BF Partners Blogs

Deferred Profit Sharing Plans (DPSPs)

Mon, 08 Jun 2020 17:03:32 GMT

The Rodney Dangerfield of Group Retirement Plans

In our previous blog we talked about how we thought that Deferred Profit Sharing Plans (DPSP’s) were very underutilized by Company’s in Canada, like Rodney they don’t get no respect. In particular we mentioned how they were very useful to avoid payroll taxes (CPP, EI, WCB, Employer Health Tax) that are the case when an employer makes a contribution to a Group RRSP.

So, let’s get into the details of DPSP’s. First of all, I think that the name scares some employer’s off when it shouldn’t. Some look at the the “Profit” part in the name and, in our opinion, read too much into it. They think that “oh, if I have a year when I don’t have a profit I won’t be able to contribute into the plan”, which isn’t true. CRA’s Information Circular 77-1R5 states that “Profits can be defined either as profits of the year or of previous years that have not been allocated.” That is a pretty broad definition, and frankly, I don’t think CRA is paying any attention to whether companies that have DPSP’s are profitable or not because there is no income tax advantage to contributing to a DPSP versus just an RRSP or a pension plan. In our over 30 years selling DPSP’s we’ve never had a client be asked by CRA whether they are profitable. DPSP’s are just another tax sheltered option for employer’s to contribute $ into for their employees, like RRSP’s or Pension Plans. The plan can be set up with a plan design similar to a Group RRSP where contributions are made as a % of the employee’s earnings, or as a fixed $ amount, or as an actual % of profits.

Here are some facts about DPSP’s that make them unique:

Only employer contributions can go into a DPSP.
The contribution limit is ½ of the Money Purchase Pension limit, for 2020 the DPSP limit is $13,915
Contributions to a DPSP, are not considered a taxable benefit. Instead, like pensions, the amount contributed to an employee’s DPSP plan gets shown on their T4 as a Pension Adjustment which reduces the employee’s RRSP contribution room for the next year.
With DPSP’s an employer can have a “vesting period” of up to 2 years. Vesting refers to when an employee owns the Company contribution, and this is a huge feature for some employers because with RRSP’s and pensions there is immediate vesting. Don’t want to reward an employee that joins your competitor after working for you for a year? Have a DPSP with a vesting period and those contributions the Company made for that employee will stay with the plan and can be used to reduce future contributions.
Employers decide whether to have withdrawal restrictions on the plan or not.
Most employers that have a DPSP also have an RRSP that is used for employee contributions.
When a company has a DPSP plan and one of the members leaves or retires the fully vested DPSP $ can be moved to their RRSP, or cashed out subject to tax.
Company owners (who directly or indirectly own more than 10% of the Company) can’t contribute to a DPSP. We make sure there is a Group RRSP to contribute to if the owner wants the Company to contribute to a plan for him or her.
Really the only potential drawback we see for a DPSP as compared to a Group RRSP is that DPSP’s aren’t eligible for withdrawals under the Government’s RRSP Home Buyer’s Plan or Lifelong Learning Plan.

Ask us whether a DPSP is right for your Company!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

The Hidden Costs of Group RRSPs

Mon, 08 Jun 2020 16:55:23 GMT

Group RRSP’s are by far the most common method for employers to help employees save for their retirement.

Group RRSP’s are by far the most common method for employers to help employees save for their retirement. They’re easy to set up, there is very little administration required from the employer’s point of view, and employees like them because they don’t have the restrictions of pensions. Typically when we think of the employer’s cost of a group RRSP we are thinking only in terms of the contribution to the plan. Ie, our payroll is $1 million a year, the plan states that the company will match up to 3% of earnings, then assuming everyone joins and contributes the maximum, our cost as a company is $30k a year. Simple.

The hidden costs are the increased payroll taxes. Group RRSP contributions by the employer are considered a taxable benefit on the employee’s pay. For instance, if an employee’s base pay is $50k and the employer is contributing 3% to the plan for them then that equals a $1500 taxable benefit and the employee’s T4 now says $51,500. With that taxable benefit can come increased CPP, EI, WCB and now the real game changer, Employer Health Tax (EHT). The reason I say game changer is because with CPP, EI and WCB there are contribution maximums (for 2020 CPP=$58,700, EI=$54,200 and WCB=$87,100), so for an employer with mainly higher paid workers they might not have paid a lot more in payroll taxes from having a standard Group RRSP because the majority of their employees had already hit the maximum. EHT is different though, there is no maximum, in BC if your payroll is over $500,000 you pay, period, and over $1.5 million it is 1.95%. Ontario and Manitoba also have employer health taxes. And hands up who thinks those taxes are going to go down. No one??

