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June 15, 2021

2020 AMPLIFIED INTEREST RATE ENVIRONMENT

While the interest rate environment is quite unlike anything seen in a very long time, 2020 really amplified this dynamic with rates reaching new lows across the yield curve, says Kendra Kaake, director of investment strategy at SEI. In the Benefits and Pensions Monitor Meetings & Events ‘Building Alignment Across Organizational Strategy, Investments, Regulatory Requirements and Operational Considerations’ webinar with Alistair Almeida, segment lead, asset owners, at CIBC Mellon, she said to keep in mind 2020 wasn’t the first time the catchphrase lower for longer has been heard. “Throughout the past two to three decades, we’ve trended toward lower rates, which has been particularly painful for everyone in the pension management business,” she said. Importantly, there’s an asymmetric risk for defined benefit pension plans when they experience these falling rates because many DB plan sponsors effectively have a short position in long duration fixed income, to the extent that their liabilities move like a portfolio of long duration bonds. The risk is a widening of that funding gap when interest rates fall. “Put another way, one of the biggest risks to many DB plan sponsors is that they tend to be very exposed to unexpected drops in the yield curve, particularly at the long end,” she said. Almeida said a CIBC Mellon survey of pension plans shows 80 per cent of pension plans decide what they want to do ‒ whether that’s an asset allocation move or insourcing versus outsourcing ‒ on a long term basis. However, the pandemic crisis prompted 64 per cent of pension plans to be concerned around liquidity ‒ their ability to get out of positions at a time of markets going downwards ‒ and also just in terms of defending the portfolio. COVID has really prompted pension plans to look at the structure of their plans and figure out how they’re going to manage that going forward,” he said. And while there’s definitely a significant demand for alternatives with 90 per cent of the pension plans wanting to increase their allocation to private equity, there has also been a shift in the focus with real estate. Many have changed their class of real estate, going from owning shopping malls to going towards the logistics. There has also been talk about a shift is away from infrastructure. “We do think this was sort of a knee jerk reaction to the crisis and concerns around liquidity,” said Almeida, as the reality is most plans actually want to maintain, if not increase, the level of infrastructure.

June 15, 2021

COVID SAW DECLINES IN CLAIMS

From the end of March into April and May, and then coming out of 2020, there was a huge decline in some portions of the medical claims, says Sandra Ventin, associate vice-president, benefits and health, at Gallagher Canada. In the ‘What We’ve Learned, COVID-19 and its Impact on Claims’ session at the Canadian Pension & Benefits Institute’s ‘Forum 2021,’ she said this was not seen in prescription drugs, but in areas like vision care, dental, and paramedical procedures due to the temporary closures of their offices. However, these trends are reversing themselves and the 2020 claim pattern is not presenting itself in the first five months of data for 2021. One thing they have found is, unfortunately, “as we’re going through this pandemic, people were becoming very sick,” she said, because they were not being treated in “that preventative health space.” So there has been increases in prescription drug claims. Emerging out of COVID, paramedical claiming has increased due, in part, to pent up demand and with providers reminding plan members to use up claims dollars by the end of the year if they could, for example, get a massage with a mask on in ventilated facilities Vision care was temporarily down, but this is for often a 24-month rolling benefit so it’s “really just a matter of a catch up period of when you can go and see your optometrist, get your prescription renewed, and then go and get some prescription eyewear or contact lenses reordered,” she said. Interestingly, hospital claims were down because non-essential hospital visits have been shut down because beds in hospitals were taken over by intensive care to treat COVID patients. However, someone who was six months away from non-life threatening surgeries like hip or knee replacement could end up waiting for close to three years.

June 15, 2021

FLEXIBILITY EXPECTED ON WHERE CANADIANS WORK

A majority (60 per cent) of Canadian workers expect more changes, in addition to greater support from managers, and flexibility with respect to where and when they work as the third wave of the COVID-19 pandemic is navigated, says a survey by Randstad Canada. At the same time, organizations are failing to place the same emphasis on culture, values, and training which may make it difficult to attract and retain top talent in the years ahead. With remote work and flexible hours becoming a reality overnight, respondents say the top three criteria of a successful remote work environment are flexible work hours, followed closely by managers who trust and listen and proper equipment. Two in 10 say their organization will implement flexible hours. Regionally, 26 per cent of workers in both Ontario and British Columbia expect a move toward flex time, while those in Quebec (14 per cent) and Alberta (12 per cent) consider it less likely. However, Dominic Lévesque, group president at Randstad Canada, says many businesses aren’t ready for the post-COVID workplace because they’ve overlooked the importance of culture and values over the past year. “There’s a real disconnect between the way companies are using technology to stay connected, but failing to connect on culture and values – the survey validates what we’ve heard anecdotally from Canadian workers since the pandemic’s onset.” A majority (61 per cent) agree the transition to remote work has significantly changed their company’s culture and almost half (47 per cent) report it has become harder to connect with their organization’s corporate values.

June 15, 2021

INFLATION DEBATE DEFINES MARKETS

Inflation debate volatility will define stock markets in the second half of 2021 and investors need to be “super-selective” and ensure “proper diversification” to take advantage of the turbulence, says Nigel Green, deVere Group CEO and founder. The U.S. CPI is predicted to rise to a 13-year high of 4.7 per cent from a year earlier, up from 4.2 per cent in April ‒ which was already the fastest jump since 2008. Green says, “A larger-than-expected rise in U.S. core inflation and a retreat in commodities and equities may result in a sharp increase in volatility across most asset classes.” This will stir fears that central banks will be forced to row back from policies that have kept interest rates low, driven liquidity, and provided fuel for the stock market gains. However, if inflation is lower than expected, the rising prices will more likely be seen as transient and that they will fade after pent-up consumer spending drops back and the supply bottlenecks ease. “Either way, today’s inflation figures won’t end the debate amongst investors – in fact, it will get hotter – as it remains too early to say either way about whether inflation is transient or persistent,” he says.