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September 21, 2020


Evidence Of CPP Sustainability Holdings Missing

There’s no evidence in the public reporting from the Canada Pension Plan (CPP) that its equity holdings either globally in the emerging markets or in Canada are sustainably themed, says Professor Cynthia A. Williams, Osler Chair in Business Law, Osgoode Hall Law School, York University; Principal, Canada Climate Law Initiative (CCLI); and Professor of Corporate Law and Sustainability, Vrieje Universiteit, Amsterdam, Netherlands. And with projections that equity holdings in coal, oil and gas are likely to continue to produce losses, given its support of the oil and gas industry, CPP is likely to show losses as well. Speaking in the CCLI discussion on ‘Pension Funds and the Transition to a Low-Carbon Economy,’ she said assets in both developed and emerging market are not going to have strong returns, unless they are sustainably themed. The most serious concern is the lost opportunity for Canada. The money it is investing in oil and gas could be going into establishing companies to develop new products and engage in research and development. “CPP has an important role to play in Canada, securing pensions, of course, but also securing the future that we need,” she said. Nick Silver, managing director of Callund Consulting in the UK, said CPP actually has a fiduciary duty to be involved in Canada’s transition out of fossil fuels, because it’s a risk to the long-term sustainability of the Canadian pension plan. And while the mission statements of the CPP show it’s “talking the talk,” it’s “not really walking walk.” With the Canadian economy over-dependent on fossil fuels, it’s hard to ensure that these people have jobs and Canada has an economy as the world transitions out of fossil fuels. CPP, because of its size and magnitude of its investments actually needs to actively encourage this transition, he said.

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Work-At-Home Deduction Guidance Needed

The hope is that the Canada Revenue Agency (CRA) understands that the current T2200 form which employees need to claim the employee work-space-in-the-home deduction during the COVID-19 pandemic lockdown is unworkable while workplace restrictions remain in place, says a Borden Ladner Gervais ‘Newsletter.’ That was a takeaway from a consultation with the CRA hosted by the Canadian Chamber of Commerce. ‘The Newsletter’ says there is no need for a form and that a simple amendment to the T4 slip would suffice. In addition, it expects to see further guidance and examples on the requirements that must be met and the expense claims that can be made by employees for work-space-in-the-home expenses incurred during COVID-19. During the September consultation, the CRA confirmed that the requirement to work from home does not need to be in writing. In cases where there is no written agreement, a “meeting of the minds” between the employer and the employee that the work must be done from home satisfies this requirement. It is expected that many employees forced to work from home under current COVID restrictions will meet this implied work-from-home requirement. During the consultation session, CRA acknowledged that taxpayers require clarity for the purposes of eligibility for this deduction. Clarification was also sought with respect to the expenses that qualify for the deduction and the manner in which those expenses should be calculated. The CRA said it will provide clarification, including one or more examples of qualifying expenses and calculations. At this time, the CRA still requires employers to provide employees with a T2200, although it has been shortened and simplified. While this revised form may help reduce administrative work slightly, those providing input during the consultation emphasized that it is still a burdensome requirement that will result in significant costs for large employers.

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Climate Change Shocks Threaten Markets

“Frequent and devastating shocks from climate change” pose a threat to U.S. financial markets, says a report by the Commodity Futures Trading Commission (CFTC). “Climate change is expected to affect multiple sectors, geographies, and assets in the United States, sometimes simultaneously and within a relatively short timeframe,” it says, noting that “transition and physical risks ‒ as well as climate and non-climate-related risks ‒ could interact with each other, amplifying shocks and stresses.” The report offers 53 recommendations for policymakers, regulators and stakeholders to begin taking steps to build a climate-resilient financial system. Financial regulators should “incorporate climate-related risk into their mandates and develop a strategy for integrating these risks in their work, including into their existing monitoring and oversight functions,” it says.

