Substantial Equity Allocations Save DB Plans
Plan sponsors will see an annual increase in the defined benefit pension plan obligation on their balance sheet of close to 15 per cent due to record low interest rates and a flattening yield curve in 2019. The ‘Mercer Pension Health Index,’ which represents the solvency ratio of a hypothetical plan, increased to 112 per cent on December 31 up from 105 per cent at the end of the third quarter and up further from 102 per cent at the beginning of the year. Positive equity market performance throughout 2019 drove an impressive year for the typical DB pension plan in spite of reaching the lowest yields on long-term bonds in 60+ years. “DB plans with substantial equity allocations owe the markets once again for saving them from what could have been a disastrous year,” says Andrew Whale, a principal in Mercer Canada’s financial strategy group. While solvency funded positions continued to improve in the fourth quarter, DB obligations for financial statement purposes increased with all-time low interest rates and credit spreads. “A one-year increase of 15 per cent on the balance sheet may cause CFOs and investors alike to take notice of legacy DB liabilities that they may have otherwise glossed over,” says Whale. This may make transferring the obligation to an insurer more appealing for some plan sponsors. The difference between the cost to settle the DB obligations via annuity purchase and the DB obligations held on the balance has shrunk, thus resulting in a much smaller financial statement impact upon transaction. Many plan sponsors see this financial impact as a barrier to risk transfer and “we have seen their appetite for annuities increase tremendously,” says Whale. Transferring risk may be a path to right sizing the DB obligation, but it will not be an appropriate solution for all plan sponsors. Others are looking for different ways to manage DB asset volatility and seek yield in this era of ultra-low interest rates, yield inversion, and uncertainty in the equity markets. This has led to increased allocations to alternative assets and a movement of assets from public to private markets. “Canadian plan sponsors can look to Europe and other geographies, where low or negative interest rate policy is not new,” says Whale. “Those countries saw increased demand for and access to alternative assets, which we are starting to see here in Canada.”
Women On Boards Growing Slowly
Progress is still slow, but the state of women’s representation on corporate boards is improving, says MSCI ESG Research LLC. Last year saw a noticeable uptick as 20 per cent of directors were women in 2019, up from 17.9 per cent in 2018 and 17.3 per cent in 2017. This 2.1 percentage point increase also slightly shortened the path to 30 per cent female directorship projected for 2027. At the current pace, a 50/50 gender split among global directors might be reached by 2044. The report shows 57.3 per cent of the companies subject to mandatory gender quotas had exceeded requirements as of October 31, 2019. Italy and France had the highest percentage of companies with more females than required. The number of companies with majority female boards doubled in 2019 compared with 2018. Yet these 22 firms accounted for fewer than one per cent of the constituents of the MSCI ACWI Index as of October 30, 2019. This means 98.7 per cent of the boards remained male-dominated.
NSSC Warns Of Unlocking Scheme
The Nova Scotia Securities Commission (NSSC) is warning investors about scams involving companies promising to provide investors access to their locked-in retirement accounts. It says several schemes claiming to provide investors with access to their locked-in accounts have been reported to regulators. “Unlocking scams usually result in significant losses from retirement savings in addition to the payment of taxes and other fees,” says Stephanie Atkinson, acting director of enforcement for the NSSC. In one recent case, an investor lost half his retirement savings in a scheme operated by a company offering to provide loans equal to half the value of locked-in accounts. The company involved is called the Finance Company, the NSSC says, and it is not registered to sell securities in Canada.
Blue Cross Alliance Forms
Blue Cross Life Insurance Company of Canada, Pacific Blue Cross, and Blue Cross Canassurance have formed an alliance to bring together local service and insight, with national expertise and scale, to provide ‘Life and Living Benefits’ products and services across Canada. Both organizations will become shareholders of Blue Cross Life, in alignment with the other members of the Canadian Association of Blue Cross Plans. Pacific Blue Cross will continue to offer the same ‘Life and Living Benefits’ products sold under its policies as a distributor for Blue Cross Life. Coverage for existing policyholders will continue within the current plan design.
