Mid term assignment, (Turnitin submission) under week 6.
There will be no campus class this week. This week is for mid term only.
Please write minimum 1500 words, No upper limit
Q: Explain relevant saving, investment and insurance plans discussed in class. What are factors
affecting individual saving and investment plans? What are determinants that are to be considered
before investing into any individual saving plan. Use the real case references* to support your
content.
*Real case references mean taking real example of financial products offered by any real bank/financial
institution with interest rates or returns they are offering.
Module 12
Insurance
Companies
Outline
Foundations of Insurance
? Insurance Categories
? Organization of Insurance Companies
? Insurance Industry Structure
? Life Insurance Companies
? Property and Casualty Insurance Companies
? Insurance Industry Regulation
? Insurance Industry Recent Trends
?
© 2021 McGraw-Hill Education Limited
Foundations of Insurance
Major Issues
?
Adverse selection occurs when the people most likely to
benefit from a transaction are the ones who actively seek
out the transaction and are thus likely to be selected.
? Insured have higher risk than general population.
? Loss probability statistics gathered for the entire
population may not truly reflect the loss potential for
the people who actually want to buy policies.
© 2021 McGraw-Hill Education Limited
Foundations of Insurance
Major Issues
Moral hazard refers to the fact that an insurance policy
changes the behaviour of the insured person.
? A fire insurance policy written for more than the value
of the property may induce the owner to arson.
? A generous automobile insurance policy may
encourage reckless driving.
? Concern arises when we cannot observe peoples
actions and so cannot judge whether a poor outcome is
intentional or just a result of bad luck.
? Solutions to the moral hazard problem are hard to find.
?
© 2021 McGraw-Hill Education Limited
Foundations of Insurance
?
To alleviate problems, insurance companies try the
following:
information collection and screening
risk-based premium
restrictive provisions
prevention of fraud by investigations
cancellations of insurance
deductibles
co-insurance
limits on the insurance coverage
© 2021 McGraw-Hill Education Limited
Foundations of Insurance
?
?
?
?
?
?
?
The insured (party covered by insurance) and the beneficiary
(party receiving payout if loss occurs) must be related.
The insurer (party selling the insurance) must be provided
with complete and accurate information by the insured.
The insured is not supposed to profit from buying insurance.
The payout needs to be adjusted with any compensation from
a third party.
The insurer must have a pool of insured large enough to
diversify the risks.
The loss must be quantifiable.
The insurer must be able to estimate the loss occurrence.
© 2021 McGraw-Hill Education Limited
Foundations of Insurance
Risk-averse people with incentives buy insurance.
? Insurance is usually sold through agents.
? Independent agent: sell insurance for a number of
different companies (i.e., insurance broker)
? Exclusive agent: sell insurance for only one company
(i.e., insurance agent)
? Regardless of the sales approach, insurance companies
hire an underwriter who decides whether to accept or
reject the issuance of a policy.
?
© 2021 McGraw-Hill Education Limited
Insurance Categories
?
?
Insurance: a device whereby an individual or a business
transfers the risk of uncertain financial loss by payment of a
premium.
Broadly grouped as life insurance and property and casualty
insurance with further classifications:
? Life insurance
? Health insurance
? Property insurance
? Liability insurance
? Credit insurance
? Farm insurance
? Reinsurance
© 2021 McGraw-Hill Education Limited
Insurance Categories
?
Ten largest insurance companies (as of December 31, 2019):
Company
Total Assets
Manulife Financial Group
$809.130 billion
Great-West LifeCo
$451.167 billion
Sun Life Financial
$297.202 billion
Fairfax Financial
$92.203 billion
Industrial Alliance Financial Corp.
$73.148 billion
Desjardins Insurance
$53.152 billion
Intact Financial
$32.292 billion
E-L Financial Corp. (Empire Life)
$23.749 billion
RBC Insurance
$18.191 billion
Co-operators Group
$15.002 billion
© 2021 McGraw-Hill Education Limited
Organization of Insurance
Companies
?
Mutual Insurance company: accumulated profits owned
by policyholders.
Policyholders
Mutual Insurer
Policy Dividends
Policy and Ownership Rights
© 2021 McGraw-Hill Education Limited
Organization of Insurance
Companies
?