In our $50,000 employee example, if the employee was in BC that $1500 RRSP contribution would attract an additional $273.63 combined employer and employee payroll taxes, or over 18% of the actual contribution. As you can imagine if you multiply that by dozens or hundreds of employees it can turn in to a big number.

So what is the solution? There are actually a few solutions and the right one for your organization depends on a number of factors with what you are trying to achieve with your plan, but they include a structured Group RRSP with withdrawal restrictions, a Defined Contribution Pension Plan (DCPP), and a Deferred Profit Sharing Plan (DPSP). With the structured Group RRSP it is a relatively easy fix to the standard Group RRSP and would mean you wouldn’t have to pay CPP, EI or WCB on the RRSP taxable benefit (but would still have to pay EHT). With the DCPP while it solves the payroll tax issue it comes with its own issues such as lack of flexibility and more government regulations/complexity. In our minds the DPSP is extremely underutilized as a tool for employers to use, the drawbacks are minor and there are other potential benefits. DPSP contributions are made only by the employer and they are treated the same for tax purposes as pension contributions, they are NOT considered a taxable benefit and the employer records the amount of the contribution on the employee’s T4 as a Pension Adjustment which reduces the employee’s RRSP contribution limit. Because the contributions are not considered a taxable benefit the contributions do not attract any additional payroll taxes – including for the Employer Health Tax which expressly excludes DPSP contributions from their definition of earnings.

Read about DPSP’s in more detail!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Group Retirement Evolution

Mon, 19 Mar 2018 20:58:23 GMT

J.P. Morgan in the U.S. recently published their 2017 Defined Contribution Pension Plan Sponsor Survey Findings, and it was interesting because the U.S. tends to be ahead of where we are in a lot of areas, pensions being one of them. This is the group they surveyed:

Yes, there are some massive plans included with appropriately massive resources to put towards employee wellness and “financial wellness” in particular, but there is also a good cross section of plans of all sizes. The biggest takeaway that I got from the study is that there is a big increase in the number of organizations that are taking an active role in trying to make sure their employees will have sufficient income in retirement. That is a big progression from just “offering a plan”. In my mind there are kind of 3 steps, 1) Offering a plan. Just having it on the shelf as part of the employee’s benefits. 2) Having an Optimal Plan. Having a plan that you are continuously trying to improve on and communicate with the employees about. 3) Helping employees reach their retirement income goals. Here you have taken things one step further and are focused on the outcome of the plan instead of just the plan itself.

What can plan sponsors do to help their employees reach their retirement income goals?

Realize that they have a fiduciary duty to plan members regardless of their involvement.
Do your due diligence by meeting with your plan advisor regularly.
Consider doing a re-enrolment. A plan re-enrolment is when the members are notified that their assets and future contributions will be invested in the target date fund closest to their 65th birthday unless they specify a new investment direction by a certain time period. This is pretty radical and wouldn’t be a good thing for all plans, but certainly some of the ones with the greatest amount of member apathy it’s worth considering.
Allow meetings with plan advisors during company time.
Communicate with plan members regularly to keep them engaged with the plan.

What can plan advisors do to help plan members reach their retirement income goals?

Make sure target date funds are offered and most times used as the default.
Work with the plan sponsor to find ways to communicate with their members in a way that works for them. That can include articles on the company intranet, group meetings for all members, group meetings for targeted groups of members – ie those within 10 years of retirement, and individual meetings.
Show members how to do an illustration of what their income might look like at retirement, or offer to do that for them.

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

The Return of Volatility

Wed, 14 Feb 2018 00:00:00 GMT

It sounds like a remake of an old horror movie, and to some people it’s just as scary, but it’s just the stock market returning to it’s more usual ways. At the time of this writing the most common gauge of the U.S. stock market, the S&P500, was down 5.2% for the week – it’s biggest drop since January 2016. The Canadian stock market faired about the same, but it felt more painful because our market hasn’t kept pace with the U.S. stock market for a few years, and especially since the U.S. election.

