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WWW.BENEFITSANDPENSIONSMONITOR.COM ISSUE 33.08

ANNUAL REVIEW & FORECAST Page 24

TIME TO ACT

Plan sponsors must react to employees’ needs Page 6

A HOLISTIC VIEW

Why plan members require diverse retirement strategies Page 10

WHITE GLOVE SERVICE Winners of the Service Provider Awards 2023 Page 17

Canada’s leading source of news, analysis, and insights for professionals within the benefits, pension, and institutional investment space. www.benefitsandpensionsmonitor.com

ISSUE 33.08

CONNECT WITH US

CONTENTS

Got a story or suggestion, or just want to find out some more information? @BPMCanada facebook.com/BPMMagazineCanada

UPFRONT 02 Editorial

Turning ‘longevity risk’ into a longevity opportunity

08 PEOPLE

PROFILE Former chief learning officerturned-author on how to nurture a modern-day workforce

face more expensive debt

32 Market leadership is broadening, says William Blair portfolio manager

38 Telus Health on how AI could change the industry

Portfolio manager reflects on Alberta’s divisive proposal to exit CPP

04 Statistics

The top 12 fastest-growing global asset managers

42 The Back Page

Is employee profit-sharing really a win-win?

FEATURE 10 Retirement planning

Purpose Investments presents a holistic approach for DC members

ANNUAL REVIEW & FORECAST

26 BMO GAM CIO’s outlook as indebted North Americans

03 Pensions

22 Sponsored Content The Year Ahead 2024 Global Economic Outlook

Sponsored by TD Global Investment Solutions

ROUNDTABLE

ADAPTING TO CHANGE

How target-date funds evolve to deliver better retirement outcomes PEOPLE

PROFILE

David Adams of Medavie Blue Cross explains why he is inspired to make a difference for plan sponsors

SPECIAL REPORT

SERVICE PROVIDER AWARDS 2023

We reveal Canada’s best service providers in the benefits, pensions, and institutional investment industry

BENEFITSANDPENSIONSMONITOR.COM

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UPFRONT

EDITORIAL

Turning ‘longevity risk’ into a longevity opportunity

“L

ongevity risk” is a term commonly used to describe the financial challenge of living longer. Think you have 10 good years after retiring? Think again – you’re more likely to have 20. Think you need X amount to live on when you leave the workforce? Think again – you’ll probably get sick, have extra medical costs, and need XX amount. How much do you want to leave your kids? Think again … and so on and so on. These discussions are often alarmist, which is understandable given the dwindling existence of company pensions and the fact that people often fail to start saving early enough. But most of us fall into the trap of comparing the future with now and failing to understand that a structural change in how we “do” life is under way. The benefit of the population, on average, being healthier for longer is that 65 is no longer shorthand for bingo and aimless sleepy hours in the corner chair watching daytime TV. Retirement, therefore, should be less about getting your ticket to God’s waiting room and more about what you’re going to do with this exciting final chapter of your life. Having the right pension plan and financial benefits for your employees helps them thrive, not merely survive, in later life. Instead of longevity risk, the mindset should be that this is a longevity opportunity. Effective retirement plans give people the chance to live their retirement years the way they want to. For some, this may include prosaic needs like paying off debt and covering monthly expenses, but it may also feature more exhilarating prospects, like turning a hobby into a business and having an “encore career.” It may also include more volunteering in the community, or ensuring you have enough for dream vacations with your grandkids. Central to this is a sound decumulation strategy so plan members can live the life they want in their later years. Start with what that looks like and work back from that. That’s where the experts come in. The article in this issue on retirement income, by Purpose Investments, delves into the complexities of this through a case study in which a fictional couple has been given the opportunity by an employer to consult with a fee-only financial planner. Such a solution can be a pivotal moment in allowing people to chase their dreams and passions in retirement, however modest or ambitious they may be. As we approach the turn of the year, everyone in the benefits, pensions, and institutional investment industry can play their part by adopting this mindset. Whether it’s health care, well-being, pensions, or portfolio strategies, these can combine to give plan members a doorway to the retirement of their dreams. What better way to convey how much you value their contribution to your business? Enjoy your latest issue of BPM. James Burton, managing editor

A KM Business Information Canada publication

benefitsandpensionsmonitor.com ISSUE 33.08 EDITORIAL Managing Editor James Burton Editor Nienke Hinton Content Editor Kel Pero

ART & PRODUCTION Designers Khaye Cortez Marla Morelos Joenel Salvador Production Coordinators Kat Guzman Loiza Razon Customer Success Executive Michelle Tamayo Vice President, Production Monica Lalisan

SALES & MARKETING Business Development Director Abhiram Prabhu Business Development Manager Doris Holinaty Account Manager Michael Hughes Webinar Producer Kristyn Dougall

CORPORATE President Tim Duce Director, People and Culture Julia Bookallil People and Culture Business Partner Alisha Lomas-Oliver Chief Revenue Officer Dane Taylor Chief Information Officer Colin Chan COO George Walmsley CEO Mike Shipley

EDITORIAL ADVISORY BOARD Randy Bauslaugh, Bauslaugh Pensions & Benefits Law Celine Chiovitti, OMERS Joe Connelly, Morneau Shepell Doug Crowe, RBC Tim Clarke, tc Health Consulting John Dynes, Cascadia Greg Hurst, Greg Hurst & Associates Neeraj Jain, Mawer Alain Malaket, InBenefits Mark Newton, Newton HR Law Robert Weston, Pharos Platform

Editorial advisory board members meet informally and are consulted when appropriate to their areas of expertise, intesest or jurisdiction. The members bear no responsibility for the contents of the magazine.

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UPFRONT

PENSIONS

Alberta’s CPP exit proposal ‘creates complexities we don’t need’ Province’s proposed opt-out from Canada Pension Plan raises tough what-if questions, says portfolio manager TO SAY it’s been an interesting few weeks in Alberta would probably be an understatement. Since the government headed by Premier Danielle Smith advanced a proposal for the province to quit the Canada Pension Plan, the province has turned into a focus of national conversation. That proposal has provoked some strong reactions, with Finance Minister Chrystia Freeland warning it would be a costly and irreversible mistake. A war of narratives has also been playing out on screens across Alberta, with the provincial government and the opposition party each coming out with their own commercials for or against the move. Markus Muhs, senior portfolio manager and financial planner at Muhs Wealth Partners with CG Wealth Management, who practices in the province, says clients concerned about Alberta’s potential pullout from the CPP shouldn’t be overly worried. While he acknowledges it could be disruptive, he says reviewing and adjusting plans in response to legislative changes is par for the course for him and other qualified financial planners. But the fact remains that the proposal, should it push through, would create additional layers of complexity for plan members and their retirement income planning. If Alberta were to set up an Alberta Pension Plan (APP), Muhs says it would require new calculations for people who move in or out of Alberta. “A lot of affluent people who work and make a living in Alberta don’t retire here; they go to BC. So what does this all mean for them? Practically everyone in Alberta

says. “I’m sure all this will be thought about if the exit happens, but it just creates extra complexities that we don’t really need.”

Quebec’s pension plan: not a perfect precedent

Markus Muhs, senior portfolio manager, Muhs Wealth Partners with CG Wealth Management

has friends and family across the country, so what would this mean for them?” he says. “Say you’re a younger person, and you’ve worked in Newfoundland for 10 years [where you contributed to the CPP]. Now you’ve moved to Fort McMurray, and you’re contributing to the APP. Do your CPP contributions translate into the APP? Are you going to have two [government pension plan] incomes when you’re retired? How’s that all going to be squared away?” Under the current system, an Albertan could work within the province up to age 65, all the while contributing to the CPP. Life could take them to BC, where they might choose to continue working part time, and they may still want to make CPP contributions. An APP in Alberta, Muhs notes, could throw a curve ball for people in that scenario. “Will that mean this person has an APP, and an additional CPP? Or could someone accumulate a full 40 years of APP, then also contribute a bit of money to CPP?” he

Proponents of the APP proposal might point to the Quebec Pension Plan (QPP) as proof that it can be done. But it’s not an apples-to-apples comparison, Muhs argues, given Quebec’s larger size and more nationalistic structure. “I’m sure there are a lot of people moving back and forth between Ontario and Quebec, but there’s probably generally a little bit less of that movement than what you’d see among Alberta, Saskatchewan and BC,” he says. “The prairie provinces and BC are all very integrated.… It’s just a different ball game here than it is in terms of how Quebec manages things.” Alberta’s proposed exit from the CPP has been a source of debate, with critics raising concerns about the impact it would have on Canadians in other provinces. Based on one much-touted calculation by LifeWorks, the province is entitled to 53 percent of the CPP’s assets – potentially a monumental windfall for Albertans that could also severely handicap other retirees and pre-retirees across Canada, outside of Quebec. “It’s a wonderful thing that Canada has the CPP that’s so well-funded. You hear these stories from the US about social security, and how it could run dry in the next decade,” Muhs says. Exiting and getting half of the CPP assets “would be a huge boon for Alberta.… But it probably would not work, and it would definitely put other people at a disadvantage.”

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UPFRONT

STATISTICS THE VALUE OF RETIREMENT BENEFITS

TOP 12 FASTEST-GROWING GLOBAL ASSET MANAGERS From top 500 of world’s largest asset managers AUM % change in USD 2017-2022

86%

of employers are most concerned about their employees’ financial stress from inflation

50%

43.7%

40%

30%

58%

who introduced/improved retirement benefits in the last year report an increase in productivity

20%

22.8% 19.2%

10%

34%

16% 13%

11.3%

0 Fidelity International

Brookfield Asset Mgmt.

Geode Capital Mgmt.

Charles Schwab Investment

Franklin Templeton

Goldman Sachs Group

of those who don’t offer any retirement benefits said the same

ARE YOUR EMPLOYEES TIRED OR OVERWORKED?

69%

agree that offering retirement benefits improves employee productivity

90%

of employers agree it’s important to offer benefits that will reduce financial stress for employees Source: Findings based on a HOOPP survey conducted online from August 7 to 17, 2023 with 754 Canadian business owners and senior leaders with 20+ employees and who have influence over HR decisions.

53%

of workers in Canada report having a negative feeling about work

30%

feel tired and overworked

29%

say work-life balance is the top priority – and it’s in the top three priorities of 68%

30%

of Millennials and Gen X workers are more inclined to prioritize work-life balance

26% 13%

of Boomers prioritize their families of Gen Z prioritizes compensation Source: Maru Public Opinion survey conducted on behalf of ADP Canada featuring 1,842 employed Canadian adults (including both employees and self-employed individuals) surveyed from September 15 to September 19, 2023.

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EMPLOYEE ENGAGEMENT

31% of employees are more likely to stay at an organization if they are energized and excited about their work

31% of these are more likely to go above and beyond, and they contribute 15% more

8.5%

8.3%

Schroders

Invesco

Fidelity Investments

Macquarie Group

UBS

Vanguard Group

46%

Source: A Thinking Ahead Institute and Pensions & Investments joint study, October 2023

of employees wish their organization did more to address employee feedback

TOP 10 CANADIAN ETF PROVIDERS BY MARKET SHARE 27.7%

RBC iShares

40%

23.7%

BMO

would prefer fixes to difficult processes over development opportunities

13.1%

Vanguard 7.6%

Horizons 5.6%

CI GAM Mackenzie

3.5%

TDAM

NBI

2.9%

Purpose

2.5%

19%

1.4%

Invesco 0

Source: National Bank, Bloomberg as of October 31, 2023.

of CHROs believe their managers know how to act on engagement feedback Source: Gartner, Inc., June 2023.

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PEOPLE

PROFILE

INSPIRED TO MAKE A DIFFERENCE David Adams, of Medavie Blue Cross, believes plan sponsors need to be more responsive to employees’ changing needs

THE CHANGING face of employee demographics and their needs is a big issue for plan sponsors today, according to David Adams, regional vice-president, business development, at Medavie Blue Cross. The question of what employer-sponsored group benefits should look like has arguably never been more pertinent. “Employers have the requirement to listen and get the appropriate information to ensure they have group employee benefit programs that satisfy the employee, who is changing,” Adams says. “There are group plan sponsors who probably have been running very traditional programs for decades. We help group plan sponsors identify and respond to those changing needs.” As an example, traditionally, group insurance programs may have been tailored to a primary user who was an older employee who may have had some health concerns. However, newer generations of employees are interested in self-care, and they access self-care through their employee benefits programs. They also use benefit programs more than previous generations and use them for different kinds of benefits than their predecessors. “HR executives need to be far more responsive to their employee value proposition and make sure they offer the right vehicle for that proposition,” Adams says. “The COVID crisis saw a chunk of the employee popula-

tion base move on, and this left recruitment gaps for many organizations. Everyone was out recruiting, so everyone needed to sharpen their employee value proposition. “Employees ended up in the driver’s seat, being able to demand things they weren’t able to previously. These types of trends tend to be cyclical, and employers react by improving their value propositions through the benefit programs.

