs of retirees. In a panel discussion on ‘Advancing Retirement Readiness’ at Franklin Templeton Investments’ ‘Retirement Innovation Summit: Advancing Retirement Readiness, the group head of pensions and benefits at George Weston Limited said they have been spending a lot of time on developing programs for decumulation which has risen to the forefront for defined contribution pension plans in the last five years. His company closed its defined benefit plan in 2006 and is now spending more time on retirement readiness for employees approaching retirement and those already retired. The company created a LIF and RIF so retirees could keep their money in the plan as there are significant fee reductions when rolling their assets over into retirement. The plan is to improve that, he said, but he needs to find products to do so. Derek Dobson, CEO and plan manager at the CAAT Pension Plan, said while it is becoming a DC world overall, surveys of most Canadians show they are willing to make higher contributions to their pension plan if they can get a retirement income for life. His plan’s innovation is to open it up to plans in the public and private sector that want to join the CAAT plan to get access to DB benefits without taking on the risk. Terra Klinck, a partner at Brown Mills Klinck Prezioso LLP, said these are interesting times to be a pension lawyer. Most pension legislation was put in place in the ’80s and was all about DB plans, However, as the DC industry grows and members get to the decumulation phase, the realization is the legislation for DC plans is not there. However, the provinces are starting to change legislation to allow for innovation. For example, several now allow pensioners to remain in their employer’s DC plans to address fee issues.

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60/40 Allocation Dead

Pension asset allocations of 60/40 equities to fixed income are dead, says Steve Mahoney, of Connor Clark and Lunn. In the Association of Canadian Pension Management (ACPM) ‘Governance of Pension Investment Decision Making in an Environment Of Lower Expected Future Returns’ session, he said instead pension funds are moving into alternative investments. Alternatives have become more popular as a way to diversify the risk bucket at a time when funds are shifting their focus from risk to returns. Risk and return goals are now in conflict, he said. Funds once took the approach that preserving capital meant risk was bad and portfolios were built around this. Today, a desire to grow returns means risk has to be taken. Alternatives are becoming popular for a number of reasons. Access is improving for funds of all sizes as the minimum commitment size has decreased and open-ended funds are being created. As well, they offer targeted returns which are potentially higher than public fixed income. Even defined contribution plans are starting to offer alternatives although members still need to opt for these funds, he said.

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Auto Features Defined U.S. DC

The defining aspects of the defined contribution pension plan industry in the U.S. are auto enrolment and auto escalation. Their adoption created an avalanche of asset flows into target date funds, says Drew Carrington, head of institutional defined contribution U.S. for Franklin Templeton Investments. He told the ‘Emerging DC Trends ‒ The View from the U.S.’ session at its ‘Retirement Innovation Summit: Advancing Retirement Readiness’ that the U.S market right now has about $7 trillion in assets in IRAs (Individual Retirement Accounts) with $5 trillion of that in DC plans. Currently, there is only about $3 trillion in private sector defined benefit pension plans in the U.S. and he said the view that everyone in U.S. was once covered by DB is a myth. At the peak in the 1980s, DB only covered 38 per cent of the workforce. DC assets exceeded DB assets for the first time in 2001 and flows to DC have been larger than flows into DB for the last 15 to 18 years. In the past year, there has also been a remarkable change, he said, in both the number of plans with auto enrolment and the number of plans with auto enrolment also offering auto escalation. The result is that millennials are saving at rates much higher than baby boomers when they were the same age.

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Two-tier Plan Discriminates

The employer’s demand for a two-tier pension plan for new workers is jeopardizing contract negotiations at the Bécancour Smelter in Québec. With a hiring boom expected at the smelter over the next few years, its unionized employees, members of Syndicat des Métallos/United Steelworkers (USW) Local 9700, are rejecting any change that they say would discriminate against new workers. “We all do the same work and there is no reason why newly hired workers should not be entitled to the same pension plan,” says Clément Masse, Steelworkers Local 9700 president. “The company is trying to tighten the screws and create division among workers. Employers have to understand that, in Quebec, we reject discrimination against new workers. It is simply not acceptable. The company wants to eliminate its defined benefits pension plan for new hires.

