Defined Benefit plans in good health with opportunity to use surplus, but prepare for risks ahead


Image courtesy Mercer/Getty Images

By Jared Mickall, Mercer Canada

Special to Financial Independence Hub

Since the beginning of the year, Canadians saw the Bank of Canada maintain the overnight rate at 5.00% as inflation eased to be less than the upper end of the Bank of Canada’s inflation-control target of 3%.

Amidst this economic backdrop, Canadians who participate in defined benefit (DB) pension plans may be interested in the financial health of their DB plans.

The Mercer Pension Health Pulse (MPHP) is a measure that tracks the median solvency ratio of the defined benefit (DB) pension plans in Mercer’s pension database. At March 29, 2024 the MPHP closed out the year at 118%, an improvement over the quarter from 116% as at December 31, 2023. The solvency ratio is one measure of the financial health of a pension plan.

Throughout Q1, most plans saw positive asset returns coupled with decreased DB liabilities, which resulted in an overall strengthening of solvency ratios. In addition, compared to the beginning of the year, there are more DB pension plans with solvency ratios above 100%.

In other words, Canadians who participate in DB plans are likely to have seen the financial health of their DB pension plans improve over Q1.

Inflation in Canada and interest rates

Canadian inflation eased to 2.9% in January, which is less than the upper end of the Bank of Canada’s inflation-control target of 3%. It is the Bank of Canada’s expectation for inflation to remain close to 3% during the first half of 2024 before gradually easing. On March 6, the Bank of Canada continued its policy of quantitative tightening by maintaining the overnight rate at 5.00%. On March 19, Canadian inflation for February 2024 came in at 2.8%, which ignited industry speculation on the timing and amount of a cut to the overnight rate.

In addition, on April 10, the Bank of Canada announced that it was maintaining the overnight rate at 5.00%. The next scheduled date for announcing the overnight rate target is June 5, 2024. Continue Reading…

Federal Budget 2024 features $53 billion new spending over 5 years; rise in capital gains inclusion rate for wealthy

Prime Minister Justin Trudeau’s 8th federal budget features $52.9 billion in new spending over five years, according to the CBC.

You can find the 430-page budget — titled Fairness for Every Generation — at the Department of Finance website here.

Released at 4 pm Tuesday, the wealthiest 0.13% of Canadians will be hit with a higher capital gains inclusion rate: as of June 25, the inclusion rate will rise to 66% for capital gains  in excess of $250,000 a year, and this will also apply to corporations.

You can find details at the Globe & Mail’s coverage here. (may only be viewable by subscribers.) For those who can’t access, it says:

“The budget doesn’t make any changes to income tax rates, nor does it include an explicit wealth tax. Instead, the tax hikes are focused on capital gains … as of June 25, the inclusion rate on capital gains realized annually above $250,000 by individuals – and on all capital gains realized by corporations and trusts – will rise from one-half to two-thirds.­”

The lifetime capital-gains exemption for Canadians will rise from $1-million to $1.25-million, the Globe says, and “The total capital-gains exemption from the sale of a principal residence will not change.” Speaking on CBC, G&M columnist Andrew Coyne called it an “underwhelming” document.

Coyne’s G&M column on the budget bore the scathing headline A government with no priorities, no anchors, and when it comes to growth, no clue. Subscribers can read it here.

A typical passage from his piece:

“…. there is not a single measure in the budget aimed at boosting investment generally – as opposed to the usual slew of measures aimed at diverting investment

into the government’s favoured sectors: artificial intelligence, ‘clean’ technologies, and so on.”

Jamie Golombek’s take on Taxes

Here is  what CIBC Wealth’s tax guru, Jamie Golombek, had to say in the Financial Post.

The federal budget released on Tuesday did not contain a general tax rate increase for the wealthy, but the government did announce that the capital gains inclusion rate will be going up and it amended the draft alternative minimum tax rules in response to concerns of the charitable sector .

On the rise in the capital gains inclusion rate, Golombek says “the $250,000 threshold will apply to capital gains realized by an individual, net of any capital losses either in the current year or carried forward from prior years  .. Capital losses carried forward from prior years will continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This effectively means that a capital loss realized at the current 50 per cent allowable rate will be fully available to offset an equivalent capital gain realized after the rate change.”

MoneySense’s Jason Heath

Fee-only financial planner Jason Heath penned this insightful analysis for MoneySense. He covers everything from the higher capital gains inclusion rate to impact on entrepreneurs, housing, renters and much more.

Rob Carrick’s Personal Finance report card

G&M personal finance columnist Rob Carrick created a personal finance Budget report card here. He gave Taxes a C-minus grade, Housing a B, Junk Fees a C and Open Banking a D, and Saving for postsecondary education an A.

