March/April 2009 • VOL 6 NO 2
Featured
Getting a better deal on generics By Sheryl Smolkin
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he Competition Bureau recommends that private plan sponsors embrace strategies such as preferred provider networks, mail-order pharmacies and patient incentives to get a better deal on generic drugs. However, sponsors and other industry experts say the first step is more transparency regarding the drug supply chain — including kickbacks and rebates to pharmacies and governments. The Bureau’s 2008 study “Benefitting from Generic Drug Competition in Canada: The Way Forward” says obtaining generic drugs at competitive prices could save private payers up to $600 million per year, with the potential for hundreds of millions of dollars in additional savings as more major drugs lose patent protection. The study reveals that despite strong competition in the supply of many generic (see generics on page 25)
ALSO INSIDE
pension funding
N.S. valuation proposal is out of tune By Sheryl Smolkin
A
new “accrued benefit” method of valuation for defined benefit pension plans recommended by the Nova Scotia Pension Review Panel is getting mixed reviews from actuaries, who say it will further exacerbate an already uneven pension environment across the country. Funding in accordance with solvency valuations that test plans against the possibility of immediate windup is currently mandated by all Canadian jurisdictions. DB plans in Nova Scotia that are not fully solvent must have funding in place to achieve full solvency within five years. However, three specific exceptions have been made for universities, specified multiemployer plans and municipalities. “Our conclusion was that the existing solvency standard for Nova Scotia was excessively conservative and produced a value that was too
high for the benefits being valued,” says Dick Crawford, an actuary and member of the panel. “At the same time, it excluded a whole bunch of important benefits, like indexing after retirement, and ancillary benefits, such as enhanced early retirement.”
Minimum funding rules
As a result, the panel has recommended that valuations be made on an accrued benefit basis, which includes consideration of all promises, but will use actuarial assumptions closer to those for going-concern valuations. It is also intended that the rules for minimum DB funding will ultimately be the same for most pension plans subject to the N.S. Pension Benefits Act, with the exception of target-date benefit plans and SMEPPs. Both surpluses and deficits will be amortized over 10 years with interest, and, on wind-up, plans will have to (see valuation on page 10)
claims administration
6 investment insider
Understanding the risks and rewards of securities lending
COB guideline resolves outstanding questions
18 quality of life
Concierge services are a valuable benefit
by Andrea Davis
28 feature story
Making sense of DC investment fees
Benefits celebrate Bollywood page 31
C
oordination of benefits is generally well-understood by plan members, but the Canadian Life and Health Insurance Association is hoping its revised Guideline G4 and accompanying consumer brochure will help to resolve any ambiguities, “It’s not a totally new guideline, but has some revisions, particularly in areas where we were silent and people had questions,” says Irene Klatt, vice-president, health insurance, with CLHIA in Toronto. The original COB Guideline,
published in 1990, was developed to help foster consistency in situations where a person can submit a claim to more than one group plan. But the growing popularity of health care spending accounts, coupled with changing family dynamics, created a need to revisit the COB Guideline. With HSAs, “people had an understanding of how they thought that should all work, but we just spelled it out a little more clearly,” says Klatt. “They haven’t changed the basics,” notes Louis Bernatchez, partner with Morneau Sobeco in Montreal. “Even (see cob on page 16)
March/April 2009 • Employee Benefit News Canada
CONTENTS Editor’s Desk 4 Drug plan sponsors are getting a raw deal. Editor’s Inbox 5 Temporary solvency relief for DB plans will not be much relief at all. Investment Insider
DB and DC investment trends
6 7
Securities lending takes a back seat in tough economy. A realistic assessment of the risks and liabilities of your pension plan will get it started on the road to recovery.
Benefits Retirement
Retirement savings plans and financial education
8 9
28
DB sponsors take small steps to better manage risks in their plans. Should you add a TFSA to your group savings plan? Our experts weigh in.
Features 24 Getting a better deal on generics
Transparency in the drug supply chain would benefit private drug plan sponsors.
28 Fee disclosure a cloudy issue
Better disclosure could put downward pressure on DC fees..
Benefits Health
Industry Resources
12 Employers adopt high-tech, cost-effective solutions to wellness. 14 Cutting drug plan costs through therapeutic substitution fails in B.C.
Resource Guide
Quality of Life
Provider Profiles
Health care plans, drug benefits, LTD and wellness
Added-value benefits that build loyalty
18 Concierge services free up valuable time for employees. 20 Improving corporate training with video games.
32
33
How to reach key EBNC departments and find EBNC advertisers in this issue.
Thumbnail descriptions and contacts for benefit service providers, organized by service category.
7
12
22
Global Watch
Understanding benefits without borders
22 Barack Obama’s plan to revamp U.S. health care.
Who’s News
Industry movers and shakers
31 Benefits celebrate Bollywood.
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March/April 2009 • Employee Benefit News Canada
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Passing the drug test By Sheryl Smolkin
“We had two provincial governments at the table — one representing their public plan for seniors and rug plan sponsors in this country are getting low income people, the other for their employee plans. a raw deal, and some of them are finally mad There were also three private-sector employers with enough to do something about it. 10,000-15,000 plan members and several others interData from the Canadian Institute for Health Inforested who couldn’t make it.” mation reveals that private insurers, including group Paton is confident that the group can double or and individual insurance, paid out $7.8 billion in 2007 even triple its size. “Then we can start to act like a purand their share of prescribed drug expenditures was chaser who goes to a garage or buys groceries. He can 34.7%. leave that garage and go to another one if he doesn’t While ESI Canada reports that plan designs enlike how they fix his car.” couraging generic substitution helped to mitigate the He also thinks that if the group is big enough, they 7.1% increases in the overall drug spend in 2007, in can challenge how PBMs are adjudicating their claims. fact, generic drugs in Canada are still about 112% more “We can say, ‘You are allowing claims to come through expensive on average than the same generics in the at full price with markups on top of that price, and United States. markups on top of the markups, plus dispensing fees, Initially, both private and public payand we’d like to talk to you about that.’ ers were in the same boat, because the Maybe we’d like to pay pharmacists for primary reason for the price differential consultative services just like Ontario did, was manufacturers’ rebates to pharmaand we’d like to have our PBM structure cies for stocking generic drugs that were their remuneration that way.” not passed on to either group. The Competition Board’s November Then several provincial governments 2008 report says Canadian taxpayers, began aggressive cost controls in public consumers and businesses could save up plans. And lo and behold, their actions to $800 million a year if changes are made drove up prices for everyone else, includto the way private plans and provinces pay ing private plan sponsors! for generic drugs. The possible reduction Now granted, we want governments in drug costs are particularly large for Sheryl Smolkin to manage wisely when they spend our private payers — businesses, employees Editor-in-Chief tax dollars on health care, but continuand individuals — who account for 52% ously downloading costs to companies of generic drug expenditures. Obtaining that are the economic engine we desgeneric drugs at competitive prices could perately need to drive us out of this recession doesn’t save them up to $600 million per year, with the potenmake a whole lot of sense either. tial for hundreds of millions of dollars in additional So how can drug plan sponsors fight back? savings as more major drugs lose patent protection. Mike Sullivan, president of Cubic Health, says first For private drug plans, these costs could be rediof all, organizations need to have a better understandrected to reduce drug plan costs or expand employee ing of what is going on in their plan. coverage. Just think of all the ways you could spend “They have to understand what they are spendthat money to enhance benefit plans and improve ing in each jurisdiction, the range of amounts for the employee wellness! same drugs being charged to their plan and how this compares to what governments and U.S. parents are paying,” he says. “I’ll bet both of my arms and legs that if you put 50 very large plan sponsors in a room, they would not be able to answer these questions because they’ve never asked them before.” Nevertheless, he recognizes that individual plan sponsors do not have the clout or the time to drive the issue. “Many of our people are HR people, and they have lots on their plate.” That’s why PEI-based drug consultant Hugh Paton is spearheading the Health Plan Sponsor Coalition of Atlantic Canada employers looking for answers. He says: “Our problem right now is we are basically getIt’s time for private drug plan sponsors across the ting ripped off for drugs. What I want to do is sit down country to become better consumers. By working with government and say, ‘What was your thinking? together with other employers and industry stakeholdWhy don’t we collaborate — bust out of our silos and ers they can ensure they are getting the best possible change our business together?’” bang for the big bucks they spend on their drug plans. At the first organizational meeting of the Coalition, For more information about the Health Plan Sponsor held earlier this year, participants represented an anCoalition forming in Atlantic Canada, contact Hugh nual drug spend of over $150 million. Paton at hgrpaton@gmail.com. —S.S.
D
Aggressive cost control measures in provincial drug plans have driven up costs for plan sponsors.
Editor’s Inbox
March/April 2009 • Employee Benefit News Canada
When is a pension bailout not a bailout? By Paul Forestell
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emporary solvency funding relief offered to defined benefit plan sponsors and administrators in several key Canadian pension jurisdictions since the fourth quarter of 2008 came with restrictions that could severely limit a company’s ability to take advantage of these provisions. A by-product of the 2008 financial crisis has been the rapid deterioration of the funded position of Canadian pension plans. In the last six months of 2008, the Mercer Pension Health Index dropped from 79% to 59%, the largest decrease in the 10 years of its existence. As a result, most pension plans in Canada faced large solvency shortfalls and increased cash funding requirements at January 1, 2009. Because Canadian pension plans are provincially regulated (except for certain federal employers, such as banks, transportation and telecommunication companies), and repeated appeals for a uniform pension law there are onerous prerequisites to achave not been productive, we must cessing the “relief.” still contend with different funding reFor example, the press release isquirements, and consequently differsued by Ontario’s Minister of Finance ent solvency funding relief measures, notes that access to funding relief is by province. tied to “consent of active members or Although the temporary solvency their collective bargaining agents and funding relief measures are different, retired plan members.” they have some common elements: Except for the most extreme cases • Use of the April 2009 Canadian of distress, it is unlikely that a comInstitute of Actuaries standard for pany would get consent from memcalculating lump-sum payments from bers, so they will likely not even try to pension plans (which ask for it. As a result, for results in lower values). Ontario registered pen• Extending the sion plans, the possibility funding period of 2008 of funding over 10 years solvency deficits from is low. five years to 10 years. At the federal level, the • Permitting the government has provided averaging of asset values sponsors with the option over up to five years. to obtain letters of credit On the face of it, for the difference in fundthese three measures ing contributions between would provide relief to 10- and 5-year funding if Paul Forestell most plan sponsors by they are unwilling or unallowing them to defer able to get consent. funding of the 2008 This is the same relief investment losses over that federal sponsors a longer period. This deferral would were provided in 2006; however the provide companies with time to adjust economy and credit markets are very cash budgets and cash funding to the different today than they were two higher level. As well, it would allow years ago. In today’s credit environtime for any potential market recovery ment, some companies may be unable that might remove the need for some to obtain a letter of credit, and those of the higher contributions. that can get one may find the cost However, in some jurisdictions unreasonable.
