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June 20, 2019


Debate Exists Over Meaning Of Inversion

Investors shouldn’t be surprised about the inverted yield curve as the economic cycle is in a late stage, says Derek Burleton, vice-president and deputy chief economist, for TD Bank Group. At this stage, even the best yield curve tends to flatten and one would expect a flat yield curve, he said in the ‘Global and Economic Market Outlook’ session at the ‘CPBI Forum 2019: Embracing Innovation.’ The Bank of Canada is calling it an “innocent inversion” and it is only one signal of an impending recession. But other signals are needed before declaring that the U.S. economy is decelerating. Alan Dunn, managing director ‒ markets and a member of the investment committee at Abbey Capita, said yield curve inversion has predicted every recession since 1960, with the exception of 1967. He said while it is a strong predictor and the U.S. Fed is paying attention to it, whether it is going to be different this time can be debated. For example, the term premium is a lot less and if it were higher as in the past, then it might be a predictor. Alex Grassino, senior investment strategist, macroeconomic strategy, at Manulife Asset Management, said a recession generally comes two years after the yield curve inverts, so there is time for investors to prepare. However, markets generally do well in the period before a recession. The evidence indicates the U.S. will go through slow patch over the next six months. In fact, all the “boxes are being ticked off” with shorter leading indicators such as the ISN Manufacturing Index inching towards a neutral level corroborating the yield curve inversion, indicating a slowing U.S. economy. Burleton suggested if there is a recession, it will be corporate lead and end quickly, lessening the impact on Canada. Dunn warned a recession will be felt, especially in Canada where household debt could make it worse. But if the U.S. escapes it quickly, Canada will follow suit.

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Sweeping Changes Proposed For Drug Pricing

Proposed changes to pricing rules for patented medicines in Canada are sweeping in their scope, although timing remains to be finalized, says Elena Lungu, manager, national prescription drug utilization information system, for the Patented Medicines Prices Review Board (PMPRB). In a ‘Telus Benefits Hub,’ she says the proposed changes to Canada’s patented medicines regulations would see, for the first time in 30 years, significant reforms in how the PMPRB sets ceilings for the prices of patented medicines. Its basket of comparator countries would increase to 12 from the current seven. Seven new countries would be added, while the U.S. and Switzerland, described as “outliers,” would be removed as they do not have national pricing containment measures in place and are less aligned to Canada economically. The new framework would provide a mechanism for manufacturers of patented medicines to report discounts and rebates that they provide to third-party payers. The PMPRB will use this information, which will remain confidential, to calculate a true transaction price as part of its price review. Finally, the PMPRB will assess factors beyond price comparisons with other countries or other therapeutic comparators. These factors include pharmacoeconomic analysis to ensure payers do not pay more for a drug than the value it offers; a consideration of market size and its reassessment over time (e.g., a larger-than-expected market size could trigger a lowering of the maximum price); and an assessment of the affordability of a drug for both payers and patients based on a country’s GDP and GDP per capita.

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Trend To OCIO Grows

In last four years, the top five OCIOs (outsourced investment officer) providers in Canada have seen their business grow by 56 per cent, so there is clearly a trend developing, says Bradley N. Rowe, a principal at Eckler. Yet, he told the ‘OCIO ‘OMG:’ Establishing Best Practices’ session at ‘CPBI Forum 2019: Embracing Innovation’ that less than 20 per cent of these were accomplished through the tender process. Instead, plan sponsors simply used their existing consultant to provide OCIO services. OCIO is all about investment governance, he said, but wondered if it is really fixing a problem. If governance is broken, he said, OCIO may not be able to fix it because it only fixes aspects of governance. And while the plan sponsor and OCIO are in a co-fiduciary relationship and the OCIO assumes a fiduciary role over implementation and operation of investment strategy, its duties do not extend to oversight which remains the responsibility of the sponsor who needs to monitor the OCIO and make sure things are going well. Sponsors are moving to OCIO for a number of reasons including de-risking, a lack of resources and skill sets, and efficiency in making decisions and acting on them quickly. However, in many cases, they just want to get out of the pension business.

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RPP Membership Grows

Membership in registered pension plans (RPPs) in Canada was more than 6.3 million in 2017, up one per cent, says Statistics Canada. For a second year in a row, the number of female members reached a new all-time high. A record 3.2 million women were members of an RPP in 2017, up 36,700. This gain increased the share of female membership to 50.5 per cent. Meanwhile, 26,100 more men were members in 2017, following a decline of 35,000 in 2016. Membership in public sector pension plans increased by over 49,000 (34,100 women and 15,200 men) to 3.3 million, accounting for 52.6 per cent of total RPP membership in 2017. Meanwhile, the number of members in private sector plans rose by 13,500 (10,900 men and 2,600 women) to three million. Although more people were members of an RPP in 2017, the pension coverage rate declined from 37.5 per cent in 2016 to 37.1 per cent. Over 4.2 million paid workers were covered by a defined benefit pension plan in 2017, up 0.7 per cent from 2016. DB plans accounted for two-thirds of members with an RPP, down 0.3 per cent from 2016. Membership in defined contribution plans rose by 3.5 per cent to almost 1.2 million, accounting for 18.4 per cent of all RPP membership. Most private sector workers are in DC plans. Membership in other plan types, excluding DB and DC, such as hybrid, composite, and combination plans declined by 4,200 members in 2017. Nearly 924,000 people, accounting for 14.6 per cent of RPP membership, belong to plans not classified as the conventional DB or DC models. Despite the drop in 2017, membership in these other plan types has risen sharply over the past decade. Total employer and employee contributions to RPPs rose 1.5 per cent year over year to $70 billion.