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Value Investing Brings Pain

It is painful to be a value investor, says Martin Cobb, executive vice-president, portfolio manager, research analyst, at Templeton Global Equity Group. In the ‘Where’s the Opportunity in Value Investing?’ session at the Franklin Templeton Investments ‘Retirement Innovation Summit: Advancing Retirement Readiness,’ he said value has underperformed growth for more than 100 months so it has been “painful for an awful long time.” Since the down periods are so painful, many investors throw in the towel during those times. However, over the long term, value will outperform 85 per cent of the time and normalization of interest rates and the economic cycle have a strong correlation with the performance of value so any normalization will see it start to recover. Even so, in this environment with growth stocks over-valued, there are opportunities for value investors to find stocks offering good returns at a much cheaper price.

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Tax Reform Need Updating

The pension industry really needs to take a look at tax reform, says Susan Nickerson, of Torys LLP. Speaking at the Association of Canadian Pension Management (ACPM) national session ‘Navigating the Maze: The Income Tax Act and Investment,’ she said the tax rules have not been updated since the 1990s and changes are needed to modernize them to keep up with today’s socioeconomic environment, increased life expectancy, and new plan designs. She outlined a number of recommendations the ACPM has come up with in areas ranging from longevity to defined contribution pension plan income splitting. Changing the age 71 deferral requirement to age 75 is one way to address longevity. Given current longevity projections and low investment returns and interest rates, changing the limit to 75 would provide more flexibility for Canadians saving for retirement. With pension splitting, currently DB members can split their pension income with their spouse immediately on retirement. DC members are required to wait until they turn 65. There is no reason for this disparity and it needs to be cleaned up, she said. The ACPM is also recommending that target benefit plans be permitted to choose whether they are treated as DB or DC based on their individual sustainability levels or circumstances. Currently, they are forced to be treated as one or the other.

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Canadian DB Plans Rebound

Canadian defined benefit pension plans, buoyed by rebounding Canadian equity returns, posted third quarter returns of 0.4 per cent, says the RBC Investor & Treasury Services’ All Plan Universe.’ This marks the sixth straight quarter of growth for Canadian pension plans. Second quarter returns showed a 1.4 per cent gain. Canadian equity returns reverted to positive territory with returns of 3.8 per cent, compared with -1.9 in the past quarter. A year ago, Canadian equities posted strong returns of 6.7 per cent with the resources, materials, and energy sectors helped fuel the 2016 gains. Canadian fixed income returns moved lower, posting a two per cent loss this quarter compared to a 1.4 per cent gain in the second quarter of 2017. “The energy sector posted stronger returns in September due to a rebound in oil prices which helped lift Canadian equities, while the bond market slipped into negative territory after strong Canadian economic growth led the Bank of Canada to raise interest rates for the first time in seven years,” says James Rausch, head of client coverage, Canada, at RBC Investor & Treasury Services. “The rate increase helped boost the financial services sector as well as drive short-term bond yields and the Canadian dollar higher. These developments will be taken into account by Canadian pension fund managers as they assess their asset allocation and look ahead to the fourth quarter and year-end returns.”

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Young Squeezed When It Comes To Retirement

Squeezing more from younger Canadians for retirement without policy decisions to save them money in other areas cannot work, says Dr. Paul Kershaw, an associate professor at School of Population and Public Health at the University of British Columbia and founder of Generation Squeeze. Speaking on ‘Achieving Intergenerational Fairness In Retirement Policy’ at the Franklin Templeton Investments ‘Retirement Innovation Summit: Advancing Retirement Readiness,’ he said the future retirement of young Canadians depends on intergenerational fairness which is not currently in place. He cited a number of examples of this. Despite the fact that average prosperity today is higher than it was in 1976, it is harder for a young person to buy a home now. In 1976, Canadians had to work five years to save a 20 per cent down payment for a home. Today, it takes 13 years across Canada, 15 years in Toronto, and 19 in Vancouver. The primary driver of net wealth for 50+ is housing, yet it is the main driver of debt for young Canadians as housing prices are growing faster than wage increases. Government spending is also skewed to over 65-year-olds. It spends $33,000 per person for those over 65 and less than $12,000 for those under age of 45. If the retirement industry wants young people to save for retirement, they have to be helped to save money in other areas like bringing down housing prices, cheaper daycare, and public transit.