Adatia Walks Through U.S. Politics
‘Will 2020 be the Year of the Bear or Bull?’ is the focus of a CPBI Pacific session. Sadiq S. Adatia, chief investment officer at Sun Life Global Investments Canada, will walk through U.S. politics including impeachment and elections, discuss his concerns about Canada and international markets, and provide insight as to why there may be some opportunity in emerging economies. It takes place January 23 in Vancouver, BC. For information, visit Bear Or Bull
Manitoba Changes Solvency Requirements
The Manitoba government will reduce solvency funding requirements to 85 per cent of solvency liabilities, enhance going concern funding requirements, and introduce solvency reserve accounts, says a Morneau Shepell ‘News & Views.’ Bill 8 (The Pension Benefits Amendment Act) will permit pension plans to establish solvency reserve accounts for special payments in respect of solvency deficits. These accounts could be withdrawn by employers under specified circumstances, regardless of whether the plan documents permit employers to withdraw pension surplus. This, with measures to reduce solvency funding requirements to 85 per cent of solvency liabilities and enhance going concern funding requirements, will be enacted through future regulations. It will also permit individuals with funds held in a locked-in retirement account (LIRA) or life income fund (LIF) to unlock the entire amount after reaching the age of 65. The individual may make a lump sum withdrawal of the balance or transfer the balance to a registered retirement income fund (RRIF) or to a registered retirement savings plan (RRSP). Pension plan members who continue to be employed after reaching the normal retirement age can also elect to stop contributing to the plan and accruing benefits, if permitted to do so under the terms of the plan. This would permit the member to retire and commence receipt of a pension without having to terminate employment.
Demand Grows For ESG Information
As investor needs evolve, an increasing demand is placed on issuers for environmental, social, and governance (ESG) related information, says the Canadian Investor Relations Institute (CIRI). Its survey found that 87 per cent of issuers consider ESG factors important to the success of their companies. Key drivers for ESG commitment include enhancing corporate reputation (81 per cent), improving risk management (73 per cent), and creating long-term shareholder value (68 per cent). The majority of issuers have committed to having an ESG/sustainability policy (54 per cent), a board or committee overseeing ESG (81 per cent), or an executive responsible for ESG (75 per cent). The strong commitment from issuers has led to an increase in ESG disclosure as well as greater engagement with shareholders.
ESG ETF Assets Grow
AIMCo Acquires Pipeline Interest
Alberta Investment Management Corporation (AIMCo), in partnership with KKR, has entered into an agreement as a consortium to acquire a combined 65 per cent equity interest in the Coastal GasLink Pipeline Project from TC Energy Corporation. It represents an opportunity for AIMCo’s clients to gain greater geographic diversification within the infrastructure portfolio through the acquisition of a Canadian-based infrastructure asset that will provide feed gas to the country’s first west coast liquified natural gas (LNG) export facility. Coastal GasLink involves the construction of 670 kilometres of pipeline and associated facilities. Once completed, the pipeline will have an initial capacity of 2.1 billion cubic feet per day and connect western Canada sedimentary basin natural gas supply from the Dawson Creek, BC, area to the LNG Canada liquefaction and export facility being constructed in Kitimat, BC.
Pharmacare Agenda Examined
The Benefits Breakfast Club will examine ‘The Changing Risk Landscape: Influencing the Pharmacare Agenda.’ This session will explore how the private sector might seek to influence the national pharmacare agenda and what private payer stakeholders can start doing now to prepare. It takes place February 13 in Oakville, ON. For information, visit http://www.cvent.com/events/bbc-the-changing-risk-landscape-influencing-the-pharmacare-agenda-february-13-2020/event-summary-cb7e4e66e14e409abcec440fbdfe1f25.aspx
Air Canada Managing Money
The investment team for Air Canada now manages money under a new entity, Trans-Canada Capital Inc. Formerly known as Air Canada Pension Investments, it now operates as an investment manager, allowing the team to manage external clients’ assets. The launch of TCC comes as Air Canada seeks regulatory approval to form its own life insurance company, which would position the team to also manage insurance assets as it looks to buy annuities to offload pension liabilities. It aims to annuitize about C$10 billion of its total portfolio. Buying annuities from a new Air Canada insurance company would essentially transfer assets and liabilities to one entity from another, but would allow TCC to retain the assets under management. TCC is currently focused on managing Air Canada’s pension assets as well as the assets of other institutional investors. Air Canada administers eight defined benefit plans that are all closed to new entrants, excluding three plans that are offered as a hybrid structure combining a DB and DC component.
Balance Of Risks Skew To Downside
Financial markets spent most of 2019 torn between signs that the current expansion is mature and optimism that policymakers stand ready to sustain growth in the years to come, says Franklin Templeton Multi-asset Solutions. The slowdown in global trade that has been the dominant economic theme this past year may be showing signs of stabilization and investors are prepared to look favourably on the signs of détente in the U.S.-China trade negotiations. Progress toward a trade deal, and whether it might be delivered before year-end, appears less certain, but also an ever-changing feature of the investment landscape. However, looking to 2020 as a whole, the balance of risks to global growth are being skewed to the downside, even as the worst fears of slowdown may have eased. Growth momentum is negative, but the consumer remains resilient. Trade disputes are only a symptom of broader, potentially longer-term, tension between the United States and China. With profit margins having peaked, this is likely to present an ongoing headwind for business investment intentions, it says. Inflation expectations, however, remain close to historical lows and various central banks are struggling to engineer a revival. A deficit in demand is likely to be the key driver of disinflation. The ability of corporations to pass costs on to consumers appears limited, increasing pressure on profit margins. In the longer-term, policymakers may be reaching the limits of conventional monetary policy. Major central banks are reviewing their mandates, which could result in more symmetrical inflation targets. The question is whether the political will exists to increase the role of fiscal policy.
