Frontlines

Derek Burleton, vice-president and deputy chief economist, TD Bank Financial Group:

“We anticipate a moderate pickup in economic growth in the U.S. in 2014. This rate would likely propel a similar improvement in Canadian growth conditions, trigger a gradual end to the Fed’s quantitative easing program and push 10-year yields on both sides of the border to around 3.2% or 3.5% by year-end.

In light of the ongoing challenge of the Federal Reserve’s communication regarding its exit strategy, this upward path is unlikely to be smooth. While a long-term deal addressing the deficit and entitlement programs would be the best-case scenario, there is greater likelihood that U.S. politicians will continue to pass temporary agreements on spending and the debt ceiling at the 11th hour, which will only add further to bouts of volatility.

We expect that the Bank of Canada will keep its overnight rate steady until mid-2015.”

Fred McMahon, resident fellow, The Fraser Institute:

“Chinese reforms are key, economically and financially. China produces mega savings, driving world rates down. The leadership wants more consumer spending, meaning lower savings. That could drive up global interest rates over time, with many side effects.

If this occurs, sovereign debt crises could re-emerge, including for the United States, though this is complicated by the fate of quantitative easing and the benefits of increased Chinese demand.

And don’t count the euro crisis over, which has the potential to affect not just Canada but the entire global economy. The euro area remains a mal-structured currency union with massive imbalances. Greece and Germany belong in the same currency club because they are in Europe no more than Switzerland and Nepal do because they both have big mountains.”

Greg Nott, chief investment officer, Russell Investments:

“Overall, the global economy is improving. Inflation in the U.S. and Canada will likely remain below the average central bank target of 2%. We forecast a 3% increase in U.S. growth in 2014, which should boost Canada’s outlook. But domestic growth will likely be somewhat hindered by a softening housing market and weaker energy revenues, due to the discount and volatility in the Canadian crude oil price.

We expect central banks in many developed countries to remain highly accommodative, given the lack of inflationary pressures. But the U.S. Federal Reserve will likely begin tapering its monthly bond purchase program in the first quarter of 2014, [so] we forecast a modest bond yield increase in Canada of 3% to 3.25%. This will pose an ongoing headwind for core fixed income portfolios, although we expect a modestly positive return. However, increasing yields, coupled with positive equity returns, should further boost DB funding ratios in 2014.”

Legal Briefs

❱ Ontario recently announced several pension changes in its 2013 Economic Outlook and Fiscal Review. The province says that if an agreement to expand the Canada Pension Plan cannot be reached across Canada, it will go it alone. Ontario is also planning changes in the area of single-employer pension plans, such as limits on contribution holidays and accelerated funding of benefit improvements. Additionally, in the area of public sector single-employer pension plans, the province intends to continue the transition to equal cost-sharing for ongoing contributions. Ontario plans to modernize investment rules for pension funds, too. Investments in certain provincial public infrastructure projects would be exempt from a rule that limits ownership in a single corporation to 30% of voting shares, allowing plans to further invest in Ontario infrastructure.

❱ Alberta has issued EPPA Update 13-01 in response to recent actuarial developments affecting inflation-indexed DB plans registered in the province. In September, the Canadian Institute of Actuaries published Alternative Settlement Methods for Hypothetical Wind-Up and Solvency Valuations, which offers guidance to actuaries who decide to use an alternative settlement method. Four alternative settlement methods were identified: the purchase of a series of annuities over a few years; the establishment of a replicating portfolio in trust to provide for the payment of pension benefits over an extended period of time; lump sum payments to members; or an assumed modification to the terms of the benefit, such as substituting fixed rate increases for inflation-indexed benefits.

❱ Quebec has published a regulation allowing the establishment of target benefit plans in some pulp and paper sector enterprises under certain conditions. (Quebec employers in all other sectors currently lack access to these types of plans.) The regulation is not expected to take effect before 2014. And Quebec’s Bill 39, known as the Voluntary Retirement Savings Plans Act, is currently being reviewed by the Committee on Public Finance of the National Assembly of Quebec. The bill is expected to be adopted before the end of the year. (Voluntary retirement savings plans are Quebec’s equivalent of pooled registered pension plans.)

Sources: Blake, Cassels & Graydon LLP; Norton Rose Fulbright

The Month in Numbers

161.8% – the average ratio of Canadian household debt to disposable income — 2013 Manulife Bank Debt Report

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