At Medavie BC, he is responsible for the insurance business for both group and individual sales. He believes in empowering individuals and moving away from compartmentalization toward a more all-inclusive and comprehensive method of communication with customers. “Prior to Medavie BC, I worked in the transportation and oil industries in their finance groups. After many years, I wanted to

“Working at Medavie Blue Cross feels like a grander cause because it can make an impact on the well-being of Canadians” David Adams, regional vice-president, business development, Medavie Blue Cross “As a provider, we had to be responsive as well and become good partners and change our own traditional thinking. We see these trends evolve and we need to remain adaptable and open-minded.”

Learning from other industries Adams built an impressive career as an accountant by working in positions with increasing responsibilities across a number of industries and then changing direction into his current role.

try a new industry and be more a part of the lifeblood of the business,” he says. “The group health insurance business is where I landed, and Medavie was very gracious to take me on for this challenging opportunity.” Adams admits it took him a little time to understand the full scope of the industry, but he is now on firm ground and feels he contributes to the organization and the industry in general. “I am responsible for our underwriting and actuarial pricing teams, product development

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hensive way. The intelligence that our representatives now bring to the market is more all-encompassing. They understand the pricing models, the value for money, our product journey, and why we’re launching different products at different intervals.” Adams strongly believes that when a company falls into silos, it becomes difficult to inspire and motivate, “because you’re inspiring and motivating in a silo. The bigger the company gets, the harder it is to do that. When you create a vision that is more comprehensive, it’s much easier to inspire your teammates and inspire the leaders in the organization.” As a company, “we are now relatively nimble, and we have the chance to inspire a lot of people. It’s important that people be aligned and that they want to come to work every day and be inspired by what we do. When you come to work with a positive energy and passion, it’s infectious, and then you want to do the best for the customers.”

Making an impact

David Adams

team, and group marketing team,” he says. He leads the business development teams to create customer value propositions and market them to Medavie BC customers. “The nice part about this level of responsibility [is that] it really gives me an appreciation for the different pockets of the value proposition that we have for our customers. I participate in what that value proposition looks like and in its pricing. I also partici-

pate in the articulation of gaining trust in the market through the business development of that value proposition.”

Communicating in a more comprehensive way “The new structure of our team has really come together nicely, and all of the prongs are gelling together to be able to talk to the market, potential customers, and advisors in a more compre-

Adams says he is inspired by the ability to make an impact. “We are at an interesting time for health care in Canada and there are all kinds of opportunities for improvement because health is important to everybody. “I am passionate that I’m working for an organization that really wants to make a difference, so that inspires me. Medavie BC values being a good corporate citizen, and I believe this is incredibly important because we are trying to make a difference in the Canadian health-care landscape. “Before I joined this industry, the healthcare system wasn’t really on my radar. I was focused on ships and gas stations and refineries and trains, and I liked my jobs. However, working at Medavie Blue Cross feels like a grander cause because it can make an impact on the well-being of Canadians. “I know my teammates feel the same way in that we all feel there is this opportunity in front of us to make a difference.”

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FEATURE

PROFILE

HOW TO NURTURE A MODERN-DAY WORKFORCE Can employers keep ‘work-life balance’ questions from becoming ‘work-work imbalance’ questions?

THE CLAIMS of offering work-life balance and the quest for peak employee engagement have long been at the forefront of organizational strategies. However, despite decades of efforts and substantial investments, tangible results in these areas remain elusive. In fact, research shows that employee engagement has hovered around 30 percent for the past 20 years, says Dan Pontefract, leadership strategist and author of Work-Life Bloom: How to Nurture a Team That Flourishes.

“engaged” simultaneously. It also offers leaders a roadmap to better support their teams.

The vortex of HR speak Pontefract, who has held senior roles at companies such as SAP, TELUS, and Business Objects, says managers have been sucked into the vortex of HR speak. “Phrases like ‘worklife balance’ and ‘employee engagement’ really started to haunt me,” he says. He knew there had to be a better way of looking at the issue of engagement, and a better way of addressing it.

“If the employee is not at their best, how can the employer help them at the stage they are at?” – Dan Pontefract Pontefract’s “work-life bloom” framework champions a more holistic, nuanced approach that recognizes and caters to the diverse needs and aspirations of people in the modern workforce. The book dissects four unique work-life personas – renewal, budding, stunted, and blooming – each highlighting different facets of people’s work-life dynamic. It suggests employees’ work-life cycles are ever-evolving, making constant engagement a myth. Thus, there is no chance for an entire team to be

“We’re only as good as our work-life balance – yet the construct we’ve created in our organizations is actually a work-work imbalance. Leaders are coached to focus on work, not life, which should then lead to employee engagement. “Employee engagement has taken the ‘human’ out of it and is only about the employee and how they must be engaged at work. The organization will measure this once, sometimes twice, per year and measure the employee engagement with questions

that are only work-related. Leaders think that this score is the measurement that will fuel the performance of the organization. “I’m trying to argue for a change in narrative that is not about a score, but about creating the right work-life factors and conditions for people to bring those life factors into work and work factors into life so that there is a synchronicity between the two,” he says. For his “work-life assessment” research, Pontefract interviewed nearly 10,000 employees spanning 11 countries. He found that a significant 82 percent of all employees view their well-being as important, yet just a disheartening 41 percent believe their employer genuinely supports them in this endeavour. He says these findings paint a clear picture: the traditional worklife balance and employee engagement paradigms are not just outdated but counterproductive. “We are never going to get everyone engaged all at the same time, which means we need to have a new, or at least evolved, model that asks, ‘Where are you right now, and how can I support you?’”

Help employees to ‘bloom’ He believes organizations need to recognize that people are at different stages of life and dealing with different life factors at any given

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FAST FACTS Name: Dan Pontefract Current role: Leadership strategist, culture change expert, author, speaker Previous experience: Served as chief envisioner and chief learning officer at TELUS, a Canadian telecommunications company with 50,000 global employees and over $14 billion in revenue. Also held senior executive positions for 12 years with SAP, Business Objects, Crystal Decisions, and the British Columbia Institute of Technology (BCIT). He is an adjunct professor at the University of Victoria’s Gustavson School of Business. Family life: Dan and his wife, Denise, have three children, two dogs, and two cats, and live in Victoria. time. Incentivizing engagement scores is not the way to increase them, he says. Engagement is an outcome that won’t be realized unless employees feel respected, have a sense of meaning, and have solid relationships at work – factors that will make the employee more likely to “bloom.” “And, if the employee is not at their best, how can the employer help them at the stage they are at? It’s a work-work imbalance if we’re not actually having conversations and dialogue about some of these life factors.” Pontefract says it starts with the leader and how they show up every day. Employees need to have trust in their boss to have these personal conversations. In fact, his research shows that 92 percent of workers believe trust is the single most important factor to have at their place of work with their leaders. Yet only 44 percent believe their workplace is a trusting one. “That’s a massive gap. “So, whether it’s physiological, social, financial, emotional, or any other wellness factors, I believe our leaders have a fiduciary responsibility to be having conversations to encourage healthy individuals in the workplace.”

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SPECIAL FEATURE

RETIREMENT PLANNING

A holistic approach for DC members

CASE STUDY: LARRY AND BRENDA’S RETIREMENT PLAN

Plan members need the appropriate tools and education to navigate the path from employment to fulfilling retirement

Meet Larry and Brenda, who are planning to retire next year. Larry’s employer has provided an opportunity to consult with a fee-based financial planner, so let’s dive into their key financial details.

RETIREMENT PLANNING in Canada requires a holistic approach, with individuals crafting a diverse portfolio to sustain their retirement years. The journey from employment to retirement requires a balancing act to navigate the intricate financial mechanisms involved. By equipping plan members with appropriate tools and education, this transition can shift from challenging to enjoyable. In this article, we delve into the multifaceted world of retirement planning for Canadian plan members who hold a mix of all three pillars of savings: government savings, workplace savings, and personal savings.

Understanding the three pillars of savings Before diving into retirement income planning, it’s essential to understand the three pillars of retirement savings for Canadians mentioned above.

Pillar 1: Government programs • The Canada Pension Plan (CPP): CPP is an earnings-based social insurance program in Canada that provides financial benefits as early as 60 or as late as 70, with annual benefits adjusted higher the later an investor starts taking payments. • Old Age Security (OAS): OAS is a taxable and income-dependent benefit that provides a basic pension at 65 or as late as 70, with annual benefits adjusted higher the later an investor starts taking the payments, and it is subject to residency and post-18 years spent in Canada. • Government assistance programs: Low-income retirees may also access

additional benefits, such as the Guaranteed Income Supplement (GIS) or provincial income support initiatives.

Pillar 2: Employer-sponsored savings plans • Many retirees benefit from employer-sponsored pension plans, including income from defined benefit (DB) or lump sum amounts in defined contribution pension plans (DCPP) or Group RRSPs.

Pillar 3: Personal savings and investments • Individual savings accounts: Retirees often use RRSPs, TFSAs, and non-registered investment accounts to provide income during retirement. • Rental properties: Some families accumulate wealth in real estate, generating income to support their retirement. • Home equity: Homeowners can tap into property equity through downsizing, reverse mortgages, or home equity lines of credit to enhance retirement income. *At the time of publication in September 2023, the Longevity Pension Fund yield to investors at 65 was approximately 7.00%. This figure is adjusted annually [ add full, proper disclaimer language]. For current yields, please visit: https://www.retirewithlongevity.com/fund/details-documents ** This example is for illustrative purposes only and is not indicative of expected nor guaranteed performance. In no circumstances should this be considered investment advice. RRSP (Registered Retirement Savings Plan) income is assumed to grow at 6% and drawn down by 4% annually. TFSA (Tax-Free Savings Account) is assumed to grow at 4.5%, which aligns with recent GIC (Guaranteed Investment Certificate) rates. The Longevity Risk Pooling Mutual Fund is represented by the Longevity Pension Fund, with a starting income rate of 7.16%. Distributions are based on the growth of $10,000 and total distributions received over the first 20 years, using the LifeWorks Economic Scenario Generator model—a dataset of 2,000 potential market outcomes—and align with the approximate 50th percentile scenario. Annuity income is fixed at 7.02%. Starting income for combined OAS (Old Age Security) and CPP (Canada Pension Plan) are $23,760 and $16,766, respectively, and are adjusted for 2% annual inflation

Pat Leo is vice-president, longevity retirement solutions, Purpose Investments

Age: Both are 64. Target retirement age: 65 Marital status: Married Children: Two adult children, ages 28 and 30. Both live at home and work full-time. Employment: Larry and Brenda are lifelong Canadian residents and are eligible for partial CPP and full OAS. Larry has been a hydro technician for 35 years. Larry’s employer offered him a DC pension, and he took advantage of this program. Brenda is an HR manager at a small firm, earning above YMPE. She took some time off work when their children were younger. Retirement financial goals: • Income: Larry and Brenda aim to generate a starting annual income of $80,000, adjusted for inflation, from various sources. • Housing: They plan to live in their home as long as possible; however, they are open to the idea of someday downsizing to a smaller home or condo. • Inheritance: Larry and Brenda would like to leave an inheritance for their children of at least $300,000 in today’s dollars, as they know that in 30+ years, that won’t buy very much. • Lifestyle: Although they are both in good health, have a strong network of friends, and enjoy several hobbies, they haven’t given much thought to how they will spend their time in retirement. They have considered increasing their volunteering activities at various charities they have supported over the years. Strength of Larry and Brenda’s retirement plan 1. Income goals can be achieved: their projected starting income is slightly

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above $83,000, effectively meeting their income goal of $80,000. Still, regular budget reviews can help align their evolving income needs and resources. 2. Their estate is protected: Their goal of leaving an inheritance is very likely to be achieved; they have flexibility between their assets and home to satisfy this goal. 3. Longevity risk is mitigated: Their plan incorporates longevity risk protection via CPP, OAS, the longevity risk-pooling mutual fund, and the life annuity. The portion of their portfolio that lacks longevity protection has modest withdrawals (~4 percent); however, once they convert their RRSP savings to an RRIF, they will need to re-evaluate this strategy. As for the TFSA savings, only the interest is withdrawn. Again, there is flexibility built into their plan. 4. Inflation is managed: Their plan incorporates inflation protection through CPP, OAS, and the longevity risk-pooling mutual fund, which is expected to increase distributions over time (but can go up or down any year.) From their other accounts, they will draw modestly to account for the likely higher income needs in the years ahead. Still, it’s important they observe the impact of inflation on their overall retirement expenses and revisit their plan as living costs change over time.