Stock Insurance company: accumulated profits owned
by shareholders.
Shareholders
Stock Dividends
Ownership
Rights
Policyholders
Mutual Insurer
Policy Rights
© 2021 McGraw-Hill Education Limited
Insurance Industry Structure
Insurance pools risk exposures, allowing losses to be
shared and reducing the uncertainty of loss.
? Insurance industry is a clunky legacy system.
? Clients have evolving expectations for insurance
transactions, insurance products and services.
? Online distribution platform for insurers with a directto-consumer channel.
? Montreal-based InsurTech: Breath Life
?
© 2021 McGraw-Hill Education Limited
Insurance Industry Structure
A healthy economy supports earnings growth at
Canadian life insurers and premium growth for property
and casualty firms, despite the ongoing drag of low
interest rates on the insurers profitability and investment
performance.
? Solid asset quality remains a driver of the stable outlook.
? Insurers have the capacity to invest in technology to
guard against competitive disruption.
? This investment should enhance client interface and
drive opportunities for all insurers to benefit from
claims efficiencies and risk segmentation.
?
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Overview
Protect nearly 29 million Canadians with various life
insurance products and pay $98 billion in benefits.
? The average life insurance protection per household is
$423,000 in 2019, up from $417,000.
? The industry is competitive, with 100 Canadian insurers
and 38 foreign-owned insurers.
? 78 private life insurers, 8 not-for-profit health benefit
providers and 14 fraternal benefit societies
? Many private life insurers are diversified financial
institutions offering more than life insurance.
?
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Overview
?
Top six life insurers based on annual revenues (2019):
Company
Founded
A.M.
Rating
Annual
Net
Revenues Income
Manulife Financial
1887
A+
$77.83 B
$5,276 M
Great-West LifeCo
(Canada Life)
1891
A+
(Superior)
$44.71 B
$2,492 M
Sun Life Financial
1846
A+
$39.69 B
$2,713 M
IA Financial
1892
A
$15.27 B
$708 M
RBC Insurance
1864
A
$4.27 B
$775 M
Empire Life
(E-L Financial)
1923
A
$2.12 B
(Excellent)
© 2021 McGraw-Hill Education Limited
$187.44 M
Life Insurance Companies
Insurance Contract
Insurance
Company
Pay upon
insurance event
Policyholder
Life
Insurance
Policy
Asset Mgmt.
© 2021 McGraw-Hill Education Limited
Beneficiary
Life Insurance Companies
Lines of Life Insurance: Ordinary Life
?
Ordinary life insurance is sold to individuals
policyholders make periodic premium payments in
exchange for coverage.
? Term life policy is pure life insurance with expiry date
and no savings element attached.
? Permanent life policy offers a package of pure life
insurance protection and investing opportunities with
no expiry.
? Whole life
? Universal life
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Lines of Life Insurance: Ordinary Life
?
Term life insurance
? temporary insurance protection
? low cost
? no cash value
? usually renewable
? likely convertible to permanent life insurance without
further underwriting
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Lines of Life Insurance: Ordinary Life
?
Permanent Life Insurance
? meet life-long protection needs
? have an investment component
? no expiry date as long as premiums are paid
? more expensive to own
? build cash value
? loans are permitted against the policy
? favourable tax treatment of policy earnings
? flexible premium allocation
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Lines of Life Insurance: Ordinary Life
?
Permanent Life insurance can be divided into two categories:
? Whole Life: traditional form where insurer takes on all risks
related to death and the underlying investment
performance.
? Premiums partly fund an increase in cash value.
? Expensive.
? Universal Life: policyholders select investment options and
insurer assumes the risk related to death.
? Policyholder may vary the timing and amount of
premium as circumstances change.
? Cash value depends on the pace of the premium.
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Lines of Life Insurance: Group and Credit
Group life insurance covers a large number of people
under a single policy.
? Contributory: both the employer and the employee
cover a share of the premiums.
? Noncontributory: the costs are borne entirely by the
employer.
? Credit life insurance protects lenders in the event a
borrower dies prior to the repayment of a debt contract,
such as a mortgage or car loan.
?
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Lines of Life Insurance: Other Activities
?