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Australia Works To Improve Pension System

Australia’s government will work to ensure people are given better options for drawing down their savings when they reach retirement. A government-commissioned review earlier this year found the superannuation system, which invests the mandatory retirement savings of Australians, has several problems including high fees, multiple accounts, and chronic underperformance by some funds. Further, a yearlong inquiry into the financial services industry uncovered misconduct that has hurt the reputation of some funds. Under laws coming into force next month, the tax office will have greater powers to help savers consolidate low-balance or inactive accounts; fees will be capped on accounts with A$6,000 or less; and exit fees will be barred. Since there is currently very little guidance on how retirees should draw down their savings when they reach retirement, funds will be required to develop a retirement income strategy and the government is also exploring ways of expanding the range of retirement income products available.

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Solutions Wanted Before Issues Arise

HR clients would like their consultants to bring solutions to them before issues arise. That was one of the messages delivered by Jason Billard, senior vice-president at Morneau Shepell, and Kelly Cardwell, vice-president, human resources, at Bosa Properties, in the ‘Pursuing Partnership’ session at ‘CPBI Forum 2019: Embracing Innovation.’ They revealed some of the likes and dislikes that HR clients have in their relationships with consultants. HR sees their consultants more as trusted advisors rather than experts today as they can access most information online with the click of a mouse and do their own analysis. As a result, they place less value on survey data and reporting. Yet, they still expect their consultants to be on the leading edge of new trends and help their clients be there as well. Consultants are doing a better job of building relationships as they are listening to clients and better understanding their needs and organizations and building solutions around this. However, consultants who do not build these relationships and only provide transactional services and off-the-shelf solutions are not meeting the needs or expectations of their clients and could soon be replaced. In fact, that was identified as something that consultants are doing worse today. They are forcing people into a box and pushing things on them that don’t work for the client’s organization and promising a personalized approach with the same services they are offering to everyone.

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DGPP Acquiring Wind Project

The Desjardins Group Pension Plan (DGPP) will acquire, upon completion of construction, a portion of EDF Renewables Canada Inc.’s stake in the Cypress Wind Project. The project will consist of 48 turbines with a total capacity of 201.6 megawatts and will be located southeast of Medicine Hat, AB. It will support energy transition in the region using a responsible and sustainable approach to economic development. DGPP will own 40.5 per cent of the project, EDF Renewables Canada will hold 34.5 per cent, and the Blood Tribe, a First Nation located at Stand Off, AB, and advised by Indigena Capital, LP, will own the remaining 25 per cent stake. The project will be developed, built, and operated by EDF Renewables which has developed 10 wind farm projects across Canada to date. Construction will start in 2020 and it is expected to be operational by 2021.

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Cherry Park Work Starts

The Cherry Park Partnership – formed by Unibail-Rodamco-Westfield and a joint venture of the Public Sector Pension Investment Board and global real estate company QuadReal Property Group– has started work on site at the £670 million residential development in Stratford, UK. It will be comprised of one, two, three, and four-bedroom homes across a range of towers and mansion blocks, complete with a residents’ gym, swimming pool, and workspace. It will also feature public realm and open spaces, including play areas and pedestrian connections throughout. The project is one of London’s largest single-site schemes and will see a phased completion with full delivery expected post-2023.

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Lamoureux Named To Order

Claude Lamoureux, retired president and chief executive officer of the Ontario Teachers’ Pension Plan, will be inducted as a Companion of the Order of the Business Hall of Fame. The honour recognizes and celebrates his lifetime achievements. Since its inception in 1979, the Order of the Business Hall of Fame has been the highest honours of its kind in Canadian business. He joined the pension plan in 1990 after the province established an independent corporation to manage it. He was responsible for overseeing the investment of the plan’s assets and the administration of the pensions of 264,000 current and retired teachers in Ontario.

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Panel Discusses Engaging ESG Clients

The Responsible Investment Association will feature a panel discussion on ‘Engaging Clients Around ESG Issues and Responsible Investment.” Alicja Brown, an investment advisor with the Remy Brown Investment Group at CIBC Wood Gundy; Patti Dolan, portfolio manager, mission wealth advisors, at Raymond James Ltd.; and Dustyn Lanz, CEO of the Responsible Investment Association; will explore various approaches to engage clients around responsible investing, including how to start the conversation with clients, using ESG data, and addressing questions about performance. It takes place June 26 in Edmonton, AB. For information, visit Engaging ESG Clients

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June 19, 2019


Connectivity Makes Us Part Of Matrix

This year, there were about 27 billion devices connected to internet and this is expected to reach 75 billion by 2025, Kevin Dougherty, executive vice-president, innovation and partnerships, at Sun Life, told the ‘Digital Transformation in the Benefits and Pension Industry’ session at the ‘CPBI Forum: Embracing Innovation.’ With a guest appearance from Toronto, ON, by an interactive holographic graphic image of David Jones, Sun Life’s senior vice-president, group benefits, Dougherty said the level of connectivity “makes us part of the matrix.” With more home and health devices connected every day, it creates the possibility of a future where artificial intelligence (AI) and these devices will be constantly analyzing information about plan members, their families, and life events and recommending changes and updates the member should be considering for the health, benefits, and pension plans. And the industry is already building these and plan members are using them. It could result in a shift in the role of insurance companies in the healthcare process. Currently, they are “firmly anchored” at end of the healthcare journey. By the time they see a claim come in, all the decisions have been made on diagnosis and treatment. The industry has been stuck there because of technology and now it is going to push the industry to the front of the process, helping members through every step of the way. This is happening because everyone has a mobile device and can make an appointment, rate their healthcare providers, get diagnosed and treated, and make a claim. As the industry gets to the front of the healthcare process, it can start to influence the process and the cost. Jones said the day is coming when a plan administrator can push a button and see what disease trends are at company or review the retirement savings of employees. With every fully integrated in an all-in-one platform, all human resource needs including payroll, benefits, and compliance can be managed in one place helping both the employer and the plan member to make better choices.

