In a shifting CAP landscape, what’s the impact of industry consolidation on plan sponsors?
It’s been an interesting year for the capital accumulation plan (CAP) industry. On Sept. 3, 2014, Standard Life announced an agreement to sell its Canadian businesses (Standard Life Financial and Standard Life Investments) to Manulife Financial for approximately $4 billion.
In his Oct. 6, 2014, presentation to the Canadian Club of Montreal, Donald Guloien, Manulife president and CEO, acknowledged one of the key reasons his company was interested in Standard Life was to increase Manulife’s presence in Quebec. “This transaction allows us to leverage Standard Life’s strong presence, 180-year history and deep understanding of the unique attributes of the Quebec market.” It also accelerates Manulife’s growth strategy for its Canadian business, he said, particularly in the wealth and asset management areas.
The deal, which still requires regulatory and Standard Life shareholder approval, is expected to close in Q1 2015.
In a research report, Morningstar analyst Vincent Lui says the acquisition makes a lot of sense from a strategic perspective. It not only allows Manulife to get more Quebec market share, “it also expands Manulife’s capabilities in group benefits, asset management and investment risk expertise—areas in which Standard Life has excelled.”
An acquisition of this scale could not have come at a better time for Manulife, he adds, noting the insurer’s Asian fund business is showing signs of slowing and this transaction should increase earnings contributions from less capitalintensive, fee-based businesses largely driven by assets under management.
Neil Craig, a senior pension consultant with Stevenson & Hunt, says Manulife will also benefit in the hybrid pension plan market (i.e., plans that have both a DB and a DC component). “In terms of benefits, sometimes [these plans] pay the better of the two, and sometimes the defined benefit is frozen,” he explains. “Either way, Manulife currently doesn’t have the capability to do the recordkeeping for both pieces. Standard Life, on the other hand, does.”
Making Waves
Of course, this acquisition isn’t the first for the CAP industry, but it is the latest in an ongoing trend.
A wave of consolidation took place in the early 2000s: Sun Life acquired Clarica in 2002; Great-West Life acquired Canada Life in 2003; and Manulife acquired John Hancock Group, including Maritime Life, in 2004.
“Standard Life has always been a very significant player, particularly in the group retirement services business,” says Tom Reid, senior vice-president, group retirement services, at Sun Life Financial. “So it felt like there was a certain sense of inevitability to a major consolidation like this happening. Notwithstanding that, Standard Life has been in Canada since 1833 and predates all of the other big insurance companies.”
But as two bigger providers become one, will it reduce innovation and competition?
Reid doesn’t think so. He explains since the Canadian market is small— especially when compared to the U.S.—providers large and small are fighting for scale. He says, moving forward, gathering more assets is going to be very important for providers, and this push will continue to drive a competitive marketplace.
As an example, Reid points to DC pension plans—which, he says, have historically been perceived as costly. Ten years ago, he explains, the average fee for a plan of 1,000 members was more than 100 basis points. Now, some providers have it down to 40.
“That’s because of competitive forces, despite the major consolidations that have happened over the last decade or so,” Reid explains. “So I think the evidence says that consolidation has not hurt the industry. In fact, it’s probably strengthened it by driving stronger productivity and lower costs—all benefits that have been largely passed on to the consumer.”
But Nigel Branker, a partner with Morneau Shepell, isn’t so sure. As he says, while the Canadian CAP marketplace is growing, it remains a relatively small market currently dominated by four large insurance carriers—Great-West Life, Manulife Financial, Standard Life and Sun Life Financial—followed by other much smaller providers (see Top 10 CAP Providers above, for this year’s ranking). With Manulife and Standard Life consolidating, the CAP market will be reduced to just three major providers. “I’d say this transaction is a good thing for Manulife and Standard Life shareholders, but less competition in any industry, especially between the biggest players, is rarely good for consumers,” explains Branker. “Also, it’s likely both companies are going to be distracted with integration issues as they try to figure out which products they’re going to keep, which ones they’re going to discontinue and which ones they’re going to merge. From that perspective, it may slow down innovation.”