Other activities of life insurers include the sale of
annuities, private pension plans, and accident and health
insurance.
? Annuities protect against the risk of outliving your
retirement money.
? Contract is initiated by investing a lump sum or
making periodic payments before the annuity
payments begin.
? Canadians retirement savings in RRSP, TSFA and
RRIF are managed by the industry.
? Health insurance supplements government benefits.
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Assets and Liabilities
With a steady flow of premiums and predictable
benefit payments, life insurers can securely invest in
long-term capital markets.
? The mix of investments within general and
segregated funds reflects the nature of the
underlying insurance contracts of two funds.
? Liabilities come from the premiums paid by insured
clients and from pension funds under management.
?
© 2021 McGraw-Hill Education Limited
Life Insurance Companies
Assets and Liabilities
?
Segregated funds are kept separate from the rest of the
insurers activities.
Assets ($762 B)
Liabilities ($665 B) and Equities ($97 B)
General Funds ($470 B)
5% short-term investment
72% policyholder liabilities
87% long-term investment
7% other liabilities
8% other investment
21% equities and long-term debt
Segregated Funds ($292 B)
16% cash & other investment
100% policyholder liabilities
34% real estate & mortgages
50% mutual funds
© 2021 McGraw-Hill Education Limited
Property-Casualty Insurance
Companies
?
Currently, 198 companies sell property-casualty (P&C)
insurance in Canada, and approximately half of them are
foreign firms.
? Top 10 firms hold 65% market share.
? In 2018, Intact Financial was the top firm, writing
14.4% of all P&C insurance premiums.
? Most banks have insurance subsidiaries, as they are
not allowed to sell insurance through their branch
networks.
© 2021 McGraw-Hill Education Limited
Property-Casualty Insurance
Companies
Property insurance protects the insured against losses of
real and personal property from fire, theft, storm,
explosion and even neglect.
? The policy can be either a named-peril policy or an openperil policy.
? Named-peril policies cover losses associated with
specific named events (e.g., flood insurance).
? Open-peril policies insure against all perils except
those specifically excluded by the policy (e.g., war)
?
© 2021 McGraw-Hill Education Limited
Property-Casualty Insurance
Companies
Casualty insurance offers protection from legal
responsibility for losses stemming from damage to
anothers property or an injury to another person.
? Distinctions between property and casualty insurance
are increasingly become blurred because they are often
sold together.
? Auto insurance: you wrecking your car is covered
under property insurance, while you accidentally
hitting another car with yours is covered under
casualty insurance.
?
© 2021 McGraw-Hill Education Limited
Property-Casualty Insurance
Companies
?
Top ten leading private P&C Insurers (2019):
Company
Market share
Intact Group
14.44%
Aviva Group
8.91%
Desjardins Group
8.33%
Lloyds Underwriters
5.91%
Cooperators Group
5.57%
Wawanesa Mutual Insurance Company
5.47%
TD Insurance Group
5.39%
RSA Group
5.13%
Economical Group
4.10%
Northbridge Group
2.88%
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Lines of P&C Insurance
Insurance companies earn revenues through premiums
and on investments they make.
? Report premiums in two ways:
? Direct written premiums: total premiums collected
? Net written premiums: total amounts adjusted for
portions paid to reinsurers
? To spread the risk, a reinsurance company agrees to
accept risks of another insurance company in exchange
for a payment.
?
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Lines of P&C Insurance
P&C insurers have $59.6 billion in direct written
premiums on six major lines in 2019.
? Among the net written premiums of $54.1 billion:
? Automobile Insurance: 44.1%
? Property Insurance:
?
Personal: 22.2%
? Commercial:14.2%
?
Liability Insurance: 10.2%
? Specialized Insurance: 7.1%
? Accident and Sickness Insurance: 2.2%
?
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Lines of P&C Insurance
?
?
Total direct claim costs by line in 2019:
Line of Business
$ million
% of the total claims
Auto
18,205
44.6
Personal property
7,810
20.0
Commercial property
6,466
16.5
Liabilities
3,746
9.6
Specialized
1,985
5.1
Accident and sickness
871
2.2
$39,084
100%
Net claims incurred are the total claim costs less any
share to be paid by reinsurers.
