Since retirees and active plan members are fundamentally different, should their investment options reflect that distinction?
That’s the question confronting defined contribution plan sponsors as they explore the relatively new world of in-plan decumulation. As of January, when the Ontario government passed a series of new regulations under the Pension Benefits Act, the majority of Canadian jurisdictions now allow DC plan sponsors to offer variable benefit accounts, with the exceptions of New Brunswick and Newfoundland and Labrador.
Since 2006, members of Saskatchewan’s Public Employees Pension Plan have been able to enroll in these accounts upon retirement. The plan offers the same investment lineup to both its active and retired members: they have the choice of six asset allocation funds, ranging from conservative to aggressive in construction, as well as two specialty funds designed for capital preservation — a bond fund that invests exclusively in long-term fixed income products and a money market fund that invests in short-term income-producing investments. Members can select up to three funds, but only one can be from the asset allocation group.
According to Dara Sewell-Zumstein, retirement information consultant with the province’s Public Employees Benefits Agency, which administers the plan, the continuity was meant to allow members to invest in a way that best suits their lifestyle.
“It really depends on their stage of life, their investment knowledge [and] their goals to determine how they want that money invested. It’s not right to say someone who’s 25 has different options than someone who’s 80. It will depend on their own personal risk tolerance, other forms of income, their spousal situation — all of those things are going to come into play when they make the decision of how to invest their money.”
There’s no inherently right or wrong answer to the question, says Zaheed Jiwani, a principal at Eckler Ltd. Whether plan sponsors elect to keep their existing lineup or look at a new one will depend on their underlying investment philosophy.
“There’s a debate [over whether] you introduce new options in decumulation given that it’s a different state for the plan member. If you offer new options — again, tying this back to your investment beliefs — why does that make sense in decumulation but not accumulation? Some plan members will ask and it’s a discussion plan sponsors need to have.”
Don’t follow the crowd
While plan sponsors looking to set up variable benefit accounts may consider consulting what’s being done in other decumulation vehicles such as group RRIFs or LIFs, doing so may give them flawed data, says Eckler’s Zaheed Jiwani. For example, retirees in their mid-70s and beyond have invested heavily in guaranteed income certificates, but not as much in target-date funds. “Most of those members who are later on in decumulation never actually had access to target-date funds in accumulation. During their peak earning periods or if they were working in the ‘80s, GICs were much more popular than they are now. Industry data is not necessarily a good indicator of what you should do.”
The choice is slightly complicated by the reality that variable benefit accounts are still quite new. While they’re usually administered through record keepers, Jiwani notes many are only starting to set them up or aren’t planning to do so until there’s more interest from plan sponsors. Among record keepers that are going ahead, some are planning to offer the same menu they do during accumulation.
Jillian Kennedy, partner and leader of DC and financial wellness at Mercer Canada, says the country’s DC decumulation marketplace — whether for variable benefits or even group registered retirement income funds or life income funds — is where accumulation was 20 years ago. “You still have your 150 funds to pick from [and] you don’t have some of the services left over for you; it’s really a drop into a retail-type market. What we need to do is take that institutional footprint we’ve put into the accumulation world and transport it into the decumulation world.”
But the industry may be at a turning point, says Lauren Bloom, Canadian head of DC sales and intermediaries at T. Rowe Price Group Inc. “[I’ve] spent a lot of time in the marketplace in Canada speaking with consultants and advisors in the DC space and it seems as though conversations are starting to happen, a majority of the time with larger plan sponsors. I think those are [the ones] that will move the dial and lead to more options becoming available.”
What’s in a target-date fund?
The PEPP’s default, a target-date fund with 13 investment phases, is very popular with active members and retirees. They enter the fund at the step that correlates with their age and it becomes more conservative as they get older. It was built for the PEPP’s average investor, based on the demographics of the plan’s membership.
“We have changed [the asset allocation] over time — people are living longer, people are working longer, so there are other factors that are going to come into play,” says Sewell-Zumstein. “We’re always monitoring it to make sure it matches the demographics of our current membership.”
Target-date funds are typically the core vehicle for members who stick to the default, so it’s important that plan sponsors looking at introducing variable benefits understand what they’re offering to members, says Jiwani. He notes each target-date manager has an underlying glide-path methodology that covers their overall goal for the fund, how they’ve modelled the path in both accumulation and decumulation and what asset classes they offer. “You really need to understand what that overall investment process and philosophy is on the glide path before you even entertain looking at the glide path.”
The main difference for target-date funds in the decumulation stage is whether they glide up to or through that period. Those that glide up to retirement flatten out in the decumulation phase and keep the investment mix constant, says Jiwani, while those that glide through continue de-risking during the member’s retirement, ultimately levelling out much further into that life stage.
