© Copyright 2000 Rogers Media. The following article first appeared in the March 2000 edition of BENEFITS CANADA magazine.

Industry

By Andrea Davis

To contribute, call (416) 596-5998, or FAX 596-5071

ACPM calls for action on retirement system

Canada's pension managers are calling on all Canadians to act on a looming retirement income crisis threatening to rupture Canada's old age security system.

The Association of Canadian Pension Management released a paper in January that lays out a list of initiatives it says need to be undertaken to deal with the baby boomer bulge moving through Canada's retirement system.

"We hope this report will jump start a national debate about how the national retirement income system will work," says Gretchen Van Riesen, director of pension and benefits policy at the Canadian Imperial Bank of Commerce in Toronto and one of the authors of the report.

The authors hope that debate will centre around the notion contained in the title of the paper, Dependence or Self-reliance: Which way for Canada's Retirement Income System?

According to the paper, the "ACPM believes that Canadians, once they understand what lies ahead, will choose to move their retirement system in a direction which is based on an understanding that those who are able must pay their own way. In other words, Canadians would move in the direction of less dependence, and more self-reliance."

If that position sounds familiar, it is. In 1997 the ACPM released a paper called A Retirement Income Strategy for Canada: Creating the Best Retirement Income System in the World, in which Canadian pension managers sounded a similar warning.

That document generated interest in the issue and led to some reforms of the Canada Pension Plan (CPP). But according to Malcolm Hamilton, a principal with William M. Mercer Limited in Toronto, those reforms weren't enough.

"The government did a good job on CPP, but that's only one-third of the entire system. We still have two-thirds of the problem," says Hamilton. "The government hasn't moved. There's more complacency now than there was five years ago."

The new paper hopes to offer some guidance. Among the recommendations:

• The authors argue that the upcoming federal budget surplus presents an unprecedented opportunity to cure the retirement system. The authors of the paper suggest new spending should be abandoned in lieu of paying down the public debt.
• Increase pension and registered retirement savings plan (RRSP) contribution limits so that they are in line with the U.S. and U.K. models. Eliminate the foreign content limit for RRSPs and pension plans.
• Revamp Old Age Security/Guaranteed Income Supplement. As it is, public pension and tax systems unfairly tax low-income earners to fund pensions for well-to-do seniors. Middle-income earners are also discouraged from saving for retirement.
• Allow higher RRSP contributions by members of corporate pension plans who, by the way, make do with fewer ancillary benefits than public employee pension plans.
• Work to create a uniform Pension Act to replace the patchwork quilt of legislation that currently exists.
• Legislate so that every investment fund is marketed to individuals under a board of governors required to act in the best interests of unitholders.
• Encourage Canadians to work longer and make financial wellness courses mandatory in primary and secondary schools.

But before a debate can take place on these issues, Hamilton stressed that the government needs to provide an aging paper so that the industry knows where it's at.

"We need an aging paper to understand the industry. That's what's missing from the government. We have no idea what the picture is, we're not even sure it [the government] knows how the system works," says Hamilton.

--Jeff Sanford

*** ***

Governance paper released

Pension fund regulators and industry representatives have communally drafted a set of governance principles--and with not a note of dissension.

The paper, Pension Plan Governance and Self-Assessment, is the outcome of a concerted effort among representatives of the Association of Canadian Pension Management (ACPM), the Pension Investments Association of Canada (PIAC) and the Office of the Superintendent of Financial Institutions (OSFI).

"I was pleased with PIAC and ACPM members on the committee. It worked so efficiently, it was amazing. We only had five meetings and we were able to deliver within a really good time frame," says Ron Bergeron, senior director of supervision at OSFI .

The document they drafted consists of a set of seven governance principles and a self-assessment questionnaire that can be used by fund managers to evaluate their own governance procedures.

"It is a self-regulating mechanism," says Bob Bertram, senior vice-president of investments for the Ontario Teachers' Pension Plan in Toronto and one of the authors of the report. "We're asking plan administrators to please look at your governance and see whether you have any shortcomings. And if you do have shortcomings, please address them."

The paper is an outgrowth of a process initiated in the mid-1990s, when PIAC, the ACPM and OSFI all published separate sets of governance principles.

Shortly thereafter, the Senate Committee on Banking, Trade and Commerce suggested the three organizations come up with a single set of principles.

