October 5 Benefits and Pensions Monitor Daily News Alerts

Longevity Insurance Should Be Option

Collective longevity risk pooling arrangements integrated with collective defined benefit pensions and Group RRSP/TFSA plans should also be an option available to Canadians. In a letter to the federal ministry of finance, the Association of Canadian Pension Management (ACPM), the Canadian Association of Retired Persons (CARP), the Canadian Institute of Actuaries (CIA), the Canadian Life and Health Insurance Association (CLHIA), and the Pension Investment Association of Canada (PIAC), and others say such an arrangement could be initiated by an employer or by a financial services provider. Due to existing pension and income tax rules, neither the individual nor the collective option to acquire longevity insurance is available to most Canadians today. It proposes three changes to improve access. The government should amend the Income Tax Regulations that prevent the creation of new collective variable payout programs to allow professional investment management and pooling of longevity risk. The Income Tax Act should be changed by increasing the permissible commencement age for registered life annuities from 71 to age 85 from registered plan assets and it should also be changed to allow TFSAs to invest in immediate or deferred (up to age 85) life annuities. At the individual level, it says longevity insurance removes the worry of outliving one’s retirement money. At the macro-economic level, it ensures Canadian seniors can contribute to maintaining aggregate demand and hence national employment levels and economic growth by consuming goods and services at rates that maintain their standard of living during their later retirement years. Without more efficient retirement income options, Canadian seniors’ inability to cover the necessary expenses later in life will put greater stress on families and communities – in addition to an already burdened healthcare system – and will create greater dependency on federal and provincial income-support programs.

Doing Nothing No Solution For Rising Drug Costs

With the growing cost of specialty drugs, plan sponsors need to do more than nothing, hoping for the best, or counting on national pharmacare becoming a reality, says Dave Wowchuk, vice-president of sales at ClaimSecure. In the ‘Modernizing the Drug Plan: Strategies to Optimize Performance and Reduce Risk’ at the ‘2018 CPBI Atlantic Regional Conference,’ he said specialty drugs are any that cost over $10,000 annually. They account for one per cent of the claims, but around 25 per cent of the cost. To compound things, some specialty drugs which came out for a specific condition are now being using for multiple ailments, but their cost has not come down which suggests pharma companies are taking advantage of plans. Changing providers is no solution because they immediately want to know about specialty drug obligations. More effective strategies to deal with this are using closed specialty preferred pharmacy networks (PPNs); substituting biosimilar for biologics, and having a drug max which limit exposure to specialty drugs. For smaller plans, he said one option is to take these drugs off a formulary and bringing in a coverage navigation system. This helps that small number of employees who need specialty drugs to find sources of funding and navigate the system. Dalhousie University is looking for ways to modernize its plan and formulary, said Kenneth MacDermid, director of total compensation at the university. The current plan covers life insurance, AD&D, health, dental, LTD, and survivor income paid to spouse of a deceased member. It also features healthcare spending accounts which have been increasingly used in recent years. It is an ASO plan where an insurance provider administers the plan, charging fees for claims adjudication. It does have a tiered formulary tied to a managed formulary to determine which medications it covers and what tier they are in. However, it is looking at ways to shift medications between the tiers in cases where the first tier medication does not work. This would correct a situation where just because a medication does not work, a member is penalized and has to pay more for a tier two drug that works. It is also emphasizing wellness in any way it can to reduce incidents of chronic illness, he said. In terms of specialty drugs, the plan has affordability and effectiveness criteria.

More Spent On Massage Than Mental Health

Over the past year, employee health benefits plans administered by Green Shield Canada (GSC) spent four times more dollars on massage than mental health services. “To give some background, for decades, the majority of Canadian full-time employees have had access to employer-sponsored health benefits plans, typically with a standard design – drug and dental coverage and a host of miscellaneous health services and devices,” says David Willows, GSC’s chief innovation and marketing officer. “But these plans have evolved very little over that time.” As Canadian health markers have steadily worsened, and healthcare costs have consistently increased above the rate of inflation, little attention has been paid to examining and changing health benefits plans to address broader, systemic health challenges. The rise of chronic diseases, the spotlight on mental health conditions, and the impact of new expensive drugs (some that cost tens of thousands of dollars a year and occasionally hundreds of thousands) have all generated momentum for a health benefits re-think. “Yet the response to these challenges in the world of health benefits has been muted,” says Willows. “The few attempts at change have fallen short, including capping the annual drug spend per employee, potentially cutting off employee access to expensive, but potentially life sustaining or saving drugs. What we have not seen is a holistic look at all the costs contained in employer-sponsored plans and a measurement of the ultimate value they provide by looking at the best available evidence from scientific literature.” In response, it has launched the SMARTspend health benefits plan providing options for employers seeking more tangible employee health outcomes from their health benefits investment. The plan design includes managed drug formularies for smart pharmaceutical options, digital mental health support options for easier access and consistency of care, and health coaching by pharmacists and dieticians to stem the tide of chronic disease. It does not include massage as a core benefit, six and nine month dentist recall for adults, and access to expensive new drugs that do not provide demonstrated advantages over established, effective ones will be slowed by a step therapy process that requires evidence of the clinical need for reimbursement of those higher cost drugs.

