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

2000 Defined contribution plan report

It was a banner year with 31% growth in the DC plan market. Meanwhile, consolidation is transforming the provider landscape.

By Kathryn Dorrell

This year's 8th Annual Defined Contribution Plan Report features a change in terminology. Formerly this report was known as the Money Purchase Plan Survey. benefits canada has now adopted "defined contribution plan" as the umbrella term for money purchase pension plans (formerly called defined contribution pension plans), group RRSPs, DPSPs, etc.

CONSOLIDATION. That's the word on everyone's lips in the defined contribution (DC) plan market these days. The battle for market dominance has taken an aggressive turn with Canada Life Assurance Company's purchase of the group savings business of TD Canada Trust (owned by TD Bank Financial Group), which comprises administered assets of $5.1 billion. The deal, which was struck in November but had not been approved at press time, puts Canada Life among the market leaders--doubling its group retirement business to an impressive $10.2 billion.

This industry is no stranger to consolidation. The Canada Trust block of group business, for instance, has changed hands for the second time this year. The first change took place in February when TD bought the trust company.

But the latest deal is more than simply another change in ownership. With Canada Trust--one of the long-standing leaders and most significant players in the industry--now out of the group savings picture, the landscape of the sector is being redefined.

"The Canada Life and TD Canada Trust consolidation is really just the tip of the iceberg," says Mary DePaoli, assistant vice-president, national marketing and sales with Sun Life Financial's group retirement services in Toronto. "I think what we will see over the next 12 to 24 months is fewer, larger players that focus on recordkeeping as a core competency in their business, much like the consolidation that occurred in the custodial business."

TD's decision to sell off the group retirement business--which administers money purchase pension plans, group retirement savings plans as well as profit sharing and stock plans--was largely driven by a reassessment of its core competencies. "We were not growing as fast as we would have liked and couldn't convince ourselves that the investment [in the DC market] was warranted," says Fred Tomczyk, president and chief executive officer of TD Wealth Management in Toronto, who comes from the Canada Trust side of the business.

"As much as anything this was about being focused," adds Tomczyk. "We spend a lot of money on technology and couldn't convince ourselves this [DC side of the business] was the best place to put this resource. When you have a leadership position, either you invest to continue it or you sell it."

Ed Weinstein, a partner with Brendan Wood International in Toronto, says TD hadn't made much of an effort to integrate Canada Trust's DC business into its operations since acquiring it 10 months ago."The DC market involves a lot of recordkeeping and high-end clients that are demanding. This doesn't fit in with what else TD does. I don't think they felt the margins were there," he adds.

Does the exit of a major financial player from the DC scene mean that the group retirement business isn't worth investing in? Not at all, says DePaoli.

"This is an industry with 30% growth in assets. Companies that focus on this business and invest in it will get the level of returns they are looking for," she says. DePaoli does believe, however, that the competitive environment and nature of the business means that providers must be committed to servicing the market in order to thrive. "Group retirement providers do need to take a hard look at the asset administration part of the business. With demands for technology and education increasing, it's a big role to fill and you have to be serious about investing in the business."

Canada Life's purchase of TD Canada Trust's group business certainly demonstrates its commitment to the market. The insurance giant gave up its property and casualty business to secure the deal with TD. "Canada Life is prepared to make the investment in recordkeeping and a high level of service to members that costs a lot of money," says Alex Harvey, vice-president of investments and pensions at Toronto-based Canada Life.

Ken Richards, assistant vice-president of marketing with Canada Life, says that Canada Life's and TD Canada Trust's group business complement each other. The TD Canada Trust operation is concentrated in the large plan sponsor market in Ontario and Western Canada, whereas Canada Life is strong in the mid- to large-size employer community with a solid base in Ontario and Eastern Canada. He adds that clients will benefit from better service and investments in the technology.

However, Greg Hurst, manager, pension division, with Vancouver-based Heath Benefits Consulting Inc. has some concerns about the deal. "[They] have quite distinct business models for the group savings market," says Hurst. "To achieve profitable synergies, I believe that Canada Life will have to substantially abandon the custodial trust model."

To ensure a smooth transition, TD will continue to provide group service while Canada Life ramps up its products so it can offer trust and mutual fund investment services in addition to its insurance products and segregated funds, explains Harvey. "We will also need to develop a unified vision and technology platform," he adds.