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Assets and Liabilities
?
Assets
? Out of the total investment of $117 billion, many of those
assets have fixed returns that can be liquidated easily.
Assets
Amount
Fraction
Bonds
$80,586 M
68.9%
Stocks
$10,904 M
9.3%
Mortgages
$1,202 M
1.0%
Real estates
$530 M
0.5%
Term deposits
$4,436 M
3.8%
Others
$19,366 M
16.5%
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Assets and Liabilities
?
Liabilities
? About 57% of the total liabilities and equity are unpaid
claims and adjustment expenses items.
? Risk exposure of property insurance is limited to the
property value, but liability risk exposure is much more
difficult to determine.
? Liability risk exposure can have long lag times (tails).
? Liability lines may be subject to social inflation.
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Assets and Liabilities
To determine insurance premiums, insurers consider the
likelihood of a customer making a claim and how much
those claims will like cost.
? Underwriting risk is the risk that premiums are
insufficient to cover losses and operating expenses after
taking into account investment income.
? Three sources of underwriting risk:
? unexpected increases in loss rates
? unexpected increases in expenses
? unexpected decreases in investment yields
?
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Assets and Liabilities
?
Four key ratios:
? Loss ratio: the actual claims incurred on a business line
relative to the net premium earned
? Expense ratio: the expenses incurred relative to the net
premium written, including loss adjustment expenses and
mainly employee compensations
? Combined ratio: includes both the loss ratio and the
expense ratio
? Operating ratio: measures overall profitability by
subtracting the investment yield from the combined ratio
? Investment yield is measured as net interest income
divided by premiums earned
© 2021 McGraw-Hill Education Limited
P&C Insurance Companies
Assets and Liabilities
P&C industry ratios in 2019:
? earned loss ratio = 67.7%
? expense ratio = 30.9%
? combined ratio = 98.6%
? investment yield = 2% lowest on record
? operating ratio = 98.6% ? 2% = 96.6%
? Overall profitability = 100% ? 96.6% = 3.4%
? Less profitable firms exit the industry, and there is a
rapid increase in premiums among the survivors.
?
© 2021 McGraw-Hill Education Limited
Insurance Industry Regulation
Life Insurance Companies
?
?
?
?
Federal and provincial governments share jurisdiction.
OSFI: governs through the Insurance Companies Act
? prudential regulation, concerned with safety and
soundness of the industry
Provincial regulation
? marketing of insurance products and licensing
requirements
Canadian Life and Health Insurance Compensation
Corporation: industry-funded organization to protect
policyholders
? $200,000 on claims in case of bankruptcy
? $60,000 in cash policy coverage.
© 2021 McGraw-Hill Education Limited
Insurance Industry Regulation
P&C Insurance Companies
As P&C insurers may be federally or provincially
incorporated, regulation is shared by provincial and
federal government.
? OSFI is the federal regulator responsible for 75% of
companies.
? Property and Casualty Insurance Compensation
Corporation: pay outstanding claims and refund
premiums paid in advance up to the following limits:
? auto and commercial insurance policies: up to
$250,000
? home insurance policies: up to $300,000 per policy
?
© 2021 McGraw-Hill Education Limited
Insurance Industry Recent Trends
Major Issues
Insurance industry becoming more global
? cross-country mergers (insurance companies as well
as universal banks)
? Insurance crime
? Severe weather claims
? Catastrophic losses
? Introduction and acceleration of insurance market
reforms
? auto insurance
?
© 2021 McGraw-Hill Education Limited
Insurance Industry Recent Trends
InsurTech
Insurers are increasingly focused on consumers needs
with more tailored product offerings.
? Despite lower premium growth and rising claims costs,
insurance companies continue to innovate and adapt
through the following:
? artificial Intelligence (AI)
? robotic process automation (RPA)
? machine learning
?
© 2021 McGraw-Hill Education Limited
Insurance Industry Recent Trends
InsurTech
Insurance companies must resolve the synthesis
challengeintegrating innovation into the legacy
resistant environment.
? Many are beginning to pivot from investments that
support business as usual to financing innovations that
facilitate more fundamental business model changes.
? All need to adapt a more customer-centric approach to
run their businesses.