Social, Environment Proposals Gain Momentum

Institutional investor support for social and environmental proposals and corporate political spending proposals continues to gain momentum, says a report from PricewaterhouseCoopers and Broadridge Financial Solutions. Based on the analysis of 4,090 shareholder meetings held in the first half of 2018, nearly 29 per cent of institutional investors supported such proposals, a new high compared to 26 per cent in 2017, 21 per cent in 2016, and 18 per cent in 2015. The numbers appear in stark contrast to the support of retail investors. Only 16 per cent of retail investors supported such proposals in the first half of 2018. Support of proposals seeking transparency on corporate political spending also a hit a new high, with 29 per cent of institutional investors supporting such proposals, up from 26 per cent in 2017, 23 per cent in 2016, and 20 per cent in 2015. Retail investor support was lower, with 21 per cent backing such proposals in the first half of 2018.

Pension Plan Governance Difficult

Governance is difficult, not easy. That was the message from Brian Muldowney, senior vice-president, institutional strategy, and Steve Mahoney, vice-president, institutional sales, of Connor, Clark & Lunn Financial Group, during the ‘Governance: The Future Does Not Require Everything to Change, But All Aspects Should Evolve’ session at the ‘2018 CPBI Atlantic Regional Conference. Muldowney said the basis of governance is the same, regardless the type of plan ? defined benefit, target benefit, or capital accumulation plan. And while a well-designed governance structure cannot ensure a plan will meet its objectives, it can help minimize the impact of market volatility. He outlined some principles that need to be considered for a governance program. These programs require effective decision-making by people with the necessary skills and resources. These people should also not rely just on advice, they need to challenge their advisors to make the best decisions. The ongoing focus should be on the objectives of the plan which means, for DB, it needs to be on the future direction and strategy, not just asset allocation. And understanding risk is critical. Governance boils down to managing risk, said Muldowney. Mahoney said a risk transformation in taking place in pension plans. In the past, risk was defined and portfolios were built around acceptable levels of risk. Today, it is “risk be damned,” he said. Portfolios are being designed to make the best return and risk is dealt with as it arises. Cash flow in DB plans is another important element as many plans are dealing with negative cash flows. To offset this, they are turning to alternatives and that brings new challenges like illiquidity and “no one wants to deal with that.” When it comes to governance in today’s environment, plan sponsors need to be aware of decision-making influences like noise and bias and be willing to challenge their asset managers and advisors as it is better to get things out in the open. And there needs to be an awareness that risk can be transformed, but not eliminated.

Investors Enthused About Commercial Property

Investors remain enthusiastic about Canada's commercial property market, despite uncertainty surrounding rising interest rates, the lateness of the investment cycle, and – in particular – scarcity of available product to meet insatiable demand, says Avison Young's ‘Fall 2018 North America and Europe Commercial Real Estate Investment Review.’ Against a backdrop of geopolitical tensions and financial volatility, Canada is still viewed globally as a safe haven, given the country's stable economic and political climate and sound property market fundamentals. "Canadian and international investors continue to view the country in a favourable light," says Bill Argeropoulos, principal and practice leader, research (Canada), for Avison Young. Office product is attracting its share of capital as the influx of technology and co-working firms adds to demand from traditional sectors. Ongoing urban intensification is not only impacting the office sector, but rising population density and the strong links between the industrial and retail sectors – resulting from the growth of eCommerce and last-mile logistics – mean that both asset types are garnering investors' attention. Meanwhile, tight housing supply is driving multi-family investment, yielding the lowest cap rates. With development robust in all sectors, the scarcity of developable land has put land sales on pace for a record year. After pouring a record $36.2 billion into commercial real estate assets (office, industrial, retail, multi-family, and ICI land worth $1 million or more) across Canada's six major markets in 2017, investors placed another $17.7 billion in first-half 2018 – down a modest $1.3 billion, or seven per cent, from the first half of 2017.