The use of letters of credit to secure pension benefits should form part of the long-term solution to pension security, but it will be an ineffective tool to deal with the short-term funding pressures in 2009. Not all jurisdictions have imposed restrictions on taking advantage of the 10-year funding option. Most notably, Quebec has allowed sponsors to fund over 10 years without employee consent or a letter of credit. This is a welcome departure from the temporary relief Quebec implemented in 2006 and from the proposed Ontario and federal relief measures. Now, as the Ontario and federal measures are only proposed at this point, there is still time for more meaningful and useful relief to be implemented. Similarly, Alberta and Saskatchewan have recently completed a consultation process regarding appropriate funding relief measures that will hopefully lead to appropriate and useful funding changes. In my view, the changes in the funding rules should permit: • 10-year funding of solvency deficits with no restrictions on consent, letters of credit or benefit improvements. • Smoothing of assets over up to five years. • The use of the new Canadian Institute of Actuaries standard for the
calculation of lump sums. These should be permanent changes, applied all across Canada. A uniform funding regime in Canada may only be aspirational, but it would be very welcome to pension industry stakeholders. The need to provide temporary relief twice in less than three years highlights the need for permanent changes and has been recognized at least by the federal government, which is currently reviewing long-term fixes for the funding of federal pension plans. A pension bailout is not a pension bailout when few, if any, plan sponsors can avail themselves of it. This is especially the case for most Ontario and federal plan sponsors. The situation is better for Quebec sponsors and at least optimistic for Western sponsors. Permanent funding changes, applied consistently across Canada, would allow employers to manage their pension plan funding better in today’s environment of restricted access to credit and equity market volatility. Measures that enhance the sustainability of pension benefits or strengthen the financial position of the plan sponsor can only serve plan beneficiaries better in the longer term. —E.B.N.C. Paul Forestell, F.S.A, F.C.I.A., is a worldwide partner and leader of the Canadian Retirement Professional Group at Mercer. He can be reached at paul.forestell@mercer.com.
March/April 2009 • Employee Benefit News Canada
Investment Insider Financial crisis sharpens critique of securities lending By Larry Swartz and Joe Connolly
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ecurities lending had been a longstanding and profitable sideline for many large pension and mutual funds. However, this practice has come into question recently, in part due to the collapse of Lehman Brothers and a succession of high-profile bailouts (e.g., Fannie Mae, Freddie Mac and AIG). In Canada, the Ontario Teachers’ Pension Plan discontinued its securities-lending practice almost two years ago, noting that in situations where the OTPP both lent out shares and held a voting interest in the same shares, it could no longer participate in key shareholder votes. Similarly, when last September’s financial markets melted down, the Canada Pension Plan Investment Board revealed that it shut down indefinitely its entire securities-lending program. When the program closed it had outstanding loans valued at $1.6 billion.
How it works
Securities lending, or stock lending, is the short-term loan of securities. Lenders are often institutions, like pension funds, that hold the securities for the long term. Borrowers are often speculative players, like hedge funds, that sell the borrowed securities short. Typically, the borrower makes money if the borrowed security’s value declines. Critics have argued that securities lending can work against the interests of the lender by driving down the value of the lender’s own holdings. They have charged that securities lending has helped hedge funds and short sellers drive down the value of the markets. Yet many in the investment community have dismissed these criticisms. For them, the returns from securities lending have proven themselves over the years. The lender of the securities is supposed to always earn an incremental return. In theory, the lender makes a profit as long as the borrower repays the loan. The securities borrower is obligated to return the securities — either on demand or at the end of
portfolio management and controls that reflect the pension plan’s risk and reward objectives. Counterparty risk represents the risk of default — an extreme situation when a borrower collapses and is unable or unwilling to return assets. Given the recent financial crisis, it’s not hard to imagine this scenario. There are a number of Many in the investapproaches to managing risks ment community have involved in securities lending. dismissed criticisms Consistent and vigilant of securities lending application of these methods because returns have can mitigate the impact of risk proven themselves and stabilize the lender-borover the years, says rower relationship. Joe Connolly. Plan administrators should request reports from the investment manager and conduct due an agreed term. diligence to ensure the appropriate To minimize the risk of default, collateral margin. The collateral marlenders insist that borrowers provide gin should provide adequate proteccollateral. The lender earns fees and tion against volatility and liquidity. interest from the collateral. The fee is To be prudent, both loaned and variable and increases as the illiquidity collateral securities should be marked of the shares increases. to market daily. Any shortfalls in the The lender should not lose if collatamount of collateral should be rectieral is sufficient and does not decline in value. Therefore, collateral is often cash or government securities of equal or greater value than the securities lent. The Office of the Superintendent of Financial Institutions Guideline, Securities Lending: Pension Plans, revised in September 2006, states “the amount of collateral taken for securities lending should reflect best practices in fied immediately. Plan administrators local markets. In Canada, the current should also ensure that collateral and market practice is to obtain collateral counterparty risks are consistent with of at least 102% of the market value of the pension plan’s Statement of Investthe securities lent.” In practice, many ment Policies & Procedures. investment firms lending securities An agent-lender can be hired by the request collateral of 105%. lender to facilitate the monitoring of overall credit risk and, depending on Understanding the risks the retainer, compliance with investWhen a pension fund lends securiment guidelines. The role of the agent ties the assets do not remain in the lender is to ensure that the approprifund; two primary types of risk result ate amount of collateral is held. In — collateral risk and counterparty risk. addition, the agent-lender is retained Collateral risk depends on what the to maintain credit quality and liquidity pension fund receives in exchange for within the investment guidelines. lending the shares. This type of risk Agent-lenders may also offer operaalso depends on whether the borrower tional and default indemnification. is able to provide additional security Plan administrators should know what when required to do so. It can be man- their indemnification covers. aged through investment research, Counterparty risk may be mini-
Pension plan administrators need to be particularly vigilant and seek proper advice in deciding on the appropriate securities lending program, says Larry Swartz.
mized by ensuring the agent-lender assesses and decides on appropriate borrowers. There should be a strict set of requirements in place that will limit exposure to each borrower and monitor the borrower’s financials, credit ratings and credit risk. Plan administrators should review their program with their consultant to learn more about the procedures for managing each of the risks. Each plan administrator should be aware of its investment guidelines and the approach the investment manager takes within the guidelines. Finally, plan administrators should proactively request the investment manager monitor their programs through reporting, periodic due-diligence reviews and access to knowledgeable staff. They should ensure that they understand their legal agreement and should ask questions of their consultants if they have concerns. Ultimately, it is the plan administrator/sponsor that must decide if the tradeoff from securities lending is prudent between return and the accompanying risk.
Critics say securities lending has helped hedge funds and short sellers drive down the value of the market. Continuing vigilance required
A securities lending program can be beneficial, but there are inherent challenges. However, risks can be minimized. When markets stabilize again the apparent risks will likely fade. But, in these uncertain times, pension plan administrators need to be particularly vigilant and seek proper advice in deciding on the appropriate securitieslending program, if any. —E.B.N.C. Larry Swartz, LLB, CFA, is a principal with Morneau Sobeco in Toronto. Joe Connolly, M.A., is an investment consultant in Morneau Sobeco’s investment consulting practice in Toronto. They can be reached at LSwartz@morneausobeco.com and JConnolly@morneausobeco.com.
March/April 2009 • Employee Benefit News Canada
Pension plans travel the long road to recovery economic cycle than a slower, steadygrowing company, such as a utility.
Asset-liability modeling
By Jeffrey Muller
H
eadlines in the financial press show the Canadian economy has entered a recession deepened by the collapse of commodities, but this downturn should not have been unexpected. Before pension plans can embark on the road to financial recovery, it is important to reflect on how they got to where they are today. In the past decade there have been three significant market events that have influenced Canadian monetary and fiscal policy, and ultimately the economy: the collapse of long-term capital management (1998); the tech bubble and wreck (1999-2002); and most recently, the real estate bubble and associated toxic assets (20042007). One lesson to be learned from these events is that, going forward, financial markets will likely be increasingly volatile. Therefore, plan sponsors will need to ask themselves “Can we continue to manage a pension plan with the expectation of lower contribution requirements in a highly volatile market environment?” In addition, to provide a holistic picture of a plan’s financial health, a balance sheet approach that considers the surplus position is also recommended. However, the Canada Revenue Agency maximum rules for contributions and surplus retention restrict the accumulation of funds in
pension plans for “a rainy day” and, in the end, have proven to be punitive.
Establish a liability benchmark
As a result, we believe the first step on the route back to plan financial health is for defined benefit plan sponsors to confirm whether the best liability benchmark for the plan is going-concern liabilities, solvency liabilities or accounting liabilities. It is difficult for a plan to satisfy more than one benchmark, but subject to the general financial position of the sponsor, the most appropriate measure to focus on is generally going-concern. This is because, barring employer insolvency, the ultimate goal of a pension plan is to pay out some level of pension benefit over the long-term, and going-concern liabilities are most closely aligned with this objective. In addition, various provincial regulators have temporarily loosened some of the solvency funding requirements to support plan sponsors through these challenging times, measuring solvency over a longer term. An understanding of the fundamental risks to the plan sponsor is also important. For example, a public-sector plan will face different risks than a plan sponsored by a private sector firm. A private-sector company in a cyclical industry, such as an automobile parts manufacturer, will have greater strains on their funding capabilities at different points in the
Assuming going-concern is the proper measure to focus on, is getting back to 100% funding realistic? What should sponsors do if they get there? Asset volatility must be understood, and sensitivity- or worst-case-scenario testing conducted. Asset volatility has historically arisen from equity mismatch risk with the plan’s liabilities, especially when the market value of assets is used. This remains a viable approach; however, a sponsor needs to be able to afford, and stomach, the volatility. A key risk management tool to help plans navigate out of their current situation is asset-liability modeling. A current ALM study is recommended given the significant changes recently in assets and interest rates. The study will give a sponsor a greater appreciation of changes in the levels and variability in pension costs (defined as the amount of money a sponsor is putting into a plan) arising under different possible outcomes, including rates and asset shocks. It also identifies potential solutions. An ALM study can also illustrate if and when a plan can reasonably expect to return to full funding using different investment approaches, as well as what cost model they are ultimately adopting.
Investment strategies
As part of an ALM study, a plan will end up considering one of two investment approaches: • Balanced approach. A plan may simply choose to “ride it out” with a traditional balanced approach to the asset allocation, in the anticipation that with time the equity markets will come back. Along with special and regular contributions, the plan indeed may recover this way. Although it could take a decade or more, this may be the only chance for smaller, singleemployer plans. • LDI approach. Another possibility is a liability-driven investment approach. Instead of focusing exclusively on return, LDI strategies seek to ensure adequate diversification against a set of specifically identified risks faced by the plan. The strategies will require leverage, derivatives and greater education requirements for the pension committee. However, by removing the equity mismatch risk associated with the traditional balanced approach,
this allows the sponsor to seek excess market return from other sources. With a balanced approach, the current portfolio is an efficient combination of equities and fixed income securities, whereas under an LDI approach the minimum risk portfolio on the surplus efficient frontier is a long-bond strategy representative of the liabilities.
Cost models
Ultimately, these two investment approaches will lead to one of two pension cost models: • Expected low cost with high variability. • Expected high cost with stable variability. A balanced approach using mostly traditional asset classes, along with the expectation of a lower long-term cost with higher variability, is the model most frequently adopted today. However due to recent economic events and the 2011 accounting changes, LDI is rapidly gaining traction. Furthermore, implementing LDI now is going to be expensive. Therefore, all things being equal, plans must choose whether to ride it out with a balanced approach to a better part of the funding cycle, or pay up now for a high-cost, but stable, LDI structure. All of this addresses the assets of a plan assuming the liabilities remain as is. If a plan sponsor truly cannot afford a DB plan due to the high cost and variability of asset approaches required today, but does not want a DC plan, another possible option for consideration is a target-benefit plan, as put forth by the Ontario Expert Commission on Pensions, which addresses both the asset and benefit (liability) sides of a plan.