• Emergency fund: It’s essential for Larry and Brenda to maintain an emergency fund to cover unexpected expenses, such as medical bills or home repairs, without needing to dip into their retirement savings. • Insurance: Reviewing coverage – including health and life insurance – is important to ensure everyone is adequately protected throughout their retirement. • Social activities and hobbies: Retirement is not just about financial planning; it’s also an opportunity to explore new interests and enjoy life. They should take steps to Financial snapshot

Pillar 1

• Health care costs: While Larry and Brenda are currently in good health, they should factor in potential healthcare costs as they age. While some costs will likely go away as their retirement progresses, other spending may replace those items.

Conclusion Larry and Brenda are fortunate that they were able to accumulate the resources needed to achieve their financial and life goals in retirement. Working with their financial planner, they have made smart investment allocations around retirement income sources that reflect the full picture of their total assets. While they know they’ll have to revisit this plan annually as market returns unfold and their health and preferences evolve, this comprehensive approach adds resilience to maintain their financial security and help them enjoy a comfortable retirement.

Investment decision

Projected income Larry • CPP: $14.4K/yr. (Canada. ca) • OAS: $8,383/yr., assuming the maximum

N/A

Brenda: • CPP: $9,360/yr. • OAS: $8,383/yr., assuming the maximum These all rise with inflation

Pillar 2

5. Taxes are minimized: Their advisor has helped them minimize taxes and maximize after-tax income. In addition to using their tax-sheltered accounts thoughtfully, they incorporate income splitting and derive income from dividend-producing investments. They’re also taking advantage of savings within their TFSAs. Other considerations

Both Larry and Brenda are eligible for CPP and OAS

stay engaged and fulfilled during retirement.

Larry’s DC pension: $300,000

Larry: • RRSP: $170K • TFSA: $75K

Pillar 3

Brenda: • RRSP: $200K • TFSA: $75K Principal Residence: $1.2 million (no outstanding liabilities or mortgage)

$200,000 is invested into a longevity risk-pooling mutual fund with a starting distribution yield of ~7%* $100,000 is invested into a fixed life annuity with guarantees but no inflation protection. The average of the providers equates to a yield of ~7%

$14,000/yr. with distributions expected to rise (no guarantee) $7,000/yr. (guaranteed)

Both • RRSPs: their combined assets of $370K are diversified across a balanced fund and a dividend portfolio with an expected average net return of 6%, from which they will draw 4% • TFSAs: their combined assets of $150K are invested in 4.5% GICs

Both • Their combined RRSPs provide an expected return of $22,200/ year, of which they will withdraw $14,800 to mitigate against the chance of depleting their assets over time • Their combined TFSAs provide $6,750/year in investment income

Total projected starting annual income:

$83,000

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SPECIAL PROMOTIONAL FEATURE

INVESTMENTS

Adapting to change:

How target-date funds evolve to deliver better retirement outcomes The experts agree – charting the right glide path takes a skilled fund manager THE COMPLEX interplay of economic factors, market dynamics, and regulatory changes has created a turbulent environment, making it increasingly challenging for plan members and institutions alike to safeguard their financial futures. Targetdate fund managers are actively reassessing their practices. Innovations such as behavioral finance and diversified asset classes have reshaped the landscape in recent years, leading to better risk-adjusted returns for DC plan members. Not all target-date funds are created equal; they deploy a wide range of investment strategies. Experts Jason Zhang, portfolio manager with Sun Life Global Investments; Andrew Dierdorf, portfolio manager with Fidelity Investments; and Derek Beane, institutional portfolio manager with MFS Investment Management delve into target-date fund portfolio construction and how it has evolved to place a greater emphasis on diversification. This includes employing multiple managers who each bring unique skills, insights, and return dynamics to portfolios.

Some interesting trends have started to form in the last few years around

Andrew Dierdorf portfolio manager Fidelity

Jason Zhang portfolio manager Sun Life Global Investments

the interaction between employment and retirement. How might these themes change the retirement outlook for Canadian members? Is the allocation in a TDF portfolio for someone retiring today likely to be different for someone retiring in 30 or 40 years? Dierdorf: With the benefit of hindsight, we can now reflect on a wealth of defined contribution [DC] experience, not only in Canada but worldwide. We’ve seen significant

Derek Beane institutional portfolio manager MFS

evolution, and anticipate this will continue, particularly regarding the changing nature of retirement. As people retire later and live longer, both savings and spending periods may be extended, necessitating careful navigation of these circumstances. The intersection of plan member experiences with fluctuating capital markets is crucial. We’ve transitioned from a robust period in the capital markets to one marked by substantial global debt, rising inflation, and changing investment dynamics. As target-

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Sponsored by

date funds adapt to these shifts, increased portfolio diversification will continue to play a pivotal role in our approach. Zhang: We know that average contributions from plan members have remained steady at around 10 percent for decades, regardless of fluctuations in interest rates and inflation and the increase in longevity. Most plan members likely can’t bear the additional cost of funding their retirement, which puts more pressure on TDF managers to deliver greater retirement outcomes. This is why we have seen TDFs evolve in important ways, on both their glide path – incorporating more equity – and their strategic asset allocations – “DB-izing it” with more sophisticated asset classes. TDF managers will continue to play an important role in determining the retirement outcomes of Canadian members as they control members’ portfolio allocations over very long-term horizons. It has been important for TDF managers to evolve their portfolios continuously to keep pace with evolving capital market expectations, demographic shifts, and trends in savings and spending, as well as regulatory changes. The industry is also increasingly embracing alternative asset classes, including real assets. These non-traditional asset classes provide powerful diversification benefits to portfolios that are usually dominated by systematic equity and interest rate risks. They also offer inflation-adjusted stable yield – nice characteristics to have when building retirement portfolios.

Do members feel that they have to be more aggressive in their investing to cope with that? Beane: Your position in the retirement savings process greatly affects your strategy. In the early stages, most people are quite similar – beginning their careers with little capital and a long investment horizon. However, as retirement approaches, circum-

stances diverge. Some have saved diligently, while others haven’t. Therefore, the closer people get to retirement, the more unique and tailored their situations become, moving away from a one-size-fits-all approach. Risk tolerance, too, varies significantly among people of the same age due to these factors.

What’s the most important consideration when constructing a TDF glide path? Zhang: The design feature that most influences member outcomes is the glide path, which must align with the fund’s objective: providing a financial foundation to preserve retirees’ lifestyles. In our most recent simulated stress testing, we found that the

ment, both the pre-retirement and post-retirement equity allocations play an incredibly important role in the wealth creation needed to support retirement spending. Beane: It’s a mosaic of decisions: What are your allocations? What underlying funds will you use? What’s your rolldown approach? What’s your rebalance approach? What’s your risk management framework? Clients primarily focus on the end result, which is, has their chosen investment met their expectations? Ultimately, as we think about putting all these pieces together, everything that we do is based on the premise of growing wealth for members along their savings journey and helping minimize the likelihood of loss in that invest-

The industry is ... increasingly embracing alternative asset classes Jason Zhang, Sun Life Global Investments landing equity point is the most important design feature in driving strong wealth accumulation: the higher the landing equity weight, the higher the asset level, all else being equal. However, stress testing results also clearly show that the more equity content you have, the higher the downside risks. While market exposure is unavoidable, managing drawdown risks and the potential for underfunding future liabilities is crucial in glide path design. In the Canadian marketplace it’s interesting that starting equity weights are quite similar across the industry, but landing equity weights [at retirement] can differ significantly. Post-retirement stress testing shows us that running a low equity weight glidepath can jeopardize the goal of generating an acceptable retirement income. As there are no more contributions in retire-

ment near retirement. Risks like sequencing and longevity are crucial aspects that we address diligently. Dierdorf: At every age, whether you are 25, 45, 65, or 85, you face unique uncertainties. Each target-date manager has a different perspective on the significance of these uncertainties, how to weigh them, and how to invest. In our research frameworks, we prioritize diversification and flexibility to effectively navigate these uncertainties for our plan members. As life happens, individual circumstances change, and capital markets fluctuate. For instance, someone who experiences a booming market for a decade might need to consider a different saving or spending strategy than someone who endures a protracted downturn. We strive to manage

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SPECIAL PROMOTIONAL FEATURE

INVESTMENTS

uncertainties through thoughtful portfolio diversification that evolves over time. The methods and timing of diversification – how to diversify, when to diversify, and how it evolves over time – vary among different fund managers. We apply unique and differentiated insights to inform our investment approach and decisions.

How do you balance the need to generate robust returns while providing smooth rides – i.e., the need to accumulate enough for retirement while trying to preserve wealth against the many risks plan members face? Beane: The trade-offs involved in targetdate fund design often represent opposing goals – growing wealth versus minimizing downside risk and volatility. It’s about taking risks when appropriate and reducing them when necessary, which ties back to our discussion on sequence risk – significant market downturns near or early in retirement can greatly affect outcomes.

occurs during the actual market downturn. What can be more significant is the shift in asset allocation due to the wide divergence in performance across asset classes. During an equity market downturn, the equity weight can drift meaningfully below the intended allocation. Rather than focusing on the steepness of the glide path, plan sponsors and members may be better served by focusing on disciplined rebalancing, which can help ensure that equity levels are at their intended target when markets do rebound, helping to minimize volatility. Dierdorf: Striking the right balance in trade-offs is crucial. Investment managers must reconcile investors’ or members’ need for returns with the various risks they face. These include both nominal and real drawdowns, with the latter being particularly relevant given the recent uptick in inflation. Looking ahead, we need to consider the types of assets that can provide unique benefits in different capital market environments.

Our goal is to deliver performance in line with design and member expectations Derek Beane, MFS When considering glide path design, there’s generally consensus that sequence risk is highest at or near retirement. A lot of attention is paid to the slope of a glide path in terms of how quickly you are de-escalating the risk. There’s an idea that steeper glidepaths de-risk at a faster rate resulting in lower exposure to equities when equity markets subsequently rebound. History in this case suggests that this concern is perhaps misunderstood or misplaced, as even the most severe market drawdowns are not long-duration events and therefore not a lot of glide path rolldown

While stocks and bonds are foundational to most portfolios, diversifying asset types like inflation-protected securities or alternatives may play an important role as capital markets evolve in the future.

How important is communicating investment risk, and how did you get those messages across? Beane: Education and clear communication are key to ensuring that plan members fully comprehend what a target-date fund is and what it isn’t. This is crucial because a major risk arises when the fund’s performance is not

in line with the investor’s expectations, potentially compromising their ability to maintain their desired standard of living in retirement. The risk profile changes based on age: If left to their own devices, younger individuals may actually be too conservative and not invest enough in capital markets, especially if they have experienced recessions early in their working life. Conversely, older individuals might take on too much risk trying to play catch-up if they have not built up sufficient retirement capital. By providing clear, educational content, we can help individuals make informed decisions about target-date funds, ensuring they are used correctly. We often see people investing in multiple target-date funds, which is generally not recommended, since these funds are already diversified and tailored to the investor’s age. Zhang: I think that’s a question that applies equally to both plan sponsors and plan members. I agree there’s a clear need for

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education around target-date funds to help plan members understand their purpose and how to use them correctly. We need to get that right for the funds to work as intended. Plan sponsors should consider how well aligned a target-date fund is to the intended member retirement outcomes of their plan, and I think that’s where we, as target-date fund managers, need to communicate what member retirement outcomes we’re targeting and how investment risk is being managed in pursuit of those goals.

How would you encourage plan sponsors to look at the “to vs. through” debate? Dierdorf: From my perspective, it’s important to consider what the right portfolio is based on where I am in my life cycle. Should I have the same portfolio when I’m 55 as I do when I’m 65 or 85? The “to versus through” terminology has become shorthand for those questions, which I view as more pertinent and important.

