© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the December 2005 edition of BENEFITS CANADA magazine.
Frontlines: A watchful eye
Trusts are about to get more scrutiny.
By Joel Kranc

Despite the recent love-in with income trusts in the institutional investment community, plan sponsors will be keeping a watchful eye on the investment vehicle in the new year. Now that income trusts are becoming part of the S&P/TSX Composite Index and interest rates are low, sponsors are starting to scrutinize income trusts and to weigh their value more carefully. That vigilance, say analysts, will be top-of-mind in 2006.

According to Scott Munn, principle with Mercer Human Resource Consulting in Calgary, “there’s going to be a great deal more scrutiny…” In the past, he adds, institutional investors paid less attention to trusts because they were wary of getting into the limited liability investments in the first place. But now, as trusts become part of the index, they will get the same amount of attention as any other member of the index.

“I believe we’ll start to see a significant review of trust compensation, in particular with alignment to performance and its alignment to the interest of those sponsors or pension funds,” says Munn.

The other issue is that of interest rates. And, says Munn, when rates begin to come up, the value of trusts will come down and make the investment “less advantageous” for plan sponsors. Ultimately, the increased scrutiny and the rising interest rate environment will make it more difficult to attract and retain senior executives. He adds that if you are an investor in these trusts, you should be worried about being able to attract and retain good talent.

Munn says trusts have begun and will continue to redesign their incentive programs to work in any interest rate environment. And institutional investors will put pressure on these companies for performance-contingent restrictive units(as an incentive to retain employees).

He notes that more pressure by plan sponsors may occur in the spring of 2006 because new guidelines by the Canadian Securities Administrators on trusts will come into effect. The inclusion of trusts in the indices will come to light as well.

According to Munn, many larger trusts have already made changes to their compensation structures and mid-size and smaller trusts can learn from their example. Ultimately, as trusts become even more mainstream than they already are and as plan sponsors shine their governance lights on them, they will receive the same scrutiny as their corporate equity cousins.


A federal court in Philadelphia ruled that shareholders couldn’t sue to recoup executive compensation under the Sarbanes-Oxley Act.

In this case, a plaintiff sued the Stonepath Group Inc.(a freight and warehouse company)and 14 of its current and former officers and directors. The judge in the case said that Sarbanes- Oxley only allows investors to sue if directors or executives buy or sell stock during a pension fund blackout.

According to the Organization for Economic Cooperation and Development (OECD), an increase in pension savings worldwide will have a modest impact on interest rates. Individuals will be saving more over their working lives, says the report, and an excess amount in savings could lower interest rates. But the demand for capital will rise, offsetting the “glut” in savings and will only affect interest rates slightly.

The OECD also noted that of all the policy issues associated with pensions, raising the age of retirement would have the smallest impact on financial markets and interest rates.

European and U.S. asset managers view the establishment of local marketing offices in other countries as an expensive but effective option for cross-border selling, according to a new study.

The report, Cross-Border Distribution of Asset Management Services by Telos GmbH of Wiesbaden, Germany and FS Associates of West Orange, New Jersey, was based on an a survey of nearly 70 European and U.S.-based asset managers. Still, only a handful of managers stated that they were fully satisfied with their cross-border strategies.

Joel Kranc