Funny enough, the market will be only too happy to receive him. As the industry has shrunk to a handful of large players and few large pension funds are entering the picture, competition for existing business is fierce. And that has meant new products emerging on the market— such as lifecycle funds—better service, according to some analysts, and lower fees for plan sponsors.
But despite the benefits for employers, challenges still exist: how can sponsors comply with the CAP Guidelines? What investment offerings should they entertain now that the foreign property rule is no longer? How many options are enough? And should they offer education or advice?
Richards certainly feels the advice and education debate is a valid one. But one that gets in the way of what should be plan sponsors’ main concerns: securing a retirement for their members. “I really think we got caught up in the distinction between education, information and advice. And in my mind it got away from why we’re offering these pension plans in the first place,” says Richards. “So if the object of the game is to get your employees into a comfortable retirement, how well are we doing based on what we’re currently doing? That’s what keeps motivating me.” CAP sponsors have a lot to think about, in light of the Joint Forum of Canadian Market Regulator’s CAP Guidelines deadline this month, plan member apathy about retirement and the ever-present debate of offering education or investment advice as a plan sponsor. And they face a newly-consolidated marketplace of fewer providers. Is the smaller pool of players affecting their product selection? And what about service? Last month, BENEFITS CANADA brought plan sponsors from across Canada to share their concerns about ensuring their memberships are looked after for retirement.
| John Clarke: joint venture controller at Synenco Energy Inc. in Calgary. Debera Tomalty: treasurer at IBM Canada, Toronto. Blair Richards: CEO Halifax Port ILA/HEA Plan, Halifax. Debra Holmes: manager of special projects, Legal Aid Ontario, Toronto. Terri Troy: director of pension and investments, Royal Bank of Canada, Toronto. |
Q: What are the big challenges down the road for Capital Accumulation Plan (CAP)sponsors?
Debra Holmes: I think it’s going to be employee education. How do you do an effective job? And how do you know if [plan members] understand? So, trying to think of some creative ways of testing employees and measuring whether any of this is sinking in [will be a priority].
Debera Tomalty: I’m looking at foreign content for my DB plan or my DC plan. One of my concerns is currency [risk]. With my DB plan, I’ve got the expertise to take that risk and hedge it. But if I give my DC [members] options, some of them will be smart enough to take the foreign currency. Others will not be.
John Clarke: I guess the real question is: do each of you think you’ve got a group of employees who have enough education to understand the suite of products you’re offering them? If you don’t think they have enough education and experience, the real question is: what are you going to do about it?
Q: What changes are you making in your plan offerings to take advantage of the removal of the FPR?
Debera Tomalty: I haven’t made any changes yet. So far I haven’t noticed any drastic shifting or increases in the foreign content. I think a lot of our employees are still comfortable limiting their foreign exchange risk [because of ] their uncertainty about foreign markets. I would like to look at global bonds and maybe bring in an emerging markets fund. I’m not rushing into it.
Terri Troy: With the elimination of the FPR, you really have to ask yourself: what’s a balanced fund anymore? Is the majority Canadian equities, and a little bit in foreign and the balance in Canadian fixed income? I think the silos are going to go away in terms of Canadian equities, U.S. equities, EAFE equities.
Blair Richards: With respect to the FPR, it’s going to eliminate some products like the clone funds, but it’s going to have positive implications around things like perhaps pressuring MERs(management expence ratios)down. We should be able to get more and better riskadjusted returns. Optimistically, [the removal of ] the FPR is going to be the catalyst for complete portfolio reviews. I’ve no doubt there will be a flow of funds beyond our borders. It might not be immediate but it’s going to happen.
Q: What education and information challenges does this post-FPR world pose to you as a plan sponsor?
Terri Troy: One of the areas that has to be looked at is education and information materials. Members
are using asset allocation tools out there that have the foreign content restraint in there. That’s not applicable anymore. We’ve already asked our insurance provider to change that right away.
Q: How supportive were providers throughout the CAP guidelines compliance process?
Debra Holmes: We’re with Standard Life and they were actually very helpful. They held seminars around the CAP guidelines and provided a number of tools that I used with my management committee as well as with the advisory committee.
Debera Tomalty: We tend to have a large enough fund and a big enough voice so we just tend to say ‘we want it done, thank you very much’ and it’s just a question of how quickly. Certainly I’m not aware of any issues of any of them pushing back and saying they cannot do it or will not do it.