In our investment process, we research, assess, and discuss the needs and sensitivities of plan members at each point in the life cycle. We consider multiple dimensions, including the risk tolerance as someone ages, how asset balances change, the future income or human capital associated with one’s ability or desire to continue to work, and the flexibility to adjust that individuals often demonstrate as experience emerges. In our view, some or all of these dimensions are different for investors at age 55, 65, and 85, which leads us to adjust the portfolio allocations and diversify appropriately based on these distinct attributes. Zhang: That’s certainly a topic that has garnered a lot of attention in the industry, but we think broadly dividing the glide paths between “to” and “through” is missing the point to some degree. It is really a decision about where to allocate risk along the entire glide path. We have strong social benefits programs

here in Canada, and this may partly explain why a “to” glide path is more popular. If you opt for a “through” glidepath, be aware that it might expose members to higher levels of risk during the critical pre-retirement period and the first year of retirement. It’s crucial that a glide path be designed with the plan members’ behavior in mind, carefully considering the specific points at which you want the rolldown in risk exposure to occur, as ill-timed member interventions have the potential to significantly alter the overall performance of the portfolio. Beane: When we launched our suite in the early 2000s, there wasn’t a distinction between “to” or “through” retirement date funds. The vintage year simply marked when a fund reached its most conservative state. Over time, however, age-based defaults led to a division between “to” and “through” providers. Despite this, most members don’t stick with a single target date through retirement.

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SPECIAL PROMOTIONAL FEATURE

INVESTMENTS

The debate over “to” versus “through” is largely irrelevant if people are altering their retirement assets soon after retiring. These approaches ultimately differ only in risk tolerance. “To” versus “through” is really a moot point if people aren’t experiencing the full rolldown that’s intended by a “through”- based approach. In essence, a “through”-based fund is implicitly a riskier “to”-based fund. As people approach retirement, their financial profiles become more varied, and one single investment vehicle is unlikely to meet the unique and individualized needs of each investor. A personalized approach, considering individual risk tolerances and capital bases, is more appropriate.

When you launched these funds, were you aiming at any specific outcomes? Beane: Our goal is to deliver performance in line with design and member expectations, focusing on capital appreciation in early stages and minimizing the downside as retirement approaches. In our design process, we conduct extensive stress testing and longevity analyses as part of our glide path design. We acknowledge that investor circumstances vary widely and often differ from an average member profile. Our approach emphasizes the risk-return profiles of equity, fixed income, and non-traditional asset classes, rather than targeting a specific outcome. We advocate for a progressive glide path that seeks to maximize capital appreciation for younger investors, transitioning to a conservative allocation with a strong focus on downside mitigation and sufficient diversification as retirement nears. This approach is designed to mitigate the impact of market sell-offs as members approach retirement, but it doesn’t target nominal outcomes. While one could create a solution based on a representative or “average” member profile, we recognize the diversity among investors, as most do not look like the “average.”

To use an analogy, if we were making shoes, we wouldn’t only produce size 9s, as that would only fit a minority of investors, even if nine were the average – for most it would be too big or too small. Similarly, our design is meant to align with the varied goals, objectives, and outcomes that people have for target-date funds. We prioritize the process over the outcome, avoiding overly precise objectives that may incentivize undesirable behavior. Ultimately, our process is tailored to serve most investors, not just the “average.” Zhang: We recognize the importance of robust asset growth during the accumulation phase, as it lays the foundation for future retirement savings. It’s universally accepted that more money is preferable, given all

We also want to ensure members’ accumulated assets heading into retirement are sufficient to support a draw-down period that is broadly aligned with life expectancies, so we conduct comprehensive stress tests using different withdrawal rules, factoring in inflation adjustments, targeting the highest acceptable probability that members will have sufficient assets to draw upon throughout their retirement.

How do ESG/sustainability/NZ considerations factor into your TDFs? Dierdorf: ESG is a rapidly evolving area, and our aim is to enhance transparency and foster conversations about its meaning with our clients, the industry, and plan members. Practically, our ESG research focuses

We strive to manage uncertainties through thoughtful portfolio diversification Andrew Dierdorf, Fidelity other factors are equal. However, a major challenge today is the modest level of contributions – approximately 10 percent. Additionally, behavioral factors such as recency bias and loss aversion can significantly affect decision-making, especially after a market downturn, leading some to abandon their plans and attempt to time the market. Our modeling and stress testing of target-date funds along the glide path aim to enhance our understanding of how different exposures can affect plan members’ retirement readiness. We use the income-replacement ratio, considering government support programs like CPP and OAS in Canada, to optimize the probability of our plan members achieving a 60 percent income replacement ratio. This is a stringent standard, considering the longevity challenges and varying asset lifespan in target-fund accounts.

primarily on identifying factors that are materially significant to financial outcomes for individual securities. Our stock and bond portfolio managers may consider both ESG and non-ESG research to assess the factors most likely to affect the future performance of various securities. Beane: We have a long history of sustainability integration into our security selection process, along with other material factors, as it provides additional insight into the potential risks and opportunities that could influence a business’s long-term viability. ESG integration is a natural part of our research and investment process – we don’t target a specific sustainability outcome or rating. There’s no need for an ESG overlay at the target-date fund level, as this is already incorporated organically through security selection in the underlying funds.

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SPECIAL REPORT

SERVICE PROVIDER AWARDS 2023

Canada’s best service providers in the benefits, pensions, and institutional investment industry are improving workplaces and leading the way in their respective fields

CONTENTS

PAGE

Feature article ................................................. 18

Methodology ................................................... 19

Service Provider Awards 2023 ...................... 21

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SPECIAL REPORT

SERVICE PROVIDER AWARDS 2023

TRANSFORMATIVE TITANS LIGHTING THE PATH FORWARD BPM’s first annual Service Provider Awards recognize 2023’s top organizations nationwide for their outstanding commitment to providing innovative solutions and responsive service to solve their customers’ most pressing needs. The inaugural 24 award winners have demonstrated a deep understanding of their

clients’ business environments, enabling benefits, pension, and financial industry professionals to work more efficiently and achieve long-term success. Across BPM’s award categories, this year’s honourees are driving change and progress in their fields by:

WINNERS BY LOCATION

2 British Columbia

Alberta Ontario

3 Quebec

• group and specialty health providers: disrupting the retail pharmacy experience by harnessing technology to create the largest online pharmacy nationally, providing employers with the peace of mind that their team is getting the medication they need • HR and benefits software: leveraging sophisticated risk-analysis tools and deep knowledge of the employee benefits landscape to empower HR leaders to build benefits plans that employees appreciate • retirement and financial planning: acting as a true fiduciary and thirdparty partner in providing group retirement services that focus on saving rather than investing for retirement and promoting financial literacy • group benefits and pension specialists: introducing exclusive technology that empowers employees to access their benefits, savings, and HR information in real time through an app, allowing HR leaders to update and disseminate information paperlessly • benefits brokers, advisors, and consultants: embracing technology and innovative solutions to revamp dated benefits programs, streamline employer administration, and enhance employee communication

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Gahnic Services and Consulting – emergency relief pioneers The benefits management consulting firm is leading the way by harnessing innovation rather than imitation to address market disruptions. The Montreal-based company has won the Service Provider Award in two categories: • group benefit and pension specialist • HR and benefit consultants It has earned a positive reputation for offering: • benefits management • innovative HR and consulting services • process and technology optimization • retirement calculations The company specializes in emergency relief and consulting throughout North America, acting as a trusted partner when clients suddenly lack resources. It helps clients navigate these challenging times with

• a customer-focused operational and strategic service that supports on-demand and remote service • a focus on the operational optimization of clients’ benefits policies • a culture of responsiveness and agility “We aim to help our customers meet unexpected challenges and find solutions quickly when they need them the most,” says Danielle Varela, CEO and managing partner. “In today’s dynamic market, clients generally react to any disruption – COVID-19, inflation, or recession – by aggressively imitating, first in response to new service offerings, then to each other, in a self-reinforcing process that creates a new competitive dynamic that threatens their bottom line.” The company’s creative and collaborative recruitment solutions help HR leaders overcome labour shortages while also promoting operational excellence and saving time and money. Its business philosophy is grounded in the understanding that flexibility has become an essential lever in the modern workplace.

“Embracing change is at the heart of our philosophy; in an age where technology and strategy evolve daily, we remain unwavering in our commitment to helping clients by staying a step ahead” Danielle Varela, Gahnic Services and Consulting

a unique and holistic approach that prioritizes collaboration, highlighted by: • a thorough understanding of group insurance, pension plans, and other employee benefits in the ecosystem

Gahnic focuses on strategy rather than technology to stay at the forefront of the industry. “Not only must we act more boldly, but we must also react boldly to digital newcomers,” says Varela. “This means adopting a

METHODOLOGY In August 2023, BPM opened the window to nominations for its firstever Service Provider Awards, inviting service providers across Canada to put forward their companies for consideration. The awards spotlight the providers that are delivering the most effective and transformative solutions across areas such as technology, consulting, financial planning, and other services. The editorial and research teams reviewed the vendors’ submissions, and nominees were evaluated mainly on the strength and process of their service delivery, with the most important factor being how these providers made benefits and pensions professionals’ lives more efficient through their products and services. In the process of selecting the best providers for 2023, the BPM team also conducted one-on-one interviews with benefits and pensions professionals and surveyed hundreds more within BPM’s network to gain a keen understanding of what these professionals think about current market offerings. A total of 24 organizations stood out based on these criteria, becoming the 2023 winners of the BPM Service Provider Awards.

dynamic and proactive strategy. Rather than defending existing lines of business, we must develop new customer segments.” As a start-up, the consulting company holds all the cards regarding going on the offensive. It emphasizes the use of technology to reinvent and disruption to redefine the value chain. By adapting quickly to the dynamic benefits and pension industry, Gahnic assists its clients in maintaining an advantage and ensuring the continuity of their group benefits policies and pension operations. “We believe that every mandate is an

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SPECIAL REPORT

SERVICE PROVIDER AWARDS 2023

WINNERS BY CATEGORY

Benefit Brokers, Advisors, and Consultants Group Health Providers (Group Insurance)

Group Benefit and Pension Specialists Retirement Planning/ Financial Planning

Virtual Care/Virtual Programs

Health Spending Accounts (HSA)

3 4

HR and Benefit Software Disability Management Consultants

Through objective assessments, recommendations, and strategies for accommodations to stay at work or return to work, Gowan influences change at every level by empowering businesses with individualized support for employees and coaching for leaders. With two decades of success behind them, the organization constantly strives to understand its clients and their unique needs. Its success is evidenced by its reputation and word-of-mouth referrals, which remain key drivers of growth and prosperity.

Wellness Programs

HR and Benefit Consultants

• in-depth knowledge of the workplace, job demands, and employee function • creative solutions for the most challenging disability management cases • engagement of all stakeholders to ensure employees with a disability or health condition can maintain a sustainable stay at work or return to work

Speciality Health Providers

Pocketpills

Employee Benefit and Pension Law

7 * Some companies fall into multiple categories

ongoing journey toward the unknown, where we constantly ask ourselves how we can do better,” Varela says.

Gowan Consulting The Ontario-based award-winner is one company whose total number of monthly

their employees’ health and productivity, including physical, cognitive, mental, vision, and hearing. Gowan Consulting, a WBE Canadacertified organization, maintains its competitive edge through:

referrals has grown by 25 percent year over year, with a projected revenue increase of 40 percent by the end of 2023. As a leading provider of workplace health, productivity, and inclusion solutions, it is at the forefront of providing employers with occupational therapy services to maximize

This outstanding service provider stands as a pillar of excellence within the virtual healthcare benefits space. The tech-driven pharmacy has developed an easy-to-use app and website that help plan members conveniently fill prescriptions and schedule automatic refills with free delivery anywhere in Canada. With a passion for redefining the pharmacy experience, the company is at the cutting edge of technological innovation, with key differentiators that include: • a national presence, with physical locations in five provinces so far • bilingual customer support • a member-first focus

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• unyielding dedication to privacy It prides itself on achieving a 4.9 Google rating with an over 90 percent planmember retention rate. Its sizable in-house tech team counts among its successes building a fully-integrated member-first digital pharmacy, covering everything from pharmacy fulfillment to member experience, complemented by a suite of enterprise product offerings. The number of employers associated with Pocketpills has nearly doubled in the last year.