DB Plans Use ETFs As Tactic

Defined benefit pension plans are using ETFs in a number of ways. Speaking on ‘ETFs In Retirement Plans’ at the ‘2018 CPBI Atlantic Regional Conference,’ Camilo Gil, executive director, ETF trading services, at CIBC Capital Markets, said used tactically they can allow funds to get into assets they believe look promising while they narrow down which individual assets they want to invest in. They can also be used to tweak allocations between portfolio rebalancing, and provide transition portfolio lodgings. They also allow plans to maintain passive exposures as it is less expensive to outsource these mandates than to do it. There is also a lot of interest in ETFs from defined contribution pension plans but many of the recordkeeping systems can’t handle assets that are valued more than once daily. There is also a belief that they can get into pooled funds for the same cost. He also discussed some of the emerging trends. The growth of fixed income ETFs among institutions is impressive. They are using them because of the low cost and the price relevant to the market can be determined easily. Actively managed ETFs are also becoming more common. Their performance is better, but the fees are higher, he said.

Modestly Overweight Canadian Equities Recommended

Disappointing global growth, a more dramatic tightening in monetary policy, geopolitical concerns, increased protectionist trade policies, and a resumption in commodity price weakness would put pressure on domestic employment trends and corporate profits, resulting in compressed earnings estimates and higher risk premiums, says HSBC Asset Management’s ‘October 2018 Outlook.’ This is its rationale for recommending being modestly overweight in Canadian equities. The view is that moderate but sustainable macro indicators (driven by improving global economic growth and still accommodative monetary policy) should enable commodity price stability and continued positive earnings growth. Domestic equity valuations are reasonable and show potential for positive absolute and favourable relative-return opportunities over the medium term. On the other hand, it sees government bonds as being underweight. The rationale for this view is many key central banks ? including the Fed, the Bank of England (BoE), and even the ECB ? have signalled that global policy rates will likely be moving higher in concert following years of aggressive, co-ordinated monetary stimulus. Similarly, the Bank of Canada has raised rates 100 basis points in the last year and has indicated that further tightening of monetary policy may be warranted by the improving economic backdrop, but that ongoing risks to its outlook will require a gradual approach to further hikes. However, if Canadian growth disappoints, more accommodative monetary policy may prove supportive for this asset class. Periods of risk aversion and flight to liquidity may also prove to be supportive. In addition, government bonds continue to offer a diversification element important in a volatile environment.

Scotia Signs PRI

Scotia Global Asset Management has become a signatory of the United Nations-supported Principles for Responsible Investment (PRI). The PRI is the world's leading proponent of responsible investment. It supports a global network of asset owners, investment managers, and service providers to incorporate environmental, social, and governance (ESG) factors into their investment and ownership decisions. This formalizes the commitment Scotia has long held to ESG issues.

Northern Trust Developing Front Office Solutions

Northern Trust Corporation will invest in Parilux Investment Technology, LLC, a step in the development of its front office solutions business designed to meet the operational and technology needs of in-house investment teams managing complex, global multi-asset class portfolios. Parilux’s software will power an integrated data management platform that delivers a range of information and functionality – including investment book of record (IBOR), accounting and risk analytics for alternative assets, and performance reporting and document management for investment teams of endowments, foundations, corporations, family offices, and other sophisticated asset owners in North America focused on asset allocation and manager selection.

PSP Investments Buys Forth Ports Shares

The Public Sector Pension Investment Board (PSP Investments) will purchase the shares that Arcus European Infrastructure Fund 1 LP holds in Forth Ports, one of the UK’s largest port groups. After completion, PSP Investments will partner with other long-term investors who are aligned to support the future growth of Forth Ports. Forth Ports is a multimodal ports owner and operator with ports serving as logistical gateways across the UK, connecting the UK with Europe and the rest of the world. It owns and operates commercial ports on the Firth of Forth, the Firth of Tay, and the Thames, with strategic positions in Tilbury (London), Grangemouth, Dundee, Rosyth, and Leith (Edinburgh). Tilbury is the site of a major new port terminal, Tilbury 2, while the Port of Dundee is strongly positioned to service the needs of the growing offshore wind sector and North Sea oil and gas decommissioning industry.

Buck Brings IT Experience

Steve Buck is managing director of technology infrastructure for the Ontario Teachers' Pension Plan (Ontario Teachers'). He brings more than 25 years of progressive experience in the IT industry to the role and was most recently vice-president, infrastructure operations, at CIBC.

Blockchain Focus Of Session

CAASA is partnering with Blockchain Ambassadors to present a session on AML and blockchain in the ‘Northern Exposure Event Series.’ The event is tailored to those in the securities investment and blockchain industries. It takes place October 29 in Toronto, ON. For information, visit AML Blockchain

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