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Hedge Funds Face ‘New Reality’

The biggest question on hedge fund managers’ minds is what the future holds. Unfortunately, the Alternative Investment Management Association (AIMA) research paper ‘Agile and Resilient: Alternative investments embrace the new reality’ says there are no certainties and much depends on the course of the COVID-19 virus and its related impacts on the economy, investment activity, and asset valuations. It found fund managers are planning for both opportunities and ongoing disruption. Concerns about disruption are front and centre with one-in-three saying they expect Central Bank interventions to continue to define the investing landscape going forward. The same number say they expect market volatility to remain elevated in the near and medium-terms. However, conversations suggest some managers expect the industry to experience significant growth over the coming 12 to 18 months as investors move away from a ‘60/40’ balanced portfolio into a more diversified portfolio supported by an allocation to alternative investments that better enables them to preserve capital and/or provides the opportunity to source differentiated investment exposure with non-correlated returns. Certain hedge fund strategies are witnessing a significant uptick. Convertible arbitrage is seeing a resurgent level of interest and global macro and credit strategies are also seeing a lot of attention. The latter could see significant activity over the coming years as investors look to support the COVID-19 economic recovery via an allocation to non-bank lending.

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ETF Popularity Expected To Skyrocket

.S. investors expect actively managed ETFs to skyrocket in popularity in the next few years, says survey by JPMorgan Asset Management. This will see them reaching more than a quarter of client allocations by 2023. Money managers in the world’s largest ETF market predict the share of active products in ETF portfolios will rise to 26 per cent, up from 19 per cent today. American respondents are more bullish on the funds than their counterparts in other regions. In Asia-Pacific, predictions are that active products will make up just four per cent of allocations, while in EMEA, the figure is 21 per cent. However, they all agree passive funds will face increasing competition from both active and smart beta strategies. The share of index-tracking ETFs globally will shrink to 61 per cent of portfolios by 2023 from the current 69 per cent, says respondents to the survey.

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Record Benefits Paid Out

Canadians received a record $103 billion in benefits from life and health insurers last year, up 60 per cent from a decade earlier, says the Canadian Life and Health Insurance Association (CLHIA). Its 2020 edition of ‘Canadian Life & Health Insurance Facts’ shows these benefits include $53.3 billion in retirement annuity payments and $38.1 billion in health benefits for prescription drugs and supplementary health services like dental care and physiotherapy, as well as $12.1 billion in life insurance benefits. It also shows that in 2019, life insurers managed $309 billion in pension assets for over eight million Canadians.

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Manulife Gets Top Scores

Manulife Investment Management  has been recognized with top scores from the United Nations-supported Principles for Responsible Investment (PRI) annual assessment report. For the second year in a row, it received A+ for strategy and governance for integrating environmental, social, and governance (ESG) considerations into investment practices across a range of asset classes. An A+ was also awarded in the listed equity and fixed income sovereign, supranational, and agency (SSA) integration modules. Its public markets received an A in all other direct investment and active ownership PRI modules for which it was assessed. The key activities within its investment teams in 2019 which helped to achieve the PRI scores include the release of its inaugural sustainable and responsible investment report; increased integration in industry analysis, sovereign analysis, and securitized fixed income; and the use of scenario analysis as a tool for companies in demonstrating planning for climate change.

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Graham Has New Role

Angelita Graham is with the Canadian leadership team of Mercer Canada. With brings more than 20 years of consulting experience, she was most recently growth leader in its wealth business.

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September 18, 2020


COVID Intensifying Deglobalization

COVID-19 will likely intensify deglobalization, says a report from AllianceBernstein. In ‘Pushing on an Open Door: COVID-19 is Intensifying Long-term Macro Trends… Especially Debt Overhangs,’ Darren Williams, director of global economic research, and Guy Bruten, chief economist ‒ Asia Pacific ex-China, say globalization had reached an apparent peak before the pandemic arrived. “A simple way to visualize the globalization trend is by looking at the ratio of exports to gross domestic product (GDP). This ratio rose steadily as globalization made headway in the decades after World War II. More globalization meant more goods and services shipped outside national borders,” they say. However, since 2013, this trend has started to reverse, partly because the global financial crisis (GFC) revealed flaws in global supply chains ‒ notably the reliance on trade financing. Technology,  automation in particular ‒ is pushing on this as well by making onshoring production a viable option versus offshoring to low-wage-labour nations. “And, of course, the institutional framework for free trade has been shaken by trade wars, due in part to a resurgence in populism,” they say. In this environment, COVID-19 arguably pushes the open door for deglobalization even further, revealing more supply-chain flaws concentrated around single points of failure. Regions of the world that had been more globally connected or networked have felt a deeper impact. “But this isn’t just about supply chains; indeed, escalating geopolitical conflict between China and the West in the wake of COVID-19 threatens to push the deglobalization door wide open,” they say.