“You really need to understand why each manager has had that approach and has come up with that investment philosophy and if that aligns with what you believe, as a plan sponsor, is appropriate for your plan members,” he says. “It’s even more of an important discussion now that plan sponsors are looking at variable benefits and other decumulation vehicles.”
Constructing the portfolio
While many retirees will stick with a target-date fund, some will opt to choose their own asset mix, so plan sponsors will have to consider what to offer. For example, some vehicles designed for capital preservation can have heavier risk exposures, which should be made clear to members, says Jiwani.
“Some fixed income might have more credit risk and some might have more currency or interest rate risk. While on the surface you think you’re providing additional choice to members and that’s a good thing, you may be introducing additional risk, even when you’re talking about something that is supposed to be lower risk.”
On the flip side, plan members also need access to viable equity options to hedge against the risk of outliving their assets. Plan sponsors may also have members with a previous defined benefit pension and whose variable benefit account may not be their main source of retirement income, says Michael Oler, vice-president and retirement income product manager at T. Rowe Price.
“They may be able to satisfy their retirement income goals [from] their DB and state-funded pensions and don’t need a lot of extra income from their other portfolio. If that’s the case, you may be able to structure programs that provide a little bit more risk because they know that they’ve got their minimum income supported by these . . . income streams.”
Alternative schools of thought
While alternative assets provide members with the benefit of diversification in the accumulation stage, making them available in decumulation presents new considerations. Offering alternatives as a sleeve within a multi-asset fund would give members other sources of liquidity should they need it, but a stand-alone fund could significantly hamper their ability to access funds.
“Not all of these alternative asset classes or funds are highly liquid,” says Jiwani. “I’ve seen a few real estate funds on the record-keeping platforms that are closed to new withdrawals because of the current environment. That would be something that’s highly stressful for plan members looking to decumulate.”
The PEPP recently adjusted its six asset allocation portfolios to introduce real estate, liquid alternatives and infrastructure. The plan is currently in the process of implementing those options, notes Sewell-Zumstien, because investing in private equity is a years-long process. “Ideally, we want to provide our members with a good investment that has a good growth rate with lower risk and that’s where the alternative investments came in.”
The level of alternatives is consistent across its six funds, regardless of their risk level. “The idea is that, if we have the same amount through each one of the asset allocations, then when someone moves from one fund to another we’re not concerned with having to sell that asset class, because it is more of a long-term investment,” she says.
Innovation on the horizon
Outside of the decumulation part of a target-date fund’s glide path, investments that are purpose-built for the retirement phase don’t exist in Canada, says Jiwani. Even then, some target-date managers have just left retirement as “the end of the glide path and it’s not explicitly modelled in terms of how they designed the target-date fund.”
But the decumulation side of the glide path will become more important in the coming years. Currently, glide paths are designed to be broadly applicable, but retirement is unique, from the time plan members choose to leave the workforce to what they want to do with those years. Pointing to more developed DC markets in Australia and the U.K., Kennedy suggests Canada could start to see glide paths that would allow members to de-risk at the time they chose to retire, rather than just ones that assume the same retirement age for everyone.
Also within the U.K. market, she highlights investment products that have “target-return outcomes,” which pool longevity risk and allow members to make selections based on their desired income stream and lifestyle. They can pick a more aggressive portfolio knowing they won’t need to access funds for a long time or a more conservative one if they know they need liquidity.
“There are a lot of really nice products we’ve seen around the globe and the targeting return also allows pooling of longevity within a product,” says Kennedy. “All of these things exist, it’s a matter of making sure employees can choose something that aligns to their risk profile.”
According to Jiwani, Eckler has spoken to several investment managers that are currently designing built-for-retirement products to take into account factors such as longevity and shortfall risks, the variety of plan members’ needs and lifestyles in retirement and tax concerns.
Fees are also an important area of the innovation conversation, he says. While DC plans’ institutional power has brought down fees on investments in accumulation, the same isn’t true of the decumulation space, with variation between record keepers. “The fact that we’re going to have access to variable benefits and an increased focus on decumulation vehicles means we need to make sure we’re not eroding plan members’ savings in decumulation.”
• DC plan sponsors that are implementing variable benefit accounts will have to consider whether their investment lineup should be different in the accumulation and decumulation phases.
• It will also be important to become familiar with the investment philosophy behind plan sponsors’ chosen target-date funds, especially how the manager chooses to model the retirement part of the glide path.
• Built-for-decumulation investment products that are currently in development will take into consideration factors such as longevity and shortfall risks, retirement needs and lifestyles and tax concerns.