Another factor that could trigger a consolidation frenzy is the end of federal protection policies in the insurance sector. These measures were implemented by Ottawa to prevent a massive buyout by the banks when the insurance industry began demutualizing. As of Dec. 31, 2001, insurance companies with assets under $5 billion can be snapped up.

There's only one thing that will put the brakes on the consolidation craze, and that's a major market correction, according to one provider who did not want to be identified. "If the market goes south the consolidation will stop. Now there is a lot of capital and it's not being put into the business but into acquiring other companies."

BANNER YEAR

The DC plan market--including money purchase pension plans (MPPPs, formerly known as defined contribution pension plans), group registered retirement savings plans (RRSPs), deferred profit sharing plans (DPSPs) and other retirement vehicles--is certainly expanding when it comes to assets under management. This past year was a banner one, with growth of 30.7% or $14.1 billion in administered assets.

This year also represents a remarkable turnaround from 1999, when the industry faced an unprecedented slow-down marked by a 1.1% increase in administered assets.

The coveted No. 1 position on the top 10 list is filled by Sun Life Financial. Sun Life posted a 34.2% increase in its administered assets this year, with $9.4 billion as of June 30, 2000. Sun Life usurps the position from Canada Trust, which has held the spot for the past two years. DePaoli attributes Sun Life's and the overall sector's success to the combination of new business growth, tremendous market performance and the increasing number of aging employees who are keeping and increasing assets in their group plans.

There's no doubt that the industry is riding a bull market. The Toronto Stock Exchange 300 Total Return Index was up 47.4% year-over-year as of June 30, 2000. "Nortel's incredible performance affected virtually every provider because it is found in many Canadian equity holdings," says DePaoli.

Weinstein of Brendan Wood International says that participation rates in DC plans is also helping the market grow. "The participation rates in voluntary plans with an employee contribution have risen by 70% over the past four years. The amount of money [members] are putting into the plan is rising dramatically too."

benefits canada's 2000 Defined Contribution Plan Survey shows the average amount the individual holds has risen to $20,311 from $15,813 in 1999. In addition, the 49 industry providers who participated in the annual survey report winning $6.4 billion in new assets this year, along with 3,605 new clients.

The Top 10 DC plan providers currently administer $50.9 billion in assets, or 85% of the entire $60.2 billion market--down slightly from 89% of the market in 1999. This year, 49 providers participated in the survey, representing 49,380 clients (up 21% over 1999). Among this select group of asset administrators, Royal Trust Group Retirement Services (No. 6) was the strongest performer in terms of growth. Its administered assets increased by an astounding 98.8% or $2.5 billion to just over $5 billion.

Gord Kosokowsky, manager, business development of group retirement services with Toronto-based Royal Trust, attributes the stellar performance to the Nortel factor, the stock plans it carries as well as the large number of high-tech companies that are among its clientele. "Our clients have had remarkable growth with their stock this year. Without this, our performance would not have been as strong," says Kosokowsky. He adds the company won four large new accounts over the past year.

In contrast to Royal Trust, TD Bank Financial Group's (No. 2) administered assets (purchased from Canada Trust and now owned by Canada Life) decreased by 9.1%. Meanwhile, Great-West/London Life (No. 4) grew modestly by 8.6% or $462 million.

"I don't think our capabilities are completely understood in the large plan sponsor market," says Bill Kyle vice-president of group retirement services at London, Ont.-based Great-West/London Life. "While we are starting to get recognized, we are not seeing business results yet. Our technology capabilities are designed on a system specifically for the [larger] marketplace, and people are quite impressed when they hear that. But at the same time [plan sponsors] have [established relationships] with suppliers that they have been using for 10 years."

MARKET SEGMENTS

Group registered retirement savings plans (RRSPs) remain the largest category in the DC plan market at $27.9 billion, with administered assets up 23.5% over last year.

In the group RRSP market, Sun Life Financial takes the No. 1 spot that Canada Trust held last year. Royal Mutual Funds, Group Financial Services is a new pro-vider on the group RRSP top 10 list, sliding into the No. 10 spot with $1.2 billion in assets, replacing Manulife Financial. Overall, the top 10 group RRSP providers hold 83% of this market compared to 86% for 1999.