Service provider award winners delivering high quality BPM’s premier list of service providers includes award winners who have built trust with their clients by delivering exceptional work and service. Testimonials show they are setting new standards for excellence by:

SERVICE PROVIDER AWARDS 2023 Gahnic Services and Consulting Phone: 450 984 1246 Email: Info@Gahnic.com Website: en.gahnic.com Acera Insurance Actuarial Analytics Alberta Retired Teachers’ Association Aria Benefits benefitsConnect Blake, Cassels & Graydon Blue Cross Brown Mills Klinck Prezioso Ceridian

• understanding their clients’ business priorities • offering exceptional support and responsiveness • consolidating payroll operations • possessing a depth of knowledge of industry-related laws • providing unique and customized financial wellness initiatives They share the hallmarks of award-winning service providers, highlighted by industry experts as offering a unique value proposition, staying abreast of industry trends and dynamics, and being true partners in and critical contributors to their clients’ success. These top-tier service providers have also experienced significant growth and expansion within the past 12 months, with several recording new client uptake and revenue growth of 30 percent or higher.

CIBC Mellon Gowan Consulting Hicks Morley Hamilton Stewart Storie iA Financial Matheis Financial Group OneLife Benefits & Consulting Open Access People Corporation Pillway Pocketpills RWAM Insurance TFG Global Insurance Solutions Vita Assure Wawanesa Life

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SPONSORED CONTENT

TD GLOBAL INVESTMENT SOLUTIONS

The Year Ahead 2024 Global Economic Outlook

David Sykes, CFA Senior Vice President, TD Bank Group Chief Investment Officer, Head of Investments, TD Asset Management Inc.

THE YEAR IN REVIEW 2023 was a challenging year, with a rollercoaster ride of market sentiment to match. Economic indicators and forecasts were often mixed, markets saw significant volatility, and the year both started and ended under the shadow of a potential economic slowdown. That said, many broad market indices showed positive returns, and we still saw plenty of opportunities on the table for active investment management. Both equities and fixed income assets delivered strong returns in early 2023, only to be hit with trouble in the U.S. banking

sector. Markets feared contagion, but despite the anxiety at the time, this contagion did not truly materialize over the long term. Within equity markets and particularly in the U.S., a large portion of the year’s returns can be attributed to the so-called “Magnificent Seven”, a collection of large cap Technology stocks that rallied on the back of artificial intelligence (“AI”) buzz mid-year. In our view, we also saw opportunities over the year in smaller pockets of the U.S. market with reasonable valuations. Fixed income yields reached decades-long highs over the year, and despite more recent volatility, particularly in the longer-duration space, we maintained an overweight allocation in the asset class throughout the year. Central banks, including the Bank of Canada (“BoC”) and the U.S. Federal Reserve (“the Fed”), doggedly pursued hawkish policy throughout the year in order to curb sticky inflation. Inflation began to slow by the end of the year; however, it remains above the target rate for both the BoC and the Fed. We also saw a pause on rate hikes in the later months of the year, which suggests that central banks are starting to see the softening they were waiting on in both inflation and labour markets (which were notably firm over the year). Markets responded well to these central bank pauses, rallying on the news of the most recent Fed rate pause in December and in anticipation of potential rate cuts in the new year. Geopolitical struggles dominated news cycles and will likely persist in 2024. Global

growth began to slow over the fourth quarter, and we expect to see that continue into the first half of 2024. It will remain important to closely monitor economic indicators as we go forward into this environment, and we expect to see some ups and downs along the way; however, compared to the forecasts from the start, or even the middle of 2023, a soft landing, albeit bumpy, for Canada and the U.S. is looking more achievable going into 2024.

THE YEAR AHEAD Overall Economic Outlook Both equity and fixed income markets rallied at the end of 2023, seeing a reason for bullishness in the possibility of central bank rate cuts rather than rate hikes in 2024. We likewise believe that the Fed’s decision to hold rates steady in December, alongside a more optimistic Fed forecast, may indicate that we will see a pivot to cuts from central banks in the second half of 2024. We believe the Fed may cut rates first, perhaps as early as May or June. We believe the BoC may start introducing cuts towards the summer. It would be a challenge to estimate where rate cuts will end for the year, but we believe that central banks will have to cut carefully, being mindful of the potential to stoke asset price reinflation in the housing market, while balancing the economy as a whole. There is little appetite from either the BoC or the Fed to move quickly as backtracking these cuts would be a credibility risk and the potential for a hard

CHART 1: GLOBAL EQUITY INDEX RETURNS Name S&P 500 Index (Large Cap)

12M

10Y

9.13%

1.74%

13.84%

9.76%

12.51%

11.82%

S&P/TSX Composite Index

7.48%

0.56%

2.28%

8.82%

9.23%

7.42%

MSCI EAFE Index (Europe, Australasia, Far East)

9.30%

1.34%

12.96%

4.32%

6.51%

4.39%

MSCI Emerging Markets Index (Emerging Markets)

8.02%

1.16%

4.65%

-3.66%

2.73%

2.50%

Source: TD Asset Management Inc. (“TDAM”). As of November 30, 2023.

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landing for the economy remains. While inflation is broadly trending downward, it is still sticky and will remain a key data point for central bank decisioning going forward. The U.S. economy is expected to continue to outperform other global economies in 2024, though perhaps not to the same degree as it did in the second half of 2023. U.S. growth had already begun to slow in the fourth quarter of 2023, and high interest rates are expected to continue to impact consumption. We anticipate that U.S., and global, growth will continue to slow, seeing a trough in the first half of 2024 with potential improvement in the second half. The end of this year will also see a U.S. presidential election, which could potentially have an impact on tax rates and tariffs, but also the appointment of the chair and vice chair of the Fed in the coming years. In Canada, we see challenges for 2024 around consumption growth, which, while positive overall, is being buoyed by population growth and is more negative on a per capita basis. Canadian housing markets may also face challenges this year, particularly in Ontario and British Columbia. That said, if the BoC starts pivoting and yields drop from their highs, this will have a positive impact on mortgage rates. This, in addition to the increase in population, should help set a floor for home prices, particularly in the single detached market. Outside of North America, we continue to see weakness in European markets. In China, much of the world is waiting to see what will happen in property markets and whether a strong government response is incoming.

Neutral Outlook for Equities in 2024 We believe that the equity market has a balanced return outlook and remain comfortable with our neutral positioning. Companies that have adapted to the economic climate of the last few years will likely be in a strong position to start 2024. Earnings growth has been negative year-over-year (“YoY”), but we

believe that it is now starting to stabilize and even show signs of positive momentum. We may see earnings growth continue to pick up if a soft landing is achieved for 2024, particularly outside of the “Magnificent Seven”. Strong free cash flows within the Energy sector, and relatively inexpensive Financials stocks, may present attractive opportunities within the Canadian equity market. International stocks have rallied this year but are challenged by weaker corporate returns and slowing macroeconomic conditions, particularly in Europe. The Chinese economy is showing signs of stabilization and the government remains focused on supporting growth, but challenges remain in the property sector. We feel that the reopening is largely reflected in markets at this point, and so we have consequently moderated our exposure to China. We see some opportunities within emerging markets, but more moderate global growth act as a headwind.

Optimistic Outlook for Fixed Income in 2024 The past year has seen volatility in fixed income markets and we expect higher for longer income returns within the asset class. However, we also continue to believe that fixed income will outperform equities overall for the next 12 months and that bonds can still provide diversification benefits, reduce overall portfolio volatility, and preserve capital. Over the longer term, government bonds continue to remain appealing due to their potential to generate positive nominal returns. Within investment grade corporate credit, spreads have been fairly stable comparatively, and we continue to see opportunities in lower-duration corporate bonds given their appealing all-in yields. We expect high-yield credit to be challenged, particularly for corporations with elevated debt loads, increasing overall volatility, and downside risk.

Stable Outlook for Alternatives in 2024 We believe that an allocation to alternative

assets can benefit diversified portfolios, especially when implemented over the long term. Commercial mortgages continue to provide accretive income while insulating investor returns from the increased volatility of interest rates. Investor appetite within infrastructure remains strong, particularly for energy transition investments and critical infrastructure sectors that generate stable, growing cash flows. Within the private debt space, high credit quality and global diversification provides safety in a potentially recessionary environment. Incremental income and potential capital appreciation from interest rate moderation provide upside. In real estate, Canada’s growing demographic profile continues to be supportive of domestic real estate, particularly multi-unit residential. Office properties continue to experience leasing and valuation headwinds and a flight to quality, while fundamentals remain sound across the other property types. Globally, we believe that high-quality assets, with low leverage and portfolios that are globally diversified, may be able outperform in the current environment. Multi-unit residential and a tilt to the Asia-Pacific can provide global real estate portfolios with enhanced risk-adjusted returns.

Measured Outlook for Commodities in 2024 Commodities can help diversify portfolios with returns that have a low correlation to both stocks and bonds. While energy and some material prices have weakened and may remain weak in the near term, we also see some support in reasonable inventories and disciplined producers. For example, we see a strong outlook for western Canadian oil producers as they have been able to generate free cash flow and have substantively reduced their debt profiles. We expect further tightness in the copper market due to recent disruptions and downgrades to existing supply. Best wishes for 2024.

Disclosures: The information contained herein has been provided for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political, and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. TD Global Investment Solutions represents TD Asset Management Inc. (“TDAM”) and Epoch Investment Partners, Inc. (“TD Epoch”). TDAM and TD Epoch are affiliates and wholly-owned subsidiaries of The Toronto-Dominion Bank. ® The TD logo and other trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.

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ANNUAL REVIEW & FORECAST 2023

INVESTMENTS

Are past growth rates sustainable? 2024 private market themes – a real estate perspective ALLOCATIONS TO direct real estate remain a key component of Canadian institutional portfolios, and as we begin to turn the page on 2023, many investors are focused on the evolution of the asset class going forward. Considerable changes have occurred over the past number of years, and as we emerge from a period defined by the pandemic into one with perhaps an equal amount of uncertainty, insights into growth prospects, capital flows, the cost of capital, and sector allocations will be critical in positioning a diversified portfolio of commercial real estate for the future. Over the past few years, the real estate market has experienced very narrow profit

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growth and return leadership, not dissimilar to the narrow public market leadership produced by the group coined the “Magnificent 7” (the seven largest US publicly listed companies as of September 30, 2023 – Alphabet, Nvidia, Tesla, Microsoft, Apple, Amazon, and Meta). And just as many equity market investors have begun to question the ability of the Magnificent 7 to sustain their market-leading profit-growth levels – particularly as their performance pulled back recently and overall market breadth improved – many real estate investors have begun to ask the same questions about the industrial sector. Are past growth rates

sustainable? What growth rates are sustainable? These questions are less a sign of longterm weakness than a signal of moderation and reversion to mean growth levels. Growth expectations will also have a direct impact on valuations and capital flows. When profit growth is narrowly focused, it makes more sense to pay a premium for growth. This thesis was a key factor in the soaring valuations experienced by the industrial, residential, data center, student housing, and self-storage sectors as outsized rent increases and continued growth expectations spurred positive momentum. The low cost of capital added further fuel to the fire.

ANNUAL REVIEW & FORECAST 2023

REAL ESTATE CAPITAL RETURNS BY SECTOR Industrial

Residential

Office

Retail

Cumulative capital returns (%)

60% 50% 40% 30% 20% 10% -10% -20% -30% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023

Source: RBC GAM, MSCI. Represents the returns of the MSCI/REALPAC Canada Annual Property Index (Unfrozen), Standing investments

However, as the cycle turns to one in which profit growth starts to equalize across sectors at lower levels, it is prudent to seek sectors or assets with more conservative valuations. Those assets that do not demand a “premium for growth” will likely be positioned to drive better long-term returns. With regard to the real estate sector in particular, this trend could drive capital rotation back to the retail and office sectors. Following this rotation of capital will be important moving into 2024, and investors would be wise to follow both the access trends and the pricing of capital.

As the cycle turns to one in which profit growth starts to equalize across sectors at lower levels, it is prudent to seek sectors or assets with more conservative valuations

Access to capital: follow the flows

One of the key distinctions of the private market sector is its unequal access to information. The real estate sector is not a level playing field, and buyers and sellers of private assets can transact based on informational advantages, forward-looking information, and access to private due-diligence data that others may never see. It is a market of extended or accelerated timing, broad or narrow auctions, and the potential to directly add value post-transaction. Within this

Capital flows create a virtuous circle. Increasing access to capital increases the clarity of the underlying cost of capital; this, in turn, supports transaction activity, providing more confidence in private valuations and driving more liquidity, which, in turn, attracts more capital. If the hours 6 p.m. to 12 a.m. are a time of “increasing access to capital,” then in 2023, the clock for the real estate sector was stuck at 3 p.m. In 2024, it is likely that

the clock will move forward to between 4 p.m. and 5 p.m., making 2024 an important year for investors to position themselves well.