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Alberta Analyzing Provincial Plan

The Alberta government will conduct an external analysis of the potential risks and benefits of a provincial pension plan. In a request for proposals (RFP) which closes October 13, the government says it wants a detailed analysis of the costs, benefits, and structure of a potential provincial pension plan if Alberta leaves the Canada Pension Plan (CPP). The analysis should include actuarial, economic, legal, and technical information regarding the establishment and ongoing operation of an Alberta Pension Plan. The hope is to get a clearer picture on what a future provincial pension plan may look like and answer key questions that Albertans are asking about the costs and benefits of such a move. The province’s ‘Fair Deal Panel’ suggested three months ago that the Alberta government consider creating its own pension plan.

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Annuity Buyout Costs Grow Attractive

The costs associated with annuity buyouts in the U.S. may be increasingly attractive, says Mercer. Its data indicates that a hypothetical retiree buy-out transaction may cost 97.7 per cent of the plan’s accounting obligations. The discovery comes following enhancements introduced by Mercer to its ‘U.S. Pension Buyout Index.’ Launched in 2013, the index tracks the relationship between the accounting liability for retirees of a DB pension plan and two cost measures: the estimated cost of transferring the pension liabilities to an insurance company (i.e., a buyout) and the approximate total economic cost of retaining the pension obligations on the balance sheet. The enhancements to the index were made following research, which revealed the number of insurers who compete for annuity and buyout transactions has doubled since 2012; insurer pricing is generally driven by the ability of insurers to source higher yielding, less liquid assets such as private credit and commercial mortgages which are not typically held by pension sponsors but are a natural fit to back illiquid annuity buy-out liabilities held on the insurer’s balance sheet; and insurers have evolved their mortality underwriting techniques to better assess mortality risk at the individual participant level. This may often lead to lower pricing especially for transactions with smaller benefits and/or where benefit accruals have been frozen for many years.

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Club Vita Sets Up Research Panel

Club Vita has established a multi-disciplinary research advisory panel to support the delivery of insights that enable pension plan sponsors and their advisors to more effectively navigate a post-pandemic world. COVID-19’s impact has not been uniform, with material differences being revealed by region and between genders, occupations, and socio-economic groups. Through the distillation and interpretation of academic research, it is focused on helping plan sponsors more clearly understand how different the future may be from the past, what will be required to enable stronger risk management in the future and restore confidence in pension plans’ stakeholders. In the process, it is providing access to its data analytics tools so pension actuaries can better understand and manage the financial impact of the pandemic, ensuring the resiliency of pension promises. The international panel includes Phil Rivard, vice-president, pension policy and funding, for Alberta’s Local Authorities Pension Plan (LAPP).

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Employers Continued Benefit Plans

Industry-wide data collected over the past six months shows that 98.5 per cent of the 27 million who had coverage through their health benefit plans in March continue to be covered, says Stephen Frank, president and CEO of the Canadian Life and Health Insurance Association (CLHIA). Since the beginning of the COVID-19 health crisis, life and health insurers have been closely monitoring the number of Canadians covered by workplace health benefits, including prescription drug coverage. These workplace plans have shown remarkable resilience during this pandemic, he says, and insurers have been working to help employers maintain these benefits for employees by proactively providing premium reductions and other forms of premium deferrals to help reduce costs. Insurers have also been working with health professionals to provide access to virtual care services including mental health supports covered by their workplace plans.”

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SHARE Gets Proxy Vote Partner

SHARE has partnered with Groupe Investissement Responsable to offer a new jointly-owned proxy voting and advisory service for institutional investors across Canada. Both have a 20-year history of advancing responsible investment in Canada. During that time, they have offered their respective clients consultation and proxy voting services to help them take into account environmental, social, and governance issues in their investments and voting decisions while respecting their fiduciary duties. Now, they will combine their proxy voting services in a single entity, which will be known as GIR. It will assume all of the operations of the old Groupe Investissement Responsable, as well as the proxy voting services formerly provided by SHARE’s in-house staff.

