This latest industry trend is likely to generate discussion within and beyond Canada
By Ed McCarthy
Consolidation is in the air. Consider these findings from Chapter 3 of CIBC Mellon’s 2021 survey, In Search of New Value, The Rise of the Consolidators: Canadian Asset Owners Pursue Scale and Opportunity:
-
72% of pension plans and sponsors are currently undertaking consolidation or risk transfer options that seek to offer greater certainty that the plan will be able to meet its liabilities.
-
50% of pension funds plan on implementing their consolidation plans over the next three to five years.
The survey notes that consolidation models work in both directions. A “consolidation in” means another plan merges into your plan or your plan manages assets on behalf of another plan. A “consolidation out” can take several forms: merging into another plan or entity; hiring an external asset manager; annuity purchase or another risk transfer method; or outsourcing investment management.
Motivations
Alistair Almeida
Alistair Almeida, executive director and segment lead, asset owners, for CIBC Mellon in Toronto, cites several factors driving interest in consolidation. Almeida says that asset owners and asset managers face rising pressure from stakeholders, increasing market complexity and growing competition for opportunities. Consequently, the pursuit of scale and its ability to support greater focus and expertise, whether by growing assets or by tapping into specialized providers, will likely continue to accelerate.
“Scale can enable efficiencies, stronger pricing power and the development of more specialist capabilities to achieve key organizational goals and keep up with regulatory change,” says Almeida. “Greater scale can confer the ability to amortize research, technology, operational efforts across a broader cost base. Others see scale as enabling greater access to desirable investment opportunities.”
Consolidating Out
Plan sponsors’ motivations can include a desire to get out of the pension plan management business. Michael Cheong, chief financial and operating officer of United Way Greater Toronto, says that the organization has been transforming itself to revitalize its operational model. Cheong summarizes the effort as a “strengthen your strengths, hire for your weaknesses” approach. Managing the pension plan for the roughly 350 UWGT members was not an organizational strength, nor would it be in the future, Cheong says, which led UWGT to consider a consolidation-out.
Michael Cheong
Cheong cites several key requirements that the agency wanted to achieve as it began to evaluate consolidation-out options:
-
A full defined benefits plan, which was important to members and their union;
-
An arrangement that was easier and simpler to understand;
-
No member investment decisions to make;
-
Enhancements in areas like indexing, early retirement and survivor benefits;
-
More stable and predictable costs, with financial liabilities eliminated and reduced annual service costs;
-
A similar investment philosophy to USGT’s on environmental, social & governance (ESG) issues;
-
Reduced governance oversight for UWGT’s Finance, Audit & Risk Committee.
UWGT’s search ultimately led it to consolidate out to the CAAT (Colleges of Applied Art and Technology) DBplus defined benefit plan. In May 2019, UWGT’s board approved the signing of a memorandum of agreement to move the agency’s roughly C$20 million of plan assets to CAAT. About 99% of the UWGT plan’s members voted in favor of the merger in December 2019 and the Financial Services Regulatory Authority of Ontario (FSRA) approved the arrangement in October 2020. After completing final requirements, CAAT’s DBplus plan issued the first payments to UWGT pensioners in December 2020, effectively taking UWGT out of pension plan management.
A Growth Model
Derek Dobson
UWGT isn’t the only plan sponsor consolidating with Toronto-based CAAT, which launched DBplus in 2019. According to Derek Dobson, CAAT’s CEO and plan manager, CAAT has grown to over 200 participating employers from 24 a few years ago and now has about 74,000 members. At the beginning of 2021, total assets had reached C$15.8 billion and Dobson says close to 80 new organizations from the public, private and not-for-profit sectors have joined CAAT in 2021. Some of the new members had no retirement plan in place when they arrived while others had a group registered retirement savings plan, a defined contribution plan or a defined benefit plan.
The emergence of Canadian pension consolidators and the move by some Canadian pension leaders to take on outside assets represents a new industry chapter that is likely to generate considerable discussion within and beyond Canada, says Almeida. However, the decision to consolidate, and if so, the selection of the model or models to employ, will not be a straightforward set of decisions, he cautions. “This is a fairly new concept in the industry and there are various structures emerging,” Almeida adds. “As with many other aspects of pension plan and asset management, one size does not fit all.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