Stormy outlook
The economic outlook for pension plans at the moment is still very stormy, and the reality is that it will be difficult for every plan to make it out of this deep down-cycle. However, with an examination of key plan risks and liability measures, a sponsor will gain an appreciation of the alternative investment approaches they can implement, along with their cost structures, either now or once their pension fund returns to financial health. —E.B.N.C. Jeffrey Muller is an investment consultant with Buck Consultants in Ottawa. He can be reached at Jeffrey.Muller@buckconsultants. com.
March/April 2009 • Employee Benefit News Canada
Retirement
More proactive risk management urged for pension plans by Andrea Davis
E
ing it with something else, then there is a risk if they can’t demonstrate it’s pretty similar in value. They could land in court because employees are objecting to the changes,” Vandersanden continues. “That hasn’t been tested in the pension environment yet, but I don’t think it would take much for somebody to make the challenge.”
ven in the face of weak economic conditions and poor market returns, defined benefit pension plans worldwide have taken only small and conservative steps toward risk management, according to a survey from Hewitt Associates. Hewitt surveyed 171 plan sponsors in 12 countries to determine their Influencing factors approaches and attitudes to managing In terms of the factors that influpension risk. Globally, 66% of survey ence a company’s attitude toward respondents say they managing pension risk, have either closed or are accounting issues domiconsidering closing the nate globally, principally plan to new entrants as a in terms of the impact step to managing risk. on the profit-and-loss The issue of penstatement. Because of sion risk management differences in accounting is particularly pressing standards between Canin Canada, which survey ada and the rest of the results indicate has the world, as well as Canada’s highest proportion of solvency funding regime, DB plans open to new Canadian plans are more entrants. In Canada, only concerned with cash Rob Vandersanden 33% of survey responfunding requirements. dents have either closed Very few organizaor are considering clostions manage pension ing their DB plan to new entrants. risk within the context of an overall In the U.S., 76% of respondents enterprise risk-management system, have either closed or are considering notes the survey, with only 12% of closing the plan to new entrants, while Canadian respondents, 18% of global 24% have already stopped accruals. respondents and 24% of U.S. partici“In the U.S., most activity around pants saying their pension risks are risk management is from a plan design part of an overall risk budget for the perspective,” says Joe McDonald, head organization. of Hewitt’s global risk services practice “Pension plan risks are still largely in North America. “Plan design is the managed in isolation,” says McDonleast effective way to manage risks.” ald. “There’s room for improvement.” Canada has a higher proportion of DB plans still open to new entrants for Asset-liability mismatch two main reasons, says Rob VanderReducing asset-liability mismatch sanden, a senior pension consultant in is the No. 1 action plan sponsors Hewitt’s Calgary office. “We don’t have worldwide have taken or are considerthe same accounting rules [yet], and ing taking, to lower their pension risk. that’s taken some of the pressure away Globally, 77% of organizations say because we don’t have some of the they’ve taken steps to reduce asset-liaimmediate balance-sheet recognition bility mismatch or are considering doissues they have in other parts of the ing so. In the U.S., that number is 78%, world.” he says. “Accounting rules in while in Canada, 69% of organizations Canada will change in 2011.” have either taken or are contemplating Plan sponsors are also reluctant to similar action. close plans to new entrants because Plan sponsors need to be more of the Wronko decision in Ontario, proactive in their risk-management which restricts the ability of employers approach because, in the current to fundamentally alter employment economic environment, “just reducing contracts (including pension, benefit asset-liability mismatch is not going and compensation arrangements). to be enough for most organizations,” “I think if a plan sponsor is looking says Vandersanden. at closing a pension plan and replacIncreasing the pension fund’s allo-
Risk disclosure Globally, only one in four companies provide communication to analysts, shareholders or credit rating agencies on their pension risk over and above the statutory accounting standards. According to Hewitt’s Global Pension Risk Survey 2008, this disclosure is an important trend that will likely accelerate in the current financial climate. “This is an area where companies should disclose,” says Hewitt’s Joe McDonald. “Companies do benefit from telling people about how they manage pension risk.” 70
Europe
7
67
UK US
7 78
Canada 20
40
3 60
14 26
2
76 0
9
16
4
21 80
100
% of Respondents No additional info Provide briefings
Considering providing Disclose in accounts
cation to foreign equities cused on managing cash was the most common flow requirements, while investment strategy others are trying to mainchange made by Canatain stable contribution dian plan sponsors to rerates, or more focused duce pension risk, cited on the pension expense by 45% of respondents. they have to disclose in An increased use of their financial statements alternative asset classes, under the accounting such as real estate, hedge rules,” he says, adding funds, commodities and that in 2008, interest rates Joe McDonald private equity was noted used for solvency valuby 24% of Canadian ations were going down respondents. while interest rates for And while there has been some accounting valuations were going up. movement in Canada toward reduc“What you do in that environment is ing equity investments and increasing very different based on whether you’re bond investments in order to reduce trying to manage solvency or accountrisk by more closely matching liabiliing liabilities.” ties, this movement is far less signifiOverall, “it’s still early days in terms cant in in this country (21%) than in of plan sponsor awareness around Europe, where 60% have reduced their what they can and should be doequity allocation. ing around taking a more proactive Plan sponsors need to clearly articuapproach to managing their pension late and document what their financial risk,” says Vandersanden. “I think objectives are for the program, says that’s a good thing for Canadian plan Vandersanden, starting with a statesponsors because it gives them the ment of which risks are the most impor- ability to look at what’s been tried in tant to manage for that particular plan. other jurisdictions and what makes “Some plan sponsors are more fosense in a Canadian context.” —A.D.
March/April 2009 • Employee Benefit News Canada
TFSA or no TFSA, that is the question By Michelle Loder and Ian Mair
M
any employers are being encouraged by their providers to add a tax-free savings account as an option to their existing group savings plan. But should the decision to add a TFSA be automatic? The tax advantages of a TFSA to individuals are clear, and the flexibility of a TFSA will appeal to many. But the decision to offer a group TFSA should align with business goals and be based on the TFSA fulfilling an identified purpose within the organization’s overall total rewards strategy. The objective for the group TFSA may also vary across employee segments. Some preliminary questions to be addressed are: • What purpose will the TFSA serve, for both the organization and plan members? • Should the TFSA be used to encourage retirement savings? • Would your employees use a TFSA for this purpose or treat it like a bank account with frequent withdrawals, jeopardizing achievement of the retirement savings objective? • In the alternative, should the TFSA be used to fund other savings objectives, such as a reserve for uninsured health care costs, “rainy days” or large purchases? • How will these choices align with your current rewards strategy and benefits programs? In addition, because a group TFSA will likely be subject to Capital Accumulation Plan Guidelines, employers should consider the impact that offering a TFSA may have on the organization’s responsibilities as a plan sponsor.
RRSP vs. TFSA
Portion of Canadian Employment workforce income range 15%
Less than $20,000
40%
$20,000 - $50,000
32%
$50,000 - $80,000
8%
$80,000 - $130,000
3%
$130,000 - $160,000
2%
More than $160,000
Source: Towers Perrin analysis
Adhering to the CAP Guidelines will require an administrative and governance framework for the selection and monitoring of service providers and investment options, and for providing proper communication and decisionmaking support tools to plan members.
For the 72% of working Canadians who earn between $20,000 and $80,000, our analysis shows that it is marginally more advantageous to save first in a registered vehicle. Employees in this income range might find it simply more convenient to limit their retirement savings to a Where should I save first? registered vehicle, because the low For employees who already have to contribution limit on the TFSA means choose where to direct funds among that once a person earns more than complex programs, offering a TFSA about $50,000, attaining a typical will entail additional employee comretirement income replacement ratio munications and tools to enable them will not be possible using only a TFSA to properly evaluate and choose where to supplement government pensions. to direct their savings. Instead, the use of both a TFSA and Towers Perrin has modeled the a registered vehicle will be required efficiency of saving in a TFSA or a (a potentially more complex option registered vehicle to determine if there that will not produce any increase in are situations where the TFSA should disposable income.) be the preferred option for funding There is a relatively small group, retirement income. representing about 8% of the workAs illustrated in the chart accompa- ing population, that earns between nying this article, our general conclu$80,000 and $130,000. To reach a sion is that if we define “better” as the typical retirement income target, this savings approach which maximizes an group will find some advantage to employee’s disposable income over the maximizing the TFSA contributions combined years of employment and first, due to the claw-back provisions retirement, then saving first through of the OAS pension. a registered vehicle will prove slightly TFSA withdrawals do not reduce more beneficial for most employees. the OAS payment, unlike income from For the 15% of Canadians with registered vehicles. The advantage, incomes below $20,000 per year, savhowever, is slight, since at this ing for retirement in a TFSA first could income level the TFSA can only fund be better, since TFSA withdrawals at a small portion of the total retirement retirement do not affect entitlement to income need. the Guaranteed Income Supplement. For Canadians who earn more than However, for this group, the retire$130,000, achieving typical retirement ment income provided by the Canada/ income targets will require saving in Quebec Pension Plan, Old Age Security both a registered vehicle and a TFSA, and the Guaranteed Income Suppledue to the contribution limits under ment will replace more than 80% of the Income Tax Act. For individuals preretirement income, so the need for who don’t need to maximize contriretirement savings in either vehicle is butions to both arrangements, it is questionable. marginally better to maximize contributions to the registered vehicle first. The residual amounts needed to top up to the desired total retireCan vehicle meet full ment income should be retirement savings need? contributed to the TFSA. Beyond a certain income Advantage to savRRSP TFSA level, most people will need ing in vehicle first to contribute the maximum TFSA (minimal) Yes Yes amounts to both a registered vehicle and a TFSA, RRSP Yes Yes and likely make additional RRSP Yes No contributions to non-registered savings plans in TFSA (minimal) Yes No order to attain their target RRSP(minimal) No No retirement income. At these income levels, there is no Neutral No No decision to make between contributing to a registered
Understanding TFSAs The TFSA became available January 1, 2009. Individuals who are 18 years of age or older can contribute up to $5,000 per year to a TFSA, regardless of their earnings or employment status. Contributions to a TFSA are made from after-tax dollars, but TFSA investment earnings and withdrawals are not subject to tax. TFSA contribution room is restored whenever a distribution is made from the account, equal to the full amount of the withdrawal. Withdrawals from a TFSA do not trigger the claw-back of government benefits such as Old Age Security or the Guaranteed Income Supplement. vehicle or TFSA first — both will be fully utilized.
The right answer
The amount of choice and flexibility in retirement savings programs offered to individuals has increased significantly in recent years due to an increase in the number of CAPs sponsored by employers and the flexibility of those arrangements. As such, your employees may already be struggling to understand and value the retirement savings opportunities available to them, in spite of efforts to communicate these programs and provide tools for monitoring progress toward retirement goals. While adding a TFSA may, in some cases, prove to be the right answer, this conclusion can only be reached by asking the right questions. Proper use by employees of the available savings options will also be maximized if they receive educational materials and other forms of communication that help them to decide how to most effectively save in each of the available programs. —E.B.N.C. This article was authored by Towers Perrin Principal Ian Mair and Towers Perrin’s Canadian DC Business Leader Michelle Loder, both based in the Toronto office. They can be reached at Ian.mair@towersperrin.com and Michelle.loder@towersperrin.com.
