Danielle Amiel, Director, Governance & Risk Management for the Medicus Pension Plan, and Craig Maddock, Vice-President & Senior Portfolio Manager of the Multi-Asset Management team discuss pension plans – what they are, how they work, how they can improve the financial situation of its members and the latest updates about the Medicus Pension Plan.
*The episode above can take up to 24 hours to appear in your favourite directories.
Legal disclaimers and full transcript available below.
Thank you again to all the doctors and health care professionals out there for taking care of us at this time. While you’re focused on public health, we here at MD are committed to protecting everything you’ve worked hard to achieve. We are here for you and your family. If you have any questions about topics covered in this podcast or your financial plan, we are here to help.
What is a pension plan and how does it work?
[Danielle Amiel 0:45] Well, Alex pensions play an important role in Canadian society in ensuring a higher quality of life for our seniors. Many studies show that when seniors are financially secure the whole economy benefits, spending much of their income in local communities. And for anyone whose parent [who] has access to a pension, you know firsthand that impacts [the] financial security for the whole family.
Getting down to the basics, the retirement system in Canada is essentially made up of three pillars. The first pillar is the publicly funded benefits like Canada and Quebec Pension Plan, Old Age Security, Guaranteed Income Supplement, all of which are administered by the government. The second pillar is made up of personal retirement savings through regular individual or corporate accounts, as well as tax deferred savings accounts like RRSPs and Tax Free Savings accounts. These two pillars are generally available to all working Canadians.
The third pillar is where workplace pensions come in and where incorporated physicians have historically been left out. A defined benefit pension plan is one that's designed to provide its members with lifetime retirement benefits, while pooling risks among plan members, including longevity risk, market risk. And pension benefits are determined by a formula often based on the length of participation and a percentage of earnings.
We are excited about the Medicus Pension Plan, why should physicians be excited about it?
[Danielle Amiel 2:12] You're right, Scotiabank and MD are thrilled to be creating the Medicus Pension Plan. Medicus is a multi-employer pension plan, which essentially means that it's a defined benefit pension plan that I talked about a minute ago, but it has two or more participating employers. So, it brings together a group of incorporated physicians and physician employers to contribute to the same pension fund, which then pays lifetime income to physician members on retirement.
Other key features of this type of plan are that, firstly, they're governed by a board of trustees who have oversight of the plan operations and investments and include at least 50% representation for the plan members. Also, they have fixed employer contributions going in based on a percentage of earnings. And lastly, benefits going out can be adjusted, meaning that since there isn't a mechanism to increase or decrease contributions based on the financial health of the plan, any surplus is shared among the plan members through benefit increases. And on the flip side plan deficits are also spread among members by decreasing benefits. These types of registered pension plans require an employer-employee relationship and honestly before Medicius self-employed physicians in Canada didn't have access to an arrangement like this that also pulled risks with other participants.
So, by facilitating the creation of Medicus as a multi-employer pension plan, MD and Scotiabank are able to provide incorporated physicians with a unique opportunity to access predictable lifetime retirement income, as well as other desirable features like family benefits through surviving spouse pensions and guarantee periods. And some of the other notable differences of Medicus compared with other retirement savings options that exist today are, you know, coming back to the idea of pooling risks with other plan members, it reduces the risk for individuals and helps ensure that they don't need to worry about drawdown strategies or outliving their assets.
Also, the pension fund and its investments are overseen by a board of trustees. So individual physicians can focus on their everyday life instead of making investment decisions. And a large pension plan also creates economies of scale, which helps to lower fees like administration, audit, legal investment fees, meaning more efficient use of each dollar contributed to the plan. But I'll actually just stop myself there because I don't want to steal any of Craig's thunder on the investment front.
What doors does the Medicus Pension Plan open up from a portfolio construction or investment management perspective?
[Craig Maddock 4:41] Oh, thanks, Alex. Again, Danielle alluded to it already but to me, there's several things we can do within a pension plan that's a potential advantage over traditional retirement savings plans.
The first would be time horizon. So, if you think a typical investor will start investing with a long time horizon, that will get shorter and shorter as they approach, enter and eventually enjoy retirement. What that means is investors tend to alter their portfolio as they age, shifting towards a more conservative portfolio. Now in a pension plan, we are investing in a perpetuity. It's really one long term collective investment objective. And the result of that is one time horizon in a portfolio asset mix that is on average much longer than the typical investor, resulting in a higher average potential return over the life of the plan. Of course, higher potential returns means higher potential benefits.
