In its report on employer pension plans in Canada published earlier this month, Statistics Canada noted the overwhelming majority of plan members are in trusteed arrangements. Of the 6.2 million members of employer-sponsored pension plans, 5.2 million are in arrangements managed by trusteed funds. But when it comes to just the defined contribution side of the equation, the reverse is true, with 761,782 members in plans with insurance company contracts and 276,933 in plans covered by trust agreements in 2015.
Both insurance- and trust-based defined contribution plans have been growing significantly, however. The 2015 insurance numbers were up from 707,002 in 2011, while the number of members in plans with trust agreements increased from 212,156 the same year.
Idan Shlesinger, managing partner for defined contribution pensions and savings plans at Morneau Shepell Ltd., says trust-based plans have had a much bigger portion of the market in the United States. But he says he’s seeing a move in Canada towards the trust-based approach, which typically provides an unbundled arrangement with separate record keepers, custodians and investment managers.
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“We’re seeing it move in that direction,” says Shlesinger, whose firm provides record-keeping services as part of unbundled defined contribution pension plans.
As the Statistics Canada numbers show, both insurance- and trust-based plans have been showing growth. And Tom Reid, senior vice-president of group retirement services at Sun Life Financial, says he doesn’t see a trend towards trusteed defined contribution plans: “I can’t think of a single employer that we work with who has approached us and said, ‘We’re considering moving to a trust-based plan.’”
To bundle or not to bundle?
For Shlesigner, the key benefits of the unbundled approach are greater control over and transparency around the plan. And while the common assumption has been that a plan needs to be fairly large to justify unbundling with a trustee, Shlesinger says the size required has decreased as the defined contribution market in Canada has matured.
“That threshold has come down,” he says, putting the average size of the plans his firm serves at $66 million and 2,700 members. Newer plans, he adds, can be as small as a few hundred members. Among the reasons for the increased accessibility of trust-based plans are improved technology and the growing interest in the defined contribution area from trustees and investment managers, according to Shlesinger.
Jillian Kennedy, leader of defined contribution and financial wellness at Mercer, says that going to a trust-based approach doesn’t necessarily mean ending the relationship with an insurance company. The insurer could still be the record keeper under a trusteed plan, she notes. And there are many reasons why a plan sponsor would consider a trust, she adds. They include the ability to leverage the relationship with existing providers of services to a separate defined benefit plan and access to more investment options and asset classes, according to Kennedy.
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And while the cost of unbundling is a common concern with trust-based plans, Kennedy suggests the ability to negotiate directly with the various providers, such as an asset manager, can result in lower fees. The key, she says, is for a plan to recognize the tipping point for when it should look at a trusteed structure.
“I think the message is you don’t have to be a $200-million pension plan to unbundle, go to trust.”
Reid, however, says the insurance model does address many of the benefits commonly touted about trust-based plans. “You can negotiate with a manager directly if you want to,” he says. “We can accommodate that.”
And the scale of insurance companies means plan sponsors can get attractive fees, along with the convenience and simplicity of bundled services, he adds. “We pass on a lot of the benefits of that scale to our clients,” he says, noting that when it comes to Sun Life’s business, the fee for Canadian equity investments for an average plan with 1,000 members is less than 40 basis points. “That’s all in,” he says, adding the fee 15 years ago would have been 100 basis points.
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And when it comes to the ability to customize a plan to access different asset classes for pension investments, Reid says insurance companies can provide those options. “We can accommodate every flavour of plan design,” he says, noting that while an insurance company may not offer exchange-traded funds on its investment platform, there’s little demand for them in the defined contribution area given the availability of indexed funds.
The custodian’s role
When it comes to trust-based plans, a key player in the arrangement is the trustee or custodian. Tim Rourke, vice-president of relationship management and pension practice lead at CIBC Mellon Global Securities Services Co., one of the companies providing those services, says he has seen some growth in the trust side of the defined contribution business in recent years. “We are seeing more sponsors looking at setting up a trust-based DC plan,” he says.
As for the trustee’s role, Rourke says it includes ensuring pension plan assets are segregated from those of the company and receiving instructions on and handling the settlement of investment transactions.
Matt Mayer, chief administrative officer at Northern Trust Corp., notes the trustee’s role also includes keeping track of the plan’s financial position, remitting taxes and issuing benefits to members. Depending on the plan, the role can extend to areas such as fund administration. In terms of who a typical client would be, Mayer says it could be a U.S.-based multinational company with a 401(k) plan that has a Canadian affiliate. It could also be a smaller Canadian company that already has a sizable defined benefit plan and is starting a new defined contribution one. Trust companies can also provide services for group registered retirement savings plans, he notes.
When it comes to what a trusteed plan looks like for its members, Shlesinger says it would be much like an insurance-based one. “You’ll see much the same thing,” he says, noting members would likely see familiar lists of investment managers. There may be a broader range of managers with a trusteed arrangement, and plan sponsors can create their own investment funds, he says. Shlesinger adds there’s less of a concern about funds being on the market for longer periods with trusteed arrangements as it’s now possible to move them more quickly and suggests the costs do fall quickly as the plan grows.
Jana Steele, a pension lawyer at Osler Hoskin & Harcourt LLP, says that while plan sponsors have a choice under pension legislation whether to go with a trust or insurance arrangement, both approaches involve the same legal obligations. “Your overriding statutory duties are the same from an administrator’s perspective,” she says, noting that a trust could nevertheless provide an additional level of governance or oversight. “But that’s not something that the Pension Benefits Act says you must do.”
And whatever structure a plan administrator chooses, it still must be cautious in selecting its providers and has an ongoing duty to monitor them, Steele emphasizes. Steele notes she has seen somewhat of a move towards considering trust arrangements by larger pension plans. Insurance companies, she adds, tend to dominate among small- to mid-size plans.
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While Kennedy downplays the extra work involved in contracting with multiple vendors under an unbundled arrangement, Reid emphasizes the convenience of the insurance model. “If you think of the insurance model, it’s just simpler,” says Reid, who adds he sees a continued move towards insurance-based plans. “To be honest, the trend has been in the opposite direction.”
Kennedy, however, emphasizes that with predictions suggesting defined contribution plans will grow quickly to 30 per cent of Canada’s pension market in the next five to eight years, they will soon achieve the size that may justify a trust arrangement.
“The tipping point absolutely starts to happen as the plan grows,” she says.