Retirement
10 March/April 2009 • Employee Benefit News Canada
Valuation (From page ) fully fund the benefits promised based on the proposed valuation standard. “We think the 10 years is important because you do not have to start using things like smoothed asset value. We recommend that all assets be valued on a mark-to-market basis because it’s more transparent and closer to what’s really happening,” comments Crawford. Another key feature of the proposed new regime is that benefit improvements will not be permitted if the plan is in deficit, unless the deficit is paid in full or the benefit is completely prepaid. The benefit improvement may also be paid for in annual installments, so long as the improvement is considered as “a hope,” rather than “a promise” until it is fully funded. “I was initially against not letting plans improve their benefits if they don’t have the money, but I can understand the panel’s perspective,” says Morneau Sobeco Partner Michael O’Connell.
Industry feedback
Although transition rules will provide that plans promising indexing based on inflation at the end of 2008 only have to amortize half of the deficit attributable to the indexing until the end of 2014, O’Connell worries about the impact of the new minimum funding rules on plan sponsors. “The trouble is we’ve had a regime in place for a long time, and I feel some sympathy with the companies that are now saying, ‘We’ve been responsibly funding on this basis and now you are asking us to change how we fund,’” he says. “Larger companies
The president of the Canadian Institute of Actuaries, Michael Hale, is also concerned that transfer values for employees based on the new rules could be lower than under the CIA standards.
in particular budget over many years, and now those budgets will change.” “Where it could really come to a head is if I go to buy an annuity for a client when the pension plan is wound up, and the minimum funding value I held at the last valuation is not sufficient,” he continues. The president of the Canadian Institute of Actuaries, Michael Hale, is also concerned that transfer values for employees based on the new rules could be lower than under the CIA standards. But the biggest issue for Hale is that by establishing a new funding approach, Nova Scotia will be shattering adherence to relatively harmonized national actuarial standards. “It’s not a bad formula, but it’s another unique valuation methodology applicable in one jurisdiction. I know in the report the panel makes reference to the creativity arising out of Morneau Sobeco Partner Michael individual provincial pension O’Connell was standards, but they add cominitially resistant plexity and unnecessary cost,” to the proposed he says.
minimum funding standards, but he readily concedes the status quo is not okay.
Finding a way forward
Crawford shares the prevailing opinion that harmonization is “a great thing” but he
says, “It is essentially unattainable in our current regulatory environment despite the wish of everyone to have it that way.” Further, he believes the impact of the new funding standard on major plan sponsors could be minimized
vision around them,” agrees Hale. “However, I’m not sure the differences alone are enough to bar doing this. I think what should be taken into account is the impact of actual benefit reductions for employees.” O’Connell was initially resistant to
Benefit improvements will not be permitted if the plan is in deficit, unless the deficit is paid in full or the benefit is completely pre-paid. if amending legislation incorporates the panel’s recommendation for a passport approach that would allow plan sponsors registered in other jurisdictions to regulate Nova Scotia employees in accordance with their own legislation. “This could help to give Nova Scotia a competitive edge, as employers with large plans elsewhere would not be expected to value their benefits in accordance with our new funding method,” he explains. “It is better if [valuation methods] can be the same, but there is a lot of individualization in plans themselves, never mind the regulation or super-
the proposed new minimum funding standards, but he readily concedes the status quo is not okay. “Solvency funding has been the bane of most plan sponsors’ lives for many years now. The new proposals are growing on me.” He also thinks that the proposed new minimum funding approach could evolve over time. “These recommendations are unlikely to come to the attention of the Nova Scotia legislature until the fall of this year, so what ever is going to happen is a fair ways off, and there is plenty of discussion still to be had.” —S.S.
12 March/April 2009 • Employee Benefit News Canada
Health
Wellness on a budget
Employers adopt high-tech, high-touch solutions
By Sue Pridham
E
ven in these difficult economic times progressive organizations understand the value of wellness programs that help maintain employee health, energy and focus. Lack of time, sedentary jobs, long commutes, stress, family responsibilities and inaccessible workout facilities are just a few of the reasons why many employees are struggling to stay active, eat well and keep their weight in check. To help employees meet these challenges, there is growing interest in cost-effective, high-tech online wellness solutions, which are particularly effective for organizations with multiple locations. These programs can also be designed with high-touch features, such as “ask the expert” capabilities, healthy competition and interactive quizzes Employees receive wellness information on a specific topic through
daily or weekly e-mails. Campaigns and resilience, and support a broader are time-defined, promote goal-setmental-health awareness initiative. ting and behavior change, and provide The 10-day campaign consisted of wellness informadaily wellness tips relating tion, follow-up and to mental and emotional evaluation. Some of the well-being, stress mancampaigns incorporate agement and self-care. healthy competition Each morning registered with optional draw employees received a prizes to reward particishort health tip that was pation. simple, practical and easy Once the wellness to incorporate into their campaign or challenge daily life. has ended, companies Employees said: can keep the wellness • “I found these daily Sue Pridham message alive by profiltips helpful in thinking ing willing employees more positively and who have made positive starting the day on a lifestyle changes on the good note. I hope to see corporate wellness intranet site. these again in the near future.” • “I thought it was a terrific camRBC’s “Feeling Good” campaign paign and looked forward to openLast fall, RBC launched Tri Fit’s ing the message each morning. “Feeling Good” e-mail campaign for The messages were perfect, and I its 57,000 employees across Canada, wouldn’t change anything.” to promote work/life effectiveness • “It was short and to the point and
did not take too much time from work to read.” • “The tips were very helpful and applicable to everyone. I have forwarded them to family and friends.” As a result of the campaign RBC is now providing a weekly wellness tip.
“Eating Well” at Staples Canada Staples Canada is also enthusiastic about delivering the wellness message online. Like RBC, they are challenged to reach out to a decentralized workforce. Fifteen thousand associates across Canada were invited to participate in the “Eating Well” campaign last fall. Associates tested their nutrition knowledge with this 4-week healthy eating campaign, covering topics such as snacking, dining out, eating breakfast and portion size. Registered associates received a weekly e-mail with a nutrition tip, an activity, recipes, trivia and a quiz. Associates who
March/April 2009 • Employee Benefit News Canada
answered the weekly quiz were eligible to win prizes. Staples associates also participated in the “Be Active” challenge last spring. Participants collected points for incorporating regular physical activity into their daily lives. Those who logged a minimum number of points online were entered into a prize-drawing. Following these organized challenges, Staples Canada associates were inspired to develop their own wellness events. One Staples store created a challenge that involved walking or jogging laps around their building on breaks. Those who logged the most laps were eligible for prizes. Another store created a weightloss challenge, and many stores have incorporated healthy snacks into Teacher Appreciation nights and meetings.
Microsoft learns to run
Microsoft conducted an e-mail “Learn to Run,” sponsored by the MicroFit Wellness Centre last April, with the goal for participating employees to be capable of running a 5-km race. The program was designed to provide
increase commitment and mileage. Participants were able to “ask the expert” questions about their running challenges at any point in the eight-week training program. Employee feedback was extremely positive: • “Before I started running, I was not able to run for more than 10 minutes without giving up. Having participated in the Learn to Run program, I was able to confidently run a half-hour without being out of breath by the sixth week.” • “The scheduled training and nutrition information enabled me to progressively increase my stamina, as well as eat properly to shock-up my energy.” • “I had so much fun competing with my peers — we supported each other every week.” • “I was amazed how the weekly fittips helped me stay motivated.”
The 12 Days of Fitmas
In December, employees at the Canada Life Toronto head office participated in “The 12 Days of Fitmas” e-mail campaign promoting the message “Tis
Online wellness solutions are particularly effective for organizations with multiple locations. a safe and motivating online support group to gradually ease participants into running, build stamina and help ease the frustration that people often experience when they decide to try running on their own. Weekly e-mails provided the motivation and information to help employees
13
the season to take time to take care of yourself.” Participants received 12 days of wellness strategies to help get them through the season with energy and patience to spare. Strategies included exercise, holiday eating and entertaining tips, healthy recipes, getting rest and more.
Participants had a lot of great things to say about the campaign: • “It is always good to remind people to stay on track, and the idea of support throughout the ‘eating season’ is great.” • “I enjoyed the e-mails. It kept me motivated to keep working out during the holidays. I enjoyed the recipes and also found some of the fitness tips to be very useful.” • “I actually used a lot of info from the e-mails and recipes — tons of good tips!! They were very motivating!”
to be integrated into a broader wellness strategy. Your organization can develop a Wellness Advisory Committee to create a framework for wellness within your organization, and a program mission and goals that reflect your organization’s culture, resources and budget. High-tech/high-touch wellness strategies can pay dividends to the employee and employer alike. Think big, start small and gradually build momentum one click at a time. — E.B.N.C.
Putting eWellness in context
Sue Pridham is the president of TriFit (www. trifit.com), which provides a broad range of workplace wellness services, including strategic planning, employee needs surveys, fitness and wellness programs, nutrition and weight management, and health fairs. She can be reached at sue@trifit.com. TriFit developed the programs discussed in this article and administered them for the companies profiled.
While high-tech wellness solutions can educate, motivate and connect employees with similar wellness goals, they should not be offered in isolation. In order for workplace wellness programs to have the greatest impact and ultimately influence behavior change, they need
Health
14 March/April 2009 • Employee Benefit News Canada
Study challenges savings from therapeutic substitution
by Andrea Davis
P
lan sponsors considering implementation of a therapeutic substitution policy as a way to control drug costs will want to carefully examine the findings of a recent study in B.C., which says the practice does not save money and can actually have a detrimental effect on patient health. A study published in the medical journal Alimentary Pharmacology & Therapeutics concludes that a B.C.government PharmaCare policy, introduced in 2003, which was intended to reduce costs by $42 million with minimal impact on patient health,
actually cost the system and patients an extra $43.5 million and significantly diminished patients’ quality of life. Therapeutic substitution is different from generic substitution, where the drugs are bio-equivalent. “It is not about generic substitution, but is about the government replacing one chemical for another non-bio-equivalent one, simply because it’s cheaper,” says Gail Attara, study co-author and executive director of the Canadian Society of Intestinal Research. B.C. introduced the therapeutic substitution policy in the proton pump inhibitor class of drugs. PPIs are an oral medication used to reduce
Gastroesophageal reflux disease at a glance According to a recent report from the Canadian Society of Intestinal Research, Acid Reflux & GERD: The Unsettling Reality in Canada, on average, acid-reflux disease patients wait over two years before seeking care. Other statistics include: • Two in five patients with GERD have difficulty sleeping, and 43% feel tired and/or worn-out. • Approximately one-quarter (24%) of Canadians experience heartburn daily or more often. • The quality of life of GERD patients is similar to that of patients who have suffered from acute coronary events. • 17% of those surveyed say they visited their physician because they were unable to work because of their symptoms.
gastric acid secretion in patients with ulcers, gastroesophageal reflux disease and other acidrelated conditions. The therapeutic substitution policy required patients with PPIs covered by the province’s PharmaCare program to switch from Shawn O’Brien one of the four PPI brand medications they were currently using to another brand name that was the cheapest. Patients who did not make the switch were forced to forego PharmaCare coverage. During the three-year study period, as many as 87,000 patients in B.C. with acid-related diseases had to stop taking the medication that was working for them and switch to the cheapest available PPI medication. The study found that, as a direct result of the therapeutic substitution policy, $24.65 million was spent on additional physician services, $9.75 million was spent on additional hospital services, and $9.11 million was spent on increased PPI utilization, for a total of more than $43.5 million.