Canada Life In Reinsurance Agreement With Aegon
Canada Life Reinsurance has entered into a long-term longevity reinsurance agreement with Aegon covering €12 billion of in-force liabilities. Close to 200,000 of in-payment and deferred pensioners will be reinsured under this agreement. Canada Life Reinsurance offers a range of innovative risk and capital management solutions covering mortality, longevity, health, and lapse risks for insurers, reinsurers, and pension funds across the U.S. and Europe, including the Netherlands, the UK, France, Germany, Italy, Spain, Portugal, Sweden, Belgium, and Ireland.
ETFs Grow In Canada
ETFs listed in Canada gathered net inflows of US$3.39 billion at the end of November, bringing year-to-date net inflows to US$17.55 billion, says ETFGI. In the month, Canadian ETF assets increased by 3.4 per cent, from US$145.69 billion in October to US$150.69 billion. At the end of November 2019, the Canadian ETFs/ETPs industry had 747 ETFs/ETPs, with 902 listings, from 36 providers on two exchanges.
Emerging Markets Examined
CAIA Vancouver will examine ‘Emerging Markets in Asia and Non-performing Loans in China.’ The speakers ‒ Christine Tan, of Sun Life Global Investments, and Avery Colcord, of CarVal Investors ‒ will discuss the current investment environment in Asian emerging markets and share contrasting perspectives on equity and credit opportunities in China. It takes place January 15 in Vancouver, BC. For information, visit CAIA Vancouver
TFSAs Need Tune-up
Tax-Free Savings Accounts (TFSAs) have had great success over the past decade, but could use a tune-up, says a report from the C.D. Howe Institute. In ‘TFSAs: Time for a Tune-Up,’ author Alexandre Laurin argues that after a decade in existence, there is now enough data and empirical analysis on TFSA use to assess the extent to which the product is reaching its policy objectives and how it can be made even more useful. TFSAs were introduced 10 years ago to improve incentives to save by eliminating taxes on investment incomes. Since then, they have experienced phenomenal growth. “After only eight years of existence, the fair-market value of all investments in TFSAs reached almost $233 billion by the end of 2016. By comparison, this is about 20 per cent of all assets held in Registered Retirement Savings Plans, Registered Retirement Income Funds, and Locked-In Retirement Accounts. The strongest growth in popularity occurs at younger ages with one-in-two 25- to 34-year-olds holding a TFSA. This is just shy of the 65-and-over age category, the most popular age category with 57 per cent. The data shows TFSAs are partly used as a tax-efficient vehicle for long-term capital accumulation, widely used for decumulation of retirement wealth in old age, and are popular among younger Canadians to save for both near-term major purchases and achieve long-term saving goals. To build on these early successes of the TFSA program and encourage continued growth, the report recommends making it possible to buy life annuities within a TFSA to encourage individual protection against longevity in retirement; permitting a surviving spouse to utilize the unused TFSA contribution room of the deceased spouse, within limits; and creating a new Tax-Free Pension Account to induce a greater number of younger and low- to mid-income workers to save for retirement on a tax-effective basis.
Strategies See Manager Consolidation
U.S. institutional investors are consolidating their manager rosters in more commoditized, efficient markets strategies. As they reduce spending on this portion of their portfolio, they simultaneously increase spending on esoteric products that are more apt to attract excess returns, says Cerulli Associates. After the 2008 recession, institutions achieved cost reductions by transitioning from actively managed strategies to passive. More recently, institutions have been achieving cost reductions by consolidating managers in the remaining active portion of portfolios. “Institutions have gained the upper hand in fee negotiation,” says James Tamposi, senior analyst at Cerulli Associates. “By re-directing their portfolios to fewer active managers and, hence, making larger allocations, institutions are securing better rack rates and leveraging bargaining power in the fee negotiations.” Beyond explicit cost savings, manager rationalization has enabled institutions to generate tracking error and simplify investment committee oversight responsibilities.
Sun Clients Can Ask Alexa
Sun Life clients can now access their benefits coverage details for massage therapist, chiropractor, physiotherapist, and psychologist services using Amazon Alexa. Canadian clients can now access details such as remaining balances, deductibles, coverage limits, and the percentage covered for each provider type using their voice and an Alexa-enabled device. Clients can also check the status of a recently submitted medical or dental claim.
