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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
Industry
By Andrea Davis
Public programs key for elderly
new research paper released by the Canadian Labour Congress (CLC) exploring the extent to which retired
Canadians depend on government-run income retirement programs has found that, for many Canadians, those
government programs are the most important source of retirement income.
In that sense, the study works to refute aspects of the recent Association of Canadian Pension Management
paper that called for changes to government sponsored income retirement programs, says one of the authors
of the CLC paper.
"Much of the ACPM [paper] seems to be premised on a view that the elderly are doing as well, if not better
than they should be," says Bob Baldwin, director of the social and economic policy department at the CLC in
Ottawa. "That is a conclusion I don't share. We know from our research that the Old Age Security and
Canada/Quebec Pension Plans are the most broadly based sources of income of older Canadians. So any cut to
those programs is going to have a broadly based negative impact on older Canadians. I see the elderly
starting out with incomes that are somewhat substandard and I see any cuts being really threatening."
The paper, co-authored by Pierre Laliberte, of the United Steel Workers of America, was written with the
intent of documenting changes in the amount and sources of income received by Canadian retirees. Baldwin
says he was taken aback by the extent to which Canadians rely on government-run retirement income programs.
"I was surprised at the magnitude of the numbers," says Baldwin. "In 60% of the elderly households with the
lowest incomes, you've got more than half of all income coming from Old Age Security (OAS) and Canada
Pension Plan (CPP). You have to get up to the highest 10% before those programs provide less than 30% of
income."
"I knew they were important sources of income but I think they proved to be more important than I
realized," he says.
The average income of elderly retired Canadians rose from $22,468 in 1973 to $32,667 in 1989 before falling
to $31,834 in 1996. Within that gross, the average amount of C/QPP income grew from $620 in 1973 to $5,678
in 1996 while the average amount of pension and annuity income grew from $2,344 to $7,098. Investment
income grew strongly from 1973 to 1989--from $3,772 to $7,014--and then fell to $4,113 in 1996. Income from
OAS and the Guranteed Income Supplement remained relatively stable, rising from $6,896 to $7,887.
But the authors are careful to note that the numbers rest on some delicate economic factors. Low inflation,
high returns on investments and slow real economic growth make the numbers look better than they would in
other economic circumstances, says Baldwin.
"The economic conditions that have been prevalent over the last 15 years have helped improve both the
absolute and relative living standards of the elderly," he says. "First, we've been through a fairly long
period of fairly low inflation, and that's important because a lot of the workplace pension income remains
unindexed, or at least not fully indexed to price changes. Second, we've been through a period since the
beginning of the 1980s of very high rates of return on financial assets. Those high rates of return on
financial assets have made a direct contribution to individual investment income. Indirectly they've made a
very important contribution to workplace pension income."
Baldwin adds that since at least the beginning of the '80s, Canadians have lived through a period of
relatively slow real economic growth. "That's helped buoy up the real economic situation of the elderly,"
he says. "And it does so mainly because the incomes of the non-elderly haven't grown as we would expect
them to in a period of more rapid real economic growth."--Jeff Sanford
*** ***
Moody's warns of default
ne of the world's foremost investment rating services expects the governments of the industrialized world
to renege on their pension promises.
The report from Moody's Investors Service in New York, Public Sector Pensions In Industrialized
Countries: A Rating Agency Perspective, was delivered by Vincent Truglia of Moody's Sovereign Risk Unit
at a January conference in New York.
"We have concluded that it is impossible for nearly every major developed nation to meet presently promised
public sector pensions, including promised healthcare for seniors, without facing changes in future
benefits," said Truglia in his remarks.
Truglia went on to say, though, that pension defaults are not viewed as seriously by the public as a breach
of promise by a government on its bond obligations. As a result, the looming crisis has not caused Moody's
to move on its ratings. All of the G7 countries maintain a relatively high rating of between Aaa and Aa3.
"Moody's has concluded that the risk of default by these governments on their debt obligations is
relatively low," said Truglia. "We expect all of these governments to change their pension system in the
future before the debt levels become unacceptably high. For us, it is not a question of 'if' but rather
'when.' "
Nevertheless, the report strikes some dark notes. It subtly warns those countries that have not taken it
upon themselves to ensure sustainability of their pension systems that action needs to be taken if they
want to maintain their high credit ratings.