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Water Next Environmental Concern

Water is the next concern to tackle in the environmental space, says research from Russell Investments on environmental, social, and governance (ESG) investing. It aims to drive the industry conversation beyond carbon and into water-stress as an investment challenge. Emily Steinbarth, a quantitative research analyst at Russell Investments, says, “A lot of work has gone into identifying how carbon can be measured, managed, and invested in for tomorrow’s green economy. But there is more to the ‘E’ in ESG than carbon.” The research on how to incorporate water issues systematically into an investment portfolio reveals water risks are regional, multi-dimensional, and very distinct from carbon. As well, currently available water-related investment tools are insufficient and, as a result, investors are inhibited from converting insights into meaningful action. The analysis of industry frameworks in this area reveal that data reporting is low, water usage is very concentrated, the market is highly exposed to water-stress regions, and imperfect, but developing, tools can be used to identify forward-looking information and proactive companies.

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Australian Plans Improved Coverage

Australians are looking for income, security, and flexibility from the retirement savings, none of which its lump sum defined contribution world provides, says David Knox, a senior partner at Mercer (Australia). Speaking at the ‘CPBI Forum: Embracing Innovation’ session of ‘Lessons Learned from the Australian Retirement System,’ he said, however, several things have worked. Coverage has increased considerably and most workers now have pension coverage which was not the case 30 or 40 years ago. As well, many workers who would never have considered life or disability insurance coverage now have it. Engagement with Australian superannuation funds has increased and 70 per cent of employers strongly support their compulsory contributions and members see it as their money. However, many employees, especially young people, have multiple accounts and self-employed and gig workers are not covered. A lack of longevity products is another issue. He said one lesson is every pillar in a retirement system needs a purpose and there needs to be interaction and integration between each of the three pillars. He also outlined the development of pensions in Australia. It has had pensions since 1909, but they were non-contributory and means tested. There is nothing equivalent to the Canada Pension Plan. One objective of the development of the superannuation system in 1988 was to get people off the state pension and cut the costs of pensions to the government. It expects by 2038 that pension expense will be 2.5 per cent of GDP, the lowest rate in the world.

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Managers Pessimistic About Growth

Money managers are very pessimistic about global economic growth due to concerns over trade wars and a possible recession, says the Bank of America Merrill Lynch’s monthly fund manager survey. Of the managers surveyed, a net 50 per cent expect global growth to weaken over the next year, down 46 percentage points from last month ‒ a record high. Meanwhile, 87 per cent of investors surveyed say the global economy is in the late cycle ‒ also a record high. Meanwhile, the percentage of investors expecting higher short-term rates has dropped to a net minusv10 per cent, the lowest level since 2008. A net 41 per cent of investors surveyed expect earnings per share to deteriorate in the next year, the second biggest monthly collapse in the survey’s 23-year history. Meanwhile, the average allocation to global equities dropped 32 percentage points to net 21 per cent underweight, the lowest allocation to equities since March 2009 and second biggest one-month drop on record. Bond allocations went up 12 percentage points to net 22 per cent underweight, the highest level since September 2011, as dovish central banks, falling inflation expectations, and a risk-off sentiment continue to drive interest rates lower.

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SSQ Adds Smart Beta Plus

SSQ Insurance has added a new family of turnkey funds, smart beta plus portfolios, to its product offering. Combining smart beta with active management, these portfolios use a core-satellite approach. The smart beta portion is the ‘core’ of the strategy and is composed of foreign investments. The passive smart beta strategies replicate a benchmark created using specific factors instead of a traditional market capitalization weighting, thereby decreasing the concentration risk. The expertise of the fund managers is applied to a rigorous and disciplined quantitative management process that is based on risk and performance forecasting models. The ‘satellite’ part is composed of actively managed Canadian funds with the objective of outperforming their benchmarks.

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Avoiding Behaviour Pitfalls Improves Returns

Being aware of behavioural pitfalls improves investment returns, says Peter Muldowney, senior vice-president at Connor, Clark & Lunn Financial Group. He told the ‘Riddle Me This: What are the Behavioural Decision-making Pitfalls’ session at the ‘CPBI Forum: Embracing Innovation’ that “our minds are riddled” with behavioural influences that make it difficult to make decisions as individuals or as investment committees. And committees face lots of decisions from how much to invest in equities, reducing fixed income, and deciding which investment managers to hire. All of these decisions can be negatively impacted by behavioural influences, including many “you may not even be aware of” which can substantially reduce returns. This is referred to as the “behaviour gap.” To prevent the risk of the behaviour gap, a combination of good investments and good behaviour are needed. To facilitate the behaviour, assessing choices and how other behavioural biases impact decisions need to be understood. Behaviours which can influence investment decision include putting too much emphasis on prices in the past, looking for facts to support views, and putting less emphasis on those facts that don’t. Anchoring is a behaviour which plagues most committees especially during asset mix reviews. Potential changes are considered in terms of the current asset mix and become anchored by this. It results in decisions that won’t stray too far from current mix even if it’s not in the best interests of a plan, he said.

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Sun Life Combines Fixed Income Businesses

Sun Life Financial Inc. has combined its affiliated fixed income institutional asset management businesses – Prime Advisors, Ryan Labs Asset Management, and Sun Life Institutional Investments (U.S. and Canada), as well as its general account ‒ into an autonomous asset management business, SLC Management. It immediately replaces the Sun Life Investment Management brand globally. With C$212 billion in combined assets under management as of March 31, it provides its more than 1,000 institutional clients with a full range of yield-oriented investment solutions across public and private fixed income asset classes as well as global real estate equity and debt. It will have two related, but distinct pillars –fixed income and real estate. The fixed income pillar will operate under the SLC Management brand name and will include the affiliates currently known as Prime Advisors, Ryan Labs Asset Management, and Sun Life Institutional Investments (in both the U.S. and Canada). The real estate pillar will be comprised of the merged operations of SLC Management’s Bentall Kennedy business with GreenOak Real Estate which becomes BentallGreenOak when that deal closes.