Blair Richards: If anything I found [our provider] overexuberant. We had to turn them down [and tell them] we don’t want any more of this stuff.
Q: From a plan sponsor perspective, how well are providers meeting your needs generally?
Terri Troy: In general, the CAP suppliers do a very good job since the alternative is really just the retail space where the fees are a lot higher and there’s a lot of sharks out there. If there is room for improvement it is on their communications area. I’d love to be able to rely on my supplier to hand out timely, relevant, accurate communications. I think the onus is on the plan sponsor to really push their suppliers. If you demand a certification from your supplier or even have an indemnification in your contract that they have to be compliant with the CAP guidelines, then they’re going to move quicker.
Debra Holmes: I would agree. When employees call me back if they’ve been talking to someone there(a supplier)and the information’s not quite right, it’s pretty upsetting. I think they do need to do more staffing or training in terms of interacting with plan members.
John Clarke: I think they do a better job than we give them credit for. They know what they’re talking about, they write very well and—from what I’ve seen—they’re very clear on the messages they want to provide.
Q: How has shrinking pool of providers affected service or variety of options?
Blair Richards: In the last five years, we have had a major transition imposed on us as the result of either a merger or acquisition. It’s taken a great deal of our time and attention. While the rhetoric was certainly noble around how bigger is better, I’m not sure we’re experiencing the economies that were promised. I sure don’t relish the prospect of going to market again because I really don’t think there are that many options. I’m hoping you’ll see a development of some niche players.
Terri Troy: I think with Fidelity launching their insurance model, that’s a big win for plan sponsors. It keeps the other insurance providers on their toes. Personally, I would like to see more of the trust model side where people don’t have to go into these segregated funds because I think the whole messaging around what is a segregated fund and why it is needed is confusing for plan members when they’re used to a mutual fund situation in a trust model.
Q: Should plan sponsors educate and engage plan members or just make the decision for them?
Debra Holmes: I think the quick answer is both. There is a portion of the population we are never going to engage. So have something for them. And for those who are interested, make as much information available as possible.
Debera Tomalty: We have an online school that provides links to various [information sites] and so on. I think our answer is educate, educate, educate. We’ve even talked about making it mandatory.
John Clarke: How many people in the room have a process two, three times per year whereby they consciously have employees confirm their investment choices ?
Debera Tomalty: We’ve tried, for those who are in a money market, to send out notices and get them to validate. The response is mediocre at best. They don’t read the e-mails, they don’t have time to look at it.
Q: The CAP guidelines say plan sponsors can offer advice. Should they?
Terri Troy: It depends on the plan sponsor and if they’re willing to assume the liability that goes with it. Our position is that we’re not prepared to assume that liability right now.
John Clarke: I think sponsors ought to consciously take more risk than they do today. My difficulty is the language is so strange; maybe what I think is advice really is just education. I think a lot of us are afraid to provide advice because of all the legal issues.
Debra Holmes: I think of advice as when the employee leaves with some specific recommendations of how they should invest their funds. Education should lead them to perhaps a similar answer. But we’re certainly not interested in doing anything that makes them walk away with a piece of paper and say: ‘this is how I’m going to invest.’
Blair Richards: I’m restricting my advice to suggesting to the members that they need to have a plan, they need to be proactive in filling in some of the [information] gaps. So there’s some very specific advice that’s being given but it’s not the sort in which plan sponsors seem to fear that they’re telling [members] where to put their money.
Terri Troy: One of the key factors is that the party providing the advice has to be independent. Is my recordkeeper independent? I don’t think so because they gain from various fee schedules on these fees. And then there’s the fee issue. Who’s going to pay the fee for the advice?
Q: What’s your biggest priority for 2006?
Terri Troy: Our biggest priority is making sure the investment line-up is reviewed now that the elimination of the foreign content is gone. And making sure there are options that are more optimal for members that would provide a higher probability of better performance, less risk, and lower fees.
Debera Tomalty: As more and more of my plans get directed into DC, I want to provide options but I don’t want to provide too many options to my employees. I don’t want everyone to put 10% in 10 funds. But certainly the FPR changes will change the types of options I may provide.
Blair Richards: I think we’re really going to focus on our investment managers and options. And on raising the knowledge of both our trustees and our employees.
Debra Holmes: My focus is very much on the employee group. From a DC perspective, getting them to clearly recognize what their role is vs. what their employer’s role is. I think too many of them still have the DB mindset that the organization is going to look after them. We have to make sure they know it might not be a happy ending.
Anna Sharratt