Patient turmoil
The biggest problem with the policy was “the turmoil it created for patients,” says James Gray, a gastroenterologist in Vancouver and a clinical associate professor at the University of British Columbia. Because many patients were required to switch medications in order to retain their coverage, the “confusion for patients was quite dramatic. And that translated to more health care visits, more trials for different therapies and more time off work. Everything was disrupted, and that resulted in huge costs to the system,” he adds. While the study didn’t document the effects of the policy on the workplace in terms of absenteeism or lost productivity, Gray says a number of studies have shown gastroesophageal reflux disease can have a negative impact on the quality of life of people who suffer from it. “If you don’t feel well from a gastrointestinal point of view, you might miss work, but if you do attend work, you might not be as productive or effective as you would be if you weren’t uncomfortable,” he says. The policy has had implications for B.C.’s private payers as well, says Attara. “Unless you submit a special
authority form and have it approved by your physician, the [PharmaCare] plan isn’t going to pay anything,” she says. “Your out of pocket doesn’t even contribute to the deductible.” And that deductible is an important component for those living in B.C., because once you fill your deductible, everything is 100% covered by PharmaCare, even if you have a private plan. “But if this product they’re taking monthly isn’t counting toward their deductible, then the private plan ends up paying more, because the expenses don’t get bumped into the category where it’s covered by PharmaCare within that year,” says Attara.
Other provinces
While some private plans in B.C. mimic the provincial formulary, therapeutic substitution is unlikely to gain traction in other parts of the country. So far, B.C. is the only province to have tested it. “I don’t really think it’s the answer,” says Shawn O’Brien, senior consultant with Aon in Toronto. “It’s been proven here that there are other costs to the system for implementing this.” In addition, plan sponsors are reluctant to be seen as dictating to members which drugs they should be taking. “When we talk to employers, it’s more about cost containment in a different way,” says Kimberley LeComte, VP with Aon in Vancouver. “They’re asking, ‘What can we do before things start hitting our plan to make employees more vested in being healthy?’” O’Brien agrees, noting that “hacking and slashing and cost-shifting is not the way to sustain your drug program. Employers are looking for more innovative ways to do that, and it’s more on the front-end health piece.” The Canadian Society of Intestinal Research has asked the minister of health in B.C. to stop therapeutic substitution in this class. Even though the mass switching mostly occurred in 2003 and 2004, when the policy was first implemented, “the reality is that if someone comes off a private plan, they have to switch. If someone turns 65, they have to switch. If someone moves here from a different province, they have to switch,” says Attara. “I think it’s really important for it to be off the books.” —A.D.
Health
16 March/April 2009 • Employee Benefit News Canada
COB (From page ) though the rules were established, they’d been established so long ago that they didn’t really touch on the subtleties that have emerged around divorce, remarrying, adoption.”
Is it working?
While the system generally works well, Klatt says COB is probably the single most frequently asked-about issue. “If they don’t understand [the sequence] and they submit to a carrier that might be the second carrier, they’re going to send it back, and the member is going to be frustrated,” she notes. “The idea is to streamline things for consumers and make it as easy for them to submit to both plans as possible.” The COB system relies on plan members to provide accurate information about coverage they might have under a spouse’s plan. And while most plan members do provide correct information, misunderstandings can arise. And when they do, there are cost
implications, says Bernatchez. Take the example of a plan member who submits a claim to their spouse’s plan first, instead of to their own. If the spouse’s insurance company has no record that the person has coverage elsewhere, it will pay the claim “when they shouldn’t, because the rules say they shouldn’t be first payer. So the first cost impact if the member doesn’t understand or ignores the rule is that the wrong insurance company and plan sponsor pick up the cost of the claim,” says Bernatchez. The second cost implication comes at the expense of the plan member, because if they make a claim under the wrong plan first, they may not get reimbursed as much as they would have had they submitted the claim to their own plan first, then to their spouse’s plan. Positive enrolment, which refers to the process of collecting information about dependents at the time of enrolment in the benefits plan, can help ensure the insurance carriers are getting accurate information. “Instead of relying on the insurance company to collect that information when a claim is submitted, the plan sponsor does it right upfront when the
Key points of CLHIA’s Guideline G4 CLHIA’s new COB Guideline, effective Jan. 1, 2009, clarifies which plan is the first payer and which is the second payer in the following potentially tricky situations: People with the same eligibility status under two plans (e.g., for people with two part-time jobs) First payer: The group plan under which the person’s coverage as a part-time employee has been in effect the longest. Second payer: The other group plan. A retiree covered under two group plans First payer: The group plan under which the person’s coverage as a retiree has been in effect the longest. Second payer: The other group plan. Students covered under both a student plan through an educational institution and as a dependent under a parent’s plan First payer: The health or dental plan through the student’s educational institution. Second Payer: The parent’s plan. If the dependent child is employed on a part-time basis and eligible for coverage, the first payer is the under the child’s own coverage as a part-time employee and the second payer is the parent’s plan. People covered as a spouse and/or a surviving spouse under more than one group plan First payer: The group plan under which the person’s coverage took effect most recently. Second payer: The other group plan.
Joint-custody arrangements First payer: The group plan of the parent with the earlier birth date in the calendar year. Second payer: The group plan of the parent with the later birth date in the calendar year. If the parents have the same birth date, the alphabetical order of the parents’ first names is used. Single-custody arrangements First payeR: The group plan of the parent with custody of the dependent child. Second paer: The group plan of the spouse of the parent with custody of the dependent child. Third payer: The group plan of the parent not having custody of the dependent child. Fourth payer: The group plan of the spouse of the parent not having custody of the dependent child. Surviving dependent-child claims First payer: The group plan of the parent with the earlier birth date in the calendar year. Second payer: The group plan of the parent with the later birth date in the calendar year. If the parents have the same birth date, the alphabetical order of the parents’ first names is used. Dental accidents where coverage is available under more than one plan First payer: The group health plan with dental accident coverage SECOND PAYER: Group dental plan.
Health member enrolls in the plan,” says Bernatchez. “Then the sponsor feeds that to the insurance company.” Positive enrolment is especially necessary for plans with drug cards, which are so easy for plan members to use. “If you don’t control dependents, [the drug card] could cost you more because people won’t use their own plan first,” cautions Bernatchez. “You’re introducing something so convenient that they’ll turn away from other plans if there aren’t some controls there.”
Who’s on first?
The new COB Guideline establishes the employee’s group plan coverage as the first payer, the dependant coverage under his or her spouse’s group plan as the second payer, and, finally, the HSA coverage as the third payer. “The health care spending account should really be seen as a last-resort account,” says Bernatchez. “It’s like a last-resort bank account.” But the guideline was also written to give insurers flexibility, says Joan Wilson, manager, group health and dental benefits, with Great-West Life in Winnipeg, who sat on the committee that reviewed the guideline prior to its public release. “There’s some flexibility to allow the different insurers to honour requests based on their own administrative practices,” she says. “There may be legitimate reasons someone might want to use their health care spending account before they use the group plan,” and the guideline allows for that. The other key area the guideline clarifies is around survivor benefits. “We never spoke to survivor benefits, and every once in awhile we’d get questions about it,” says Klatt. The new guideline confirms that “generally the rules that were in force before the parent or spouse passed away would continue under the survivor benefit coverage until such point as you have an external change,” says Klatt. “The thinking we had on that was we didn’t want to disrupt the already grieving and mourning family by adding another layer. We’d never had rules around
March/April 2009 • Employee Benefit News Canada 17
that before.” To help further clarify the issue for plan members, CLHIA is launching a consumer brochure
this spring outlining the rules. “We tried to write [the guideline] in a way that is understandable to a lay person,”
says Wilson. “It’s pretty straightforward language, and the core intent has not changed at all. We just expanded the rules a
little bit to add some clarity around circumstances that hadn’t been addressed previously.” —A.D.
18 March/April 2009 • Employee Benefit News Canada
Quality of Life Giving the gift of time
Concierge services can save employees time and improve productivity By Sheryl Smolkin
A
t one time or another all of us have wished that there were more than 24 hours in the day so that we could work out, get more sleep, take a course or spend more quality time with the family. That’s why Katherine Giovanni, president of the International Concierge and Errand Association thinks concierge benefits are one of the most effective work/life benefits employers can provide. “It’s going to give you an edge up on your competition because not everyone is offering this benefit.” Concierges can be: • Hired in-house. • Small business owners servicing one or more local organizations. • Larger national providers. Available services are limited only by the imagination and can range from sourcing hard to get tickets for a favourite performer, to planning a party on short notice, to taking a car in for servicing. We profile below three very different concierge services that provide value-added services for both corporate clients and their employees. —S.S.
Concierge services by Jill Weinstein When Towers Perrin decided to pilot a concierge program in 2001, they advertised internally for someone to fill the position. Library technician Jill Weinstein says, “I thought it was something I could be really good at, so I applied and became the corporate concierge.” For the first four years as a salaried employee, Weinstein provided concierge services both to the company and to individual TP associates for business and personal reasons. Three years ago, she established her own business Concierge Services by Jill Weinstein, and TP continued as her major client. On the corporate side, Weinstein handles contractual arrangements and a myriad of other details for company holiday parties and client dinners. She also finds tickets to shows and sports events, buys client gifts and sets up itineraries for clients or prospective hires visiting Toronto. “We found other staff members were just wasting too much time on one-offs,” says Towers Perrin Toronto’s Managing Principal Kevin Aselstine. “Of course there is a hard cost, but it eliminates the soft cost of you or your assistant searching the Internet or phoning ticket lines.” Personal services for individual employees include finding and waiting for service people, planning events, creating itineraries for vacations — “anything people would do for themselves but don’t have the time to do or don’t want to do,” says Weinstein.
Whether performing corporate services for TP or personal services for employees, her rate is typically $55 an hour, and she enters her charges directly into the company billing system. A flat fee applies for straightforward ticket orders, flower purchases, etc. In the early years, there was a company subsidy to employees using the concierge service for personal reasons, but for several years individual employees have paid the full amount Weinstein invoices, via payroll deduction. Ross Gascho is currently a partner at the law firm Fasken Martineau. He often called on Weinstein for help when he was employed at TP, and although he now has to pick up the full tab, the relationship has continued. “The thing that stands out the most for me is that she would meet repair people at the house, and she saved me endless amounts of time that I would otherwise be waiting for someone, because you know how sometimes they give you a window of four or six or eight hours,” says Gascho. “She was extremely popular. I’m still using her for the same kind of thing.” Another one of Weinstein’s fans is TP actuary and consultant Rachna de Koning. Over the last seven years, they frequently worked together on client events. But the real test was when de Koning hired her on three weeks notice to plan her 40th birthday party. “We entertained 100 people, and my husband and I only spent two or three hours in total on the event. She did everything from finding the venue, to renting furniture, hiring a DJ, getting a liquor license and selecting a menu. Everyone, including me, had a great time, and nobody could believe I pulled it off.” Because Weinstein’s concierge services are now offered on a pay-as-you-go basis only to employees, Aselstine says, “She may not be as broadly used on an individual basis by employees anymore. But there are still a number of very busy people here who have her to do errands, shopping — things like that — because for them cost is really not the consideration.” De Koning agrees. “I’ve heard people say, ‘Jill knows what my wife likes.’ People at TP know Jill can get it done, and it will be done well. I think both from a corporate and a personal perspective having access to her concierge service is great for employee productivity.”
