One primary difference in investment results for CAP members is that under the pooled GIA/GIC interest is credited at the average rate earned by the fund (e.g. if it is wholly invested in 5-year terms, it will be the average rate over the past five years), compared to an evolving averaging period that doesn’t reach the ultimate level until the member has been invested in the fund for a full cycle (e.g. 5 years, if 5 year GIAs are utilized). The difference will be favourable if interest rates are trending downward, or unfavourable if rates are trending upward. The difference becomes moot (at least conceptually) once a full investment cycle is completed, or if a member participates in the pooled GIA from inception of the fund.
The other important difference is that a member’s account in a pooled GIA/GIC the value will always reflect accumulated income, and early withdrawals will not generate any market value adjustments. The only exception to this would be on full or partial liquidation of a pooled GIA/GIC, the latter occurring if cash outflows exceed cash inflows plus maturities at such point in time. Pooled GIC holding would usually be settled in conjunction with deposits or re-investment of maturities (e.g. end of the month).
One significant disadvantage of a pooled GIA/GIC is the cost to run them. Since insurers view individual GIAs as more advantageous to them, they are reluctant to create a standard pooled GIA offering, which would dilute the costs of running a pooled GIA across a wide base of clients. Thus, they can only be established on a “one-off” basis, with maintenance fees charged by the administrator. Note that this is not generally an issue for pooled GICs on a trust-based administrative platform.
The problem of market value adjustments will still exist if the fund uses GIAs issued by the bundled provider; however this could be addressed by utilizing GIAs issued by a third-party institution. Also, pooled GIAs/GICs are eligible for Assuris or CDIC coverage if they are appropriately structured.
Regardless of whether a CAP sponsor opts to offer GIAs in pooled or individual formats, careful consideration should be given to the contractual terms. CAP sponsors of plans with significant asset volumes will find that insurers will be willing to negotiate some terms. Smaller plans may not be able to negotiate terms, but they should make sure they fully understand how GIAs work, so they will not be faced with unwanted surprises should they decide to change providers.
Greg Hurst is a Principal and CAP Practice Leader with Morneau Sobeco in Vancouver.
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