"We did some test marketing on the self-assessment document, where PIAC, the ACPM and OSFI sent it out to some sample members," says Bertram. "Some did OK but some had issues to deal with. I guess that simply confirms the document should be out there and should be used." Bergeron agrees.

"So many times we see people on pension plan boards or committees who are good employees but know very little about administering the risk related to pension plans and frankly, these people are exposing themselves to lawsuits. One way to address that problem was to come out with a tool for pension administrators to help them better manage the pension plan," says Bergeron.

He also views the paper as an opportunity to implement the notion of industry self-regulation.

"The accountability has turned back to plan administrators where it belongs. It doesn't belong in the hands of the regulator," says Bergeron. "What we've done I think, is raise the bar with respect to the accountability and transparency of information. And I think that is to the benefit of all plan beneficiaries."

That's not to say OSFI can now close up shop, though.

"We will challenge the administrators who totally disregard the guidelines," says Bergeron. "In a couple of years, the committee will reconvene to do a survey across Canada of the adherence to the governance and self-assessment guidelines. If we see the message is not getting through then we're going to have to consider what other options are available. One option that will always be left open is to put these types of guidelines into regulations."

But OSFI would rather not play the heavy. "That is the last option," says Bergeron. --Jeff Sanford

*** ***

Securities industry needs restructuring

Ontario Securities Commission chair David Brown outlined his vision of the future of the securities industry in a recent speech to the Association of Canadian Pension Management (ACPM). He said that the regulatory structure is falling behind as legislation from a past era tries to keep up with a rapidly changing industry. That disparity is leading to inconsistencies in the marketplace, he said.

"Financial services regulation is not keeping up with the financial services market," said Brown. "Different financial service providers are regulated in different ways--even when they provide the same product."

Brown cited as an example registered retirement savings plans (RRSPs), which can be subject to different disclosure regimes, suitability standards, educational requirements and reporting requirements depending on where the consumer buys the RRSP.

A paper released by the Canadian Securities Administrators (CSA) examined the issue and suggested the provinces and territories administer market regulation (rules aimed at protecting consumers) while federal legislation should deal with prudential regulation (the rules aimed at reducing the risk of insolvency among financial institutions).

"Under this proposed regulatory regime, the same overall market regulation structure would apply to all financial service providers--including industries that are under the purview of the federal government," said Brown. "A combination of formal and informal agreements would produce a co-ordinated, harmonized regulatory structure across Canada."

While Brown said that the regulation of pension plans themselves are unlikely to be affected by the CSA proposals, he did indicate that group RRSPs and defined contribution plans may be the target of new regulation.

Convergence of the various investment sectors seems a sure thing, but there are still substantial differences between the retail industry and the pension services industry on fiduciary responsibility and the 'pension promise.'

Brown noted that the pension model could serve as a good model for other investment funds, an idea broached in the recent ACPM paper, Dependence or Self-reliance: Which way for Canada's Retirement Income System?

"The logic is there but what the final outcome of this will be is hard to envisage," said Gretchen Van Riesen, director of pension and benefits policy at the Canadian Imperial Bank of Commerce in Toronto, of Brown's speech.--Jeff Sanford

*** ***

Canadian drug laws part of U.S. Senate race

Canada's pharmaceutical laws are suddenly playing a part in Hillary Clinton's campaign to be elected to the U.S. Senate.

The U.S. first lady recently suggested in a speech that U.S. law be amended to allow New York state pharmacies the right to import Canadian brand name prescription drugs into the U.S.

South of the border, common brand name drugs cost twice as much as they do in Canada. Tour operators in the U.S. have already started organizing bus trips across the border so seniors can stock up on their prescriptions at lower prices.

The reason drugs are cheaper here is that in Canada, the price of prescription drugs is controlled by the Patented Medicine Prices Review Board, while the U.S. market operates on a laissez-faire principle of supply and demand.

Brand name drug makers are quick to point out the impact that lifting the import restrictions between the two markets would have.

Allowing the importation of drugs priced in a controlled market into a free market, they say, would lead to the end of drug manufacturers introducing new drugs into the Canadian market.

Economic theory aside, they also point out that Clinton seems to have ignored one important piece of the puzzle--Canadian law restricts the export of the drugs.

"She seems to think that Canadian price-controlled drugs, manufactured in Canada for the Canadian market, could be imported into the U.S. market," says Chris Ward, vice-president strategic planning and communications at Canada's Research-Based Pharmaceutical Companies, the industry organization that represents brand name drug manufacturers.