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FTSE Russell Launches Green Revenue Model

FTSE Russell has launched its enhanced ‘Green Revenues 2.0 Data Model’’ The model measures the green revenue exposure of more than 16,000 listed companies across 48 developed and emerging markets. This represents 98.5 per cent of the total global market value of listed companies. It provides investors with a classification system covering green products and services in 10 sectors, 64 sub-sectors, and 133 micro-sectors. A green ‘tiering’ system is also applied to determine net environmental impact based on seven environmental objectives, recognizing that green revenues come in lighter and darker ‘shades.’ By using three tiers to rank sources of green revenue, the data supports a clearer understanding of investors’ ‘green exposure.’

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Relationship Enhances Private Market Capabilities

Mackenzie Financial Corporation, an IGM Financial Inc. subsidiary, Great-West Lifeco Inc., and Northleaf Capital Partners Ltd. have entered into a strategic relationship to expand and enhance the private markets product capabilities across IGM’s and Lifeco’s distribution channels. Mackenzie and Lifeco will jointly acquire a non-controlling interest in Northleaf through an acquisition vehicle 80 per cent owned by Mackenzie and 20 per cent owned by Lifeco. This expands Mackenzie’s capabilities to offer global private equity, private credit, and infrastructure investment solutions through its retail advisory channels and financial institution distribution partners. It also enhances portfolio construction at IG Wealth Management, building on its capabilities of incorporating private asset classes into client portfolios, with an emphasis on high-net worth and mass affluent client segments. For Lifeco, its strategy to expand alternative investments for its balance sheet and increase client/customer access to private markets solutions across its global distribution channels advanced. Finally, Northleaf’s growth strategy will accelerate by providing additional access to balance sheet capital, global relationships, and best-in-class retail product development and distribution. Northleaf has assets around the global in private equity, private credit, and infrastructure. The firm has $17 billion in assets under management on behalf of institutional investors and high-net worth individuals around the world.

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Boctor Joins Osler

Andrea Boctor is a partner at Osler, Hoskin & Harcourt LLP. Most recently, she was a partner at Stikeman Elliott and head of its national pensions and benefits practice group.

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September 17, 2020


Member Registry Needed For Missing Beneficiaries

Ongoing initiatives to find unlocatable pension plan members utilizing an optional missing member registry should be pursued, says the Pension Investment Association of Canada (PIAC). In its submission to the Financial Services Regulatory Authority of Ontario on the consultation document ‘Principles and Practices Regarding Missing Members,’ it also calls for the exploring of partnerships with ministries, departments, and agencies of the governments of Ontario and Canada to investigate information sharing arrangements that would improve administrators’ ability to locate members. PIAC also believes that Ontario pension plan administrators need some place to send money on behalf of unlocatable members, so that the responsibility for these benefits would rest with a government entity. The Bank of Canada does this for unclaimed bank balances and some other provinces have unclaimed property regimes which accept pension benefits, it says.

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Gene Therapies Pose Coverage Dilemma

Gene therapies represent the next leap forward in potentially curative medicine, but they also pose a coverage and affordability dilemma, says HBM+ in its inaugural ‘Drug Trends and Strategic Insights’ report. Fundamentally, it says one-time, curative treatments with large upfront costs challenge the current benefits model which was designed for recurring claims and more distributed costs. As a result, novel reimbursement models and mechanisms for these therapies to ensure they can be included as part of benefit plans are needed. These include deferred payment models where the cost of the drug across multiple years (up to 10 years in some cases). This involves close collaboration with pharmaceutical manufacturers to ensure the payment model is fair and reasonable to all parties. Other approaches include outcome-based product listing agreements where the price of the drug is indexed to the outcomes achieved based on real-world experience and milestone-based payment models which directly tie installment payments to patients reaching certain milestones. For instance, each additional year of patient survival after receiving therapy is tied to one payment to the pharmaceutical manufacturer.

