Erosion of confidence in the Canadian insurance industry has opened the door for American managers to expand into the developing Canadian defined contribution plan market.
Buck Consultants, New York, and Morley Capital Management Inc., Lake Oswego, Ore., will be the first U.S. firms to offer GIC funds in Canada. Both firms plan launch dates this year to capitalize on the move to diversify the Canadian GIC market - now concentrated in the hands of the Canadian insurance industry.
Among employers reportedly expressing interest in the pooled GIC offerings are Molson Breweries Inc., IBM-Canada and Bell-Canada.
The damage to the Canadian insurance industry's reputation following the August 1994 failure of Confederation Life Insurance Co. was spelled out in a recent report from Moody's Investors Service, New York.
Noting it's unlikely investors will fully recover their GIC investments from Confederation in both Canada and the United States, Moody's said: "Even if full recovery is eventually achieved by all policy holders, we believe the period of disruption and uncertainty will cause long-term harm to public trust in the (Canadian insurance) industry. That this happened to a prestigious old-line company such as Confederation Life is particularly damaging....Investors can be expected to approach all Canadian (insurance) companies with much greater caution in the future."
Pooled GIC funds are well suited to the Canadian market, according to industry experts, because of their low minimum contribution levels and because of the diversification among carriers.
While the Buck fund was officially formed in June 1995, it failed to attract much interest and will be reintroduced early this year after a suitable marketing firm has been hired, according to Roger Plouffe, a benefits consultant with Buck in Toronto.
The Buck fund will consist of a wrapped portfolio of actively managed Canadian government guaranteed bonds. The bond fund will be managed by Phillips, Hager & North Ltd., Vancouver. Bankers Trust Co. will provide the book value wrapper.
The Morley fund will be introduced this month through its recently created Canadian subsidiary - Garmaise Morley Capital Inc., Toronto.
The Morley fund will consist of a diversified pool of traditional insurance company GICs, 80% of which must be issued by Canadian carriers in compliance with Canadian regulations. Helen Stewart, vice president-director of research at Morley, said the fund eventually will add synthetic contracts to the mix, utilizing Canadian wrapper providers.
The Morley fund also will be offered by Sun Life Insurance Co. of Canada, Toronto, to help give the fund more visibility among the diverse Canadian employer base.
Ms. Stewart said since Confederation Life's failure, Canadian companies have expressed "significant interest" in the pooled fund.
Buck and Morley officials believe the collapse of Confederation Life has spotlighted the need for diversification in the GIC market in Canada - much as the failures of Executive LIfe Insurance Co. and Mutual Benefit LIfe Insurance Co. opened the U.S. market to diversified GIC and synthetic GIC offerings.
Most defined contribution plans in Canada are concentrated within the insurance industry for full service record keeping, investment management and GICs, said Buck's Mr. Plouffe.
"The insurance industry is the gatekeeper in Canada," he said.
Buck has several clients in Canada that had all plan assets with Confederation Life, he said.
"When we looked around for alternatives in Canada, we could find nothing different from the classic GIC. We saw the pooled fund approach as the best opportunity to get this going," he said.
Both firms expect to attract most interest from defined contribution plans with $10 million to $30 million in assets; both expect the pooled funds to benefit as small Canadian companies and their plans grow.
Just as most U.S. companies in the 1970s and early 1980s almost exclusively purchased GICs from a single issuer, it's not unusual for a Canadian retirement plan to use one issuer today.
Mr. Plouffe said the move to diversification in Canadian stable value funds has been slow because of the "mindset" among Canadian employers, "who believe their employees want individual GICs."
"That's what's been offered to employees in the past and they believe that's the only way to do it, I think, sometimes, out of ignorance," he said.
He said management of many larger Canadian companies "have never heard of stable value funds, even at the management level. It's a long cycle."
But, as in the United States, defined contribution plans have become popular and are in need of diversified offerings. "The future of retirement savings is in defined contribution plans, " he said.