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CBT Treatments Successful

Cognitive behavioural therapy (CBT) has been shown to successfully treat 67 per cent of individuals with clinical depression and reduces the risk of having a subsequent bout of depression. And it costs half of traditional treatments like face-to-face therapy and medications, says Paul Parnass, clinical manager, online and telephonic counselling, stay at work services, at Homewood Health. Speaking on ‘The Delivery Of Innovative Counselling Services in the 21st Century’ at the ‘CPBI Forum: Embracing Innovation’ with Eric Pfeiffer, senior health management consultant ‒ team lead, at Manulife, he said while it has been around for a while, it is a short-term goal oriented treatment approach that is an alternative to face-to-face treatments. It works on the basis of helping identify negative patterns of thinking and behaviour that contribute to emotional problems and is commonly used to treat depression and anxiety. Structured and time limited, it focuses on changing people’s attitudes and behaviours by focusing on their thoughts, beliefs and attitudes (cognitions), and behaviours. If negative thoughts lead to negative emotions and negative behaviours, changing the thoughts changes the emotions and changing the emotions changes behaviours. During the process, the client is actively involved with homework such as journals and thought records. It is not a passive approach where they are told what to do. It is effective because it is available 24/7 with self-directed modular learning focused on helping clients develop strategies to examine what they are feeling. Benefits include the fact that no appointments are needed so there is no travel or wait times so time is not lost from work. Pfeiffer talked about the need for comprehensive and integrated approaches to deal with chronic disease in the workplace. With the growth of these in the workplace, employers need more than a one-off program. And if diet, activity levels, and alcohol consumption can be controlled, there could be a reduction of death rates in Canada by up to 88 per cent. The programs need to be based on data which is specific to an organization’s health risks and a culture supporting what is being done. While date is used to drive these programs, the employer needs to determine if employees are ready to change and consider the physical environment, policies and procedures that are aligned, and barriers removed like the cost of mental health treatments or putting in change rooms or lockers. And technology will have a profound impact on how these programs are delivered. Businesses are moving from time and place specific programs like lunch and learns. A gym at one location is great for those who work there, he said, but these types of programs don’t work with employees at different offices. The benefits of having healthy workers include engaged employees, improved workplace culture, and employees who believe they are healthier and have a greater sense of wellbeing.

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PSP Provides Funding

Health technology company Collective Health has announced a $205 million round of new funding led by the SoftBank Vision Fund. Additional participation includes PSP Investments, Sun Life, and other investors. Collective Health will use the funding to accelerate adoption of its enterprise healthcare platform with employers across the U.S. and deepen strategic partnerships across the industry and deliver even greater technology capabilities to address fundamental health insurance service issues that plague U.S. consumers and employers alike.

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Benefits Overview Provided

Designed by CPBI Ontario, the ‘HRPA Canadian Benefits Certificate Program’ will provide a comprehensive overview of benefit programs in Canada. Sessions will examine the basics and developing better strategies, managing programs more effectively, and keeping escalating costs under control. Each day builds on the knowledge and skills of the previous level. It takes place November 5 to 7 in Toronto, ON. For information, visit Benefits Certificate

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June 18, 2019


Blockchain Branding Exercise

Kaushik Venkatadri, senior director, Blockchain Centre Of Excellence at RBC “totally” believes blockchain is going to change the world. Speaking at the ‘CPBI Forum: Embracing Innovation’ session ‘Demystifying Blockchain,’ he said it is really a question of when. Blockchain is not a new concept, it is just an evolution of a lot of old ideas and systems. As well, there is no rigorous technical definition or formula that says “this is blockchain.” It is a branding exercise and a concept based on five principles. To start, and perhaps most important, all blockchain systems are peer-to-peer systems. This means there is no single entity and it operates like “a true democracy” which means no single entity can dominate a blockchain system. Blockchain systems are also consensus driven. Any transaction sent to the system requires the peers to reach some sort of consensus before it is validated. So if, for example, the big five banks in Canada decided to build a blockchain system, every time they send a transaction to the system, they have to agree jointly that it is a good transaction. This is typically done through some form of voting algorithm. The third principle is that blockchain systems have immutability at their heart. What this means is once a transaction is committed to a blockchain system, it cannot be modified or deleted. Blockchain systems are cryptographically secured. Not only is the data encrypted, which a best practice today, those who send messages or information to the same have to digitally sign them. “What this means is every time you interact with the system, you actually have to fix a digital signature with your message. And that digital signature is going to prove that you’re the only person in the universe who could have signed that message,” said Venkatadri. Finally, the fifth principle says any data put on the blockchain has to be transparent. This creates a level of trust because participants don’t need to rely on a counterparty to say this is the right position. No longer are “extremely elaborate reconciliation processes needed to make sure our data looks as it should.” And this could means as blockchain grows, the need for third-parties to facilitate transactions could disappear as the real “promise of blockchain is to bring all these principles together to create what we call the trust network.” He said most foundational technologies follow a very steady progression of four phases to move into the mainstream and he estimated that blockchain is a couple of decades away from that. He used the internet as an example. It took at least 30 years to get to the point it is at today where “we wonder what we did before it.” He expects blockchain to follow a similar path.

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Vector Exceeds Targets

Vestcor Inc. exceeded the key performance targets of its administrative clients during the year despite an overall 13 per cent increase in pension and benefit applications. Its 2018 annual report reports a 2.08 per cent overall gross investment return for total assets under active management for the year ended December 31, 2018, with a management expense ratio of approximately 0.12 per cent. Despite difficult market conditions, especially during the last quarter of 2018, it was able to achieve positive investment performance for its clients,” says John A. Sinclair, its president and chief executive officer. “Our clients frequently cite capital preservation as a key objective for their investment strategies. Despite a negative market environment for risk assets in 2018, we are pleased to have delivered on that objective during the year.” Pension funds under active management specifically achieved an overall 2018 return of 2.07 per cent which exceeded blended client portfolio benchmarks, before investment management costs, by approximately 1.15 per cent during the year. Originally known as the NB Investment Management Corporation prior to its privatization in 2016, Vestcor, the amalgamation of Vestcor Investment Management Corporation and Vestcor Pension Services Corporation, provides global investment management services to nine different public sector client groups in New Brunswick.