?
© 2021 McGraw-Hill Education Limited
Module 15
Pension Funds
Outline
? Pension Funds Defined
? Pension Fund Industry
? Employer-Sponsored Registered Pension Plans
? Types of Pension Plans
? Government-Funded Pension Plans
? Personal Savings Plans
? Regulation of Pension Plans
© 2021 McGraw-Hill Education Limited
Pension Funds Defined
Pension funds are retirement savings accumulated
from contributions of employers, employees or both
when individuals are still working.
? Funds are collectively managed and invested with
influence from government regulations.
? The primary objective is to provide individuals who
have reached retirement age with income in the
form of a lifetime pension or capital.
?
© 2021 McGraw-Hill Education Limited
Pension Funds Defined
?
Three ways of saving money for retirement:
? Government-funded plans
? E.g., Canada Pension Plan and Quebec Pension
Plan
? Employer-sponsored pension plans
? E.g., trusted pension funds, profit-sharing plans and
group RRSPs
? Individual savings plans
? E.g., RRSPs
© 2021 McGraw-Hill Education Limited
Employer-Sponsored Registered
Pension Plans
A private pension plan is organized by a company that
provides individuals with retirement income.
? Plans must be registered with the government to have
tax-sheltered status.
? Under these plans, employee and employer (or just
the employer) regularly contributes money to the plan.
? Upon retirement, individuals collect benefits from the
plan.
? If they are vested, employees can transfer the old
pension to a new plan when they switch jobs and work
with a different employer.
?
© 2021 McGraw-Hill Education Limited
Employer-Sponsored Registered
Pension Plans
Plan members may wonder if the money kept in the
pension account sufficiently supports the promised
payments.
? If the exact amount of money needed is available, the
plan is fully funded.
? If funds are inadequate, it is underfunded.
? If excess funds are in the account, it is overfunded.
? The assets of pension plans must be managed under the
prudent person rule.
?
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
?
Private pension plans offered by employers can vary
widely along different dimensions:
? Contributory or non-contributory: employer does or
does not match employees contributions.
? Voluntary or compulsory: the employee may or may
not choose whether to join the plan.
? Trusteed or insured: the plan is managed by a
committee of trustees and contributors or by an
insurance company.
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
How retirement benefits are earned divides employer
pension plans into two main types:
? Defined-benefit plans
? Employers use a specific formula to promise to pay
employees a set amount of retirement income.
? Both parities contribute to the plan.
? Employers invest and manage the fund while
employees do not involve themselves with any
investment decisions.
? Pension benefit does not depend on how well the
investments perform, but it may be inflation-adjusted.
?
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
Example: Defined-Benefit Plan
Annual benefit is calculated with this formula: 2% × avg
salary from last three years × # of years worked.
? An individual has worked 20 years for a company, and
their salaries for the last three years were $45,000,
$50,000 and $55,000.
? Benefit = 2% × $50,000 × 20 years = $20,000/year
? Yearly payment of $20,000 under this defined-benefit
plan lasts throughout retirement, making budgeting
easier for the employee.
?
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
?
Defined-contribution plans
? Employees know how much they pay into the plan,
but benefits are unknown and depend on how the plan
is managed and how the investments perform.
? Contributions by employees and the employer are
fixed and the assets grow on a tax-deferred basis.
? Employees may choose how the money is invested,
but with limited options.
? Funds cannot be withdrawn before the owner retires.
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
Example: Defined-Contribution Plan
An individual making $60,000/year joins a definedcontribution plan at 45 and retires at 65.
? This employee puts 5% of their earnings into the plan,
and their employer agrees to match the contribution.
? A 4% return per year is assumed over 20 years.
? Total contribution is 10% of the workers annual salary
= 0.1 × 60,000 = $6,000/year ($3,000 from employee
and $3,000 from employer).
? A lump sum retirement income = 6,000 {[(1 + 0.04)20
1] /0.04} = 6,000 × 29.778 = $178,668.
?
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
The increased prevalence of defined-contribution plans
is reflected in nearly all plan sizes but almost exclusively
in the private sector.
? The changing labour market structure and different
business practices of employers have encouraged the
growth of this type of plan.