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Climate Risk Journey In Early Stages

While the investment community has made tremendous progress in recognizing climate risk, it is still in the early stages of the journey, says the Investor Leadership Network (ILN). In ‘Climate Change Mitigation and your portfolio: Practical Tools for Investors,’ it says to lead the industry, investors need to enhance institutional understanding of climate risk by framing it from a common perspective. This will improve understanding and communication at every organizational level and help decision-makers develop better plans and strategies. Investors who use qualitative and quantitative methods of scenario analysis will be able to stress test portfolios for physical and transition climate risks across sectors, geographies, and assets. However, it says investors need the capabilities to quantify (and ultimately price) climate risk in as much detail as other fundamental financial risk drivers and the tools they use should be systematically embedded into core portfolio and enterprise risk processes. The business community will make advances in this area as it learns more about the physical impacts of climate change and as transition scenarios crystalize, says the report.

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LAPP Maintains Contribution Rates

Member and employer contribution rates will remain the same for 2021 after a decision by LAPP’s Sponsor Board to be prudent in the face of unpredictable economic times brought on by COVID-19. Chris Brown, its CEO, says, “With more unknowns ahead, like the timing of a vaccine or the impact on markets resulting from the U.S. presidential election, financial markets continue to be volatile and investment returns could be unstable for some time to come.” In 2021, contribution rates will see members paying between 8.4 per cent and 11.3 per cent of pensionable pay, depending on their salary. Employers contribute at a rate one per cent higher than their employees. Prior to 2020, LAPP contributions were decreased an aggregate of two per cent per year, for two years in a row, in 2018 and 2019. These decreases reduced the employer rate and employee rates by one per cent in each of those two years. “The good news is that LAPP is fully funded and was in a good financial position before the pandemic hit in the first quarter of 2020. Barring any huge catastrophes, LAPP is well-placed to weather any future storms and is managing risks on an ongoing basis,” says Brown.

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OSFI Examines Digital Risks

The Office of the Superintendent of Financial Institutions (OSFI) will look into the risks arising from rapid technological advancement and digitalization, as these trends impact the stability of the Canadian financial sector. This consultation supports its strategic objective to ensure that federally-regulated financial institutions and pension plans are better prepared to identify and develop resilience to non-financial risks before they negatively affect their financial condition. Its paper, ‘Developing financial sector resilience in a digital world,’ focuses on the risk areas of cyber security, advanced analytics (artificial intelligence and machine learning), and the use of third-party services such as cloud computing. Understanding the financial sector’s use of technology and how technology risks are managed is central to this consultation. Comments and submissions on the discussion paper should be sent to Tech.Paper@osfi-bsif.gc.ca

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UK Looks At Improving DC Outcomes With Illiquid Investments

The UK government has launched a consultation on improving outcomes for defined contribution pension schemes by encouraging investment in a more diverse range of long-term assets, including illiquid products such as venture capital and green infrastructure. Under diversification, the government is proposing amendments to the charge cap to accommodate performance fees in order to facilitate investment in illiquid investments, and “to put the exclusion of physical assets on a statutory footing.” It also intends to develop a further alternative option for schemes to use in calculating performance fees, to facilitate investment in less liquid assets such as venture capital.

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Lower Longevity Helps Pensions

Funding of most Dutch pension funds has improved by up to 1.5 per cent following a new longevity prognosis by the Netherlands’ Actuarial Society (AG). As a consequence, more funds are less likely to cut pension rights in 2019 and 2020. The AG predicted that the rate of increase of life expectancy in the Netherlands would level off relative to its earlier prognosis in 2016, in part as a result of more of the elderly population dying from flu in the past two years. Based on the  latest forecast, the life expectancy of a girl born in 2019 would be 92.5 years, rather than 93.3 years as per the previous prognosis. A boy born next year is now expected to reach age 90, instead of 90.4 years. The impact of the new insights would differ for each pension fund, with schemes with a relatively large male population experiencing an improvement in their funding ratios of approximately 1.2 per cent.

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European Alternative Assets Rising

Total assets under management (AUM) for Europe-based alternatives funds have reached €2 trillion for the first time at the end of 2019, says Preqin’s ‘2020 Alternative Assets in Europe’ report, produced in partnership with Amundi. This is up from €1.79 trillion at the end of 2018, and €1.39 trillion at the end of 2015. The UK is the largest market, with €1,180 billion in AUM, followed by France (€242 billion). Since the beginning of the year, Germany overtook the UK as the most active private capital market by total deal value for the first time. As with the wider financial landscape, the COVID-19 pandemic has caused significant disruption to the alternatives industry in Europe, with fundraising and deal-making being directly impacted since the start of the year. But while activity is not at the record highs seen in recent years, funds are continuing to raise capital and managers are putting money to work as investor appetite remains strong. Alternative assets are seen as a portfolio diversifier and volatility dampener and overall as a source of appealing risk-adjusted returns in a world of persistently low interest rates and volatile equities.