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No Organization ‘Too Small’ For Attack

No organization is “too small” for a cyberattack. In the context of cyber extortion, Sandy Treleaven, vice-president, financial institutions and cyber risk practice, at AON, told the ‘CPBI Forum: Embracing Innovation’ session ‘Cyber Risk in the Financial Services Sector: Myths, Realities and Solutions,’ that “everybody gets attacked ‒ the big companies, the little companies. In fact, sometimes the mindset with the extortion of small companies is since they’re smaller, their lines of defense are going to be less, “we’re going to be able to get in there. We’re going to be able to scare them. So sometimes it’s the little guys that really get beaten up,” she said. She recounted a long list of cyber risk exposures with the two most common extortion and employee risk at the top of the list. Many companies now are letting their employees transact business via social media so there’s all kinds of liability that “creeps” into the mix. And individuals need to realize how much private information their employer has on them. From salaries to social insurance numbers, “there’s a ton of information at risk. So even if a company says to itself, ‘well, we don’t really have client information, everybody’s has employee information and for a large company, that can be a huge risk in and of itself,” said Treleaven. But employees also create risk. Sometimes they make mistakes, but there are also malicious employees and some involved with somebody on the outside that wants to do harm to a company. This is “a very frequent source of claims activity in in my world,” she said, and “if you’ve got that employee that makes a mistake, or you’ve got that employee misbehaving, then you’ve got risk.” She also dispelled several myths. For example, some businesses believe the service providers will take care of them in the event of a breach. In fact, they are “masters of deflection” when it comes to denying responsibility.

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Alternatives And DC Still Struggle

The industry is still struggling with is how alternatives fit into defined contribution pension plans, says Matthew Williams, head of institutional and client service at Franklin Templeton Investments. In an interview, he said the interest in alternatives is due in part to a desire to produce a better risk adjusted return. One of the challenges with alternatives is they can be illiquid investments particularly in assets like infrastructure and real estate. “Thankfully,” he says, the rules are being expanded to permit liquid alternatives which may present more opportunities for record keepers and asset managers to bring more thoughtfulness to DC portfolio construction. For example, the Franklin global real asset class is roughly 70 per cent private and 30 per cent public assets across real estate and infrastructure. The portfolio has been constructed across the liquidity continuum to satisfy that requirement. Approaches like this all lead up to trying to build better risk adjusted strategies to catch some of the liquidity premium.

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‘Solutions’ Overused Word

“It’s not what you say, it’s what people hear,” says Scott West, head of consulting at Invesco. In the ‘Redefined Contribution Plans, Engaging Members with Clarity’ session at the ‘CPBI Forum: Embracing Innovation.’ He called many who work in the DC world “bilingual. We know we speak English and we also speak ‘finglish, financial English. It’s a language we didn’t agree to. It was just were thrust upon us.” And it has created a lot of words, that “means stuff to us, but very little to other people.” One example is the world “solutions.” It is used all the time and some companies have whole departments devoted to finding solutions. However, it is overused and “toxic,” he said, and while it is not meant to be arrogant, “it presupposes you have a problem. Now you have a problem, we have a solution.” If the client acknowledges they have a problem, that is when solutions should be offered. To engage plan members, providers and sponsors should avoid talking about the downside before the upside. One example is the word glide path. Likely, the plan member has no idea what it means and charts showing the glide path have a line going down. What they do understand is retirement path and they will engage with charts with the line rising to the right. And if the approach to engage members is to be positive, they should also be plausible and not make unrealistic claims. He also urged them to get rid of jargon. “We can’t get rid of all the jargon, nor would we want to, but there are certain phrases we have that although we’ve grown up with them, are confusing,” he said. The problem is jargon can be confusing. And when jargon is used, it needs to be accompanied by putting things in context using simpler terms.

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Investors Becoming Aware Of ESG Risks

Investors are becoming more aware of the risk elements of environmental, social, and governance (ESG) issues, which is increasing their significance, says Franz Partsch, director of the treasury department at the Austrian National Bank (OeNB). Speaking at the annual summit aimed at institutional investors from Germany, Austria, and Switzerland, he called for more standards in ESG investing. “We are looking at sustainability from a risk point of view – we do not want to be exposed to ESG risks both because of return as well as reputation,” he said. When the national bank tendered an equity mandate last year with an ESG benchmark, it saw major differences in the technical implementation of ESG. The differences between providers were mainly concerned with how ESG was implemented within company structures and in the ex-post assessment of ESG issues. “Many areas of sustainable investing are lacking best practice and market standards,” Partsch said. However, he is convinced that the standard rating process and the assessment of ESG criteria would merge in the near future.

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Benchmark Set For Engagement

The ADP Research Institute’s 19-country ‘Global Study of Engagement’ provides a global benchmark for engagement. It reveals that 84 per cent of workers globally are just coming to work instead of contributing all they could to their organizations as fully engaged employees. The research indicates employees who identify as part of a team are 2.3 times more likely to be fully engaged. However, “teams” are often not the same as what is reflected on the organizational chart. As well, the team leader is critical to employee engagement. Employees who completely trust their team leader are 12 times more likely to be fully engaged at work. “Due to current labour market conditions, employers are increasingly focused on elevating engagement, reducing turnover, and attracting top talent,” says Marcus Buckingham, head of people and performance research at the ADP Research Institute. “It has been widely reported that companies with high engagement perform better financially, are more productive, have lower turnover. and greater customer satisfaction. Our research found that working on a team – regardless of demographics, work status, gig worker, or non-gig worker – is the common thread to ensuring a productive and engaged workforce.” The United Arab Emirates has the highest percentage of fully engaged workers at 26 per cent, while China has the lowest with just six per cent. Engagement in Canada and the United States sits at 17 per cent.