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Amendment Would Protect Pensions

An Ontario backbench member of Parliament has tabled a bill to amend Canada’s insolvency laws so they offer more protection to pension plans, post-retirement benefits, and severance when a company is in deep financial trouble. Scott Duvall, a New Democrat MP who represents a riding in Hamilton, Ont., has proposed amendments that would make changes to the Bankruptcy and Insolvency Act as well as the Companies Creditors Arrangement Act (CCAA). The treatment of pensions during court-supervised restructurings has attracted new attention since Sears Canada sought protection under the CCAA in July. In addition to ending post-retirement health benefits and severance payments immediately, Sears Canada’s collapse meant future pension payments could be cut if there aren’t sufficient assets to make up its solvency deficit. “We must fix the imbalances to current legislation and provide Canadian workers, retirees, and their families the protection they expect and deserve,” says Duvall. Bills introduced by backbench members of Parliament seldom make it through the legislative process to become law, however.

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App Reveals Drug Data

Reformulary Group has launched ‘DrugFinder,’ a consumer app that allows Canadians to search prescription drugs and look up the drugs that provide the best combination of clinical and cost effectiveness. It enables users to make informed drug choices based on scientific evidence and independent medical advice, thereby giving them greater control of their health. It is “taking consumer empowerment to the next level,” says Helen Stevenson, CEO of the Reformulary Group CEO. “Many Canadians are not aware they have a choice in the drugs they take. Some drugs cost more than others and yet are clinically similar. With DrugFinder, all Canadians now have a free, independent and credible source for prescription drug information and effective alternatives.”

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Billard Returns To Morneau Shepell

Jason Billard (CPHR/MBA) is a partner and British Columbia region leader at Morneau Shepell. He rejoins the firm after leaving in July of 2014 for a position as managing partner, Pacific region, at Aon Hewitt.

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Investment Examined At Session

Johnny Quigley, of Hillsdale Investment Management; Pierre Saint-Laurent, a professor at HEC et Conseiller; and Daniel Primeau, of UBS Canada; will discuss understanding alternative investments, evaluating fixed income managers, and managing investment risk at a CPBI Quebec Region session on investments. It takes place November 15 and 16 in Montreal, QC. For information, visit Investment Session

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November 8, 2017


DC Limit Should Be Raised

Ottawa should raise contribution limits for savers in RRSPs and defined contribution pension plans, says a C.D. Howe Institute report. In ‘Rethinking Limits on Tax-Deferred Retirement Savings in Canada,’ author William Robson finds current limits are outdated, unfair, and put savers in RRSPs and defined contribution plans at a major disadvantage. “People are living longer and ‒ even more importantly ‒ yields on investments suitable for retirement saving are very low. These changes have raised the cost of obtaining a given level of retirement income,” says the president and CEO of the institute. The core of the problem is the Factor of Nine, an outdated ‘equivalency test’ for savings in various retirement saving plans. First adopted in 1990, the factor uses a hypothetical DB pension plan in which saving nine per cent of annual earnings will let a person buy a retirement annuity equal to one per cent of pre-retirement income. The Income Tax Act lets a member of a DB plan accrue a maximum annuity of two per cent of final earnings tax-free in the year of accrual which, over 35 years, would yield a pension equal to 70 per cent of pre-retirement earnings. The factor limits holders of RRSPs or defined-contribution plans to contributions worth up to 18 percent of their earnings a year. While intended to let them achieve an equivalent outcome, this limit badly damages their hopes of achieving retirement security like that of members of DB plans common in Canada’s public sector. The author recommends updating the factor s underlying assumptions to reflect current economic and demographic realities; specifically, allowing a higher tax deferred saving limit, raising the threshold from 18 per cent to 30 per cent or more.