March/April 2009 • Employee Benefit News Canada
Eservus online concierge services If you work in or have visited a large office tower in Toronto, Calgary or Vancouver, chances are you are familiar with eservus. The online concierge service, which is available to tenants of over 200 buildings in these three cities, recently celebrated its 10th anniversary. Companies located in nonparticipating buildings can also purchase the service for their employees. The company specializes in giving clients access to discounts on tickets for sports events and the arts, plus other services, such as car rentals, fitness memberships, gift baskets, travel, hotels and restaurants. President and founder Kirk Layton says, “A lot of property managers are looking for ways they can provide value-added services to attract and retain tenants and this is one way they can do it.” Eservus promotes its services to tenants, through screens in building elevators, weekly e-mails, paper newsletters and events in the lobby. Layton says, “We’ve got about 43,000 registered employees who get our weekly electronic newsletter. We also leverage our database by running contests where we encourage clients to sign up their co-workers for a chance for both of them to win a prize.” How much does it cost? “Where a building purchases the service, they are charged pennies per square foot annually, depending on the size of the property. Companies like Rogers that own 100% of their building are charged in the same way,” he notes. “Private companies like AirMiles/Loyal-
tyOne pay between $.50 and $1 a month per employee (depending on the number of employees), with a $250 monthly minimum, plus delivery costs.” Because offerings can be accessed through their Website, (www.eservus.com/) and the vast majority of requests come electronically, the company can service its clientele in three cities with only 12 employees. Examples of some of the recent deals available to clients are: • 20% off on a bi-weekly membership to Goodlife Fitness. • 20% off on Choice Hotels worldwide. • All tickets to Broadway hit “Dirty Dancing” for $45. That eservus has found a niche is evidenced by the fact that the company earned a spot on the 2006 Profit 100, Profit magazine’s annual ranking of the fastest-growing companies in Canada. But perhaps the best evidence of its success is feedback from happy customers. EDS employee Jane Holz says, “I have ordered tickets for several events and bought one product. It is so easy and quick. Eservus is becoming my method of choice as the emails about coming items help me plan in advance and get great tickets! Well done!”
Thirsty Muse Personal Assistance Services Thirsty Muse has serviced its corporate clients since 2001 using a unique “time currency” business model. Customers purchase the time currency, known as “delegation units,” in bulk to distribute as an enhanced benefit to their employees or customers. Jason Rawn “Telus buys the program for just shy of 17,000 of their employees. Generally, employees get about 20 hours of personal assistant access per year,” says President Jason Rawn. “KPMG applies it right across the board to all of their employees, including students.” Delegation units can also be easily packaged up and used as a customer loyalty tool. For example, Royal LePage Relocation Services buys time currency in bulk and offers it to clients who are relocating. BMO Harris Bank and Nesbit Burns position packages of delegation units as a customer loyalty tool for clients with a specified level of assets. Examples of research requests that can be fulfilled over the phone are finding the best deal on a new car or TV, ideas for gifts and locating accommodations for an upcoming vacation. Personal assistants will also leave the office to collect mail and water plants when clients are away, pick up and deliver laundry, groceries, etc., and assist at events. “Almost anything legal and ethical, you name it, we can do it,” Rawn says. The main call centre is in Vancouver, but the company also has employees in Calgary, Toronto and Montreal. In cities such as Victoria, Regina, Halifax, Saskatoon and Winnipeg, Thirsty Muse partners with local concierge services. Companies are charged based on expectations for utilization of the program. “In the current economy a lot of companies have a great deal of work on their plate because they have downsized, and at the same time they need to produce results. In those circumstances, if higher usage is anticipated, we will charge more, but generally speaking the service costs $150-$200/year for each employee,” he explains. However Rawn, says the most gratifying part of the business is the feedback he gets from clients. “It’s incredibly inspiring, and it is how we monitor our service level agreements with companies like KPMG, Telus and the Bank of Montreal. Tradespeople and many other establishments are not accessible when the workday ends, and children have been fed and put to bed. Over 99% of the feedback we get is ‘You’ve really helped out my life.’”
19
Quality of Life
20 March/April 2009 • Employee Benefit News Canada
Video games enhance training By Kelley M. Butler
T
ell the truth — which training session would you rather go through: spending two hours watching PowerPoint slides go by or playing a video game? The benefits and communications teams at Assurant Employee Benefits, a Kansas City-based benefits carrier, thought employees would be more engaged by the latter and have achieved success with the company’s series of online training-video games called “It’s Your Business.” “We wanted to help employees understand our business better and wanted to use a model that was new, different, interesting,” says Sylvia Wagner, Assurant’s senior vice president of HR. “We put together a team of me, IT and communications to come up with something that had a ‘cool factor,’ rather than just traditional business education. I have an 18-year-old son, so I’ve been watching that generation and how they learn. They really respond to gaming,” and she thought Assurant’s workers would, too. After conducting an RFP among tech companies that specialize in creating gaming platforms, Assurant partnered with Kansas City-based Propaganda3. It turns out, Assurant wasn’t the only firm trying something new and different. “We build a lot of gaming Web sites, but our primary clientele is ad agencies. So, [working with Assurant, a benefits firm,] was a break for us,” says Marcelo Vegara, president of Propaganda3. “But [Assurant’s team] had put a great deal of thought into what they were trying to do and break the mold regarding training. What made the collaboration between us so great was they put a lot of thought in from the beginning about exactly what they wanted. They even already had games in mind!” According to Vegara, the typical initial investment for a gaming module is between $15,000 and $25,000, with each new game costing between $7,000 and $25,000 to produce. The pricing varies so widely, he says, based on the game’s complexity. “Something like “Hangman” is very straightforward, where a scenario-type game — with more animation and activity — is more complex,” he explains. Among the games in Assurant’s “It’s Your Business” module features
Two screenshots of “It’s Your Business,” the online training module from Assurant Employee Benefits that teaches and quizzes employees on their company knowledge using a video game format. a Hangman-esque game that quizzes employees on key business terms and features the firm’s CEO tethered to a hot air balloon by several strings. A string is cut with each wrong answer, until he ultimately falls to the ground. The games test workers on company strategy, customer base, how the company makes money and how employees contribute to company success.
CEO v. CFO smackdown
Designing the games was the fun part; communicating the new training was tougher, although Assurant execs still had a great time. As “It’s Your Business” was rolled out last July, “we had an all-employee meeting to explain the system, what it meant for them and what we were asking them to do,” Wagner says. “We
The gaming format can be a good fit for companies with a diverse workforce. launched a portal on our intranet and blog where people could ask questions and find more information.” Then, at the games’ premiere, “we had the CEO come play the game against the CFO,” she recalls. She won’t say who won — just that everyone enjoyed themselves, and enthusiasm continues currently. “We give a
leaderboard award to our top scorers, so people keep playing trying to get their score higher — not just doing it because they have to do it. We track results on a division level as well, so there’s some friendly competition between departments.”
For both the young and young at heart
Vegara thinks the gaming format can be a good fit for companies with a diverse workforce. “For a younger workforce, this is what they grew up doing — playing video games. And even people over 35 are seeing through Wii and iPhone games that video games are an engaging way to learn and teach,” he says. For any age group, he continues, “it’s delivering information in a way that’s going to stick with people. It’s active learning, not a sit back and snooze kind of environment.” Wagner affirms that Gen X, Y and boomers alike have benefited from the new training model. “We have a mixture of multiple generations, and we didn’t know if gaming would engage to older workers,” she says. “But we decided that making it easy to use and fun would work with everybody. It’s working; some of our highest scorers aren’t necessarily the youngest workers.”
Measuring success
In addition to the less quantifiable successes, like increased employee engagement, “It’s Your Business” is scoring success in hard numbers as well. When the module was launched in July, “we had a goal of having 95% of
employees participate in two games [out of a total of eight] by the end of the year,” Wagner says. “We hit our participation targets just six weeks after the launch.” Assurant also is measuring how well employees are retaining what they’re learning. The module features “an extensive back-end database. When employees play, they have to enter their employee ID, and it tracks the number of times each person has played and their scores each time,” explains Angela Skinner, Assurant’s manager of external communications. “Then managers can pull up all of their direct reports to see how they are performing as a group.” Skinner explains that there is nothing punitive about “It’s Your Business.” “It’s not factored into their performance appraisal, but getting high participation is tied to employee bonuses, so there’s a lot of peer pressure to participate.” That said, the company is satisfied with both participation and knowledge retention, according Wagner. “It was kind of a risk that has exceeded our expectations. Our CEO is very happy.” As if a happy CEO weren’t gift enough, Assurant received a local award from the American Society for Training and Development for “It’s Your Business,” in Best Practices in Workplace Learning and Performance Through Technology Innovation. For employers looking to replicate Assurant’s success, Wagner recommends building a diverse team from HR/benefits, IT and communications to “bring different perspectives to the table.” But perhaps most important, Skinner says, “Don’t be afraid to have fun!” —K.B.
22 March/April 2009 • Employee Benefit News Canada
Global Watch U.S. health care reform to take center stage this year Experts predict Obama, Congress will revamp health care in phases cost more than $1 trillion. “It will be a huge, huge expense,” Nussbaum says. “I haven’t a clue where the money is going to come from.” However, Shawn Jenkins, CEO of BenefitFocus, a South Carolina-based benefits software provider, says that the federal spending on the Wall Street bailout and other rescue packages could be a positive sign. “There have been a lot of bold proposals and lots of money floating around. That could be a good environment for getting something passed.”
By Kelley M. Butler
P
resident Barack Obama took office in January, and while stabilizing the economy clearly is priority No. 1, benefits experts predict a health care proposal to emerge from the Oval Office this year as well. “We do have enormous problems — overwhelming problems — with the economy, but [health care reform] will see action sometime this year,” says Ted Nussbaum, Watson Wyatt director of health care consulting for North America. “I think because this issue has been on top of Obama’s agenda, and Ted Kennedy [D-Mass.] certainly won’t let it go, there will be some firstphase plan introduced this year.” Obama campaigned vigorously about the need for health care reform during 2007 and 2008. “When it comes to health care, we don’t have to choose between a government-run health care system and the unaffordable one we have now. If you already have health insurance, the only thing that will change under my plan is that we will lower your premiums,” he said on the stump. “If you don’t have health insurance, you’ll be able to get the same kind of health insurance that members of Congress give themselves. And as someone who watched his own mother spend the final months of her life arguing with insurance companies because they claimed her cancer was a pre-existing condition, they didn’t want to pay for her treatment, I will stop insurance companies from discriminating against those who are sick
and need care the most,” the president said in campaign stops across the nation. Now, Obama is poised to make his agenda into concrete legislation, with his fellow Democrats ready to lend support, if not put forth proposals of their own.