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Dialogue Closes Financing

Dialogue, a virtual healthcare platform in Canada, has closed a $40 million round of financing led by la Caisse de dépôt et placement du Québec (CDPQ) and Holtzbrinck Ventures. The company will use the funds to maintain its position in Canada and continue its expansion in the European market. Dialogue offers companies services to directly access front-line healthcare professionals. Using a virtual technology platform, employees and their family members can contact a professional using a mobile application or the internet. Founded in 2016, it now has over 400 clients including companies such as National Bank, Lightspeed, Industrial Alliance, Air Canada Vacations, Stingray, Cirque du Soleil, Hopper, and WSP.

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James Joins Stem

Thomas (Tom) James is assistant vice-president at Stem Capital. He will be primarily responsible for promotion of business development and strategy. He has over 25 years of benefits consulting experience in major roles with national and boutique consulting firms.

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Schwartz Chats At Dinner

The CFA Society Toronto’s ‘2019 Investment Dinner’ will feature a fireside chat with Gerry Schwartz, chairman, founder, and chief executive officer of Onex Corporation. It takes place November 5 in Toronto, ON. For information, visit CFA Dinner

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June 17, 2019


Canadians Will Outlive Retirement Savings

Canadian men will likely outlive their retirement savings in about 10 years and women a couple of years after that, says a report from the World Economic Forum. It says retirement account balances around the world are not growing fast enough to cover rising life expectancy. “The size of the gap is such that it requires action” from policymakers, employers, and individuals, says Han Yik, head of institutional investors at the World Economic Forum and the report’s co-author. Unless more is done, older people will either need to get by on less or postpone retirement, he said. However, most of the world’s retirees are doing well compared with those in Japan, where the retirement savings gap is 15 years for men and almost 20 years for women. While Japanese workers save no less than others, they tend to invest in very safe assets that produce few gains over time. As well, around the world, governments and employers have pushed more responsibility for retirement onto individuals by shifting from traditional pensions to defined contribution plans. The size of the world’s collective retirement savings gap could exceed US$400 trillion by 2050, up from US$70 trillion in 2015. The U.S. savings gap will be the largest at US$137 trillion, followed by China at US$119 trillion and India at US$85 trillion. Among the forum’s recommendations are making sure more workers are covered by retirement plans on the job. Employers should be doing more to improve investment options while pushing workers to save a sufficient amount of their income, says the report. The forum assumed retirees would need enough income to cover 70 per cent of their pre-retirement pay and didn’t include government payments in the total.

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Institutional Investors Endorse Sustainable Finance

Institutional investors are endorsing sustainable finance and welcoming a report from Canada’s Expert Panel on Sustainable Finance. The panel’s report includes 15 recommendations to support the growth and development of sustainable finance in Canada. Sustainable finance refers to capital flows, risk management activities, and financial processes that incorporate environmental and social factors as a means of promoting sustainable economic growth and the long-term stability of the financial system. It has been endorsed by the Responsible Investment Association with Dustyn Lanz, its CEO, saying “Investors need reliable information and a clear policy framework to better understand how climate change and other societal challenges could impact their portfolios. They also need a stable financial system in which to operate. The expert panel’s report marks an important step forward on all of those fronts.” University of Toronto Asset Management Corporation also fully supports the report. Daren M. Smith, its president and chief investment officer, says in order to integrate ESG considerations into its investment decisions, it needs “high quality, reliable data and the panel’s recommendation to establish a Canadian Centre for Climate Information and Analytics would be an innovative step in this regard.

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Canadians Risk Losing Access To Drugs

The Canadian Life and Health Insurance Association (CLHIA) estimates that 7.7 million Canadians would risk losing access to drugs for cancer, pain management, depression, and diabetes if their private plan was replaced by even the most comprehensive government-run public plan. More than 25 million Canadians access prescription medicines through workplace health benefit plans. These plans provide thousands of pharmaceuticals that even the most generous public plans do not provide. However, it is urging the federal government to move forward with steps that will expand access to prescription medicines for those who need it and control prescription drug costs. “We believe there is an achievable and affordable path forward that ensures all Canadians are able to access to the medications they need without putting at risk what’s working today,” says Stephen Frank, CLHIA’s president and CEO. “In our view, government plans and insurer-based plans should co-operate to negotiate lower drug prices for all Canadians. The life and health insurance industry supports the measures announced in the 2019 federal budget including the creation of a new Canadian drug agency and the funds that have been earmarked to improve access to high cost drugs for rare diseases.” The CLHIA also believes it is crucial to move forward quickly with the planned modernization of the Patented Medicine Pricing Review Board to bring drug prices into line with global averages.

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Interest In Social Infrastructure Grows In Europe

European investors are showing growing interest in social infrastructure, says Matthew Williams, head of institutional and client service at Franklin Templeton Investments, and it is probably just a matter of time before these impact investments come to North America. These investments have a dual purpose. They provide a financial return while helping to provide capital to government for infrastructure improvements. In situations where governments are strapped for cash, social infrastructure funds are stepping in and buying these ‒ such as schools, police stations, hospitals, managed care facilities, and community hall ‒ and making the necessary improvements. They are then leased back to the government which can then deploy the capital from selling the asset for other purposes. The infrastructure fund, on the other hand, gets the steady stream of income from leasing it back to the government. European investors have “jumped on the concept” as it is meshing with their social beliefs. As an extension of ESG (environment, social, and governance) investing, fund managers and investors can not only measure the return on these investments, but measure the impact as well.

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Pharmacoeconomics Assesses Drug Cost Effectiveness

The ability to determine if a new drug is cost-effective and increases quality of life and plan member productivity are among the main advantages that pharmacoeconomic evidence brings to drug reimbursement and formulary decision-making, says Daria O’Reilly, lead health economist on the pharmacy consulting team, at TELUS Health. In its ‘Health Benefits Hub,’ she said the process of health economic evaluation, or pharmacoeconomics, results in an enhanced drug review program that goes well beyond clinical evidence to determine listing recommendations by also incorporating economic evaluation such as cost-effectiveness and budget impact or affordability analysis. Health economists are able to use a widely accepted statistic, called the incremental cost effectiveness ratio (ICER), to summarize the cost-effectiveness of a new medication relative to comparator drugs, she says. The lower the ICER, the better. There may be instances, however, where a drug is deemed cost-effective, but the budget impact would be substantial. These enhanced drug review programs are becoming the norm for a growing number of higher-cost, specialty drugs coming to market.