Cost of capital: unequal access to information drives valuation uncertainty

context, there can be a very wide range in the market’s view of the cost of capital, driving a wide range in market value opinions, and 2024 will likely be a year when beauty is once again in the eye of the beholder and there is little consensus on valuations. Bearing all this in mind, our key takeaways for 2024 are: watch for the beginnings of a capital rotation, watch for the normalization of growth expectations across sectors, and use the year to position your portfolio for when the clock moves past 6 p.m. Michael Kitt is head, private markets and real estate equity investments at RBC Global Asset Management Inc.

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ANNUAL REVIEW & FORECAST 2023

ECONOMY

Is North American household debt setting up another crisis? CIO of BMO GAM offers economic, market outlook as indebted North Americans face more expensive debt NORTH AMERICAN households owe a significant amount of money. Canadians owed a total of $2.34 trillion as of Q2, with an average credit card balance of $4,000, according to TransUnion. The New York Fed reports that US household debt sat around $17.06 trillion in Q2, with total credit card debt in excess of $1 trillion. In a new era of higher-for-longer interest rates, there is growing concern that household debt levels could present a structural risk to markets and economies. Sadiq Adatia, chief investment officer of BMO Global Asset Management, explained that while the levels of household debt pose risks to the system, the relative strength of the North American consumer going into this period means investors may not be in for as rough a ride as they might expect. He believes, rather, that current high levels of consumer debt in North America, coupled with higher borrowing costs, should result in a slightly weakened consumer – but one who retains enough resilience to ensure relative stability in what may be a slowing global economy. “It’s a tricky market and we are seeing higher volatility. We are also seeing consumers starting to slow down,” Adatia says. “But there’s an analogy I like to use, which is that we’re looking at an egg beginning to crack. The question is, are we looking at a raw egg or a hard-boiled egg? The raw egg will make a mess, but the hard-boiled egg will be fine. I think when it comes to our outlook for the consumer and for a possible recession ahead, we’re looking at a hardboiled egg.”

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Where are consumers strong, and where are they weakening? Adatia’s view begins with the relative strength of the North American consumer leading into this rate-hiking period. Adatia adds a caveat to that assessment by noting that consumers in the US are generally less indebted and less interest-rate-sensitive than their Canadian counterparts. Nevertheless, going into the rate hikes, savings rates and asset levels were higher, and home values had skyrocketed. The strength of that consumer has been key to the

haven’t factored into their analysis of consumer strength is US student debt. US student loans had been covered by a government forbearance program since March of 2020, but on September first of this year that program ended and US student loan payments resumed. According to the Federal Reserve, Americans owe around $1.77 trillion in student loan debt, and the resumption of repayments of that debt will take a lot of money out of consumers’ pockets and out of the US economy.

“It’s a tricky market and we are seeing higher volatility. We are also seeing consumers starting to slow down” Sadiq Adatia, chief investment officer, BMO Global Asset Management surprising resilience of the American and – to a lesser extent – Canadian economies so far this year. Looking at the present day, however, he is starting to see cracks forming. Those cracks include weakness in the labour market, where numbers are still strong but softening, as well as pullbacks in retail statistics and spending levels. From an investment standpoint, equity markets have shown softness, and bond markets have seen a historic collapse. Housing markets, too, have dropped some value. All of that, in Adatia’s view, points to a weakening consumer and more pain down the road. One key area Adatia thinks many analysts

As consumers start to feel the impact of higher rates more acutely now, Adatia believes they will significantly adjust their spending patterns. Over the next two or three years he predicts a shift in patterns toward staples and away from discretionary spending. If and when we hit a recession, Adatia thinks banks will cut rates and ensure that it doesn’t last more than a few quarters. But a rate cut from current levels will still be an increase for consumers who enjoyed near-zero interest in the leadup to and aftermath of the COVID-19 pandemic. This consumer shift stemming from higher-cost debt, in Adatia’s view, should prompt an asset allocations rethink.

ANNUAL REVIEW & FORECAST 2023

90+ DAY DELINQUENCY RATE Y/Y CHANGES FOR ALL PRODUCT LOANS

NEWFOUNDLAND

4.10%

PRINCE EDWARD ISLAND

11.54%

ALBERTA

NOVA SCOTIA

MANITOBA

-5.80%

5.67%

BRITISH COLUMBIA

-0.95%

2.36%

QUEBEC

ONTARIO

SASKATCHEWAN

.19%

19.35%

15.12%

NEW BRUNSWICK

2.15%

Source: Source: Transunion Q2 2023 Credit Industry Insights Report

Investing as consumers weaken In terms of equities, Adatia believes many consumer discretionary stocks will struggle in this environment. Middle-class consumers will shift away from luxury goods, and stocks will see a rotation to value that is typical of a slowing growth environment. While he takes a positive view of technology, he believes that advisors need to be more selective with their tech allocations – noting that recent earnings reports are already showing divergence among big tech names. Conversely, Adatia sees promise in staples and quality companies. However, he thinks that the nature of our modern world is such that investors should reconsider what they

view as a consumer staple. Consumers may be more reticent than expected to cut their Netflix subscriptions and data plans, for example. He thinks the health-care sector should show resilience and benefit from the aging baby boom generation’s growing need for health care. Valuations in that sector, he says, are attractive enough for advisors to consider. Overall, diversification remains Adatia’s watchword, while he notes that there are a number of significant unknowns in this economic environment. If corporations feel a deeper pinch from weakening consumption, for example, there may be more job cuts, prompting a longer recession. To prepare for any eventuality, he thinks advisors need to

be selective about their bond allocations and consider alts exposure as part of a long-term volatility moderation strategy. Consumer debt levels can provoke panic among some clients, whether in terms of the scale of some numbers or the immediate pinch they feel as their own borrowing becomes costlier. “Long-term goals shouldn’t be changed by short-term situations unless there’s a structural change going on,” Adatia says. “If we get pullbacks but we believe in the long-term picture, we should be adding to our portfolios. If they hear that nervousness, they should think about what sorts of things they can put into the portfolio to give us that protection.”

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ANNUAL REVIEW & FORECAST 2023

INVESTMENTS

Learning to live with higher rates: Back to the future? Despite slower growth and disinflation, there is little sign of a Bank of Canada pivot

CANADIAN INVESTORS look forward to 2024, after another year of living dangerously with higher interest rates. Widely predicted recessions in the G7 have not occurred, even if growth slowed sharply in Canada in mid-year, and the Bank of Canada (BoC) has raised rates some 500bp and reduced its balance sheet size by almost 45 percent (since March 2021).

Little sign of an early pivot to ease policy from the BoC Despite slower growth and disinflation, shown in chart 1, there is little sign of the BoC pivoting to lower rates. Indeed, the current policy rate of five percent compares with the BoC’s 2023 estimates of the neutral policy rate of two to three percent, and the 10s/2s yield curve remains deeply inverted, suggesting policy is highly restrictive. Further, the BoC is not projecting a return to inflation at the two percent target until mid-2025.

Why did the Bank of Canada tighten so much in 2022–23? Why has 500bp of BoC tightening been required, to date, plus quantitative tightening, to achieve the disinflation seen so far? Several factors have contributed. First, the BoC did not start from a neutral policy stance but from a highly stimulative one, with zero rates and a vastly expanded balance sheet (which almost quintupled in size to CDN$575 billion in March 2021 versus CDN$120 billion a year earlier). Lagged stimulus from earlier quantitative easing may have increased inflation risks in 2022–23.

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ANNUAL REVIEW & FORECAST 2023

DISINFLATION ACROSS THE G7 & CHINA (CPI %, Y/Y) US

Canada

Japan

Eurozone

China

12 10 8 6 4 2 0 -2 2018

2019

2020

2021

2022

2023 Source: LSEG/Refinitiv. Data to October 2023.

Second, the tightening in the labour market risked second-round inflation effects, should inflation expectations destabilize. Third, after breaching the two percent inflation target, the BoC did not wish to risk a prolonged overshoot by failing to tighten policy sufficiently. Fourth, until growth stalled in mid-2023, aggregate demand had held up well, helped by relatively high employment, COVID windfalls, and the high share of fixed-rate mortgages protecting consumers from sharp rate increases. Fifth, on aggregate supply, the BoC lowered its potential output growth estimates by as much as one percent for 2023 after COVID supply-chain disruptions, despite faster labour-force growth. Finally, at the margin, fiscal policy supplied net stimulus to the economy in 2022–23, despite real growth of 3.4 percent in 2022.

sensitive sectors and particularly asset classes with long duration, like real-return bonds and real estate, suffered significant losses in 2022–23 as they repriced to higher discount rates on future cash flows.

A perfect storm for tightening

Also worth bearing in mind is the impact of any productivity changes resulting from gen AI and the end of zero rates. Widespread implementation of modern IT and the PC appeared

These factors created a perfect storm for sizeable monetary policy tightening, some cyclical and some structural. Interest-rate-

Higher inflation regime not needed for higher rates The evidence of 2022–23 and the Goldilocks period suggests a switch to a higher-inflation regime is not needed for the current higher interest rates to become the new normal. Indeed, the closest parallel with 2023–24 may be the Goldilocks era of the early 2000s, when inflation was subdued, but nominal rates were again in the three-to-five-percent region.

Ending zero rates and AI may sustain higher rate regime

to boost productivity in the Goldilocks period. Without “creative destruction,” as Schumpeter described it, very low rates can cause misallocation of capital if borrowing costs are below the true marginal product of capital, keeping inefficient companies afloat and depressing productivity growth. Although Canada largely escaped the worst of the global financial crisis in 2007–09, and rates did not fall to zero, G7 productivity growth was depressed in the post-GFC period of near-zero rates, with a long tail of companies with very weak productivity growth. Should gen AI boost Canadian productivity growth, as new technology is implemented, this could be another factor sustaining a higher level of equilibrium interest rates in the economy as the new normal, though the precise timing of this is uncertain. Robin Marshall is director, global investment research, LSEG

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ANNUAL REVIEW & FORECAST 2023

RETIREMENT

Tackling the industry’s dominant themes How advances in data analysis, technology, and integrated experiences can help improve long-term results for plan sponsors, consultants, and advisors RETIREMENT INCOME, personalization, and diversification are dominant themes for retirement-plan sponsors and their consultants and advisors. T. Rowe Price, a global investment management firm and a leader in retirement, recently shared its perspectives on how these themes will present challenges and opportunities for the US retirement industry, but we believe many of these same considerations are applicable to Canadian investors, too.

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Retirement income Retirement income challenges can’t be solved with a single investment solution. Plan sponsors, consultants, and advisors are therefore encouraged to take the broadest possible view of retirement income. This can include participant tools, a retiree-friendly plan design, and considerations for both investment and insurance solutions, as well as access to personalized advice. The retirement industry historically has

focused efforts primarily on planning and saving for retirement. At T. Rowe Price, we recognize the increasing need to help people better manage their income and spending in retirement. Fortunately, more employers are actively seeking to identify retirement solutions for their plan participants. A change in mindset from both employers and retirees, combined with an evolution in products and services, could drive broader adoption of retirement income solutions. In

ANNUAL REVIEW & FORECAST 2023

making cost-effective delivery of both sophisticated and personalized solutions a reality. As a result, employers and financial professionals are increasingly offering customized options that consider an individual’s circumstances beyond age – such as debt and spousal savings – a service that is anticipated to continue growing on par with demand.

Diversification

fact, signs of this trend are already emerging, given an increase in the number of plan sponsors moving from information-gathering toward decision-making and implementation.