DPSPs posted the strongest growth by far in the DC plan market at 41.2% for a total of $4.3 billion. Once again, Royal Mutual Funds, Group Financial is new to the top 10 DPSP providers list with 40% growth and $28 billion in assets. It replaces Fidelity. Meanwhile, Scotia McLeod experienced the most significant growth, increasing its assets year-over-year by 52.7% or $33 billion.

Ken Richards, assistant vice-president of business development at Canada Life, says DPSPs are becoming more popular in diverse industries. He adds the fact that TD Canada Trust had the ability to handle stock purchase plans "was an attractive asset for us in the acquisition."

For MPPPs, Sun Life Financial, Clarica and Great-West/London Life hold onto the top three spots again this year as the market grew by 24.2%. Morneau Sobeco posted the biggest gain with growth of 55.8%.

MONEY MANAGEMENT

When it comes to total assets under management, investment managers currently hold $50.6 billion, with 10,726 clients. The top two money managers in the DC plan market are Phillips, Hager & North Investment Management Ltd. and TD Bank Financial Group, both at $6.5 million, followed by: Great-West/London Life at $5.9 billion; Frank Russell Canada Limited at $4.6 billion; McLean Budden Ltd. at $3.6 billion; Sun Life Financial at $3.2 billion; and Perigee with $2.6 billion.

Phillips, Hager & North Investment Management Ltd. takes the No. 1 spot in the MPPP market with $4.3 billion. Trailing noticeably behind are: McLean Budden Ltd. at $1.9 billion; TD Bank Financial Group at $1.8 billion; TD Quantitative Capital at $1.7 billion; Foyston, Gordon & Payne Inc. at $1.5 billion; TAL Global Asset Management at $1.4 billion and Perigee Investment Counsel Inc. at $1.4 billion.

TD Bank Financial holds the top spot in group RRSPs with $2.2 billion in managed assets. Once again, the competition for this spot isn't stiff. McLean Budden Ltd. is second with $1.8 billion followed by Perigee Investment Counsel Inc. and AIM Funds Management Inc. (formerly Trimark Investments)--both with $1 billion. National Life of Canada and General Trust of Canada manage $937 million and $928 million, respectively.

TD Bank Financial also leads the pack in the DPSP asset management market with $1.2 billion, followed by: RT Capital Management Inc. at $289 million; McLean Budden Ltd. at $249 million; Phillips, Hager & North Investment Management Ltd. at $121 million; Connor, Clark & Lunn at $120 million; AIM Funds Management Inc. at $105 million; and Perigee Investment Counsel Inc. at $92 million.

GROWING THE BUSINESS

There are several ways that DC plan providers can continue to grow their business. "We are seeing a slow-down in conversions from DB to DC plans. But there is quite a bit of new business with start-up companies," says Colin Ripsman, a senior investment consultant with William M. Mercer Limited in Toronto. "This might not be as attractive as winning a mature account but the DC market is still an immature [industry] and providers have to buy into today's new companies and grow with them."

Kyle of Great-West/London Life says a recent study of DC plan members reveals that the majority hold most of their money in a personal RRSP. He predicts that there will be a rise in plan participation as more investors transfer personal assets into group plans to take advantage of features such as lower management fees.

DePaoli forecasts double-digit growth between 25% and 35% over the next few years, whereas Richards of Canada Life is more conservative in his outlook. "Growth will probably be slower going forward in about the 10% to 15% range," he says.

These optimistic growth projections will ensure providers thrive. However, with Canada Trust's legacy now in the hands of Canada Life and talk of more consolidation in the air, competition for the No. 1 spot on the top 10 DC plan providers list is bound to get stiffer over the next year.

The top 10

Canada's defined contribution plan industry grew a remarkable 31% this year. Sun Life Financial has moved into the No. 1 spot, over the recently merged TD Bank and Canada Trust (assets as of June 30, 2000). (Administered)

1 Includes TD Canada Trust, TD Asset Management and TD Quantitative Capital. TDAM assets are $119.5 million.

Figure does not include group LLIFs, RRIFs, etc.

SOURCE: BENEFITS CANADA Defined Contribution Plan Survey, 2000.

