2001 Defined Contribution Plan Report

The industry as a whole actually grew over the past year in terms of attracting new business, maintains DePaoli. The top 10 providers report gaining 2,416 new clients and more than 205,000 new plan members. But this could not offset the impact of volatile markets and members pulling money out of voluntary plans as the markets tumbled.

A look at how the major indexes fared over the past two years illustrates just what DC providers were up against. The Toronto Stock Exchange (TSE) 300 Total Return Index was up 47.4% year-over-year as of June 30, 2000. By that date this year the index had plummeted 12.7%. Annual returns on the Standard & Poor's 500 total return index dropped from 6% as of June 30, 2000 to -15.8% at the end of this June.

The economic slide has put pressure on the industry's bottom line in two ways. First, fees collected on a per-member basis are down as there are fewer members in DC plans as a result of corporate downsizing (expected to worsen over the coming year). The industry as a whole is reporting a decrease of more than 74,000 plan members this year. Second, fees collected on assets have dwindled along with members' returns.

Still, the insurance giants behind most of this country's top administrators are committed to weathering the storm. "Insurers in Canada are good stable institutions. There is enough diversity in the business to take us through a downturn," says Catherine Owens, vice-president of marketing and business development with Manulife Financial's domestic pension operations in Waterloo, Ont.

Kevin Martino, a consultant in the Calgary office of Towers Perrin, concurs. "These organizations make their bread and butter out of taking a long-term view."

Providers point out that the retail side of the business--the mutual fund industry--has been much harder hit by the downturn. "There is a stability and consistency of earnings in the DC business that does not exist in the retail side," says DePaoli. "The conservative nature of the industry, which includes the selection of funds offered to members, has helped insulate it."

THE KEY PLAYERS
The top 10 providers, as a whole, performed a little better than the overall industry, with a decrease of 2.6% or $1.3 billion in assets over last year. The news is more positive when it comes to market share. This year's top 10 providers captured 87.2% of the total DC market, up from 84.5% last year, but still down slightly from 89% in 1999.

The variance, in terms of performance, among the players on this year's list is unprecedented. Last year's No. 1 provider, Sun Life Financial (now No. 3), is reporting a 12.8% decrease in assets. Canada Life, which bought up the group business of TD Canada Trust last year, takes over the top spot. Clarica Life Insurance Co.'s assets are up by 56% on the heels of its purchase of the majority ($3.1 billion) of Royal Trust Group Retirement Services' DC business. And Standard Life Insurance Co. is up by an impressive 20%.

Canada Life takes the No. 1 spot for the first time. Last November, it acquired the group retirement business of TD Canada Trust, which was worth $5.1 billion at the time. The company has done a good job of keeping most of these clients, according to Joan Johannson, director, product and marketing, investment and pensions with Canada Life in Toronto. "The retention of clients and assets through the merger has been high. There was some expectation of loss as some people are leary of change and it opens their minds to looking at other alternatives." She adds that independent surveys show that the satisfaction rate among plan sponsors has risen each quarter since Canada Life purchased TD Canada Trust's group business.

Johannson believes Canada Life's No. 1 spot will help it win more business. "When you are in a leadership position, clearly you are investing in the business. This provides a feeling of comfort to plan sponsors."

Like Canada Life, Kevin Strain, vice-president of pensions and group savings with Clarica in Waterloo, Ont., attributes part of his firm's $3.5 billion growth to a successful integration of RT's business and retention of existing clients from both firms. The integration will be complete by Dec. 31, and Strain estimates that Clarica will have retained 85% of the business it acquired from RT. He adds the firm has also gained a significant number of new sales from existing clients of both firms that introduced new plans.

Last year's top player, Sun Life, was hit particularly hard by the market downturn. The company's 12.5% or $1.2 billion decline this year is due to the substantial devaluation in the stock markets. Sun Life administers the assets of several large technology company single-stock purchase plans.

DePaoli says while the company gained $2 billion in new sales, it lost more than $1.8 billion in net investment change alone. "We also experienced high withdrawals as members took money out of voluntary accounts due to the volatility." While Sun Life gained 81,514 new members, it lost more than half (46,327) of this amount from its existing membership base.

With two key players out of the DC market (TD Canada Trust and RT) and solid growth of almost 20%, Standard Life of Montreal moves from No. 8. into the No. 5 position on this year's top 10 list. Standard Life gained more than 240 new clients and almost 45,000 new members.

Year-over-year, the company accumulated $477 million in new client assets alone, says Alain Brunet, senior vice-president of marketing at Standard Life in Montreal. The biggest areas of growth were in group RRSPs and DPSPs. "These plans seem to be the most popular among the newer DC plan sponsors," says Louise Pellerin-Lacasse, vice-president of marketing for group savings and retirement with Standard Life.

Moving up one notch this year to No. 8 is Manulife. Its assets under administration are flat this year. But Owens says the company is pleased with this performance considering the economic downturn and the fact that it has 1,245 fewer plan sponsors this year. The decrease in clients came out of a rationalization process, as the company discovered that there was little growth at the small end of its client base, says Owens.

"Some sponsors were letting their plans languish as they did not have the resources to maintain them. We offered them other solutions, including early retirement settlement plans and plans on the individual side." The firm's lack of growth is also a reflection of the fact that plan members have not contributed as much to their DC plans as they have in the past, says Owens.