"I really don't see that it's a very workable solution. First of all I think what she is suggesting is that the U.S. legislation could be amended to allow the importation of prescription drugs, which is all well and good; however, I don't think she's in a position to amend Canadian legislation," says Ward.--Jeff Sanford

*** ***

Time lost due to illness to increase

William M. Mercer Limited's annual Fearless Forecast breakfast in Toronto last month provided employers with some new perspectives on employee health issues.

Anne Nicoll, a consultant with Mercer, presented the results of Mercer's Managed Time Loss Benchmarking survey.

The survey grew out of a desire to fill in the knowledge gap with respect to the costs employers incur because of employee absences. The study covered both occupational and non-occupational illness and found that 70% of costs for illness are attached to non-occupational illness.

But while the number of lost-time injuries has fallen over the last 10 years, Nicoll thinks that trend has bottomed out. She identified four trends she says will work to drive absences up over the next few years.

The prime driver of the increase will be an aging population.

"What is often not well recognized is that, even before retirement, illness rates increase steadily with age," says Nicoll.

The second trend is the increased waiting times that continue to plague the healthcare system. Nicoll quoted a 1997 report by the Fraser Institute that found waiting times for appointments with specialists increased 27% from 1993 to 1996.

The third reason employees may be absent from work has to do with increased stress among workers. "The drive to be globally competitive has led to reorganizations, mergers and acquisitions," says Nicoll. "There is a human side to all this change--job uncertainty and increased or changed job demands create strain on employees."

Nicoll pointed to a survey of Canadian insurers' long-term disability (LTD) books of business that showed a steady increase in the proportion of LTD claims for mental disorders. They rose 37% between 1992 and 1996. Nicoll says that some 30% of LTD claims Mercer deals with are related to mental health.

The fourth trend she says may drive employers cost for lost time is the nature of current illness and injury insurance. Most of the programs directed to non-occupational illness are about income replacement. That means they focus on paying the employee to be off work rather than working to get the employee back to work.--Jeff Sanford

*** ***

Bayer Care no longer

The healthcare division of Bayer has announced that it will be shutting down its health wellness program, Bayer Care.

According to Lisa Milburn, a communications specialist with the company, a business review of the program prompted the decision to get out of the wellness business.

"We've decided to close down the program. Bayer decided it was outside of our core business," says Milburn. "We have pharma-diagnostics and biologic [divisions], and we decided we'd concentrate on those rather than the health wellness business."

The program, sometimes operated in partnership with Manulife, ran for about three years. But the company soon discovered what kind of commitment was necessary.

"This was something we took on a as a pilot. It was really an experiment to us, to get into it and understand it," says Milburn. "Once we did get into it and began to understand how much was involved to keep up with technology, we realized it was too big of a business to get into full-force, at least for Bayer."--Jeff Sanford

*** ***

Penad goes global

Kitchener, Ont.-based Penad Pension Services Limited is having success delivering the Canadian pension model to the Carribean.

Since last September, Penad has operated in the Caribbean islands through a spin-off sister company known as Penad Caribbean N.V., based in Willemstad, Curaçao.

Traditionally, residents of the Caribbean take a fatalistic view of the world, wondering whether they'll have resources for tomorrow, let alone 30 years down the road, according to Hank Cotton, director of benefits at Penad in Kitchener, Ont. But as local economies develop and mature, many homegrown businesses are beginning to see the need for pensions.

"Many of the islands are addressing the need for pension plans for their people as are corporations that have pension plans that operate down there. It's like what Canada was back in the '70s and '80s," says Cotton.

For now, Penad has the market to itself, but Cotton doesn't expect that to last.

"Eventually the competition will show up. It never takes long these days. The consulting community can't ignore a market like this," he says.--Jeff Sanford

*** ***

CORRECTION

"Shake up at Comstat" (Industry section, February 2000), incorrectly identified Andrew Dawson of Comstat Capital Sciences in Vancouver. Dawson is the new chairman of the board.

"Multi-employer plans concern OSFI" (Industry Section, January 2000), incorrectly identified the Office of the Superintendent of Financial Institutions.

*** ***

NEWS ARCHIVE

Here's a selection of news headlines that appeared on the benefits canada Web site last month.

• ACPM report suggests board of governors for all investment funds
• Hamilton continues to slam government
• CDNX launches new sector indexes
• CPP to invest another $663 million
• Caisse to invest in talent

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."