"In those countries with sizable pension promises still in place, and with unfavourable demographics, the
time horizon for any potential rating action would have to be sooner rather than later," said Truglia.
But Catherine Drummond, director general, program policy and planning, income security programs with Human
Resources Development Canada in Ottawa, doesn't believe the Moody's report applies to Canada.
"I think they make a couple of wrong assumptions. They talk about how they expect industrial nations to
default on their pension promises but they're making an assumption that the pension promise that a
government gives to its populace means no social program will ever change. I don't believe that's what the
promise is," she says. "I think you promise your populace a level of social programming in line with what
the populace wants and in a democratic country that does change from time to time."
That said, Drummond thinks the government has made the changes necessary to ensure the Canadian income
retirement system is sustainable.
"I would say that Canada is in very good shape because we were one of the first of these countries to
recognize the problem and undertake reform in public pensions," she says. "In fact in 1996, the OECD
country study they quote in this [Moody's report] gave Canada a pretty good rating even then, and this is
before they had taken into account the reforms we did in 1998."
Drummond cites the government's decision to raise the Canada Pension Plan (CPP) contribution rate and the
creation of an independent investment board to invest CPP funds in the market as steps the government has
taken to achieve sustainability.
"The actuarial reports on both the CPP and the Old Age Security show them as being completely manageable as
the population ages," says Drummond.--Jeff Sanford
*** ***
WTO patent rulings
everal recent rulings by the World Trade Organization (WTO) will rewrite the structure of Canadian drug
patent laws. But what kind of effect that will have on the price plan sponsors pay for drugs depends on who
you talk to.
Under the ruling, Canadian patents on some brand name drugs will be extended to bring them in line with
international standards. The case was brought before the WTO by the United States.
Jim Keon, president of the Canadian Drug Manufacturers Association (CDMA), estimates the ruling will affect
about 25 drugs and cost consumers a total of $200 million.
"Any of your sponsor programs that take advantage of low-cost medicines, some of those will be delayed in
getting to market. That means higher drug costs because you will have to pay for the brand product for a
longer period of time," says Keon.
But Anie Perrault, director of communications and public affairs for Canada's Research-Based Pharmaceutical
Companies (the industry association representing Canada's brand name drug manufacturers), says that number
is way out of line.
"We think the CDMA is right in saying between 25 and 30 patents are affected, but out of these patents only
a few will actually come to market. There are a lot of patents that are never going to be commercialized,"
says Perrault. "A survey we conducted within our companies found only two medicines currently on the market
will be impacted by this decision."
"These two medicines, Pravachol and Monopirl, represent less than 2% of the whole pharmaceutical market in
Canada," adds Perrault.
The CDMA's Keon was pleased, though, with another WTO ruling on drug patents in a case brought against
Canada by the European Commission (EC). In that case, the EC was hoping to prevent generic drug
manufacturers from developing, and then pushing through trials, drugs that are still under patent. As it
is, generic drug companies can develop their products, put them through clinical trials and submit them to
Health Canada for approval during the patent term so that at the end of the patent the product is ready to
come on the market. The WTO ruled that Canadian generic drug manufacturers can continue doing this.
"That was a very important victory for us. It doesn't make our life any easier, because we've always done
that, but if we had lost that decision I think it would have delayed the entry of generics on to the market
by three or four years. That would have really put the domestic generic drug industry into peril," says
Keon.
The WTO did rule against the practice of manufacturing and then stockpiling newly developed generic drugs.
During the last six months of a patent, generic drug makers would manufacture and stockpile their product
so that it was ready to ship on the last day of the patent. The WTO says that practice isn't consistent
with international standards.--Jeff Sanford
*** ***
U.S. reviews ERISA
s part of a review of the Employment Retirement Income Security Act (ERISA) by the U.S. government,
employers and employee groups are clashing over whether or not employers should be able to offer investment
advice to their employees.
Consumer groups, unions and corporate representatives appeared last month before the Education and
Workforce Committee on Capitol Hill to overhaul the ERISA provisions--legislation which hasn't been
reviewed since it was adopted in 1974.
Corporate representatives urged Congress to significantly lessen the rules surrounding a company's ability
to give investment advice to employees enroled in defined contribution plans. Consumer groups and union
representatives cautioned Congress to be careful. They argue that conflict of interest will harm workers.
They worry objective investment advice would dissolve in the face of big mutual fund companies--the same
ones who provide options in retirement accounts--stepping in to offer advice.