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Harassment Legislation Necessary

Unifor says federal legislation aimed at confronting workplace violence and harassment is a necessary and vital action that should be implemented quickly. If adopted, Bill C-65, which seeks to amend both the Canada Labour Code and the Parliamentary Employment and Staff Relations Act, will require employers in federally-regulated workplaces to develop improved policies and programs to help prevent workplace violence and harassment. Protections are also expanded to the public service and employees on Parliament Hill. “The proposed legislation is urgently needed to address and prevent sexual harassment in the workplace, it is key to empower and protect workers who face this form of violence,” says Jerry Dias, Unifor national president.

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China Real Problem For U.S.

The Northern American Free Trade Agreement (NAFTA) has been very positive to all three of its participants, says Charles Nadim, a portfolio manager, Canadian equities, at Jarislowsky Fraser Global Investment Management. Unfortunately, U.S. President Donald Trump doesn’t understand the real problem is not Canada, it is China when it comes to trade deficits, he told its ‘A Quality Approach to Higher Growth & Higher Yield Investing’ session. He said the sticking points in the current discussion over the agreement are that the U.S. wants more U.S. content in auto manufacturing. As well, it wants preferential treatment for U.S. companies bidding on government contracts, and it wants to take trade disputes to U.S. courts instead of the current practice of using a third party. And while the tone of the negotiations has become more negative, it doesn’t look like the talks will wind up this year as intended. If NAFTA were cancelled, the old WTO rules would likely be applied once more, he said. However, the Canadian dollar would likely weaken offsetting an impact of increased tariffs. Another option, an all-out trade war, would hurt the U.S., he said, although it would likely send Canada into a recession.

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CRAs Play Critical Part In ESG

Because of their unique role in fixed income markets, credit rating agencies (CRAs) play a crucial part in promoting greater environmental, social, and governance (ESG) integration in credit risk analysis, says the UN PRI. Its ‘ESG in Credit Ratings Initiative’ aims to enhance the transparent and systematic integration of ESG factors in credit risk analysis. As global bonds outstanding hit US$92.2 trillion in 2016 and fixed income instruments are by far the largest asset class globally, it is important to understand how ESG factors can affect the default risk of a bond issue or its issuer, it says. For this reason, the PRI is facilitating a dialogue between CRAs and investors to cultivate a common language, find solutions to enhance ESG consideration in credit risk analysis, and bridge existing investor-CRA disconnects. ‘Shifting perceptions: ESG, credit risk and ratings – part 1: the state of playis its first report in a three-part series outlining how investors and CRAs are paying heed to ESG factors in credit risk analysis. The report concludes that investors and CRAs are ramping up efforts to consider ESG factors in credit risk analysis. Resource allocation is clearly increasing, with research mostly focused on environmental issues. However, ESG integration is not yet systematic.

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Low Yield Will Continue

The present low yield environment in fixed income will likely continue for several more years, says Chris Kresic, a portfolio manager, fixed income, at Jarislowsky Fraser Global Investment Management. Speaking at its ‘A Quality Approach to Higher Growth & Higher Yield Investing’ session, he said trend economic growth in the U.S. will remain muted and yields follow trend growth. The decline in trend growth is due to demographics and will continue on the downside for next several years until the working age population starts recovering. This means interest rates levels will stay low. The only way to reverse this is if there is a massive wave of immigration to the U.S. changing the demographic profile by increasing the number of workers and improving productivity.

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China Moving To Second Largest Market

China will become the second-largest asset management market globally, behind the United States, by 2019, says Casey Quirk, a practice of Deloitte Consulting LLP. It also expects China to attract half of the industry’s new asset flows in the same timeframe. By 2030, the Chinese market should represent more than US$17 trillion in assets under management (AUM), up from US$ 2.8 trillion in 2016. Its white paper, ‘Leadership in Times of Plenty: Future Winners in China’s Asset Management Industry’ says Chinese growth rates should average 15 per cent per year through 2025, moderating to 12 per cent per year from 2025 to 2030. In total, this will result in US$8.5 trillion in new assets flowing into the industry from Chinese investors between 2017 and 2030. Put another way, China will account for about the same amount of net new flows as all other global markets put together between today and 2030.