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CDPQ Invests In AppDirect

The Caisse de dépôt et placement du Québec (CDPQ) and existing investors have provided US$185 million to AppDirect, a subscription commerce platform. Since its funding round in 2015, AppDirect has expanded its global footprint and served more than 2,000 merchants. The new funding supports accelerated organic expansion, strategic acquisitions, and additional hiring. AppDirect offers a subscription commerce platform that removes the complexity of building a recurring business model to sell any product, through any channel, on any device.

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Duce Joins Mercer

Brad Duce is a principal at Mercer. Most recently, he was an associate partner at Aon Hewitt, a firm he joined in 2002 from Towers Perrin.

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September 16, 2020


Low Yield Is New Paradigm

A report from Mackenzie Investments says low yields are the new paradigm for long-term investors, rather than a cyclical bump in the road. For investors and portfolio managers, the reality of low yields means adding risk to meet long-run return expectations or increasing savings to offset weaker returns. It also implies that long-term savers require more assets to fund a target level of retirement income as accumulated savings compound at a slower growth rate. Faced with higher pre-retirement savings needs, many investors may instead look to take on more risk to fund retirement through higher returns and thereby face “a greater ‘risk of ruin should valuations drop sharply after retirement,” it says. “This could leave retirees with insufficient assets to fund their spending needs.”

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Companies Rethink Human Capital Strategies

Companies are rethinking their human capital strategies in response to the humanitarian and economic impacts of the novel coronavirus (COVID-19) pandemic, says an Aon plc study. ‘Accelerating Workforce Agility and Resilience’ demonstrates how companies are actively preparing for the future of work. Michael Burke, chief executive officer for Aon’s human capital business, says, “The degree to which firms are focused on improving workforce agility and making remote working effective is incredible.” However, at the same time, companies continue to struggle with many of the acute challenges presented by the pandemic, such as assisting working parents when schools are closed or employees who are caring for elderly family members. “Companies with best-in-class responses are looking at these issues holistically to serve their people from every angle,” says Burke. While workforce agility was defined as very important or extremely important to the future success of their organization following the onset of the pandemic, on global basis, only 39 per cent of survey respondents currently view their workforces as very agile or extremely agile. This workforce agility gap between what employees and teams can handle today versus what will be required of them in the near future is significant and represents a major challenge for companies looking to reshape their business and human capital strategies. Helping employees address acute challenges related to the pandemic remains an ongoing and evolving challenge for companies. Globally, 59 per cent of survey respondents say their companies have taken some action to support working parents who may not have the ability to send their children to on-site schools or other childcare facilities. However, most of these efforts are currently tied to enhancing employee assistance programs (EAPs) and expanding networking groups for parents. The prevalence of new or temporary programs to provide direct assistance to parents to cover childcare, tutoring, or eLearning costs remains low.

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Now’s The Time To Challenge CAP Governance Approach

The COVID-19 pandemic and its impacts on market volatility, members’ financial wellbeing, and on overall wellbeing is prompting sponsors to re-examine and question whether their programs are fully optimizing their potential to deliver valued benefits for their workforce and how their governance frameworks may be leveraged to achieve superior results, say Michelle Loder, vice president, defined contribution solutions, and Anne Ananddakopal is a principal, defined contribution solutions, at Morneau Shepell. In the article ‘Now’s The Time To Challenge Your CAP Governance Approach’ at the Benefits and Pensions Monitor website, they say a governance framework can be leveraged to not just protect members and beneficiaries, but also to enhance the delivery of retirement benefits, capitalizing on opportunities to promote greater program efficiency without necessarily or automatically landing on the somewhat obvious solution of just contributing more.