Personalization Consumers increasingly expect personalized experiences in many aspects of their lives, and the retirement experience is no different. T. Rowe Price has collected data showing that personalization and targeted communications can help drive positive behavioral changes that improve retirement outcomes. For example, participants who watched targeted educational videos on T. Rowe Price’s recordkeeping system were twice as likely as others to increase their deferral rates and add or update their account beneficiaries. Still, the diverse nature of participants can make personalization challenging. Traditionally, addressing personalization on an individual basis was costly and required one-on-one consultation with a financial advisor; however, advances in technology are

T. Rowe Price has long maintained that portfolio diversification is instrumental to achieving successful long-term retirement outcomes, and making investment decisions based on the risks participants face at different stages along their retirement journey has, by and large, become conventional wisdom. However, the 2022 correlated sell-off in both stocks and bonds reinforced the importance of a dynamic approach that can help mitigate downside risk while taking advantage of excess return opportunities. Diversification should encompass multiple market segments and also incorporate additional levers for making short-term adjustments that could further enhance returns and help mitigate near-term risks. For over a decade, inflation wasn’t a major concern, but in today’s post-pandemic distorted market environment – where inflation risk has persisted and interest rates are expected to stay higher for longer – plan sponsors and advisors should ensure that investment allocations align with the current market outlook. This is especially true for fixed-income allocations within target-date strategies, the most popular vehicle for retirement investors. Expanded options in global fixed-income markets and non-core sectors can also create additional opportunities for diversification and potential excess returns.

Final thoughts The retirement industry is increasingly focused

on helping investors balance saving for retirement with other financial priorities. Advances in data analysis, technology, and integrated experiences can help stimulate participants’ actions and improve long-term results. T. Rowe Price benefits from participant data collected across its US recordkeeping business. This year’s 2024 US Retirement Market Outlook included research and data from proprietary studies across T. Rowe Price, along with select industry data, as well as insights and input from retirement strategists and investment professionals across the firm. This outlook is a helpful guide to similar trends taking hold across the Canadian retirement landscape. Important Information FOR ACCREDITED INVESTORS ONLY. NOT FOR FURTHER DISTRIBUTION. This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction. Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc., enters into written delegation agreements with affiliates to provide investment management services. © 2023 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. 202311- 3240882

Sudipto Banerjee, Ph.D. is vice president, retirement thought leadership, T. Rowe Price

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ANNUAL REVIEW & FORECAST 2023

INVESTMENTS

The broadening of market leadership We are now in an economic regime quite different from the decade following the global financial crisis

MARKET LEADERSHIP began to broaden throughout the third quarter relative to the narrowly led performance we experienced in the first half of the year. We believe that we are now in a different inflation and interest-rate environment – one that we have not seen in a long time – and we expect the broadening of market leadership to continue.

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Broadening leadership Beginning in June, following stronger-than-expected economic data, the market began to acknowledge that monetary policy was not likely to shift from tightening to easing any time soon, thus coalescing around a view that rates are likely to remain higher for longer. This sentiment pressured the valuations of

longer-duration cash flows, and we subsequently experienced a shift in style performance to favor value over growth. This was evident during the quarter as the MSCI All Country World Index (ACWI) Value outperformed its growth counterpart by 3.11 percent. Relative outperformance was driven by inexpensive and cyclical sectors such as energy,

ANNUAL REVIEW & FORECAST 2023

autos, financials, and consumer discretionary retail. We have also seen a broadening in regional performance. Italy, Spain, and Japan outperformed in developed markets, while Brazil, India, and Turkey had strong returns in emerging markets.

Economic expectations The global economy remains on an expansionary course, although the pace is slow. Disinflation has been the primary story over the course of the year. In the United States, inflation has averaged two percent to 2.5 percent since June, but more recently, higher energy prices drove inflation toward three percent. Shelter also remains a primary driver of the year-over-year change in the Consumer Price Index (CPI), but shelter prices are sequentially decelerating on a monthly basis. While the monthly data may be volatile, we expect that US inflation will likely remain in the 2.5 percent to three percent range for the remainder of the year. We have seen a similar trend in Europe. A soft landing is likely. Importantly, disinflation’s ability to buoy real incomes and consumer spending growth is improving, particularly in developed markets. It has contributed to positive real wage growth in both the United States and Europe. This is contributing to better purchasing power and stronger consumption, which we expect to support gross domestic product (GDP) growth. It also suggests that a soft landing is likely. We continue to closely monitor energy prices. Although natural gas prices have come down across the board, it is important to note that European gas prices are still twice as high as they were before the Russia-Ukraine war. In particular, Germany has seen a significant hit to its energy-intensive industrial production, primarily due to these higher prices.

Earnings growth expectations How does this all equate into expectations for corporate earnings growth? There appears to be a significant amount of mispricing between what we expect in aggregate economic growth and what has been

observed in consensus estimates, and we note some interesting divergences. We believe developed Europe and Japan are likely to have the most potential upside in 2024. US companies are expected to deliver double-digit earnings per share (EPS) growth next year; however, we believe these estimates could be overly optimistic. Developed Europe, meanwhile, is likely to be one of the weakest regions for corporate earnings growth for the remainder of the year. These markets contrast with Japan, which has experienced strong and broad earnings growth this year, while estimates for next year appear quite modest. We believe developed Europe and Japan are likely to have the most potential upside relative to expectations in 2024. Emerging markets, led by China, have been the weakest performers this year. Perhaps not surprisingly, estimates are pointing to a rebound in earnings in 2024. While economic activity in China has decelerated throughout

the year, recent macro data suggests that the economy is near or at trough levels. Signs of stabilization in the purchasing managers’ index (PMI), acceleration in retail sales growth, and easing of deflationary pressures are encouraging.

Where to from here? While the prospect of higher-for-longer rates has seemingly surprised the market, we believe we are now in an economic regime that is quite different from the decade following the global financial crisis. That period was anomalous, with low inflation and extraordinarily accommodative monetary policy. We merely expect low inflation and extraordinary accommodative monetary policy to revert to the very longterm averages of previous decades.

Ken McAtamney is partner, head of the global equity team, portfolio manager, William Blair

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ANNUAL REVIEW & FORECAST 2023

BENEFITS

Artificial intelligence and benefits fraud: A double-edged sword 34

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ARTIFICIAL INTELLIGENCE has already begun to transform the way many of us live and work. Many industries will undergo significant changes as AI technologies become more pervasive, and the insurance industry is no exception. AI has numerous applications – and implications – for group benefits providers and their clients. Before we dive in, let’s start with a definition. AI is basically a machine’s ability to perform the cognitive functions we would normally associate with the human mind, including perceiving, reasoning, learning, problem solving, and exercising creativity. Many of us interact every day with AI applications such as Siri, Alexa, and Google Assistant. These applications can take information in the form of audio or text, interpret the information, and either provide a response or complete an action.

ANNUAL REVIEW & FORECAST 2023

This is all done through a combination of pre-programmed scripts and machine learning algorithms. Machine learning is a form of AI that allows software to become more accurate at predicting outcomes without being explicitly programmed to do so. One application of machine learning in our industry is in fraud detection – identifying patterns in data to make predictions in relation to known fraudulent patterns. The Canadian Life and Health Insurance Association recently established a co-operative data-pooling initiative. Each month, anonymized claims are pooled together from member carriers and run through an AI tool to generate alerts for potentially fraudulent activities. Increasing the size of the data set being analyzed to a pool that contains millions of records can help identify situations and patterns in a way that wouldn’t

otherwise be possible. Think about the impossible day scenario. One carrier may see only a few claims from a particular health-care provider on a particular day –but by combining data across the industry, we can see when that provider actually billed for 20 hours in a single day. We’ve had AI capabilities for a few years now – so what’s new? The biggest difference is that the new AI systems are capable of deep learning, a subset of machine learning. With deep learning, an application need only input raw data and the AI network will derive the analysis by itself, learn more independently, and apply what it learns. Credit card companies use deep learning as part of their fraud-detection programs. Within seconds they can evaluate more than 500 data elements to determine whether a transaction is suspicious, looking at things

like payment method, time, location, item purchased, and amount spent to identify any deviations from the norm. Another application of deep learning is generative AI. It identifies patterns and structures to create new, original content in a range of formats, including text, audio, images, and video. It can even be used to create synthetic data – data that doesn’t already exist, such as a training environment for autonomous vehicles or even music and art. ChatGPT is probably the best-known example of generative AI. The app was introduced in November 2022 and set the record for reaching 100 million active users – in just two months. The opportunities to apply deep learning and generative AI to augment our capabilities are exciting and attractive. But there is another side to AI. The same technologies that can be used to detect and control fraud can also be used to perpetrate it. For example, generative AI can be used to duplicate your voice after only a few minutes of listening in. That has huge implications for privacy and data protection, particularly for any financial services provider that uses your voice as authentication to access services. From a benefits plan perspective, it wouldn’t be difficult to use a generative AI application such as ChatGPT to create a fake business with a fake balance sheet and fake employees. This fake business could then apply for coverage with a group insurer. Once implemented, how much harder would it be to generate fabricated claims for the fictitious employees of this bogus company? So, while new technologies evolve and bring exciting changes that make our lives easier, they come with risks. As insurers, we will need to exercise great care as we look to leverage the new AI. At the same time, we will need to adapt and keep pace with these changes to identify and counter new risks. Jon Sider is director of group health and dental claims at Equitable

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ANNUAL REVIEW & FORECAST 2023

BENEFITS

Ways employers can strengthen their businesses in 2024 The bottom line matters – but so does engaging and stabilizing your workforce

WITH RISING costs and labour shortages expected to continue, Canadian employers will need to take steps to strengthen their organizations. This means not only paying attention to the bottom line, but also considering ways to engage and stabilize the workforce. In 2024, organizations can differentiate themselves by offering personalized benefits. They can identify organizational goals to drive and support expenditures. And offering financial well-being programs – including retirement-readiness support – will improve employee stability.

Financial concerns

1 Inflation and rising costs will strain employee benefits programs. Employers are already facing rising premiums, particularly with fees for employer-sponsored dental plans increasing between five percent and 10 percent. At the same time, skyrocketing drug costs have led insurers to pay a recordbreaking amount in claims – including nearly $44 billion in medical claims alone. Yet employers find themselves with few options. The fierce competition for talent has pushed employers to cover the extra costs themselves rather than pass them on to employees. Employers will look to

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personalized benefits offerings in order to spend their benefits dollars strategically. Engaging an experienced benefits broker will help organizations find these types of savings in benefits plans.

Employee interests

2 It’s an employee’s workplace today. Recruitment and retention are challenges with fewer available workers. Employers will use their benefits offerings to attract and retain that new talent, since a majority of Canadian workers – especially those under 30 – are willing to change jobs for a stronger benefits package. But building that stronger benefits package requires the use of data and analytics to inform the benefits strategy – and many organizations simply aren’t leveraging the data appropriately. Whether it’s financial education, fertility benefits, or mental health coverage, organizations must understand their employees’ needs. Tools like HUB’s Workforce Persona Analysis can clarify the gaps between those needs and the organization’s current offerings. Personalized benefits based on data and analytics will put the right benefits into the hands of the right employees, delivering quality employee experiences (QEX) that improve recruiting and retention.

Organizational resilience

3 The pressure is on. When finances are tight, rising costs come under increasing scrutiny. HR leaders and benefits managers will have to combat the issue by more obviously aligning benefits offerings with organizational goals. Identifying critical goals such as employee well-being and job engagement goes a long way toward boosting recruitment and retention.

ANNUAL REVIEW & FORECAST 2023

aside any retirement savings at all. Today, many employees are looking for help from their employers. Organizations can send a strong message of support if they offer not only a retirement savings plan but also financial well-being initiatives to engage younger employees who haven’t thought about their lives “after work.” Those that build a strong communications plan to engage employees and offer financial well-being on top of it will build a workforce that is loyal and engaged.

Planning for 2024 It can be challenging to build comprehensive, successful benefits programs. But those who turn to a benefits broker for guidance will have an easier time getting started. In 2024, organizations that follow these guidelines will be more successful:

An integrated benefits strategy connects the organization with the benefits program more closely. Folding in those goals, such as financial literacy, physical well-being, and mental health, can help direct leaders to support the right goals. In many cases, it’s about offering the right technology solutions. For example, when organizational leaders understand that their employees need the simplicity of an app, they are better

able to support the financial investment in that solution.

Retirement issues

4 Retirement savings are a real issue for most Canadians. Although Gen Z employees have started investing in RRSPs earlier than expected, approximately half of working Canadians know they aren’t ready for retirement and roughly one-third haven’t set

• Start with the data. Figure out what is happening in your organization and what your people need. • Offer personalization. One size fits none. Offering personalized benefits helps you adapt to the needs and wants of individual employees. • Prioritize well-being. Offer holistic-integrated solutions that support the employee’s overall well-being to energize your workforce. • Focus on benefits. Finally, use your benefits offerings to attract and retain talent.

Joy Sloane is a senior vice president in global insurance brokerage Hub International’s employee benefits consulting – national accounts practice, and has 32 years of consulting experience.