Obama’s plan
Athough President Obama hasn’t sent a specific proposal to Congress, several significant changes he intends to make in America’s health care system were outlined during the campaign. His plan would: • Require insurance companies to cover pre-existing conditions. • Offer a tax credit to small employers to offset the cost of providing health insurance to employees. • Cover a portion of employers’ catastrophic health costs in return for lower premiums for employees. • Invest in strategies to reduce preventable medical errors. • Require large employers that do not offer coverage to contribute a percentage of payroll into a pool to pay for employees’ health care. • Allow medicines imported from other developed countries. • Require hospitals to collect and report health care cost and quality data. • Require coverage of preventive services, including cancer screenings. Such large-scale initiatives undoubtedly carry a similarly large price tag. Although the president has said he’ll pay for the plan by repealing tax cuts for people earning more than $250,000 per year, experts are wary, as analysis has estimated the plan will
Baucus, Kennedy, Wyden offer plans
While stating support for President Obama’s overall health care reform vision, three Democratic senators have drafted plans of their own. Sen. Max Baucus (D-Mont.) has introduced a plan similar to the president’s, which would maintain the employer-based system, but require employers of a certain size to provide coverage or pay into an insurance pool. The plan also is in line with the president’s in prohibiting insurers from denying coverage for pre-existing conditions. Further, the plan offers tax credits to individuals who purchase private insurance, and subsidies to lower-income families and small businesses. However, unlike Obama, Baucus’ plan would require all Americans to purchase health insurance. Sen. Ron Wyden (D-Ore.), who introduced the Healthy Americans Act two years ago, also favours an individual mandate, but more boldly appears to phase out employer-based coverage. Under his plan, employers could essentially shift what they pay for health coverage to pay employees extra wages. Workers would then buy health insurance from Health Help Agencies run by individual states. Although the bill technically preserves employer-based coverage, Wyden would eliminate employers’ tax exemption for benefits, so employers would have little incentive to offer it. Wyden’s proposal is supported by 14 other senators across both parties. At press time Sen. Ted Kennedy had yet to unveil health care legislation, but in November he established working
groups to address three areas of health care reform: prevention and public health, improvements in the quality of care and insurance coverage.
What employers want
A pre-election survey by Buck Consultants finds that U.S. employers want to continue to provide health coverage to their employees, but are against a government mandate to do so. Most employers favour a health care system similar to what already exists, but adding: • A safety net for the uninsured. • A continuing, and potentially expanded, role for consumer-driven health plans. • A national promotion of health and wellness. Among other findings, if a mandate does become law, two-thirds believe employers should have plan design discretion, such as the option to offer CDHPs. As the Chamber of Commerce’s Public Affairs Director Katie Strong told Benefits Forum & Expo attendees in September, “Employers feel that they can manage health benefits and plan flexibility much better than the federal government.” Jenkins adds: “Employers feel like they’re doing a great job, investing a lot of time, energy and money into these plans, so additional mandates are not going to be met with favour.”
Outlook for ‘09
Both Jenkins and Nussbaum predict movement on health care reform this year; nevertheless Jenkins says it will be a long road. He sums it up: “Clearly, there are a lot of different views on how to best solve this problem — how to pay for [reform], who would be covered, whether to have a mandate, even what mandate means. To think we could simply have it come down to one piece of legislation is unrealistic. We’ll need to chip away at it.” Nussbaum concurs, reminding that “the devil is always in the details, and right now we have concepts on the table and not much else.” —K.B. Kelley M. Butler is the editor-in-chief of EBNC’s sister publication, Employee Benefit News.
Cover Story
Getting a better deal on
March/April 2009 • Employee Benefit News Canada 25
Generics Private plan sponsors need transparency in drug supply chain (From page 1) drugs, the design of public and private drug plans allows competitive rebates averaging 40% to be provided by manufacturers, but gives little incentive for pharmacies to pass these savings on to private plan sponsors. This cost transfer to private plans and individuals has been exacerbated by provincial government tactics to reduce the public drug spend, including caps on generic prices and competitive tendering based on cost for preferential listing of specific drugs. “When the Competition Bureau says there is a lack of action on the part of plan sponsors, I sort of cringe because even my clients, which are the biggest companies in Canada, have not had the appetite to go after the whole idea of transparency,” says Wendy Poirier, a principal in Towers Perrin’s Calgary office.
Understanding the problem “The gap between prices for public and private plans can vary from one drug to another and even between pharmacies. The range of submitted costs is unbelievable,” explains Mike Sullivan, the president of Cubic Health Inc. “For example, just the ingredient cost for a 90-day supply of Plavix in Ontario can range from $240 to $320. How could one pharmacy have a cost base 33% higher than their competitor at the other end of the spectrum?” “My first big problem is separating whether yearover- year escalation in drug plan costs is even related (see generics on page 26)
Cover Story
26 March/April 2009 • Employee Benefit News Canada
Generics (From page 25) to increases in the cost of generic drugs,” says Jeannie McQuaid, HR supervisor at Belshield Enterprises in Belleville, Ontario. “Who would ever know? As a plan administrator I don’t get to see a breakdown of how many drugs were generic or the individual pricing on those. I have to fight tooth and nail every renewal period just to get a separation between the drug component as compared to other medical services or hospitalization.” Until recently, Hugh Paton was a senior benefits consultant at Bell Aliant. Currently, he is spearheading an Atlantic Canada employer coalition looking for ways to manage the escalating cost of drug benefits, including differences in the public/private drug spend. “If in fact we have been paying 40% too much for every generic drug we buy, and employees are paying 40% more than they need to, that’s something we want to investigate and reduce,” says Paton. He also notes that public plans have created a two-tier effect — a disruption in the marketplace. “The Competition Bureau says new generic drugs are coming out at 70% to 75% of the cost of brand name drugs, not 50% or 63%. We know that’s true, because we’ve seen it in our claims experience.”
“The gap between prices for public and private plans can vary from one drug to another and even between pharmacies, “ explains Mike Sullivan, the president of Cubic Health Inc.
Looking for viable solutions So what can plan sponsors do to level the playing field between public and private drug plans for the cost of generic drug? PPNs, mail-order pharmacies and plan designs that incent employees to be better consumers have been around for many years, but they’ve been a hard sell in this country. Mercer Worldwide Partner Brian Lindenberg thinks the “pain factor” has not been great enough to convince employers to make significant plan design changes. “Employers are reluctant to tell
”My first big problem is separating out whether year-over- year escalation in drug plan costs is even related to increases in the cost of generic drugs,” says Jeannie McQuaid, HR supervisor at Belshield Enterprises.
“If the fact is that we have been paying 40% too much for every generic drug we buy, that’s something we want to investigate and reduce,” says consultant Hugh Paton..
their employees to buy at a particular pharmacy chain so the company can get a better deal. Another reality is that employers tend to negotiate lower dispensing fees, not reduced pricing for the drugs. This is largely because pharmacies are reluctant to do so because they make a big chunk of their money through these rebates.” For McQuaid, limited penetration of the few currently available PPNs is a live issue. “Some of these strategies are based on the premise that everyone has access to everything. They don’t work when you have people living in small towns and villages where there is no in-network pharmacy.”
Public plan policy inflates private plan prices Private plans sponsored by employers or employee associations account for more than 35% of expenditures on prescription drugs in Canada, while approximately 50% are covered by public plans. In contrast, 17% of prescription drug costs are paid for by individuals out of pocket, either as copayments or deductibles, or because the specific drugs are not covered, or they do not have insurance. The Fraser Institute reports that brandname drugs are about 53% less expensive on average than in the United States, but generic drugs in Canada are about 112% more expensive on average than the same generic drugs in the United States. The Ontario government’s Transparent Drug System for Patients Act, adopted in June 2006, ended the traditional pricing framework for generic drugs across Canada based on maximum prices allowed under
the Ontario Drug Benefit Plan. For most generics, this amounted to 63% of the interchangeable brand reference formula price. The TDSPA reduced the maximum for most generic drugs to 50% of the interchangeable brand product price. Private payers in Ontario, and public and private payers in other provinces, did not obtain the reduced ODBP prices. The exception was Quebec, which requires that generic manufacturers provide the province the lowest price available in other provinces. The Competition Bureau’s study found that the ODBP and Quebec prices for generic drugs introduced before October 2006 dropped 21% after the TDSPA price caps were implemented, but prices for older generics stayed about 63% of the brand name for private plans in Ontario,
and public and private plans in provinces other than Quebec. However as patents expired and newer generics came onto the market, they were introduced at prices ranging between 70% and 75% of the interchangeable-brand product price, even where multiple suppliers were active in the market. Provinces such as B.C. and Ontario have also started issuing tenders for the supply of particular medications (generic or brand name) to their public drug plans, with winning bids to be determined primarily on the basis of confidential rebates off the product list price. A similar deal negotiated by pharmacy benefit manager Medavie Blue Cross, which brought the net price of Biaxin below the generic cost, was repealed by the manufacturer as a result of objections from the pharmacy sector.
MHCS Director of Business Development Leanne MacFarlane says, “Depending on how much activity is flowed through the PPN, some of our long-standing clients have enjoyed savings of 15%-25% off what they would otherwise be paying.”
Managed Health Care Services is a pharmacy benefit manager operating a PPN based on over 210 stores across Canada under the banners of Lawton Drugs, Sobey’s Pharmacy, Price Chopper Pharmacy and Thrifty’s Food Pharmacy, plus other affiliate providers. Sobey’s also offers mail-order services. MHCS Director of Business Development Leanne MacFarlane says her company works with other pharmacies that accept their drug cards in regions where they do not have their own stores, but she readily acknowledges that “employer discounts are based on the number of scripts filled through the primary network.” “Depending on how much activity is flowed through PPN, some of our long-standing clients have enjoyed savings of 15%-25% off what they would otherwise be paying,” she continues. Nevertheless, where an employer has implemented a PPN, employees who go outside the network generally have to pay the claim and then submit an application for reimbursement. “What few employers know is that the reimbursement client is considered a cash client by the pharmacy and they are charged the highest amount,” says Sullivan. “Therefore they run the risk of having a materially higher cost base on those out of network claims that can water down any saving realized through the PPN.” Towers Perrin Principal Karen Millard agrees that employers have to fully understand what they are getting into. “I’m less than impressed with what the pharmacies are coming back with in terms of what they are prepared to do. Also, the Competition
Cover Story
March/April 2009 • Employee Benefit News Canada 27
Bridging Quebec’s public/private pricing gap
Bureau won’t be happy if the decision of employees about where to buy is unreasonably restricted.”
In Quebec, by law, every individual must have drug benefits, and anyone who is eligible for private coverage must be insured privately. Unlike other provinces, drugs on the mandatory list cannot be “de-listed” by a private plan, as a result of a tender, for example. However, the government negotiates, for both public and private plans, the cost of ingredients and forbids manufacturers from having two pricing lists. The government also limits discounts paid to pharmacists by manufacturers to a maximum of 20% of their total sales. The agreement stipulates that manufacturers cannot sell generic drugs at a price higher than the lowest one in Canada. As a result, Quebec benefits from Ontario provisions, which limit ingredient cost to 50% of the price of brand-name drugs. For drugs listed on the mandatory formulary, manufacturers are entitled to a maximum annual price increase. Up to 2007, no price increases had been permitted for 14 years. Price increases, in excess of what the government has authorized, and the difference in ingredient cost between a generic and a brand-name drug, can be passed on to individuals insured by public and private plans. However, two important constraints apply only to private plans: • The claimant must be reimbursed at least 69% of the amount claimed by the pharmacists for the prescription. • Excess amounts passed on to claimants must count toward the $927 annual maximum out-ofpocket amount; once this is used up, the plan must reimburse 100% of the prescription cost. The Ministère de la Santé et des Services Sociaux negotiates with the Association québécoise des pharmaciens propriétaires (representing owner
The changing landscape
Towers Perrin lawyer and Principal Karen Millard says, “I’m less than impressed with what the pharmacies are coming back with in terms of what they are prepared to do.