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NEST Excluding Tobacco

The National Employment Savings Trust (NEST) will exclude tobacco from its entire portfolio, a process that it estimates will take up to two years. The UK’s largest defined contribution master trust views the tobacco sector as a dying industry. Facing stricter worldwide regulation, increasingly aggressive legal action by governments, and falling global smoking rates, it says the industry is being regulated out of existence. NEST has already excluded tobacco from its ESG (environmental, social, and governance) emerging markets and commodities funds.

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Australis Partners With La Caisse

Australis Partners, an independent private equity firm focused on Latin America, in association with la Caisse de dépôt et placement du Québec and the International Finance Corporation (IFC), has finalized the acquisition of the 50 per cent stake in each of Alianza Fiduciaria and Alianza Valores owned by Advent International. Australis Partners, CDPQ, IFC, and current 50 per cent shareholder Organización DeLima have formed a new investment alliance to manage their collective investment in the Alianza companies. Alianza Fiduciaria is a Colombian trust and asset management company with more than 30 years in the sector. Alianza Valores is a brokerage house in Colombia with more than 60 years of experience in the sector, offering alternatives of fixed income, equities, foreign exchange, among others.

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Pension Basics Examined

Designed by CPBI Ontario, the ‘HRPA Canadian Pension Certificate Program’ examines the basics of plan administration and governance. Sessions look at key legal obligations, retirement savings plans and plan governance, and best practices in risk management. Offered in three levels over three consecutive days, those who complete program with receive a pensions program certificate. It takes place September 10 to 12 in Toronto, ON. For information, visit Pension Certificate

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Commuted Value Interest Rate Assumptions

The interest assumptions required to calculate commuted values and marriage breakdown values for an event which occurs in any month up to and including June 2019 are now available at www.an-actual-actuary.com. An Excel spreadsheet on the website contains nine worksheets:
• Commuted Values February 2011 CIA
• Marital Breakdown: CSOP 4300 ‒ January 2012
• Ontario (Bill 133) Prior Rates – Rates for Ontario Marital Breakdown with valuation date prior to January 1, 2012
• Annuity Proxy for Solvency Calculations for Non-Indexed & Fully-Indexed Pensions
• Minimum Interest on Employee Required Contributions
• HISTORICAL Marital Breakdown: CSOP 4300 ‒ May 2009 (Now Frozen)
• HISTORICAL: Commuted Values ‒ 2009 Basis (Now Frozen)
• HISTORICAL: Commuted Values ‒ 2005 Basis (Now Frozen)
• HISTORICAL: Commuted Values ‒ 1993 Basis (Now Frozen)
You can use this spreadsheet to compare the interest rates which you may have calculated and/or you can download the spreadsheet to your own computer. Another actuary has already provided a peer review of the updated rates in this spreadsheet and determined that he/she agrees with the results.

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June 14, 2019


Tax Clarification Helps Pension Funds

Proposed regulations from the U.S. Treasury Department are a major (and pragmatic) step forward in clarifying certain key components of the Section 897(l) exception in a way that will be very helpful to many Canadian pension funds, says an Osler, Hoskin & Harcourt ‘Update.’ The proposed regulations represent a significant leap forward in bringing greater clarity and comfort to Canadian pension funds that wish to take advantage of the U.S. tax benefits offered under Section 897(l) of the U.S. Internal Revenue Code of 1986. In adopting this broad-based regulatory framework, the U.S. Treasury Department is clearly attempting to be receptive to taxpayer concerns and signaling that it is willing to accommodate a wide array of foreign pension fund arrangements. While the changes adopted in these rules are directionally helpful, they do heighten the technical complexity of the overall regime and do create new limitations. As a result, now may be the time for Canadian pension funds to conduct a careful reassessment of their standing under the 897(l) rules; identify any structural or organizational modifications that may be appropriate in light of the new rules; and, if they find they have intractable issues under the new rules, consider making these issues known to the Treasury Department before the proposed regulations are finalized. From the time of its enactment in late 2015, Section 897(l) has reshaped the way that Canadian (and other non-U.S.) pension funds invest in U.S. real estate. With its sweeping exemption from U.S. tax on U.S. real estate, it has dramatically improved the potential after-tax returns available to ‘qualified’ pension fund investors and has prompted a significant influx of Canadian pension fund capital into this asset class. While the benefits offered by this provision have been extraordinarily attractive for pension funds, the precise scope and limits of Section 897(l) have been stubbornly unclear and this has hampered the ability of some Canadian pension arrangements to benefit from this important opportunity.