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TD Thanks Those Who Care

TD has launched its annual ‘TD Thanks You’ campaign, aimed at thanking and rewarding those who are making an impact in their communities. New is this year is that TD colleagues will also be recognized alongside customers, who have demonstrated courage and resilience in the face of COVID-19 by helping their communities during the pandemic. Nominated by TD colleagues, these individuals and organizations have delivered care, services, and support that have helped many overcome the unanticipated challenges that appeared due to the pandemic. Through the fall, TD will be sharing stories of customers and employees and their acts of humanity on its social media channels.

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Desjardins On Renewable Power

The Desjardins Group Pension Plan and Desjardins Financial Security have partnered with Connor, Clark & Lunn Infrastructure to acquire a majority stake in a portfolio of U.S. renewable power assets from EDP Renováveis (EDPR). EDPR has developed four wind farms currently in operation and one construction stage solar farm. When all the farms, located in the states of Indiana, Wisconsin, Oklahoma and Ohio, are in operation, they will combine to produce more than 560 megawatts (MW). EDPR will stay on as a minority shareholder and continue to operate and manage the farms.

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Hedge Funds Post Strong Returns

Hedge funds posted their strongest five-month total return since early 2000 and one of their strongest recoveries in three decades, says Hedge Fund Research (HFR). In the five months through to August, hedge funds posted returns of 15.4 per cent, led by equity hedge strategies. Quant strategies, large cap technology, and specialized energy exposures also gained strongly.

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Orida Heads Real Assets

Deborah Orida is senior managing director and global head of real assets for the Canada Pension Plan Investment Board (CPP Investments). She joined CPP Investments in 2009 and has held senior leadership roles including managing director and head of private equity Asia.

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September 15, 2020


Semi-Annual Reporting Gets PIAC Backing

While the Pension Investment Association of Canada (PIAC) supports the move to semi-annual reporting, it recognizes investors require regular and consistent disclosure to analyze and track ongoing changes in an issuer’s financial and operational performance. In its comments to the Capital Markets Modernization Taskforce on ‘Modernizing Ontario’s Capital Markets,’ it says members represent pension plans with a focus on delivering returns over the long term. Therefore, it is particularly interested in the proposal to allow issuers to report semi-annually in an effort reduce their reporting burden while fostering a longer-term view by management. PIAC is of the belief that providing quarterly reporting and guidance may lead some issuers to focus on short-term thinking and to make decisions that are short-term oriented to meet the demands of the market and lead to less than optimal outcomes for shareholders and the beneficiaries of the pension plans that they represent. However, it is concerned about the potential impact on transparency from this proposal. Therefore, it suggests that if a semi-annual reporting requirement is to be implemented, that there must be sufficient reporting to disclose on a timely basis any material changes to the issuers’ business activities and business plans.

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Solvency Position Improves

As capital markets rallied over the quarter ending June 30, the median projected solvency ratio for defined pension plans in Ontario increased to 90 per cent, says FSRA in its ‘Q2 2020 Estimated Solvency Report for Ontario’s Defined Benefit Pension Plans.’ It says bout three quarters of the plans are estimated to have double-digit investment returns in the second quarter. However, the impact is partially offset by the decline in solvency discount rates over the quarter. This resulted in the median projected solvency ratio increasing to 90 per cent at June 30, up from 85 per cent at the end of March. While 26 per cent of pension plans are projected to be fully solvency funded, 36 per cent are projected to have a solvency ratio below 85 per cent. Despite the COVID-19 pandemic which saw global equity market indices drop to their lowest levels of the year just before the March 31 quarter end, fears of continued deterioration did not materialize and capital markets rallied in in the second quarter, even as the economy was constrained by efforts to contain the outbreak. Despite the rebound in asset values this past quarter, the vast majority of plans opened the year in a stronger funded position on a solvency basis. Many plan administrators are reviewing or have reviewed their funding and investment strategies so they can prudently manage their plans through the cycle. It strongly urges those that have not to do so.