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ANNUAL REVIEW & FORECAST 2023

BENEFITS

Navigating the future of health care

How innovative AI can help group benefit insurers deliver more value and enable employers to win the war on talent WITH THE COVID-19 pandemic exposing the struggles that our national health-care system is facing, there has been a growing emphasis on improving health-care navigation for Canadians.   Further, as governments work to overcome health-care gaps and challenges – such as staff shortages – people in Canada

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are becoming more engaged in their own well-being. Employers are also proactively keeping their workforces healthy by adding more health benefits like digital health solutions, which, amid rising labour shortages, burnout, and disengagement, are helping to attract and retain top talent.   While this proactive approach by

employers to add vetted health resources is a good step, the call for easier accessibility and navigation of these resources is expected to increase as more Generation Zs (or Gen Z) join the workforce. According to a paper by TELUS Health, Gen Z is facing a mental health crisis, and they have a strong preference for personalized services, expecting

ANNUAL REVIEW & FORECAST 2023

personalization and technology to be integrated into all areas of their workplace. In fact, the same paper highlighted how 91 percent of Gen Z workers said that the technologies offered by an employer are a factor in deciding among similar job offers. As this trend emerges, private payers see an opportunity to lead in bringing these innovative solutions to the marketplace at scale. Payers and employers can further improve these solutions by using innovative artificial intelligence (AI) to strengthen relationships with employees and plan members while creating cost sustainability for benefits payers, employers, and plan members.

AI-strengthened relationships as a competitive advantage   Innovation in health navigation calls for a fresh approach from employers and payers

to keep them competitive, as younger employees, in particular, have less patience wading through a myriad of health resources and manual inputs that make up many companies’ health programs. AI and personalization may appear contradictory to some, but recent developments in the market show how advanced AI-powered health navigation experiences can deliver more customizable solutions that meet the needs and expectations of plan members and their dependents.   How could this work? Let’s imagine you sprained your ankle while playing soccer. When accessing the care provider registry selected by your employer, you can quickly access a network of practitioners near you who are vetted by your insurer and covered by your group benefit plan. This eliminates time-consuming searches and makes it faster and easier for you to receive care while processing your claim adjudication and reimbursement in real time. Now consider a scenario where a plan member is suffering from mental stress and doesn’t have access to these tools. They have little energy to browse manually through multiple webpages to find a suitable professional who aligns with their preferences, has been vetted by the insurer, and is covered under their plan. They may not, in fact, get connected with the care they need or that is covered by their benefit plan. With an advanced, smart health-navigation system, the care provider registry can understand the plan members’ needs and connect them with trusted resources within their benefit ecosystem, including their employer’s employee assistance plan (EAP) as a preferred partner. This process makes

it more convenient for plan members to access the support they need for their mental well-being.

The convergence between payers and providers as an enabler of better health outcomes The above examples illustrate how AI serves as the catalyst for connecting health records, claims, and provider networks, resulting in personalized and efficient services for end users. By moving through a more seamless health-care navigation journey, one’s health outcomes are improved and engagement is heightened. On the payer side, leveraging AI algorithms that analyze patterns can accurately detect fraudulent claims. By enabling the allocation of resources to legitimate claims, AI algorithms ensure resources are used efficiently so that they can be dedicated to creating competitive plans that help to retain talent. By slashing the amount of administrative burden and manual inputs needed, these algorithms also encourage cost sustainability. Canadians are increasingly empowering themselves to make informed decisions about their health and well-being, but are also expecting their employers to play a bigger role. By prioritizing personalization, access, and improved user experience in health navigation through AI, payers and employers can not only rise to the challenge but also remain competitive in the effort to recruit and keep the best talent.

Martin Bélanger is managing director, payor and provider solutions, TELUS Health

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ANNUAL REVIEW & FORECAST 2023

PENSIONS

How can pension funds invest differently to create and capture value? Study shows how four large Canadian pension funds have taken control of the value-creation process PENSION FUNDS spend billions on active investments that aim to generate “alpha” – the extra value above and beyond risk-adjusted returns. The problem is that in the long and complex chain of industry players connecting the real economy to the financial sector, pension funds are at the bottom of the value-creation chain. Upstream, entrepreneurs and developers launch projects and create value, followed downstream by venture capitalists and private equity funds, who provide financing and oversee the value-creation process, and further downstream by mutual funds and hedge funds. Finally, at the tail-end, pension funds enter as limited partners, allocating billions to these specialized intermediaries. The fees pension funds pay to upstream players are such that their active investment returns are often comparable to those of passive investments. In other words, any alpha they generate is absorbed by the fees they pay out. In my recent study, done jointly with Barbara Zvan and Eduard van Gelderen, we show how four large Canadian pension funds have taken control of the value-creation process in order to capture a greater proportion of the upstream value. Their

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landmark projects include Ontario Teachers Pension Plan (OTPP)’s acquisition of Cadillac Fairview, a major real estate operator and developer; Public Sector Pension Investments (PSP)’s development of Mahi Pono, a largescale agricultural operation in Hawaii; Caisse des Dépots et Placements du Quebec (CDPQ)’s development of REM, a new metro system in Montreal; and CPP Investments’ acquisition of Antares Capital, a major private credit platform in the US. These projects are noteworthy for their size, complexity, and diversity – spanning four asset classes: real estate, natural resources, infrastructure, and private credit. The projects’ size, complexity, and variety provide insights into how the funds created and captured value in four important ways. The first way is to achieve meaningful scale in markets that bring strategic value to the funds. For example, Antares Capital acted as the platform through which CPP Investments could consolidate and grow investments in the lucrative US mid-cap loan market, where deploying large amounts of capital is difficult. The second way toward value capture is vertically integrating parts of the value chain and thus reducing fee drag. The funds did this

ANNUAL REVIEW & FORECAST 2023

by acquiring controlling stakes in established operators who brought expertise in identifying opportunities and in management. For example, when OTPP acquired and privatized Cadillac Fairview, it became the subsidiary responsible for managing the fund’s real estate portfolio. A third way of creating value is by becoming an anchor investor. Anchor investors provide stability, structure, and leadership, which is necessary to coordinate multiple stakeholder groups. In the cases of Mahi Pono and the REM, the large and longterm capital commitments of PSP and CDPQ gave credibility to each development project and made it possible to coordinate local communities and public authorities whose buy-in was critical to their long-term success. A fourth means of value creation is developing internal synergies. The pension funds leveraged their operators to create value elsewhere within their organization. PSP leveraged its Mahi Pono operator, Pomona Farming, OTPP leveraged Cadillac Fairview, CDPQ utilized CDPQ Infra, and CPP Investments leveraged Antares Capital, using each operator’s on-the-field expertise to pursue active investment strategies in related markets. It needs to be emphasized that these in-house projects are not for the faint of heart. They come with considerable risks that require careful management. Four primary sources of risk became evident. The first is the reputation risk that is characteristic of large and illiquid ventures. Each fund managed this risk by carefully building a distinct business model and ownership structure that aligns the incentives of the different stakeholders. There is no cookie-cutter approach to these transactions, and each has to be handled according to its individual contexts. The second is operational development risk, which the funds addressed by using well-established operators and the productive involvement of the different stakeholder groups. The third source of risk is government interference, which would dictate that funds would have to be short-term focused and modify or exit the projects early. This risk is mitigated for

large public Canadian pension funds because they are not subject to strict solvency requirements as in the EU. The funds also benefit from a strong governance structure, allowing them to operate at arm’s length from their public sponsors. Importantly, they have agile professional boards with clear authority delegation structures, allowing them to invest in complex projects in private markets. The fourth risk is not having a proper governance structure that clearly outlines the roles and responsibilities of the different actors along the value chain. This can lead to a pension fund being too involved in the day-to-day operations of its operator without understanding the underlying business. The pension fund may also lack sufficient capital to meet the operator’s needs. The four funds have handled these risks by investing in and partnering with operators who run their operations independently as separate entities in which the funds act through the operators’ boards and commit to providing ongoing financing. What about smaller funds? In our study we also analyze the case of University Pension Plan Ontario (UPP), a new fund that manages the pension assets of Ontario universities. Unlike the larger plans, UPP does not have the capacity to invest in large development projects by itself. Because of this limitation, UPP has instead established a more flexible strategy focused on building strategic relationships with general partners and identifying smaller mid-market deals that align with their expertise and don’t receive as much attention from the larger funds. Despite the risks, our study shows that it is possible for institutional asset owners to invest differently and directly create and capture value. For long-term pension funds and their millions of members, alpha may not be so elusive after all. Sebastien Betermier is associate professor of finance at the Desautels Faculty of Management at McGill University and executive director of the International Centre of Pension Management. The views expressed in this article do not necessarily reflect the views of either organization.

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OPINION

Is employee profitsharing a win-win? When theory meets the real world, things get a bit complicated HAVING EMPLOYEES act as owners of the company for which they work should be a no-brainer. It is, in theory, the perfect employee benefit, as the employee wins and the employer gains, too, through increased company productivity. It also should please those who call for capitalism to be reinvented in some form, as what could be more democratic than employees profiting from their efforts? And all this should be true whether employees are part of an employee share ownership plan (ESOP) or a profit-sharing plan. Of course, when theory meets the real world, things get a bit more complicated. A survey done in the year 2000 by Richard Long of the University of Saskatchewan of Canadian CEOs showed almost 100 percent agreement that profit-sharing was good for their companies, promoted loyalty, and increased job satisfaction. CEOs were in less agreement about its effects on employee absenteeism, and were split between “positive contribution” and “no contribution” on its role in the company’s stock performance. But are, or were, CEOs correct in their assessment? A more comprehensive study has just been published by Elio NimierDavid of the University of Chicago, with David Thesmar of MIT and David Sraer at Berkeley, titled “The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France.” It seeks to answer two questions: 1. Does this program actually benefit employees, or are firms merely substituting profit-sharing for normal wages? 2. Does this promote firm productivity? France is a useful example, as the government

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passed a law in 1967 requiring all firms with more than 100 employees (reduced to 50 employees in 1991) to distribute a share of their excess profits (defined as profits above five percent of book equity) to employees. This formula, which is effectively a significant tax on profits, as well as its implementation for more than 50 years, make for a rich data set to examine. Along the way the authors made some interesting discoveries. Pre-1991, there was

As to the second question, involving firm productivity, the authors found no productivity gains. They tried hard and used several different measures and looked for any increase above one percent over non-profit-sharing firms, yet found nothing. “We obtain consistent findings across all measures: profit-sharing leads to a precisely estimated zero effect on productivity,” noted the authors. They also looked at other factors that have been cited by other researchers as a benefit of profit-sharing, including reduced sick leaves and the probability of working extra hours. They found no effect on these measures. Finally, to those researchers who often say that much profit-sharing comes to too small an amount to change employee behaviour, they note that in this case, “the requirement to share profits represents a transfer to employees of about 10.5 percent of a firm’s pre-tax income” – a not-insignificant amount of money.

For firms with positive excess profits, employees had a 1.8 percent increase in their total compensation more than the usual “bunching” of firms reporting between 95 and 99 employees, which was under the 100-employee threshold for mandated profit-sharing. This bunching completely disappeared after the threshold was changed in 1991. The authors thus rejected the idea that profit-sharing is perceived by all employers as a benefit to their companies. Workers do benefit from profit-sharing. The authors concluded that for firms with positive excess profits, employees had a 1.8 percent increase in their total compensation (wages+profit-sharing). About three-quarters of this increase came at the expense of the owners of the firm, with the rest being paid for by the government in the form of lower corporate income tax, as profit-sharing reduces the corporate income tax base.

Profit-sharing has benefits. Employees benefit, though the results are not equal. Workers at the lower end of the skill distribution list do not see their base salary reduced (due to minimum wage thresholds) and thus benefit fully from profit-sharing, whereas employees at the higher end show a decline in their base wages, leaving total compensation unchanged. Just don’t think that this is a panacea to increase productivity in your company.

Jim Helik is a contributing author to the Managing High Net Worth and the Commodities as Investments courses published by CSI Global Education. He is also one of the first holders in Canada of the Human Resource Management Professional designation from the Society for Human Resource Management.

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Benefits and Pensions Monitor’s special reports provide an expert-collated resource for the industry when looking for best-in-class partners and the most revered service providers. The special reports also provide an opportunity to honor the top companies and individuals in the industry for their hard work and commitment to innovation. In 2024, BPM will produce a comprehensive portfolio of special reports covering a plethora of topics and agendas that are top of mind for professionals and most pertinent to the industry.

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