“Even if generic pricing goes down, there is no guarantee that [Quebec] private plans will benefit. On the private side, it’s a free-for-all,” says Johanne Brosseau, a consultant in Aon’s Montreal office.
pharmacists of over 1,600 pharmacies in Québec) the amount charged to the Régie de l’assurance maladie du Québec for patients insured under the public plan, based on the following formula: Cost of ingredient + 6% (max. $24) + $8.28 ($8.44 on April 1, 2009) Private plans do not benefit from this agreement, thus pharmacists apply their “usual and customary” price. “Even if generic pricing goes down, there is no guarantee that private plans will benefit. On the private side, it’s an open market”, says Johanne Brosseau, a consultant in Aon’s Montreal office. “Just recently, carriers realized that if they want to get somewhere in terms of a negotiated agreement with the AQPP, they have to do their homework.” Aon has developed an algorithm to calculate a “maximum eligible price” private plan claimants will be reimbursed in Quebec, to help plan sponsors avoid significant discrepancies between what public and private plans are charged for the same prescription. Over the last 18 months, four large employers have introduced this element into their plan design. “To the extent permissible, overall direct savings generated with this approach are about 3%, resulting from both cost transfer and lower amounts claimed by pharmacists. However, we would save another 2% if we weren’t constrained by these rules” says Brosseau. “Before this approach is adopted, we educate employees and teach them to shop around for the best service/price ratio” she continues. “Pharmacists and government are feeling the heat. In spite of initial difficulties, we are very pleased with how it is going.”
Mercer Worldwide Partner Brian Lindenberg thinks the ‘pain factor’ has not been great enough to convince employers to make significant plan design changes.
“A national employer with operations in small towns across Canada suggested that if they could arrange for a PPN with a major retailer in major centres, it would at least be a step in the right direction,” says Wendy Poirier, a principal in Towers Perrin’s Calgary office.
Plan sponsor response to the Competition Bureau’s suggested options for obtaining competitive pricing of generics has been muted to date, but there are indications that the landscape is starting to shift. “With a greater understanding of the issues, plan sponsors will begin to ask the tough questions like ‘how can I better manage these costs?’” says Lindenberg. “But it will take some innovative plan sponsors and PBMs or insurers who will go out and negotiate better deals.” Poirier says recently, for the first time, a national employer with operations in small towns across Canada suggested that if they could arrange for a PPN with a major retailer in major centres, it would at least be a step in the right direction. “Even if they couldn’t get transparency, they could get a deal based on volume.” MacFarlane cautions that the indirect funding or allowances that pharmacies do get are subsidizing the professional services pharmacists provide, including maintaining stores that are open long hours in virtually every community. Nevertheless, she says that the pharmacy industry would be among the first to say the model could be modernized and is actively engaged in the process. “Governments and the private sector have to bust out of our silos and change our business together, instead of one by one,” says Paton. “We need to stop paying pharmacists the 40% under the table, but put some of that money back on the table for the professional and consultative services pharmacists provide.” Sullivan agrees that more transparency around discrepancies in public/private pricing of generics is important, and employer alliances like Paton’s group in Atlantic Canada can help employers negotiate better deals. But he thinks the future will also bring new players and more competition into the Canadian space. “Canada has the highest generic drug prices in the developing world. Anyone who thinks floating numbers like $600 or $800 million, or a billion dollars, to the large U.S. PBMs and international health care companies isn’t going to get their attention is really not thinking clearly. U.S. PBMs make their money on the spread, and our price discrepancies could be an absolute gold mine for these groups.” —S.S.
28 March/April 2009 • Employee Benefit News Canada
Feature Story
Fee disclosure a
cloudy issue Better disclosure could put downward pressure on DC fees
BY Andrea Davis
T
he economic downpour could have a silver lining for sponsors of defined contribution plans. While plan members have seen their balances shrink significantly in recent months, some consultants say this is the ideal time for sponsors to advertise the good deal members are getting in terms of their investment management fees. “The fees at your local bank are much, much higher than what these individuals are paying in their group plans,” says Jill Purcell, senior investment consultant with Watson Wyatt in Toronto. “And I don’t know that sponsors really do a very good job of communicating that, of selling that benefit, and therefore encouraging members to invest in the group plan rather than their own individual RRSPs.” And while group fees are typically lower than retail fees, there’s still very little disclosure in terms of what members are actually getting for the fees they are paying. Fees in DC plans are typically charged through the investment management fee — a bit of a misnomer because it covers more than just the fees paid to fund managers. The IMF is charged as a percentage of assets and also includes the administrative, recordkeeping and custody costs of the recordkeeper, as well as the recordkeeper’s profit margin. Some plan sponsors also may have implemented a fee structure that contains fixed recordkeeping and administration fees, which are
charged on a per member/per year basis. What’s disclosed to members is the IMF as a whole, but not the breakdown of its various components. “That’s okay, because for the member I don’t think it really makes a difference,” says Jean-Daniel Côté, principal with Mercer in Montreal. “What makes a difference to the member is knowing that they pay more in fees for whatever money they have invested in a retail mutual fund.” But others maintain that plan members deserve more transparent fee disclosure precisely because they are the ones paying the majority of fees and expenses of the plan. “To ensure there’s adequate levels of accountability moving on up the chain, it’s important to have disclosure at the plan member level,” says Greg Hurst, principal and national DC practice leader with Morneau Sobeco in Vancouver.
Minimum requirements
The International Centre for Pension Management, based at the University of Toronto, released “Fee Disclosure to Pension Participants: Establishing Minimum Requirements” last fall, which argues that plan members “need information concerning fees to make informed decisions about the services they are purchasing. To provide them that information, governments may need to mandate minimum requirements as to fee disclosure in defined contribution plans.” The recent Alberta/B.C. Joint Expert Panel (see fees on page 30)
March/April 2009 • Employee Benefit News Canada 29
5 fee questions If you’re concerned about the fees in your plan, here are some questions you can ask your provider. 1. Can we restructure our pricing to reflect a fixed cost component for recordkeeping and administration? “Generally, the answer to that is ‘yes, we’d be happy to do that,’” says Morneau Sobeco’s Greg Hurst.
2. C an we allow members to
select between two pricing regimes — one that includes a fixed cost, and one that is totally asset-based? While the answer is likely to be ‘no’, it’s worth asking, says Hurst. “Depending on your plan, you may be delivering a good asset base to your provider, and they may accommodate that,” he says.
3. C an you break out the investment management fee you pay your fund managers from the part of the fee you allocate to recordkeeping, administration and custody? “It would be very revealing for a sponsor to ask providers to break down the fees that way because they’ll get a sense of how much resistance the provider has to providing that type of breakdown,” notes Hurst.
4. A re any commissions being
paid relative to our investment management fees, what is the amount of those commissions and who are they being paid to? Insurers will readily provide this information, says Hurst, but if the broker who’s receiving those commissions isn’t delivering any services to the plan, then the sponsor can ask to stop paying the commission, which can lead to immediate savings.
5. D o you have a broker bonus
program? Broker bonus programs are funded through the overall revenue insurance companies earn, but the bonuses are only paid to select brokers who meet certain criteria. “It’s important for plan sponsors to know about broker bonuses because they will want to know if the advice they’re receiving could be biased,” says Hurst.
Feature Story
30 March/April 2009 • Employee Benefit News Canada
Fees (From page 28) on Pensions recommended the establishment of an occupa-
tional pension plan open to all workers in the two provinces, noting that such a plan would have sufficient economies of scale to allow all workers to ac-
cess not only quality investment management expertise, but also “plan administration services at costs comparable to those currently enjoyed by the public
sector and other large pension plans” in those two provinces. The JEPP report recommends that, if such a plan is implemented, total management
expense ratios (including plan administration costs) should not exceed 0.5% of assets under management. Janet Rabovsky, practice leader, Central Canada, investment consulting, with Watson Wyatt, believes the JEPP proposal for a multiemployer plan has tremendous potential. “We would like to see a more cost-effective solution that isn’t necessarily tied to an individual plan sponsor and their ability to get assets into their plan,” she says. And while fees can have a significant impact on benefit adequacy, the more important issue may be contribution levels. “Even before the current [financial] crisis, DC members should have been contributing something like 17% to 18% of their salary just to recover what was lost in the 2000 to 2002 period,” says Rabovsky. “You have to assume that’s gone up now. That’s a much bigger issue than fees.”
Reviewing fees
If you implemented your plan a decade ago and haven’t looked at your fee structure since then, it’s probably time for a review. The Guidelines for Capital Accumulation Plans recommend a periodic review — based on established criteria — of all service providers, investment options, records maintenance, and decisionmaking tools for members. “If returns go down, one way an employer can show added value is by negotiating better fees,” says Tony Ioanna, vice president with Aon in Montreal. “In the last six months or so, I’m seeing more clients give me the green light to go to market just for fees.” And if you don’t ask for a better deal on fees, it’s unlikely your provider will bring up the issue. But it’s important to strike a balance between being fair and being stingy. “You still want a good working relationship with your provider,” says Mercer’s Côté. “I’ve seen consultants really push the provider to the limit in terms of fees, and it’s not necessarily a good thing for the plan sponsor, because every time they ask for something from the provider after that, the provider may charge them for it.” — A.D.
March/April 2009 • Employee Benefit News Canada
Who’s News
31
When benefits celebrate Bollywood By Sheryl Smolkin
W
hen benefits celebrated Bollywood at the CPBI Benefits Ball recently held in Toronto, the result was scrumptious food, great entertainment and a significant donation to the Crohn’s and Colitis Foundation of Canada. A cold evening and an even chillier economy did not deter over 300 ticket holders. The master of ceremonies for the evening was Zaib Shaikh, star of the popular CBC series “Little Mosque on the Prairie” and entertainment was provided by the energetic and accomplished Indo Jazz Dance Movement Group. Generous sponsors included: • Event sponsors Desjardins Financial Security, Great-West Life and Sun Life Financial. • Activity sponsors Manulife Financial, Borden Ladner Gervais and Mercer. • Media sponsors Benefits and Pensions Monitor, Employee Benefit News Canada and Benefits Canada. The beautiful table settings and flowers were enhanced by goody bags that contained generous gift certificates to the Rosewater Supper Club and colourful pashminas.
Raffle winners were: • John McLaren, Future Benefits Management Inc. (white gold and diamond necklace) • Vicki Teti, Ontario Power Generation (Golf at “The Club at Bondhead”) • Eleanor Fleeton (comprehensive Medcan medical assessment). Event Chair David Lester (SEI Canada) says, “The high point of the evening for me was when our three event sponsors took to the stage together to be acknowledged for their generosity and support. It gave me a great sense of pride to be associated with our industry and the CPBI Benefits Ball. The Bollywood Dancers were a lot of fun to watch too.” —S.S.
Indo Jazz Dance Movement Group.
Representing event sponsors: John Stevenson, Great-West Life; Stephen McGregor, Desjardins; Dan Henry, Sun Life; and MC Zaib Shaikh.
Morneau Sobeco Partner Bethune Whiston and her husband Reza Piroznia take dance instructions.
Colourful pashminas in the gift bags enhanced the beautiful table settings.
Event Chair David Lester and MC Zaib Shaikh.
Photography by Joel Troster