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Canadians Having Difficulty With ‘New Normal’

The ‘new normal’ has become a household term since the pandemic began. However, Canadians are still having difficultly adapting to their new routines, says the Morneau Shepell ‘Mental Health Index.’ When considering the areas that have been most challenging, it found that adjusting to changes in one’s personal life was more difficult than in their work life or finances. Thirty-four per cent of respondents stated they were undecided or felt they had adapted poorly to changes in their personal life or routine and 30 per cent believed they had adapted badly to both changes in work and finances respectively. The results show that while the first few months of the pandemic brought forward many questions about employment and financial security, the paradigm has now shifted. Canadians have begun to regain some control in areas that were initially challenging and, instead, are now facing increasing insecurities in their day-to-day life as restrictions ease across the country and isolated outbreaks occur. “While the economy continues to be top-of-mind for all Canadians, those who indicate high levels of uncertainty (-26.8) and those who most believe we will not return to a pre-pandemic state (-19.6), have the lowest scores. It is important to understand that even as some people are adapting, others are not,” says Paula Allen, senior vice president of research, analytics, and innovation at Morneau Shepell. “The importance of collective responsibility goes well beyond wearing a mask in public. We each need to look for changes in our friends and family, and offer support for those needing professional help.”

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OTIP Joins DBPlus

The Ontario Teachers Insurance Plan (OTIP) and its group of companies has joined CAAT’s DBPlus. In all, 685 full-time employees from OTIP and its group of companies joined DBplus on a go-forward basis. In addition, all part-time and contract employees will have the option to join the plan. With this change, the employees move from a defined contribution plan into a defined benefit plan. Members will be able to transfer their DC balances to purchase additional pension with DBplus, increasing the lifetime pension they will receive from the CAAT Pension Plan.

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Closet Indexing Hurts Returns

Investors stuck in closet index funds can expect lower returns, says research from the European Securities and Markets Authority (ESMA). Its paper examining the phenomenon of closet indexing ‒ purportedly active funds closely tracking a benchmark index ‒ finds that “investors can expect lower net returns from closet indexers than from a genuinely actively managed fund portfolio. It also found that closet indexing is associated with slightly lower investing costs than truly active funds, but that costs are far above the level for passive funds.

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Foreign Managers Can Set Up In China

Foreign ownership limits on fund management companies (FMCs) and securities firms have been fully removed in China since April 1, making eligible foreign managers now allowed to set up foreign-owned FMCs directly or convert their wholly foreign-owned enterprises (WFOEs) for private securities fund (PSF) businesses into public FMCs, says Cerulli Associates. This has seen J.P. Morgan reaching an agreement with its Chinese partner, Shanghai Trust, to increase its stake in their joint venture (JV) FMC, China International Fund Management, to 100 per cent from 49 per cent. Another three managers ‒ BlackRock, Neuberger Berman,, and Fidelity ‒ have submitted applications for wholly foreign-owned FMCs. While it says that China is a long-term plan for many global asset managers, some could delay their market entries due to the COVID-19 pandemic or because they are prudently evaluating the various industry guidelines. In particular, the draft guidelines proposed by the China Securities Regulatory Commission (CSRC) governing FMCs in July are significant, as the previous ‘one minority, one controlling’ shareholding principle could be replaced by the ‘one minority, one controlling, and one license’ principle. This means a single financial institution can invest in no more than two FMCs and can only hold a controlling stake in one of them.

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Divestment Deal Activity Plunges

The value of divestment deals plunged to record lows in the first six months of 2020, says Willis Towers Watson’s ‘Divestment Performance Monitor (DPM),’ in partnership with the Business School (formerly Cass). As the COVID-19 pandemic emerged, with corporations confronted by a sudden and dramatic shift in their markets, 63 per cent that sold portions of their business in the first half of 2020 underperformed. Companies actively engaged in divestment deals in the first half of 2020 underperformed the global index by an average of 11.3 percentage points (pp). This is an even sharper decline than the first half of 2019 (-7.0 pp) and the second half 2019 (-5.9 pp), making it the poorest performing six-month period since the divestments database launched in 2010. While the negative performance is significant, it says it is not unexpected considering the severity and volatility of the markets in the first half of 2020. Given the defensive role that divestitures can play in distressed circumstances, the absence of a bigger spike in deal volume is perhaps more surprising. With 292 deals completed in the first half of 2020, overall numbers are down globally compared with the previous six months (315).

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Cimino Joins Morse

Sal Cimino is senior consultant, private drug plans, at MORSE Consulting. Most recently, he was director of pharmacy services at Green Shield Canada, a position he held for almost 20 years.

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