On the other side, the Finance department says an Improving economy means higher tax revenue: $20 billion in new revenue in five years. The $40 billion deficit is projected to stay more or less pat till 2025/2026, after which it starts to inch down.

$46 billion next year on payments on the Debt

Here’s initial coverage of the budget from National Post. There, it reports that Ottawa will spend $480 billion next year, including $46 billion in payments on the national debt. Among the highlights mentioned:

“Among the new spending is more money for home building, including tax measures that allow first time buyers to take more money out of their RRSP for a down payment and to delay when they start repaying the money.There is also $1.1 billion for interest-free student loans and grants, more funding for the Liberal daycare program and for the first phases of national pharmacare that will cover insulin and contraceptives. There is also funding for a new disability benefit and money for artificial intelligence research.”

Mix of Bad Economics and Bad Politics

Also in the National Post, Philip Cross dubbed the budget “a continuation of the Trudeau government’s orgy of spending financed by debt and higher taxes.”

Sample passage:

“Besides being bad economics, the government’s massive spending is bad politics because it antagonizes most provinces without any obvious electoral return from its spending.” Continue Reading…

Markets, Patience, & The Rolling Stones

Image by Shutterstock, courtesy Outcome

By Noah Solomon

Special to Financial Independence Hub

Time is on my side, yes it is
Time is on my side, yes it is

Now you always say
That you want to be free
But you’ll come running back (said you would baby)
You’ll come running back (I said so many times before)
You’ll come running back to me

— The Rolling Stones

The Rolling Stones’ iconic hit, “Time Is On My Side,” is a testament to the power of patience. Its lyrics remind listeners that even though things can seem challenging, eventually everything will fall into place. Although this message may be conceptually appealing, it is increasingly ringing hollow with many investors.

Discipline is one of the most important principles of successful, long-term investing. Successful investors tend to stick to their knitting, even during times when this entails avoiding “hot” stocks and underperforming over the short or medium term.

However, even the most disciplined investors have their limits, which have been sorely tested over the past decade, courtesy of the blistering appreciation of mega-cap growth stocks. Such companies are largely represented by the aptly named Magnificent 7 (MAG7), which includes Apple, Microsoft, NVIDIA, Meta, Alphabet, and Tesla. The “pain trade” of prolonged, MAG7-related underperformance has been pervasive across investment styles, countries, and active management in general.

Value managers have been caught in the wrong place (or style) at the wrong time, to say the least. As the table below demonstrates, growth stocks have left their value counterparts in the dust over the decade ending in 2023.

S&P 500 Growth Index vs. S&P 500 Value Index: 2013-2023

This incredible dispersion has caused investment styles to dominate investment acumen to the point where even some of the best value managers have underperformed some of the worst growth managers. Alternately stated, there has been little, if anything that a value-based investor could have done to avoid getting outrun by the growth trade juggernaut that has dominated markets over the past 10 years.

The effect of the tremendous run of MAG7 companies has also had a profound effect on the relative performance of different countries and regions.

Comparative Returns: 2013-2023 (in USD)

To put it mildly, the S&P 500 Index, which its heavy exposure to MAG7 companies has turbocharged, has left non-U.S. indexes in the dust. The bottom line is that if you were underweight U.S. stocks, you were doomed to underperform.

Lastly, the MAG7 juggernaut has cast a dark shadow over active management (more on this later).  According to Morningstar, during the decade ending in 2023, 90.2% of U.S. large cap managers underperformed their benchmarks. When it comes to active equity strategies, most clients’ experiences have been less than inspiring, if not disappointing.

From Big is Bad to Big is Beautiful

The dramatic outperformance of mega-cap companies over the past 10 years stands in sharp contrast to their longer-term historical pattern. Over the past several decades, underweighting the very largest stocks has been a winning bet. Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted portfolio of the other 490 stocks by an average of 2.4% per year. Continue Reading…

A Smart Balance for Retirees: HBIG Blends Tradition with Innovation

Image by Harvest ETFs

By Ambrose O’Callaghan

(Sponsor Blog)

Canadians in or nearing retirement may be seeking out an investment that provides stability in the face of broader market and economic challenges. Balanced mutual fund portfolios have remained the most popular form of investment fund among Canadians.

However, most current balanced mutual funds and ETFs in the Canadian market provide income at levels below inflation rates. Moreover, these balanced funds/ETFs often pay quarterly, semi-annual, and annual distributions as opposed to monthly.

Today, we zero in on a balanced ETF designed to offer stability, growth opportunities, and high monthly cash distributions.

Today — April 15, 2024 — Harvest ETFs launches the Harvest Balanced Income & Growth ETF (HBIG:TSX). This exchange-traded fund (ETF) is designed to provide Canadian investors of all ages — and especially those in retirement — with access to a balanced portfolio consisting of primarily Harvest Equity Income ETFs and Harvest Fixed Income ETFs that deliver high monthly cash distributions.

