CPBI Forum 2013
The inaugural inductees into the CPBI Hall of Fame, dealing with the rising cost of healthcare, leakage in investment returns, and the advantages of investing in stocks were among the highlights as the Canadian Pension & Benefits Institute (CPBI) took its annual Forum south of the border to Chicago, IL.
Larry Baldwin and Laurence Coward are the first inductees into the CPBI Hall of Fame. The two were industry pioneers and founding members of the Canadian Pension Conference which later became the Canadian Pension & Benefits Institute. Baldwin was a member of the CPBI from 1960 to 1966. Coward was a member from 1960 and was awarded a lifetime membership after serving as president from 1963 to 1965.
Steve B. Miller, senior vice-president and chief medical officer of Express Scripts, told ‘The Future of Canadian Drug Spend’ session that those who are not prepared will not be successful dealing with the rising cost of healthcare. The pharmaceutical spend in Canada is growing faster than the U.S. In fact, if it continues growing at its current pace, it could catch up to the U.S. in the next 10 years. However, Canada is wasting an enormous amount of healthcare dollars in this area. Patients getting their drugs through retail instead of less expensive channels waste $1.2 billion each year. And the use of more expensive drugs when less expensive generics are available wastes another $3.9 billion.
One approach to mitigating drug costs is measuring health risks to make the business case for preventative programs, said Wendy Poirier, division leader, health and group benefits, at Towers Watson. In the ‘New Perspectives in Linking Health Risk Status to Future Healthcare Costs’ session, she said that employers have more wellness techniques to use today than five years ago and more are migrating into wellness. However, employers still want to see where their money is being spent. To do so, they are using health risk assessments, aggregating data from drug providers, and getting scorecards to measure the health of their employees. She said reducing health risks can reduce health costs immediately and over time. However, there is an even greater financial impact from preventing health risks and by helping those with chronic conditions.
In the investment stream, Jane Ambachtsheer, a partner at Mercer, said while leakage in investment returns is not a big concern when returns are high, today's low return environment is prompting asset managers to look for ways to fix it. In the session ‘Sustainable Capitalism 2.0,’ she said manager fees, turnover of managers, M&A fees, and short-termism can all cause leakage and reduce returns. And the impatience now being seen in the industry with average holding periods for institutions relatively short makes this one area the industry is starting to pay attention to. It is looking at measures such as rewarding long-term investors with extra voting rights or dividends. De-emphasizing the short-term can also be done by doing away with quarterly financial reports and reporting with one annual report which sets out the company’s financial, long-term, and sustainability initiative objectives. This forces analysts to take a longer term view of a company's prospects instead of recent financial history.
Leo De Bever, CEO of the Alberta Investment Management Corporation (AIMCO), said the notion that being invested in bonds reduces risk is just nonsense. In the session the ‘State of Capital Markets’ he said there are two scenarios for bonds going forward – “terrible and really terrible.” This means investors may be better off in stocks over the next 10 years.
Keith Ambachstcheer, director of the Rotman International Centre for Pension Management; David P. Richardson, senior economist, TIAA-CREF Institute; and Sue Reibel, senior vice-president, business development, at Manulife Financial; all tackled pension issues.
Ambachtsheer said Canada needs to increase pillar two coverage, employment based arrangements and registered pension plans, if it wants to reach the top spot in the ‘Mercer Melbourne Pension Index’ of 18 countries. In the session ‘How To Improve Canada's Pension System,’ he said, however, with about five million private sector workers without pension plans, solutions are needed to improve the pension coverage issue if it wants to move into the top spot. Solutions currently being proposed include expanding the CPP/QPP and pooled registered pension plans (PRPPs). However, he called the latter watered down group retirement savings plans.
Low coverage in certain sectors, inadequate contribution rates in both defined benefit and defined contribution plans, and the focus on wealth accumulation, not retirement income, are just some of the challenges facing the U.S. retirement system, said Richardson. In a session ‘The U.S. Retirement System: Challenges and Opportunities,’ he said one of the issues is that the country has a large, heterogeneous mobile workforce. The fact they change jobs often is one of the reasons, along with funding issues, for the decline of DB plans in the U.S. However, even though there is a complex system, there is a growing understanding that the best way to improve social security is to strengthen the other pillars – individual savings and employer sponsored pension plans. For example, one proposal to solve the lack of employer sponsored pension coverage especially at small companies is to create auto individual retirement accounts (IRAs). Employers who do not offer workplace plans would be required to make IRAs available to employees.
A similar approach is being considered with pooled registered pension plans (PRPPs), said Reibel. However, when we look at pension coverage issues in Canada, there is no silver bullet, she said. In the ‘PRPPs Across Canada’ session, she said increasing Canada Pension Plan benefits is not the answer. Even doubling it is not enough to help Canadians who do not have access to an employer pension plan. “People are not saving so how do we get them saving,” she said. “We know that employer plans work better,” so something is needed for small to medium sized employers. Since pensions are not their core business, PRPPs (pooled registered pension plans) address the concerns of small business which need something that doesn't have a lot of “bells and whistles.”
Even if interest rates rise to their natural level of three to four per cent, this will not be good for pension funds, said Don Drummond, former senior vice-president and chief economist at TD Bank Financial Group. He told the session ‘Industry in Transition: Sustainability of Health and Pension Systems’ that he expects the normal premium on long-term bonds to slip from two to one per cent meaning that when inflation and fees are factored in the return for pension funds will be close to zero. This will force more funds into equities and even if they return five per cent it could see more people forced to work longer to receive the same retirement benefit. This explains in part why the labour force participation rate for 55-year-old males is rising. And while many older workers would prefer to transition into retirement using, for example, phased retirement programs, Canadian businesses have been slow to accommodate this. This has an impact on younger Canadians. Many are finding that their first few years in the labour force sees them taking contract positions, which is delaying their ability to save for retirement and start families. For example, the average age of Canadian women having their first child has risen to 30, he said.
It might be time for defined benefit pension plans to transfer bond portfolios to annuities, said Brent Simmons, senior managing director, defined benefit solutions, at Sun Life. In the session ‘Deep-fried Beaver Tails: Canadian Longevity Risk and Solutions,’ he said its research surprisingly shows Canadian annuities give higher yields than bonds. Sponsors can look at them as some kind of fixed income which also has the benefits of a risk transfer, plus they are a better match to plan liabilities. However, with any consideration of using annuities to transfer away plan risk, sponsors need to work with their consultant and insurance provider as every plan is different. For example, the cost of an annuity for a plan with white collar, older workers is likely to be more expensive than other plans.
The competition for talent will have an impact on benefits, said Peter Sheahan, founder and CEO, ChangeLabs. In the opening keynote ‘Work 3.0: A global perspective on the future of work, applied to a Canadian context,’ he said going forward work will be very customized in terms of where people work and how they work. As a result, benefits plans will have to be changed to accommodate this. This could see a proliferation of a la carte, pick and choose pension and benefits programs. There will also be a need for portability of pensions and benefits, allowing employees to take them with them as they change jobs. Sponsors may also face questions over who is an employee and can be a member of a plan and who isn’t.