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

Industry

By Andrea Davis

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Bill 27 raises concerns

Changes to the Pension Benefits Act of Ontario that allow individuals facing severe financial hardship or those with shortened life expectancy to commute the value of their pension savings, have raised concern in the industry that plan sponsors may soon be funding new liabilities.

The new provisions are contained in Bill 27, which was passed by the Ontario legislature in December. Previously the option to commute the value of a pension in cases of shortened life expectancy only extended to individuals younger than retirement age, or to those in retirement age if the plan sponsor wrote that option into their plan. This bill makes that option mandatory.

The government is also expected, within the next month, to proclaim that certain individuals suffering severe financial hardship will be able to commute the value of their pension under certain strict guidelines. The exact definition of severe financial hardship is not yet clear.

These new provisions, initially introduced with little fanfare, have begun to generate debate within the pension industry as plan sponsors realize they may be facing new liabilities. The concern centres on what actuarial assumptions will be used to calculate the value of the pension paid to those commuting under the shortened life expectancy option. The government has yet to define the actuarial assumptions.

"What do you pay them out?" asks Murray Gold, a lawyer with Koskie Minsky in Toronto. "That hasn't been determined, and that's something very controversial about this. If you're paying them out the value that they would have had if they would have lived to a normal retirement age then your whole mortality equation is thrown up in the air and your plan becomes a lot more expensive."

The concern is that if a so-called mortality table for healthy individuals is used there will be a "windfall" to the pensioner, and a corresponding cost to the pension plan.

According to Bruce McNaughtonat the Ministry of Finance, though, the government is listening to the concerns of plan sponsors.

"We're looking at the possibility of prescribing a standard for calculating this for people with shortened life expectancy so that this isn't going to involve a large cost for the pension plans," says McNaughton. "You don't want a dispute between the plan and the member, so we're looking at putting in a provision which would make it clear how you do the calculation, to ensure that it is broadly cost neutral."

Beyond the cost issue there is also concern about what will happen to an individual who beats the odds and lives beyond the time their doctor thought they would. Presumably these individuals would find themselves struggling in old age without a pension. Allowing that possibility, says Gold, fundamentally changes the definition of a pension.

"You've changed the idea of what a pension is," says Gold. "You're no longer providing pensions to everybody as long as they live, you're providing people with some kind of account and if they know they're going to die early then they can pull the money out of that account."

McNaughton doesn't dispute that interpretation, but he says there's a philosophical argument about whether or not it's correct.

"I think many in the Ontario cabinet are of the view that the pension system is pretty paternalistic. People have choices made for them and they should be able to make the choices themselves," he says.--Jeff Sanford

Versus acquires Fairvest

ersus Technologies Inc., a Canadian provider of electronic trading services, has announced it will acquire Fairvest Securities Corporation, a Toronto-based brokerage firm that specializes in Canadian corporate governance research.

The move marks a new strategic direction for Versus, which has been busy pulling institutional clients onto its electronic trading network.

"It's the beginning of a small but significant step into the content space," says Nigel Etherington, vice-president for strategic business development at Versus. "We have been looking at opportunities, not just within the trade execution technology focus, but more broadly in the pre-trade and post-trade decisions support area."

As for the decision to acquire Fairvest, Etherington says the company was a natural choice.

"Fairvest was looking for ways to augment its growth and that's how we started talking," says Etherington. "Fairvest, which has a strong reputation in Canada for being fair and independent in corporate governance research, has a product that has a good overlap with our existing client base."

The acquisition should work out well for both parties. "The products they do have, a proxy review service and a proxy voting service, are offerings that are paper-based and will benefit from electronic distribution," says Etherington.

The deal, subject to regulatory approval, is expected to be finalized this month.--Jeff Sanford

U of T launches asset firm

he University of Toronto is set to launch an asset managment corporation to focus on producing better returns from the almost $4 billion in pension, endowment and operating assets that the university currently has under external management.

"The number one thing we want to do is expand our staff and bring in more professionals," says Robert White, chief financial officer of the University of Toronto. "By enlarging the staff we'll be better equipped to engage, monitor and manage external managers."

The new entity will be known as the University of Toronto Investment Management Corp. Robert Korthals, chairman of the board of the Ontario Teachers' Pension Plan Board and retired president of Toronto-Dominion Bank, has been named chairman of the board of the new entity. The search is still under way for a chief executive officer.

"The investment world is changing dramatically day by day and we want to be able to ride with that and look for opportunities, particularly in the area of private equities and alternative investments," says White.

Eventually, he says, the university hopes to manage its money internally.

"The last two or three years have not been good times for value managers, so that's an area of concern," says White. "As well, by changing from an investment committee to a real board of trustees, it makes a difference in how everyone looks at their role. If you're asked to be a volunteer member of an investment committee or asked to join a board of directors, would you see a difference?"