? Although defined-contribution plans have some
undeniable advantages for employees, their increased
prevalence suggests a transfer of risk from employers to
worker.
?
© 2021 McGraw-Hill Education Limited
Types of Pension Plans
A cash balance pension plan was developed in the US
as a response to the shortcomings of defined-benefit and
defined-contribution plans.
? Benefit in this plan is a lump sum amount determined
by a formula rather than a periodic contribution.
? Is an offshoot of the traditional defined benefit plan.
? Due to the pension adjustment requirements and other
restrictions on calculating the cash balance, this hybrid
pension plan is not popular in Canada yet.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
While many funds are privately run, a public pension
plan is one sponsored by a government body.
? Old Age Security (OAS) pension is one of the two pillars
of Canadas retirement income system.
? Benefit is not based on employment history.
? It is a monthly payment available to seniors aged 65
and older with Canadian legal status, having lived at
least 10 years in the country since age 18.
? For seniors with lower income, this pension is
supplemented by the Guaranteed Income Supplement
(GIS), which is added to the monthly OAS payment.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
The other pillar is the Canada Pension Plan (CPP) and
the Quebec Pension Plan (QPP).
? The CPP is now managed by the CPP Investment
Board.
? The Caisse de depot et placement du Quebec
(CDPQ) is in charge of the QPP.
? Membership in both plans is mandatory for all persons in
the labour force between the ages of 18 and 65.
? The demographic change has almost crashed the
system, forcing government to restructure the pension
plan with aggressive investment strategies.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
Unlike the OAS, CPP and QPP benefits are based on
the collecting time, an individuals total lifetime
contributions and pre-retirement income level.
? CPP pension is a monthly, taxable benefit that replaces
part of an individuals income at retirement.
? Once a person is qualified, the benefit will be paid for
their remaining lifespan.
? CPP payments are not automatic.
? Recipient should apply six months in advance of when
they want their pension to start, as early as age 60.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
Taking CPP at age 60 will cause the retiree to lose up to
36% of their pension permanently due to a 0.6%
reduction for every month before the normal retirement
age of 65 (7.2% per year).
? Payments will be permanently increased by 0.7% for
each month after age 65 up to age 70 (8.4% per year) by
delaying CPP.
? There is no further increase after age 70.
? Most people start receiving CPP the month after their
65th birthday.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
?
CPP payment for new beneficiaries receiving benefit
for the first time as of January 2020:
Type of benefit
Average
monthly
amount
Yearly average Monthly
amount
maximum
amount
Retirement
pension,
age 65+
$679.16
$8,149.92
$1,175.83
Retirement
pension, delayed
to age 70
$944.40
$11,572.89
$1,669.61
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
The maximum pensionable earnings under the CPP for
2020 increased to $58,700 (from $57,400).
? Contributors who earn more than $58,700 in 2020 are
not required or permitted to make additional
contributions to the CPP.
? Anyone earning less than $3,500 is automatically
exempt from CPP contribution.
? At age 70, a person stops contributing to CPP even if
they are still working.
?
© 2021 McGraw-Hill Education Limited
Government-Funded Pension
Plans
?
Top 10 public pension funds by asset size:
Canada Pension Plan Investment Board (CPPIB)
Caisse de depot et placement du Quebec (CDPQ)
Ontario Teachers Pension Plan Board (OTPP)
British Columbia Investment Management Corporation (BCIMC)
Public Sector Pension Investment Board (PSP Investment)
Ontario Municipal Employees Retirement System (OMERS)
Healthcare of Ontario Pension Plan (HOOPP)
Alberta Investment Management Corp (AIMCo)
Ontario Pension Board (OPB)
OPSEU Pension (OP Trust)
© 2021 McGraw-Hill Education Limited
Personal Savings Plans
Registered Retirement Savings Plans (RRSPs) are not
truly pension plans.
? Like pension plan contributions, no tax is assessed on
this income or on its yield as long as the fund remains
in the account.
? After age 71, the RRSP account must be converted to a
Registered Retirement Income Fund (RRIF).
? RRSP is a tax-free savings plan used to invest for the
retirement .
? RRIF is a tax-sheltered account allowing individuals to
withdraw income in retirement.