Of course, DC plan members have to put a lot more thought into their investment strategy during retirement than if they’re retiring with a DB pension, so education will be a key component of a variable benefit offering, says Oler. “Plan sponsors need to take members on that journey — what they should think about, the different ways to think about it in terms of their own stated preferences and how to make that choice. That becomes something where you need to engage them in simple ways.”
Indeed, plan sponsors can’t forget that entering a new life stage doesn’t inherently make plan members savvier investors, says Jiwani. “Plan members exhibit as high a degree of inertia in decumulation as they do in accumulation. . . . [But] people might start to pay more attention to it, so you want to make sure the offerings are very easy to understand and . . . are not going to overwhelm members.”
In terms of products, Kennedy believes this mindset will drive the development of investment options. “I think the variable benefit account is a product that will force us to think more about, ‘Well, maybe as I go into retirement and I’m going to draw on income here, I should have a strategy that aligns to that, [which is] different from the menu of funds that I had while I was working.’ That hasn’t happened yet in our market.”
Kelsey Rolfe is an associate editor at Benefits Canada.
Iveson says $17.3-million federal housing investment puts Edmonton on the right track to end homelessness – Edmonton Journal
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“The goal was to create urgency around accommodation for everybody this winter and urgency around bringing the right kind of units online in a matter of months rather than years and so I think we’ve accomplished that with the federal government’s announcement,” he said. “I think we’ve made considerable progress within the last eight or nine weeks and anyone who wants to come in from the cold will have a place to do it within that 10-week timeframe. So I’m pleased with how it’s come together.”
Now that the funding is secured, Iveson said the city will work with social agencies over the next few weeks to “go shopping” for the right sites.
“We’ve been in discussions with a number of hoteliers and also looking at some of the modular sites that the city had previously approved so the money will move quickly and as soon as we have a decision point on that we’ll bring that forward, but our goal will be to move that within weeks,” he said.
Iveson said the city will also be aggressively pushing for a portion of the other $500 million that will be granted to specific projects. A few projects are already in the works, Iveson said, pointing to four planned supportive housing complexes that will provide 150 units. Projects under this stream must be completed within one year of a signed agreement.
The city is working to open up a 24-7 temporary shelter at the Edmonton Convention Centre by Friday, which will accommodate up to 300 residents overnight. The Mustard Seed and Hope Mission are also looking to expand their overnight shelters in order to serve more people at larger spaces while maintaining appropriate physical distancing amid the COVID-19 pandemic.
Investment approaches to continued uncertainty – Investment Executive
“The average client portfolio is riskier today than it has been historically because you’re not getting the natural diversification” that bonds provide, said panellist Luke Ellis, CEO with London, U.K.–based Man Group plc, a global investment management firm with offerings that include quantitative portfolios. As a result, asset allocation must be reconsidered, he said.
Ellis also warned of the challenge of identifying winners and losers in a world of massive government spending. The market is not efficient when fiscal policy helps support weak companies, he said.
Neil Cunningham, president and CEO with Ottawa-based PSP Investments, one of Canada’s largest pension investment managers, said PSP is reducing government bonds in portfolios in favour of emerging market debt, private credit and high inflation–linked infrastructure projects with little operating or credit risk. Adding in these assets increases risk, so the firm reduces equities to stay within risk limits, he said.
More generally, as a long-term investor, Cunningham aims to distinguish between noise and longer-term trends. The U.S. election, he said, is noise: “We’re much more concerned with the trends that get accelerated by Covid,” such as de-globalization, greater e-commerce adoption and working from home.
Cunningham also suggested investors follow the long-term trends of ESG and diversity and inclusion because governments, employees and customers will consider these factors as they legislate, work and shop.
Mohammed Alardhi, executive chairman with Manama, Bahrain–based Investcorp, a global manager of alternatives, highlighted the need to diversify within sectors and geographies, noting that investors in oil-producing regions were particularly hard hit by the pandemic.
Cunningham described investing in a U.K. pub business just months before the economic shutdown. No one expected a business that stayed open during the Blitz to close, he said. The lesson: “Unless you diversify both geographically and by sector, you’re bound to get hit by something you didn’t expect.” Unexpected downturns also require investors to ensure they have sufficient liquidity, he said.
Panellists also considered trends arising from geopolitics.
The outcome of U.S.-China tensions will be key for many portfolios over the next decade, depending on the position investors take, Ellis said.
For example, should China be a small part of a portfolio because of the country’s restrictions on foreign businesses, or should it be a large part as the eventual largest economy in the world?