The second is the use of alternative investments like private equity, real estate, private credit. There's really two benefits connected to the ability to use private assets within a plan. The first is accessibility. Now, it's extremely difficult to invest private assets in a traditional retirement savings plan. However, the regulations around pensions make this actually very attractive. That's why you see large allocations in big pension plans around the world like that CBP pension plan. And we can invest in private assets in the Medicus pension plan to try to generate better risk adjusted return.
The second benefit to private assets in a pension plan, it's kind of linked to my first comments around time horizon. Because the pension plan is managed in perpetuity, the time horizon extends beyond the lifetime of the plan members. As a result, the plan does not only invest in private assets, but can hold a higher allocation to private assets than a traditional investor would through their investing lifecycle. Now this too, can lead to potentially higher returns, which again leads to potentially higher benefits.
And the third piece is what Danielle also mentioned, what was around the cost. So, the size and the scale of the plan over time will enable us to use the most sophisticated investment strategies available to investors, achieve prudent diversification of style through its sector, geography, and really harness a variety of different skills, and then ultimately, the overall plan management at very favourable costs of the plan. And again, that directly improves return and hence benefits again.
How does the approach in the Medicus Pension Plan compare to the strategies and processes we use to manage assets in MD client portfolios?
[Craig Maddock 7:18] Well, the good news Alex, is we will take the same approach to managing Medicus as we manage the MD portfolios for our clients today. So that's the same philosophy, the same process, the same investment team that, to be quite frank, has been managing for decades. Think about our forward-looking market assumptions our tactical portfolio adjustments, the multi-manager approach, the use of private assets solutions that I just mentioned, these are all building blocks that we manage today, in MD physician accounts. We're going to use those same tools, same building blocks in the management of the Medicus Pension Plan.
So really, it's everything MD clients have come to expect from investing in MD, just in a more sophisticated pension plan structure. So those twists and nuances really are about the benefit of the structure, and the ability that we can combine more of what we do into a retirement account for physicians.
How does a pension plan fit into the overall financial planning picture? For example, if a MD client already has a plan and is well on their way to achieving their financial goals – how can the Medicus Pension Plan fit in?
[Danielle Amiel 8:22] I mean, as we all know, there's no one size fits all solution for financial planning. And our advisors work closely with our physician clients to understand their needs and goals, including life after retirement. For most physicians, access to secure predictable retirement income usually isn't part of their financial picture unless their spouse has access to a defined benefit pension plan. So Medicus can play an important role in a physician's complete financial plan because it allows for a portion of a physicians planned retirement income to be more predictable.
By pooling various risks, including market risk and longevity risk, among all plan participants, Medicus significantly reduces the impact of such risks for a portion of the physician’s retirement income, and enhances the likelihood of the predicted benefit, which can be more of a worry for retirees in volatile markets like we have today. Even physicians who have solid financial plans in place, who are already on track for their goals, can improve the likelihood of reaching those goals with Medicus.
So overall, Medicus will offer a diversified risk and return solution that is an excellent complement to the vast array of investment services and advice already available to all physicians, incorporated and unincorporated, through MD and Scotiabank.
Many believe that you need to be contributing for your entire career (30+ years) to really reap the benefits of a pension plan. Is this true?
[Craig Maddock 9:55] Generally, the longer you participate in a plan, the more you'll get out of it. And that's no different for many other plans even like a Registered Retirement Savings Plan. However, for many physicians, the pension plan will just be one part of their overall retirement plan. So, I'd suggest even if you're nearing retirement, contributing for you know, even 10 years can be enough to provide an additional source of meaningful retirement income. And physicians will be eligible to join the plan up until the age of 71.
From the perspective of someone who could join the Medicus Pension Plan, what is the key benefit that has you excited most?
[Danielle Amiel 10:32] I guess for me, it's really all about peace of mind. Knowing you'll have a predictable stream of income in retirement that you can plan for and rely on for key day-to-day expenses and that'll continue on to your family even after you're gone. That's the tremendous value of joining a plan like Medicus.
[Craig Maddock 10:49] Yeah and for me Alex, it's really about the additional investment components we can build into a pension plan that we can't do in a traditional RRSP. And I think that just allows us to generate better returns better outcomes, and ultimately a better retirement for physician clients.
The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company and MD Life Insurance Company. For a detailed list of these companies, visit md.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies and Scotia Wealth Insurance Services Inc.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
©2022 MD Financial Management Inc.
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, photographing, recording or any other information storage and retrieval system, without the express written consent of MD Financial Management Inc.