?
© 2021 McGraw-Hill Education Limited
Personal Savings Plans
RRSPs are registered with the Canada Revenue Agency
(CRA), which determines the maximum annual
contribution limit for every individual taxpayer.
? In 2020, the RRSP contribution limit was still 18% of
earned income in the previous year, with a dollar limit
of $27,230.
? Contribution limit will be adjusted with other employersponsored registered pension plans.
? All Canadians are eligible to purchase RRSPs
regardless of age.
?
© 2021 McGraw-Hill Education Limited
Regulation of Pension Plans
Pension regulation in Canada falls mostly within
provincial jurisdiction by virtue of the property and civil
rights power granted by the Constitution Act, 1867.
? Emphasis is on the best interests of the owners or
beneficiaries of the pension plans.
? The Financial Services Commission of Ontario (FSCO)
is responsible for the administration and enforcement of
matters like pension plan funding, vesting of benefits,
fiduciary responsibility, pension fund transferability and
pension fund insurance.
?
© 2021 McGraw-Hill Education Limited
Module 14
Investment
Companies
Outline
Investment Companies
? Closed-End Investment Companies
? Open-End Investment Companies
? Different Types of Investment Funds
? Pricing of Investment Funds
? Fee Structure of Investment Funds
? Regulation
? Growth in Investment Funds
? Hedge Funds
? Exchange-Traded Funds
?
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Investment Companies
Investment companies pool money from numerous
individual investors and it to purchase securities.
Windsor
Funds
IBM
securities
?
$
?
Investors
shares
This is a form of indirect investing.
? The investors own the securities issued by IBM only
indirectly through the investment company Windsor
Funds.
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Investment Companies
Organizational Structure
Directors or trustees
? Represent shareholders and hire people to operate the
fund
? Fund managers
? Decide how and when to invest based on fund objectives
? Fund distributors
? Help sell shares to investors
? Other service providers
? Internal parties (marketing, legal, reporting units)
? External parties (custodian, transfer agent and
independent public accountant)
?
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Investment Companies
Organizational Structure
Shareholders
(Owners)
Board of Directors
(oversee the funds
activities)
Fund
Manager
(handle
investment)
Brokers or
Dealers
(sell
shares)
Internal
Administrator
(follow rules)
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Custodian
(collect/distribute
cash)
Closed-End Investment
Companies
?
Closed-end investment companies issue shares only at
start-up to invest in the securities and assets of other
firms.
? Reinvest proceeds and borrowings in a portfolio to
earn income and capital gains.
? A fixed supply of outstanding shares are traded OTC
or on stock exchanges.
? In 2019, about $265 billion was managed by closedend companies.
? Example: RioCan Real Estate Investment Trust
(REIT)
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Open-End Investment Companies
?
?
?
Open-end investment companies (mutual funds) constantly
sell new shares to the public and use the proceeds to manage
a portfolio of securities.
Right of redemption is the most distinguishing feature of openend investment companies.
Number of shares in existence varies based on net sales and
redemptions.
? In 2019, about 140 open-end investment companies
handled more than 4,000 funds.
? Mutual fund investments rose to $1.71 trillion in 2020.
? By setting up their subsidiaries, banks and insurance
companies are major players in the industry.
© 2021 McGraw-Hill Education Limited
Open-End Investment Companies
Mutual Fund Company
Parent Company
BMO Investments
Bank of Montreal
CIBC Securities
CIBC
Royal Mutual Funds
Royal Bank
Scotia Securities
Scotiabank
TD Investment Services
TD Canada Trust
Manulife Investment Management
Manulife Financial Group
Sun Life Capital SLC Management
Sun Life Financial Group
AGF Investments
Independent
Fidelity Investments Canada
Fidelity Investments, U.S.
Franklin Templeton Investments
Franklin Templeton Investments, U.S.
© 2021 McGraw-Hill Education Limited
Different Types of Investment
Funds
There are two basic types of investment funds available
to investors.
? Long-term funds
? Bond funds, Equity funds, Balanced funds and
Specialty funds
? Short-term funds
? Money market funds
? Investment Funds Standards Committee (1998) provides
a complete 35 categories listing for investors and
industry standardization.
?
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