As U.S.-China tensions put pressure on other governments to pick a side, investors will face an increasingly challenging environment, Ellis said.
Cunningham said his firm was increasing allocations to Australasia and emerging markets based on long-term geopolitical trends that will see those economies benefit.
The outlook for investment in Canada
Ian McKay, CEO with Ottawa-based Invest in Canada, also spoke at the session and provided a positive outlook for foreign investment in this country despite an overall negative forecast for foreign investment flows.
Global foreign direct investment (FDI) is expected to decrease by up to 40% this year and by a further 5–10% in 2021, according to the World Investment Report 2020 from the United Nations Conference on Trade and Development.
This would bring FDI flows to “the lowest levels we’ve seen in over 20 years,” McKay said, which will motivate governments, investment funds and agencies to reassess their strategic plans and investing criteria.
As they do so, Canada is proving attractive.
Since the pandemic, Invest in Canada has experienced a spike in interest from global investors in three sectors in Canada: life sciences, associated with a vaccine for Covid-19; the digital economy, in which Canada is a leader in artificial intelligence; and clean technology, such as hydrogen or electric cars and renewable energy.
“In Canada, we have the right ingredients for that — the raw materials, highly skilled workforce, innovative ecosystems and global market access,” McKay said.
Fundamental factors also favour Canada when it comes to attracting investment, such as political and economic stability, an open mindset to free and rules-based trade, and a global supply of workforce talent, McKay said.
Despite the forecast for foreign investment flows, “we are certain that the future is bright for those investors who continue to build and expand their operations in Canada,” McKay said.
Foreign Investment Plummets During Pandemic, Except in China – The Wall Street Journal
Foreign direct investment in China largely held steady during the first half of this year, even as investment inflows into the U.S. and European Union plummeted, in a fresh sign that the world’s second-largest economy has suffered less damage from the pandemic.
Globally, the monthly average for new investments for the first half of the year was down almost half on the monthly average for the whole of 2019, the largest decline on record, the United Nations’s Conference on Trade and Development said Tuesday. But while foreign investment in the U.S. and European Union fell by 61% and 29% respectively, inflows to China were down by just 4%. China attracted foreign investment totaling $76 billion during the period, while the U.S. attracted $51 billion.
The U.S. has long been the top global destination for businesses investing overseas, while China has long ranked second.
Unctad said the modest nature of the decline in foreign investment to China was surprising. Back in March, when China was the epicenter of the pandemic with significant parts of its economy in lockdown, Unctad forecast that it would be the big loser, and expected global flows of investment to fall by 15% across 2020.
However, China’s economy reopened in April just as the U.S. and Europe were in lockdown, and the country has since contained the virus with only localized and short-lived restrictions. By contrast, the U.S. and Europe have seen resurgences in infections that have slowed their recoveries. In the three months through September, China’s economy had already exceeded the levels of output recorded in the last quarter of 2019, according to data out last week.
The resilience of foreign investment in China appears to confound earlier expectations that businesses would seek to reduce their reliance on the country as a key part of their supply chains. But James Zhan, Unctad’s director of investment and enterprise, said it was too early to reach that conclusion.
“One of the main reasons for reconfiguration of global supply chains is to increase resilience, which requires backup plans and redundant capacities,” he said. “A more practical approach companies can take would be building additional production bases outside of China, which means new investment to other countries instead of divestment from China or moving production out of China.”
Across all developed economies, inflows of foreign investment were down 75% in the first half from the 2019 monthly average to total just $98 billion, a level last seen in 1994. In some cases—such as the Netherlands and the U.K.—that decline took the form of a reduction in loans from the parent company to its overseas subsidiaries, which are counted as foreign investment.
With tensions running high, Washington and Beijing have pushed to decouple technology and trade. But American financial firms including JPMorgan and Goldman Sachs are doubling down on investing in China and expanding headcount. Photo Composite: Crystal Tai[object Object]
“In times of crisis, some multinational enterprises would like to keep funds close to home,” said Mr. Zhan. “Fear that Covid-19 and the quest for funds could lead to tax increase may also accelerate the intra-firm capital movements.”
Foreign investment in developing economies proved more resilient, falling by just 16% to $296 billion.
Unctad said there were signs of a pickup in investment during the three months through September, and it repeated its forecast that flows for 2020 as a whole would likely be 40% down on 2019. But it warned that the second wave of rising infections hitting a number of developed economies could see flows down 50% for the year.
While foreign investment in most countries fell during the first six months, a small number saw an increase. One was Germany, which saw inflows rise 15% to $21 billion, largely due to a small number of foreign acquisitions of existing businesses.
Write to Paul Hannon at email@example.com
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