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PfAD Impact Varies

Plans that were very well funded under the Ontario’s old solvency pension funding regime and were able to take contribution holidays now are finding themselves in the position where they need to potentially put more money into the plan to satisfy the PfAD (Provision for Adverse Deviation) obligations and are unable to continue their contribution holidays, says Lindsay McLeod, a partner at Blakes. Speaking at the CFA Society Toronto’s ‘PfAD ‒ New Rules for Ontario Pension Plans ‒ Are You Prepared?’, she said as a result the new going-concern funding regime in Ontario has not been well-received for those plans. However, at the WSIB, the reaction has been mostly positive, said Paul Filkiewicz, a special advisor to the plan. Its plan is slightly under funded on both a solvency and going concern basis slightly. So the reaction there is positive because it means lower contributions to the plan to make up shortfalls. Rachna de Konig, vice-president and director, relationship management, at TDAM thinks the rules are going to evolve. “The current ones are a good starting point, but I think even the ministry knows that those rules need to evolve because there’s just still a lot of ambiguity and there’s still things that just don’t work,” she said. She wasn’t confident changes were coming until the ministry put out the most recent update because they did it fairly quickly. However, the ministry has demonstrated that they put this out as a starting point and there were some things where the FSCO interpretation just wasn’t what the ministry intended. “So they got on it, they’ve made that change,” she said. In the short term, the changes will address the ambiguity around the new funding rules because there is a lot of this in areas such as what they need to file and how to make investment decisions. In the long term, they’ll be other changes as people see whether it is actually working or not. Luc Girard, a partner at Mercer (Canada), said the idea behind the new funding rules is to recognize safe or non-risky investment such as fixed income because it looks very much like the periodic payments to retirees making it the best matching asset class. For investments outside of the fixed income classes, there needs to be a margin set aside to account for the risks of investments like equities ‒ the PfAD. It also varies between closed and open plans. Less margin is required for open plans because they still have cash flow coming in through things like contributions. McLeod said one element is that of companies owned by U.S. parents. They don’t see PfAD as a trade-off to reduce solvency funding requirements, but simply as an increased funding requirement.

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Formulary Management Of Biosimilars Needed

Formulary management policies are needed that “support the use of biosimilars and encourage patients and prescribers to choose the most cost effective therapies to ensure the sustainability of national pharmacare,” says the Advisory Council on the Implementation of National Pharmacare’s final report. It says that “Biosimilars are biologic drugs proven to have the same clinical effect as more expensive brand name biologic drugs already authorized for sale. Canada’s use of biosimilars has been very low relative to other countries due to a combination of factors, including limited awareness of the clinical and scientific evidence supporting the use of biosimilars and aggressive marketing techniques used by brand name biologic companies to retain their market share.” Prescribers and patients should be better supported with information reinforcing the safety, efficacy, and benefits of biosimilars. Switching or transitioning patients from original biologic treatments to their corresponding biosimilar medicines is the responsible choice for those who manage drug budgets,” says Jim Keon, president of Biosimilars Canada. “Such policies are also consistent with Health Canada’s recommendation that decisions should be made by the treating physician in consultation with the patient and taking into account available clinical evidence and any policies of the relevant jurisdiction.” Biosimilar transitioning or ‘switching’ initiatives have already been implemented in Canada. In December 2018, Green Shield Canada concluded a successful biologic transitioning pilot project and the government of British Columbia has announced a biosimilar transitioning or ‘switching’ initiative where about 20,400 BC PharmaCare patients will work with their healthcare team to transition from the biologic to the biosimilar drug within six months. The projected savings will allow the province to immediately expand coverage to include two additional drugs and expand access for existing treatments. 

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Developing Market Pension Funds Tackling Alternatives

Pension funds in Asia, Latin America, and Africa tend to be more conservative and less diversified than their peers in developed markets, but that is starting to change, says a survey by Mercer. These pension funds have been gradually diversifying out of the fixed income assets that used to make up the bulk of their portfolios. Over the past five years, fixed income investments decreased by 11.3 percentage points, while allocations to equities, alternatives, and short-term assets have increased. Asian, Latin American, and African pension funds have also broadened their exposures to foreign equity and fixed income, while paring their allocations to domestic assets. While alternatives continue to make up a small portion of these allocators’ portfolios overall ‒ the current asset-weighted average allocation is 4.4 per cent ‒ some developing market pensions have been hiking up their allocations to private assets and hedge funds. Among the biggest adopters of alternatives in recent years are the pension funds in Taiwan, Mexico, and Malaysia.

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Trade Tension Hurts Asset Prices

Renewed trade tension has hurt asset prices and raised fears about global growth. Worse still, hostilities have spread beyond the U.S. and China to Mexico, while the Huawei dispute points to a much broader conflict between the world’s two largest economies, says the ‘AB Global Economic Outlook June 2019.’ It says the strategic conflict between China and the West is likely to overshadow the investment landscape for many years to come which need to be remembered even if there’s a trade war truce. From a cyclical perspective, considerable damage has already been done and global growth is likely to remain sluggish, or worse, this year and next. Against this backdrop, the global economy urgently needs fresh policy support which will come from China and most likely the U.S. Fed. The key question in the U.S., it says, is whether policymakers will act pre-emptively or require a patch of weak data to push them into action.

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ETFs Experience Outflows

ETFs and ETPs listed globally saw net outflows of US$4.05 billion in May, bringing year-to-date net inflows to US$141.04 billion, says ETFGI’s May 2019 Global ETF and ETP industry landscape insights report. Assets invested in the global ETF/ETP industry have decreased by 4.6 per cent, from US$5.57 trillion at the end of April, to US$5.32 trillion.

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CGI Cancels Caisse Shares

CGI intends to enter into a private agreement with la Caisse de dépôt et placement du Québec for the purchase for cancellation of 5.6 million of Class A subordinate voting shares held by la Caisse. The transaction will be made in connection with the periodic portfolio rebalancing of la Caisse. Once completed, la Caisse will continue to hold approximately 37.4 million Class A shares, representing approximately 13.9  per cent of CGI’s total outstanding shares.

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‘No Plan Is An Island’ Theme Of Conference

‘No Plan Is an Island’ is the theme of the ‘2019 CPBI Atlantic Regional Conference.’ Sessions will include ‘Cut the Crap: Creating Nutritional Consciousness in the Workplace’ with Dr. Yoni Freedhoff, author of the ‘Diet Fix,’ who will explore the linkages of food with chronic disease; chronic pain, and mental health. Blair Richards, of the Halifax Port ILA/HEA, will examine the missing link between contribution levels and the benefits those contributions are expected to provide ‒ an element that isn’t often measured in terms of the adequacy of retirement income, particularly within defined contribution plan models. ‘The Psychology of Investing’ will be the focus of a talk by Darin Eddy, of the HRM Pension Plan. He will provide insight into the psychology and drivers behind making investment decisions. It takes place October 2 to 4 in Charlottetown, PE. For information, visit CPBI Atlantic

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