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Quebec Helps Address Retirement Savings Gap

When combined with recent changes to the Canada Pension Plan (CPP), the government of Quebec’s move to enhance the Québec Pension Plan (QPP) and to amend various retirement-related legislative provision is a good start in addressing Canada’s retirement savings gap, says a Mercer ‘Response.’ It will implement measures for Quebec-based workers in the same manner as the Canada Pension Plan and this fully funded expansion includes several important positive characteristics. To start, it is national in scope when combined with the CPP enhancement. It is also future focused as it accumulates gradually without affecting past service. It is also flexible as it allows for potential contribution and benefits adjustments if contributions are insufficient.

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Emerging Markets Where Growth Is

Emerging markets is where most of the growth in the world is coming from, says Marc Novakoff, a portfolio manager, global equities, at Jarislowsky Fraser Global Investment Management. At its ‘A Quality Approach to Higher Growth & Higher Yield Investing’ session, he said there are a lot of opportunities in emerging markets which have changed dramatically in the last 10 years. The potential for superior growth is due to urbanization which is a key indicator of growth. Productivity and efficiency gains are also due to technology which is very exciting in emerging markets, he said, with many of the companies there ahead of developed markets.

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OPTrust Earns MarCom Award

OPTrust has won a gold MarCom Award for its defined benefit advocacy program. The award recognizes its communications work on the ‘People for Pensions’ campaign which launched in April 2017 and raises awareness about the value of DB pension plans. The digital, print, and community outreach campaign shares information on the benefit of DB plans compared to other kinds of retirement savings vehicles and illustrates how the DB model supports the economy. Hugh O’Reilly, OPTrust president and CEO, says, “As strong pension citizens, we believe programs like this provide another important channel to communicate the value of the DB model and advocate for retirement security. Its award was given in the ‘Strategic Communications/Public Relations Program’ category. The awards are an international creative competition that recognizes outstanding achievement by marketing and communication professionals.

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Canadians Seek Healthier Living

An overwhelming majority of Canadians (91 per cent) say they are searching for a way to break through to healthier living by overcoming obstacles that include a lack of motivation and time, says Research & Incite, on behalf of POM Wonderful. Its survey looking at Canadian attitudes toward health and wellness as well as goals for healthier lifestyles revealed that only 29 per cent polled have managed to achieve any of their healthy living goals this year. While nine in 10 Canadians (91 per cent) surveyed want to live a healthier lifestyle, 71 per cent also said that they are seeking better eating habits. Half of those polled said their goals include eating less processed food, eating less fast food (36 per cent), and eating more naturally sourced food (32 per cent). Unfortunately, nearly one in four said they find it challenging to incorporate healthy foods into their diet.

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Millennials More Conservative

Millennials are notably more conservative investors compared to Baby Boomers, says a report from BMO Wealth Management. ‘Make better investment choices by understanding and reducing bias’ found that Millennials are less inclined to buy and hold investments for the long term (32 per cent) compared to Generation-Xers (43 per cent) and Baby Boomers (44 per cent). Also, more Millennials said they would put money aside and decide later what to do with it (31 per cent) than both Generation-Xers (22 per cent) and Baby Boomers (22 per cent). More than half of each generation cited retirement as their top financial goal. Millennials agreed that saving for retirement is important, however, they cited this objective as a top priority only half as often (32 per cent) as Baby Boomers (63 per cent) and Generation-Xers (62 per cent).

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Turkiewicz Joins Green

Keaton Turkiewicz is a benefits consultant at Green Benefits Group Inc. Most recently, he was an account executive at Great West Life, a firm he joined in November of 2012 after a career as a professional hockey player.

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Keynotes Set For ISCEBS Event

‘Innovation Meets Personalization: Pharmacogenetics & Financial Technologies in Group Health and Retirement’ will be the topics at the Toronto Chapter ISCEBS’ biennial keynote speaker event. Simon Chan, CEO at BAL Consulting, will lead a discussion of FinTech and retirement which will be followed by a panel discussion with Michael Prouse, director of operations at Personalized Prescribing Inc.; Veronika Litinski, of GeneYouIn; and James L. Kennedy, head of the Tanenbaum Centre for Pharmacogenetics; on pharmacogenetics. It takes place November 22 in Toronto, ON. For information, visit ISCEBS Keynote

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