Elimination of FPR will also affect pension plans

(August 10, 2005) Removing the foreign property rule has shifted considerations in many areas of money management, including pensions, but where defined benefit (DB) plans have professionals determining appropriate asset mixes, clients with defined contribution (DC) plans could find themselves behind the curve.

DB plan are typically handled by large investment managers. However in DC plans, members assume the risk, even though their investment expertise is usually limited, Investors Group noted in a recent report.

Advisors can add value by talking to clients about pension plans, says Jack Courtney, director of tax and estate planning in the advanced financial planning department at Investors Group. “Whether you can manage the money or not inside DC plans, helping clients understand what they can reasonably expect as a level of income from it can open other opportunities.”

Very often, he says many clients don’t understand what their DC plans will be worth in retirement. Where DB plans use a formula to project exactly what income a client can expect, the information generated by DC plans only outlines how much money is invested.

As well, most DC plans put the onus on clients to decide the appropriate mix of assets for their portfolio. “Even though in a defined contribution plan, you would probably be given an opportunity to invest in a foreign large cap or foreign small cap or U.S. small cap, and maybe a European fund, you still need to have some investment knowledge to know what combination of those funds to put together to get your optimum rate of return and to minimize risk, whereas in the defined benefit plan it’s all being managed by a professional money manager. They’re typically chartered financial analysts with many years of training and experience.”

But even those with the benefit of training and experience are still grappling with how to appropriately allocate assets within a portfolio.

A survey of delegates gathered at the Canadian Investment Review’s Global Investment Conference in Whistler, B.C. last spring revealed that approximately 35% of portfolios, on average, are currently invested in non-domestic asset classes.

And the home country bias is strong, even among institutional managers. Going forward, they say removing the foreign content rule will probably only result in an extra 2-4% of their fund assets being invested abroad. Overall, pension fund managers say the biggest opportunities presented by this new realm of investment options exists mainly in the world of fixed-income products.

When clients are picking their own sector weightings, Courtney says it is important for advisors to help out, first by red-flagging asset mix concerns and being aware of any performance-chasing urges, then by sitting down with clients to help them understand what income they can expect from their plans, based on reasonable rates of return.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com