For those  looking for more cash flows to help bridge the income gap, or who want to meet RRIF withdrawal minimums, we have also launched the Harvest Balanced Income & Growth Enhanced ETF (HBIE:TSX), an alternative fund that uses leverage. This ETF seeks to provide unitholders with high monthly cash distributions and the opportunity for capital appreciation by investing, on a levered basis, in a portfolio that seeks to replicate HBIG. With the use of the leverage, the risk rating for HBIE is slightly elevated relative to HBIG.

Here is a link to the Business Wire news release issued this morning.

What is a balanced portfolio? How is Harvest changing the original formula to meet investor needs in 2024? Let’s jump in.

What makes up the traditional 60/40 portfolio?

According to the Investment Funds Institute of Canada (IFIC), the number of mutual fund assets in Canada totalled $2.012 trillion at the end of February 2024. That was up 2.9%, or $57.1 billion, from January. Meanwhile, ETF assets totalled $403 billion at the end of the same period – up 4.1% month over month.

Balanced mutual funds make up $923 billion, nearly half of the total mutual funds operational in Canada. That means that Balanced portfolios are the most popular among Canadians who are invested in mutual funds. ETFs, by comparison, are heavily weighted in Equity and Bond funds, while Balanced ETFs only make up $16.5 billion out of $403 billion.

A balanced fund typically refers to a portfolio that is broken down by 60% equity and 40% fixed-income exposure. That ratio allows for capital appreciation while mitigating risk and providing protection from volatility with the exposure to bonds. While the 60/40 ratio is a proxy for the typical balanced portfolio, it is not one-size-fits-all. Some balanced portfolios may aim for ratios that weigh either equities or bonds more heavily.

How do covered calls generate high income?

Harvest ETFs believes wealth is created and preserved by owning leading businesses and high-quality fixed income securities. Moreover, Harvest is a market leader in covered call options ETFs. Harvest has been writing covered call options for 15 years. Moreover, the firm has a strong track record for delivering consistent distributions. Continue Reading…

Should Millennials prioritize paying down Debt over saving for Retirement?

Image via Pexels: T. Leish

Paying down Debt versus Saving for Retirement has always been one of those conundrums facing every generation.

As a semi-retired baby boomer myself, I was a bit late to both the housing party and Retirement savings exercise.

Once I got married in my mid 30s, buying a house and paying down a mortgage was our priority, although two reasonable incomes made it possible to do both: pay off mortgage debt while also saving for retirement and enjoying some tax savings through the RRSP.

Certainly, I’ve always believed paying down debt on high credit-card interest is a priority, certainly over TFSAs. I think TFSAs are great but it’s hard to beat the guaranteed return of paying down interest being charged at 20% or so per annum.

Mercer’s latest Retirement Readiness Barometer

Now a new report from Mercer Canada released earlier this week — the fifth annual Mercer Retirement Readiness Barometer (MRRB) —  warns that millennials and younger Canadians who divide their disposable income between saving for retirement and paying down debts could find themselves delaying their retirement by one or two years compared to if they focused solely on paying down debt in the short term.  

The MRRB says that in today’s economic climate of elevated interest rates, a 30-year-old with $30,000 of personal (non-mortgage) debt could retire one year earlier with $125,000 more in savings if they solely focus on paying off debt within 10 years, before then shifting focus to saving for retirement. 

But if that individual instead splits disposable income between saving for retirement and paying down debt for the entire period until retirement at age 65, it can take more than three times as long to pay down the debt. 

These findings assume a 30-year-old worker is earning $70,000 and can allocate 5% of their income either to paying down debt or saving for retirement; with the interest rate on their debt being higher than the expected rate of returns of their investments. 

Higher interest rates may help retiring Boomers

Interestingly, despite the MRRB’s focus on the young, it does mention boomers near retirement age and the importance of financial literacy surrounding decisions on what to do with retirement savings as they transition into a period where they are no longer working.

The second infographic shown below shows that while high interest rates make it tougher for young people to get out of debt, boomers already at or near Retirement may find higher interest rates to be an advantage as they retire. It explains that “in an elevated interest rate environment, retirees may have windows of opportunity, although financial literacy will be required to navigate various retirement income options.”

I recently touched on this in a MoneySense Retired Money column on the need to wind up RRSPs at the end of the year you turn 71: in most cases, cashing out and paying stiff taxes is not advised, so most people either convert to a RRIF and/or  use the funds to buy a life annuity from an insurance company. Part 2 of that column will run later in April.

You can find the full Mercer release from Tuesday here.

Background on Mercer Retirement Readiness Barometer

Included is an infographic, the major elements of which I’ve reproduced below.



Continue Reading…