Numbers Game
Of course, there are a number of other concerns facing CAP providers. There has been a trend toward smaller investment menus (less than 15 options) among new plans. “Even existing plans are reducing the investment options that they make available,” says Kyle. (A 2003 U.S. study by Iyengar, Jiang and Huberman indicated that the more funds available, the less active members become.) Campbell agrees. “People are acknowledging that engaging someone to become an investment expert is highly unlikely,” she says. “They’re designing fund lineups that set the average person up for success.”
The debate over pension reform and retirement incomes is another issue for CAP providers. Reid says Sun Life has been looking seriously at one solution in particular—a multi-employer DC pension plan. “If there are 11 million Canadians who are not covered by a pension plan, at least part of the problem is that smaller employers don’t have the HR infrastructure to support and manage a plan,” he says. “If you could create one plan that other smaller employers could join, it would mitigate those concerns.”
Another area, which worries Moir, is savings. Many Canadians do not max out or contribute enough to their RRSPs. This year, Canadians can contribute 18% of their previous year’s earned income to a maximum of $21,000. However, unless they are high wage earners, many Canadians do not contribute that much. According to Government of Canada statistics on filing tax, the median Canadian RRSP contribution in 2008 was $2,700.
“Telling people [as per the ABC plan] that we’re going to mandate that you must put this plan in and contribute more to it…to me, it’s almost another tax for a plan sponsor; another cost that, in this environment, they may not be prepared to absorb.” But, Moir continues, if there are ways to make this more cost-effective and ways to find tax incentives, participation might increase.
Consolidated Providers
While there are many providers across Canada, many in the CAP industry would agree that the market is dominated by four very large ones. Nevertheless, there is movement within the industry.
In October of last year, Great-West Life acquired Fidelity Investments’ $2.2-billion group retirement and savings plan recordkeeping business. And, in November, BMO announced that it has completed the acquistion of Integra’s group retirement recordkeeping.
While providers tend to see this as a reflection of the natural business cycle found in any industry, there are many opinions as to what it might mean. “I think there’s a growing realization that it’s really important for a service provider to have a significant asset base in order to afford the ongoing investment that’s required to meet the increasing expectations of plan sponsors and plan members,” says Kyle. It’s a scale game, and many smaller providers may find it is difficult to compete, he continues. Williams agrees. “We’re seeing a similar shaping of the landscape in Canada to what we saw in the U.S., with most of the DC recordkeeping business being run by a small number of very large providers.”
Leblanc says consolidation was expected for a number of reasons. “First of all, the Canadian marketplace is very small compared with the U.S., in terms of the number of people served with DC and also the fact that the penetration rate of DC is only 8% compared with 56% in the U.S., and it is very well covered by the providers.”
However, Leblanc continues, “as in recent events, future consolidation will continue to happen for effectiveness gain rather than market revolution.”
Michael Chwalka, head of institutional sales with SEI Investments Canada, says that some of the larger providers will now be in a better position to provide customized solutions. “Recordkeeping has become a commoditized service and, therefore, companies feel they need scale in order to compete,” he says. “Lack of scale in the past prohibited many companies from responding to special requests. The impact of consolidation will perhaps allow them to be more open and eager to provide greater flexibility and customization.”
While Chwalka admits this may put more price pressure on the smaller providers, he says it doesn’t necessarily mean the “death” of smaller providers. “Many of the smaller firms differentiate themselves based on personal service to remain competitive,” he says. “I don’t think they’ll be squeezed out of the market, as long as they step up to the challenge of differentiating themselves, perhaps as a specialist provider in a specific sector of the market.”
Debating the DC Trend For a number of years, defined benefit (DB) pension plans have had a rough time. And for those same number of years now, we’ve heard that defined contribution (DC) plans are the way of the future. But has the expected shift from DB to DC actually occurred? In a recent survey by Watson Wyatt, the solvency ratio of a typical Canadian DB plan was at 80% by July 2009, up from 61% at February 2009. This can be attributed to several factors, including greater yields on government bonds and higher returns. However, even though the federal and some provincial governments have introduced solvency relief measures, DB plan sponsors are still worried. According to Watson Wyatt’s 2009 Pension Risk Survey, 30% of publicly traded Canadian companies are considering changing their current DB plans to some form of DC arrangement. “We’re definitely seeing more plans come to market where they look like a startup DC plan, but the case is really that the DB plan has been capped to new entrants or [plan sponsors] have frozen their DB benefits and all their go-forward contributions go toward the DC plan,” says Nancy Campbell, assistant vice-president, marketing, group savings and retirement solutions, with Manulife Financial. “Maybe not at the rate that other countries have seen, but [it’s] definitely starting.” There has also been more discussion about DB to DC conversion over the last year, according to Damon Williams, president of Phillips, Hager & North Investment Management Ltd. (part of RBC Global Asset Management). “When markets fall as much as they have over the last year, any funding stress becomes sharply highlighted,” he says. “The issues that have been causing the erosion of the DB plan marketplace—the funding volatility, the ultimate cost of funding [the plans in] a low interest rate environment—have been around for a while, but they’ve probably been stepped up on the priorities of many plan sponsors.” Issues such as how quickly plan sponsors are asked to fund any shortfalls or how high the minimum required level of funding is may affect the appeal of DB plans to plan sponsors, and that’s something regulators need to be sensitive to, adds Williams. “DB plans are a great tool, a great component of our overall retirement system. We need to make sure we’re very careful that we don’t drive plan sponsors or force plan sponsors, through poorly designed legislation or regulations, into making decisions that are not in the best long-term interests of the Canadian workforce.” |
Into the Future
Despite recent challenges, CAP providers are being quite optimistic. “We are helping millions of Canadians save for retirement. There are several thousands of employers with whom we work who are endorsing the CAP business model in Canada—and that’s not changing,” says Reid. He adds that about five years ago, Sun Life would have had roughly 600,000 plan members; now it has more than one million. “That in and of itself is a strong endorsement of the need for and the efficacy of the CAP model.”
However, in the current discussion and debate around retirement savings needs, there are a number of questions. Should saving for retirement be a purely private sector solution? Should there be more public sector involvement? What’s the role of the recordkeeper? Is there going to be an increasing role for guarantees or, potentially, hybrid plan designs?
But the CAP industry has a sound foundation for any changes. “We’ve already got the whole infrastructure built in the CAP industry,” says Reid. “We’ve got the call centres ready, the websites built and the investment platforms built. And we’re doing it without any reliance on any taxpayer dollars.”
With pension reform in the news—and the strife over DB plans such as General Motors just as prominent—there may be more opportunity for CAP providers, according to Moir. “Change means opportunity. And I think the CAP industry—being so competitive and so innovative—will jump into that gap.”
From an industry standpoint, Moir says, the governments that want to leave the industry out of the pension reform discussion are missing the mark. “Look at our industry, the insurance companies and the investment firms,” he says. “Great tools, products, the ability to get educated, the ability to get advice—there’s a massive network across the country.”
Brooke Smith is associate editor of Benefits Canada.
brooke.smith@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the December 2009 edition of BENEFITS CANADA magazine.