ETFs Gather Inflows
ETFs and ETPs listed globally gathered net inflows of $75.29 billion in November, bringing year-to-date net inflows to US$477.01 billion, says ETFGI. This is significantly higher than the US$439.61 billion gathered at this point last year. Assets invested in the global ETF/ETP industry have increased by 2.5 per cent, from US$5.96 trillion at the end of October, to US$6.12 trillion at the end of November.
Summit Looks At Climate Change
The ‘SHARE Investor Summit 2020’ is a gathering of investment decision-makers and leaders from pension funds, foundations, Indigenous communities, trade unions, faith-based groups, universities, civil society, and investment management firms. Under the banner of ‘The Power of Many,’ it will address key issues including the climate crisis and just transition, inequality, the future of work, and reconciliation. It takes place in February 19 to 21, 2020, in Vancouver, BC. For more information, visit SHARE Summit
Canada Life Eliminating Plastic Cards
To reduce its carbon footprint, Canada Life is taking a first step to eliminate plastic drug cards. Beginning January 1, 2020, it will begin encouraging its group benefits plan sponsors to opt out of providing plastic drug cards to their members. “In 2018, we issued approximately 1.1 million cards,” says Ryan Weiss, vice-president, product and experience, group customer, at Canada Life. “Stacked flat on top of each other, the pile would be twice as tall as the CN Tower. I’m confident that when offered the choice, plan sponsors will agree plastic cards are no longer a necessary feature of their plan.” With advancements in digital technology, customers can get their drug card online or from GroupNet mobile, its benefits app that allows members to make claims, check coverage balances, and even has a mobile-friendly version of the card that can be added to a device’s electronic wallet. It has already begun educating sponsors and stakeholders about the change. The goal is to go to a completely digital member experience by 2021.
Alberta Implements Mandatory Switching
Alberta has become the second province in Canada to implement a mandatory switching program for certain biologic drugs, following in the footsteps of British Columbia, says a Telus ‘Health Benefits Hub.’ Affected patients in Alberta have until July 1, 2020, to switch to a biosimilar if they wish to continue to receive coverage from the public drug plan. The Alberta Biosimilar Initiative applies to Enbrel (etanercept) for inflammatory conditions, Remicade (infliximab) for inflammatory and gastrointestinal conditions, Lantus (insulin glargine) for diabetes, and Neupogen (filgrastim) and Neulasta (pegfilgrastim), both for a blood disorder. The program also includes Copaxone (glatiramer) for multiple sclerosis, which is a non-biologic complex drug. Pregnant women are exempt from making the switch during the transition period. Physicians can also request exceptional coverage of the originator for other patients, if they can demonstrate the need based on medical reasons. Alberta expects the increased use of biosimilars will save $227 million to $380 million over the next four years. It has indicated that savings will be re-invested in other healthcare services.
Election Results Have No Impact
Heading toward a pivotal U.S. presidential contest in November, Capital Group is reminding investors that election results, historically speaking, have made essentially no difference when it comes to long-term investment returns. Its ‘2020 Outlook’ says what has mattered is staying invested. Looking at U.S. election results back to 1932, U.S. stocks have trended up regardless of whether a Republican or Democrat won the White House. Investors who held on for at least a year were rewarded for their patience, though they had to withstand heightened volatility during the primaries (i.e., statewide elections to select each party‘s candidate). Election-related volatility can in fact produce select opportunities. U.S. pharmaceutical and managed care stocks have recently come under pressure amid political criticism of private sector health insurance. That, in turn, has resulted in some attractive company valuations for investors who believe that a government takeover of the U.S. healthcare system isn’t imminent. “Investing during an election year can be tough on your nerves,” says Greg Johnson, a Capital Group portfolio manager, “but it’s mostly noise, and the markets carry on. Long-term equity returns are determined by the value of individual companies over time.”
Sun Life Acquires InfraRed Stake
Sun Life Financial Inc. intends to acquire a majority stake in InfraRed Capital Partners, a global infrastructure and real estate investment manager. InfraRed advises institutional and pooled fund clients on approximately US$12 billion in assets under management as of September 30, 2019. It is headquartered in London, UK, and will form part of its alternatives asset management business.
CAA Adds Virtual Care
The CAA Club Group has added virtual care to its extended health benefits package for all full-time and part-time employees, says Morneau Shepell. Offered through a joint partnership with Maple and Morneau Shepell’s employee and family assistance program (EFAP) team, CAA Club Group’s associates will now be able to access doctors in minutes, 24/7, through the virtual care platform.
Property Index Results Presented
Simon Fairchild, executive director of MSCI, will kick off the ‘REALPAC/MSCI Canada Real Estate Investment Forum’ with the presentation of the 2019 results of the ‘Canada Quarterly Property Index.’ Then, REALPAC’s CEO Michael Brooks will moderate a panel of industry experts to discuss the results and state of the industry. It takes place February 4, 2020, in Vancouver, BC. For information, visit Vancouver Forum