Executive summary

• Total administered assets for the defined contribution plan market are $60.2 billion for the year ending June 30, 2000. This includes money purchase pension plans, group RRSPs, DPSPs, non-registered RRSPs and savings, employee share purchase plans and more. The figure is up 30.7% over last year. The market represents 49,380 clients and 2,965,013 lives.
• Total assets under investment management are $50.6 billion as of June 30, 2000, with 10,726 clients represented. The average Canadian holds $20,311.
• Out of the 49 providers who participated in this year's survey, 39 offer a generic newsletter to their clients; 40 offer Web sites, 36 have toll-free numbers, 24 customize newsletters and seminars, 19 deliver software products and 16 use video. In addition, 38 suppliers provide plan sponsor education material, while only four companies report charging extra for this service.
• Administered DC plan assets breakdown as follows: $27.8 billion for group RRSPs; $20.3 billion for money purchase pension plans; $4.3 billion for DPSPs; and $7.7 billion for other.

Top group RRSP providers

Sun Life Financial has taken over the No. 1 spot in the group RRSP business. Scotia McLeod Inc. is close behind (assets as of June 30, 2000).

1 Includes TD Canada Trust, TD Asset Management and TD Quantitative Capital.

SOURCE: BENEFITS CANADA Defined Contribution Plan Survey, 2000.

Top money purchase pension plan providers

Sun Life Financial has held onto its No. 1 spot this year. Clarica is up to No. 2 from No. 3 last year (assets as of June 30, 2000).

1 Includes TD Canada Trust, TD Asset Management and TD Quantitative Capital.

SOURCE: BENEFITS CANADA Defined Contribution Plan Survey, 2000.

Top DPSP providers

Sun Life maintains its No. 1 position for the second year in a row. < TD Bank is holding strong at No. 2 (assets as of June 30, 2000).

1 Includes TD Canada Trust, TD Asset Management and TD Quantitative Capital.

SOURCE: BENEFITS CANADA Defined Contribution Plan Survey, 2000.

Is bigger really better?

Defined contribution (DC) plan providers say acquisitions such as Canada Life's recent purchase of the group retirement services business of TD Canada Trust are a sign of things to come in this evolving market. Is the move towards a smaller number of larger providers troubling for plan sponsors and employees?

At least one plan sponsor questions the benefits of a shrinking provider market. "We self-administer our DC plan but I can see that this trend may be viewed by plan sponsors as limiting opportunities," says Louise Koza, manager of pension investments and plan policy at the University of Western Ontario in London, Ont. Koza expresses concerns over the possibility of dwindling service, higher fees and less flexibility in a shrinking provider world.

Bucking the bigger is better trend, Koza recently discovered the advantages of teaming up with a smaller firm. "I was looking for a provider for a retirement income fund that we were establishing and the best deal was a 1.5% return on assets [for a combined administrative and management fee]," she says. Koza decided to keep the business in-house under a partnership with Pacific & Western Trust Corporation of Saskatchewan (the firm also has an office in London, Ont.) The result? "We are saving 1% on return on assets for our plan members," says Koza.

However, Bill Kyle, vice-president of group retirement services at London, Ont.-based Great-West / London Life, says he doesn't think there is a downside to the consolidation trend. "There will still be a good choice, and [the providers] that are going to survive are going to have the asset base to be able to afford the investments required to meet the expectations of the market. That means customers and plan members will be very well served."

Mary DePaoli, assistant vice-president, national marketing and sales with Sun Life Financial's group retirement services, concurs. "The plan sponsors definitely benefit in the end. They will have the opportunity to chose a supplier that will [invest in their business] and create the kind of product development that clients expect."

Unfortunately, Greg Hurst, manager, pension division of Heath Benefits Consulting Inc. in Vancouver doesn't have such a rosy outlook on the shrinking provider market. He fears the Canada Life-TD Canada Trust deal could result in disruption to clients and possibly higher costs, particularly for organizations that are using the provider's unbundled services.

The DC plan universe

Group RRSPs represent 46.3% of the industry this year, compared to 49% in 1999. Money purchase pension plans come in at 33.7%, down from 35.5% (assets as of June 30, 2000).

Money Purchase Pension Plans - $20,313.9
Group RRSPs - $27,877.9
Other - $7,690.9 (including non-registered RRSPs and savings, ESPPs, etc.)
DPSPs - $4,340.0

SOURCE: BENEFITS CANADA Defined Contribution Plan Survey, 2000.

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."