Looking at the rest of the players among the top 10, Great-West/London Life is No. 4 with a decline of $153 million. ScotiaMcLeod Inc.'s assets are down by $89.5 million. General Trust of Canada and Royal Mutual Funds, Group Financial are both new names on the top 10 list. General Trust experienced a loss of $732 million this year, while Royal grew by $107 billion.

MARKET CATEGORIES
Group RRSPs now comprise $23.9 billion worth of the DC universe. MPPPs account for $23.5 billion, while DPSPs are $3.2 billion (see "Share of the pie," page 33). According to the Canadian Life and Health Insurance Association, the number of MPPPs in Canada shrank by 2,558 plans while the volume of group RRSPs grew by 5,417 plans between 1990 and 1999.

Providers say group RRSPs will hold their appeal as they are a simple and inexpensive option in an environment where many plan sponsors are watching their dollars and looking for the least complex pension arrangement.

In the group RRSP ranking, Canada Life grew by 43%, Clarica by 19%, Standard by 15.6% and Manulife by 11.1%. Canada Life, ScotiaMcLeod, Sun Life and Great-West were also on the top 10 list but they all experienced a decline in assets.

The leaders among MPPP providers include Canada Life with 88% growth, Clarica with 71.8% growth, Sun Life with 12.3% growth and Standard with 13.9%. Great-West/London Life was among the top five MPPP providers but it experienced a decline in this market of 2.1%.

Sun Life's stock plan woes are evident in the DPSP ranking. It takes the No. 2 spot with a decline in assets of 50.7%. Canada Life is No. 1 with 2.3% growth, Standard Life is No. 4 with a staggering 111% increase over last year and Great-West/London Life (No. 5) had growth of 24.4%.

There has not been a rush to safe investments yet. But this could change as members see sharp declines in rates of return in their statements that include September. "We may see a flight back to guaranteed investment certificates and less volatile funds," says Owens. Manulife saw a shift to asset allocation funds before Sept. 11. Owens says 30% of all new assets are now going into these funds. The average Canadian holds $15,470 in his or her DC plan this year, compared to $20,311 last year and $15,813 in 1999.

MONEY MANAGEMENT
Investment managers hold $42 billion in DC assets and 13,369 clients as of June 30. Assets are down by 17% over last year, as a result of the overall decrease in assets in the DC business and the fact that several money managers did not submit reports this year.

The top money managers in the DC business this year are Phillips, Hager & North Investment Management Ltd. with $6.9 billion in assets, followed by McLean Budden Ltd. ($6.5 billion), Great-West/London Life ($5.4 billion), Sun Life ($4.7 billion) and TAL Global Asset Management ($2.5 billion). McLean Budden Ltd. takes the top spot in the MPPP category with $6.5 billion under management, followed by Phillips, Hager & North ($4.5 billion), Sun Life ($2 billion), TAL ($1.5 billion) and Connor, Clark & Lunn ($1.4 billion).

Sun Life tops the group RRSP market with $1.9 billion. The other leading players are: Royal Mutual Funds ($1.3 billion), AIM Funds Management Inc. ($1.1 billion), Connor Clark and Lunn ($559 million), and Brinson Canada ($395 million).

Lastly, the leading managers in the DPSP area are: Sun Life ($459 million), Brinson Canada ($290 million), AIM ($116 million), Phillips, Hager & North ($110 million) and Sceptre ($71 million).

LOOKING AHEAD
All major providers in the DC business agree that more consolidation lies ahead. This is a maturing market, they say, with the majority of DB-to- DC conversions already in place. It is also an expensive business to run, with increasing demands for technology and plan member education and communication. "We need the economy of scale to absorb these costs," says Owens.

The most widely cited takeover targets are Clarica and Canada Life, firms that lose government protection on Dec. 31. Johannson says "Canada Life does not appear to be worried about rumours that it is set to be swallowed up. [It] has a history of buying companies. We may be an acquirer again. There have been few transactions [take-overs] of firms our size in the history of the insurance industry."

DePaoli says regulatory reform will have a direct impact on the pace of consolidation. "If the Joint Forum of Financial Market Regulators comes out and says 'the fiduciary is responsible,' it will drive more consolidation as more employers will outsource internal asset administration. Plan sponsors will see that monthly valuations and providing Internet access for members is not sustainable. The outcome of the Joint Forum will be the single biggest factor to affect our industry in a long time."

With or without more consolidation, competition in the industry will become more intense as providers battle uncertain markets, the decreases in fees that come with company lay-offs, a decline in members' contributions as well as lower market returns. "The markets will be a tough challenge," concedes Brunet of Standard Life.

Looking at market segments, Strain sees significant growth in non-registered plans, particularly at the large end of the market. With downsizing an issue among many plan sponsors, Clarica is focusing on termination products that provide "a mindful transition as the member leaves the plan." This helps Clarica keep members on as clients, even if they are no longer on the group side of its business.

Manulife launched a new ownership program for its existing clients in September and the take-up rate has been double what it expected. "Employers are looking to reward performance and [these plans] don't have the regulations, cost and predetermined funding formula of other retirement benefits," says Owens.

Over the next year, providers will also have to address concerns relating to plan members approaching retirement in a bear market. "The industry has not done a good job to date of coming to grips with the sufficiency of retirement income," says Martino of Towers Perrin. "This weakness has been masked by 10% and 15% market returns. Tough times make for a good test of providers."BC