On the other hand, Branker says this latest acquisition may provide a golden opportunity for smaller providers. Perhaps it will serve as the impetus for smaller carriers to further differentiate themselves by trying something different, sparking greater innovation to the benefit of CAP sponsors and members.
“We now have three jumbo carriers, one medium-sized different carrier and a bunch of smaller carriers,” Branker continues. “So it’s quite possible we’ll see a few of the smaller carriers come together to gain more market share. Or maybe some of the smaller carriers will get picked up by the larger companies one by one.” Oma Sharma, a partner with Mercer, says recordkeeping is a very competitive business, and scale matters to providers as they try to balance the costs of delivering services while remaining competitive. She says, in this market, bigger is better—the more economies of scale a recordkeeper has, the more competitive it can be.
Still, in her opinion, the amount of consolidation that has occurred over the last few years is concerning.
“I think there may very well be too much consolidation going on,” Sharma says. “As the bigger recordkeepers come together, money managers’ access to the DC space is becoming more and more challenging. Essentially, in order to access the DC market, they have to secure space on recordkeepers’ fund platforms, and this is harder when there are even fewer recordkeepers than before.
Another factor is the recordkeepers are themselves competing in the investment management space and may be less motivated to add new external manager funds in the future. Restricted fund choice is not good—most plan sponsors and members must choose funds from what is available through the recordkeeper and may not be able to gain access to best-in-class investment products and solutions.”
Ripple Effects
As companies of different sizes compete for CAP market share, it raises a key question: why does a plan sponsor choose one provider over another?
Jackie Patel, director, marketing and sales support, with Desjardins Insurance, says more established providers have more maturity in the marketplace—something some consumers appreciate. In her opinion, the downside can be a “cookiecutter” approach to solutions, while smaller providers fighting to gain market share typically differentiate themselves by being more flexible and innovative in their product and service offerings.
“I believe smaller companies truly have a fundamental value of placing people first,” explains Patel. “I know it sounds cliché, but I believe it’s a key difference of what separates a small provider from a large one. There is no one catch-all retirement solution, so why try to box people into something? Products and services need to be personalized and tailored to the client, and I believe smaller companies, in being more flexible, do a better job of that.”
Marcus Turner, a senior investment consultant with Towers Watson, says the size of the recordkeeper isn’t a significant factor when he helps a client choose a CAP provider.
“We don’t help a client decide on one over the other based on the size and its assets under its management,” he explains. “Generally, they all have the relevant capabilities and decent credit ratings in the Canadian market, so we tend to focus on matching a client’s preferences with the skill set of the right recordkeeper.”
He says a recordkeeper’s areas of expertise are generally a function of thecompany’s legacy systems and processes,coupled with where they have elected to reinvest their capital. Each recordkeeper has unique strengths reflecting its area of focus, which differentiates its suite of products. As an example, Turner says some recordkeepers put the focus on technology with a seamless, intuitive platform, offering the latest and greatest in technology to assist members in making investment decisions. Others, he says, make their priority to improve the one-on-one investment consulting experience. Clients will decide what makes the most sense for them and their membership.
Turner uses skiing as an analogy. “As a skier, you might decide your priority is to go down the hill as fast as you can, but for others, they might prefer something that can handle the backcountry,” he explains. “All skis will get you to the bottom of the hill, but you want to select the ski model that gives you the most enjoyable experience. Well, it’s the same with recordkeepers. They can all do the job, but they all do it somewhat differently.”
It’s too soon to tell how Manulife’s acquisition of Standard Life will alter the CAP market in the long term, or if there’s more consolidation to come. But, in the near term, it’s sure to make some waves.
Tony Palermo is a freelance writer based in Smiths Falls, Ont.
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