For their part, the corporate groups, and several U.S. senators, contend that the 55 million Americans
enroled in defined contribution plans are asking for, and need, good investment advice about their pension
plans.--Jeff Sanford
*** ***
Perigee acquired
ne of Canada's largest homegrown asset management companies has announced it will merge with a U.S.
brokerage firm to ensure it isn't left behind as Canadian plan sponsors increasingly look south for asset
managers.
Perigee Inc. will ask shareholders to agree to a merger between itself and U.S. asset manager Legg Mason.
According to Alex Wilson, the chief executive officer and managing principal of Perigee, such a deal is
necessary to keep up with the demands of clients.
"It was important for us to be able to position ourselves with products that meet client needs for
international management, be it U.S. or international," says Wilson. "In this day and age, that requires
feet on the ground in the countries in which you're going to invest."
Under terms of the agreement, Legg Mason will acquire all of the outstanding shares of Perigee, while
shareholders of Perigee will receive approximately 8% of the shares of Legg Mason.
According to the BENEFITS CANADA 2000 Top 40 Money Managers survey, Perigee is the seventh largest asset
management firm in Canada with $13.8 billion under management.
"It's pretty clear that Canadian plan sponsors are moving more and more toward hiring U.S. managers for
U.S. assets," says Wilson. "We know what drove us and we thought it was an industry dynamic that affects
everybody in the industry."
The industry dynamic Wilson refers to is the problem of a concentrated and narrow market, especially in the
technology sector.
"Most plan sponsors are looking at the problem of value managers, where there's been the emergence of a
market with different characteristics," says Wilson. "Those with value styles tended to underperform and
plan sponsors are quite clearly moving to find alternative outcomes that give better performance."
Perigree shareholders are slated to receive .387 of a share of a new company, Legg Mason Canada Holdings,
for each Perigee share, assuming the price of Legg Mason stays stable until the deal closes.
Legg Mason will pay close to $208 million in total for Perigee. Perigee shareholders will be asked to
approve the deal at a meeting in May.--Jeff Sanford
*** ***
VaR services offered online
oronto-basedRussell/Mellon Analytical Services has teamed up with Measurerisk.com to offer value at risk
(VaR) reporting and portfolio stress testing services to its clients.
Measurerisk.com is a New York-based company that has developed a system to measure the potential losses of
institutional funds and deliver those reports over the Internet.
According to Andrew Lapkin, chief executive officer of Measurerisk.com, many of the custody banks are
feeling pressure from their clients to offer enhanced analytical services, a trend that bodes well for his
business.
The recent task of Measurerisk.com has been customizing VaR for use in institutional funds.
"One of the problems with VaR when we went to set this up is that the way it was being used inside major
banks was not appropriate for most pension funds," says Lapkin. "You really have to do things a little bit
differently. The focus at Measurerisk.com has been to take VaR and apply it in a way that makes sense for a
pension fund."
The firm has also focused on providing VaR measurements for pension funds that use derivatives, a course of
action Lapkin thinks will allow alternative investment strategies to gain wider acceptance in the pension
fund community.
"A lot of pension funds have put strict guidelines around managers with respect to what they can and cannot
do," says Lapkin. "If your concern is, 'I'm afraid they could use them wrong, or I could take on too much
risk,' with VaR you are able to monitor that and so you can rest assured that you have control over your
portfolio and that the risk level is appropriate."
Measurerisk.com will also work with Russell/Mellon to merge the two firms' reporting capabilities.
"We will be able to offer a set of reports that combine performance and attribution information with VaR
stress testing information for a comprehensive view of where a client's portfolio stands," says
Lapkin.--Jeff Sanford
*** ***
www.benefitscanada.com
Here's a selection of news headlines appearing on the Benefits Canada Web site. To view the full stories,
visit www.benefitscanada.com/archive.html
The Caisse: tax cuts don't go far enough
ACPM reaction: budget incomplete
Ontario doctors concerned about aging population
United Nations report on aging populations and immigration released
Corporate disclosure behind the times in Canada
*** ***
Correction
In the Defined Contribution Plan Summit 2000 special report in the March 2000 issue of BENEFITS CANADA,
Sherallyn Miller was incorrectly identified as chair of the Joint Forum of Financial Market Regulators. The
chair of the Joint Forum of Financial Market Regulators is Dina Palozzi, superintendent of financial
services, Financial Services Commission of Ontario.
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