Most of the money under management will come from the university's fully-funded $2 billion defined benefit pension plan.--Jeff Sanford

Record year for VC

The venture capital (VC) industry in Canada set a record in 1999 for financings, with $2.7 billion invested in 1999 in speculative, start-up enterprises--an increase of over 60% from 1998.

The figures are from the Canadian Venture Capital Association's (CVCA) annual survey of venture capital investment. Although the number of financings was down from 1998 (989 financings in 1999, down 8% from 1998) the survey found that the average size of those financings was up, from $1.5 million in 1998 to $2.8 million in 1999.

According to Ron Begg, president of the CVCA, the numbers reflect the development of Canada's new economy.

"It's another record year," says Begg. "The deals are getting larger as the new economy takes hold."

Within Canada, the emphasis on the new economy is reflected in how the numbers break down by province. The high tech industrial pockets around Ottawa and Kitchener-Waterloo accounted for much of the action, giving Ontario 46% of the disbursements by province. Slicing the numbers by sector, $2.2 billion went to financing technology-related companies. That's 80% of the total, up from 68% the year before.

While those numbers suggest Canada is finally developing a computer-based, Silicon Valley culture similar to the one that exists in the U.S., the size of the deals still trails the numbers of our neighbour to the south. The average size of a deal in Canada was almost $3 million, while the average size deal in the U.S. was about $10 million.

Nevertheless both Begg and Mary McDonald, one of the authors of the study, extoll the growing culture of venture capital in Canada.

"The Canadian VC industry is not only getting bigger, it is also becoming more knowledgeable, more specialized and more sophisticated," says McDonald.

Begg and McDonald hope that the developing industry will attract more institutional players to the VC market.

Traditionally, pension funds were the main source for venture capital in Canada but many pension funds wereburned in deals in the late 1980s and the industry went through a nuclear winter in the early 1990s as institutional firms abandoned the market.

"I think there's a real issue here," says McDonald. "A handful of large funds are investing and the rest are sitting on the the sidelines. "

If more pension funds are to be attracted to the market, a couple of hurdles need to be cleared first. As it stands, the Canadian VC industry differs sharply from the U.S. industry in how it is structured. In Canada, most venture capital flows through labour sponsored funds (50%), a wholly Canadian phenomenon. Only 17% of VC deals are done by corporate entities. In the U.S., the bulk of venture capital comes from pension funds, channeled through gatekeeper VC firms.

Those gatekeeper firms, which take care of the leg work for the funds, have failed to materialize in Canada and it's up to the pension funds to do the research themselves.

"I was talking to a mid-size pension fund and they said that to pay for the cost to develop the expertise needed to manage what would probably only be 2% of their portfolio, was not worth it," says McDonald.

Along with the fact that the Canadian VC market may be too small for some pension funds to get involved, it also suffers from a lack of data.

As it is, only solid figures for the labour sponsored funds exist. That will change this fall, though, as the CVCA has hired McDonald to put together complete return results for the venture capital industry as a whole. Once those figures are available, McDonald hopes to see movement from plan trustees, some of whom have been showing interest after hearing about triple-figure returns in the U.S.

"Pension fund trustees are now looking at the increasing rate of returns being made in the U.S," says McDonald, "and they're wondering if they should get involved."

--Jeff Sanford

New diabetes drug

Health Canada has approved a new drug to treat type 2 diabetes. Avandia, developed by SmithKline Beecham, is the first drug available in Canada that directly treats insulin resistance, a major underlying factor in type 2 diabetes.

Avandia directly decreases insulin resistance, which allows the body's own insulin to work more effectively to lower blood sugar levels. In addition, the medication may lower blood pressure and improve lipid levels, which decrease the risk of heart disease.

The drug, taken orally once a day, is the first treatment in a new class of oral anti-diabetic agents.

"We would ask provincial governments to look positively at a review and potential support to include this new classification of drugs on the formulary listings," says Martin McInally, senior manager, media relations with the Canadian Diabetes Association in Toronto.

Health Canada approved the drug based on a priority review of data from clinical studies involving more than 4,500 patients with type 2 diabetes.

The studies show that Avandia effectively lowers blood sugar levels of patients and maintains blood sugar control for up to 12 months. Managing blood sugar levels is a key component in delaying or negating the onset of some of the complications associated with the disease, such as blindness, heart disease, kidney disease and lower limb amputations.

Type 2 diabetes accounts for 90% of diabetes cases. More than two million Canadians are affected by the disease, according to the Canadian Diabetes Association.

"The number of individuals that will be developing type 2 diabetes is going to increase dramatically as the population ages," says McInally. "In Canada, we're looking at almost a doubling of cases by the year 2010."

A two-milligram tablet of Avandia, sold in bottles of 60, costs $1.23.

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."