As humans we tend to forget all except the most recent past, and as far as stock markets go, 2017 was very benign. That is not the norm however. I had just met recently with our rep from one of our favorite investment managers, Edgepoint, and he was lamenting on the lack of volatility in the markets. Despite the incredible success that Edgepoint has had, having volatility to the down side is actually very helpful for them in their investment process, and that volatility was almost non-existent in 2017. In 2017 there was only 8 days with price moves over 1% and none with price moves over 2%. That is near historical lows, and certainly the lowest since at least 1980. They say that the stock market needs to “climb a wall of worry”, and it seemed like for quite a while that worry for the average investor was not there – until now. Before this the last 5% drop in the U.S. market was August 21, 2015 which was also the last 10% drop. The last 20% drop was July 9th 2008, while the Canadian market had a 20% drop on January 7th 2016. The drops didn’t all happen on that one day, but were from the previous peak to the low.

It almost doesn’t matter what the reason for the drop is, the fact is that it is happening and it was overdue. For what it’s worth though, the biggest reason is that interest rates are increasing rapidly, especially in the U.S., where the economy is clicking on all cylinders and fuelling worries that inflation will increase. 10 year bonds in the U.S. yielded 2.05% on September 8th last year and now closed at 2.85%. Rates are still low, but that’s nearly a 40% increase in 5 months. Rising interest rates worry investors because higher interest rates mean that fixed income investments like bonds and GIC’s will become more enticing for some compared to stocks, and it means higher borrowing costs for businesses reducing their profits.

What are the professional investment managers like Edgepoint doing? They are using any drops to either add to current holdings at a more attractive price, or buying into companies that they have had their eye on but didn’t buy into because they felt the stock price was too high. They also eliminated quite a few positions towards the end of last year that had done very well, but they felt were getting too expensive. For individuals, hopefully your equity holdings are long term investments like they should be, your investment mix between equities and fixed income is matched to your risk tolerance, and you have been rebalancing between the two regularly. If that is the case, buckle up, and feel confident in your long term investment strategy.

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Health Plan Benefits that are Most Appreciated

Thu, 01 Feb 2018 00:00:00 GMT

When building your plan, it’s important to understand what features employees appreciate the most since the best benefit plans consist of a mix of the “highly appreciated today” benefits, and the less appreciated but highly valuable true insurance.

In general, employees appreciate the frequently claimed transactional benefits the most: dental, extended medical coverage that includes drugs, and visioncare.
For dental coverage, basic dental covers almost all kinds of dental treatments that employees and their dependents might use. You can add major dental coverage (crowns, bridges dentures) and childrens orthodontics. They are certainly nice to have, however, this is coverage with diminishing “appreciation” returns, as not many employees will use either of these benefits, and premium is payable for all employees.

Extended Health coverage is highly valued, especially for its protection provided in the event of high drug costs. Paramedical coverage (physiotherapists, chiropractor, massage therapy etc) is especially valued by younger employees who tend to claim less for drugs.

There is a fallacy that Visioncare has a different pricing arrangement than other transactional benefits: this is not the case. Again, glasses/contacts are not applicable to all employees, so this benefit is frequently added as the plan and the business mature and plan enhancements are needed.
And true insurance benefits are generally not as highly appreciated, but can be extremely valuable. Life insurance, which is easily purchased outside a benefit plan, is usually kept at a low level. Long Term Disability however, is highly valuable to employees, even if they might not at first appreciate it. The cost of Long Term Disability through a group plan is a fraction of the cost of trying to buy it on your own. As well, some if not all of an employee’s group LTD coverage does not require medicals.

BF Partners is a Financial Service company offering Employee Benefits and Financial Planning/Pension advice for businesses and business owners. The BFP brand stands for quality, integrity, commitment and professionalism. Click here for more information on BF Partners Employee Benefits plans.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

Individual Health & Dental Plans

Mon, 15 Jan 2018 00:00:00 GMT

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We are frequently asked about individual health and dental plans and whether they make sense to have. And, as far as insurance companies go, by far the largest number of enquiries about products are for individual health and dental plans – shockingly not many people call in wanting life insurance! The reason for the interest is simple, we all have out of pocket expenses for dental, prescription drugs, physiotherapy etc. that we would like to pay a small amount as a premium to cover those larger bills. Unfortunately, the reality is that for most people they are going to end up paying a lot more in premiums than they will ever get back in paid claims.

In order to understand why that is we first have to look at the original concept of insurance. Insurance was originally developed to help people with catastrophic losses that were infrequent, but when they happened were devastating for the individual or family that it happened to. Along comes insurance where a large number of people could pay a small amount and pool their money together to “insure” that if they were the one that suffered the loss that they wouldn’t be financially ruined. And that’s where insurance works best, life insurance, disability insurance, travel insurance, fire insurance are all examples of where you pay a relatively small amount as premium to cover a risk that could be hundreds of thousands or millions of dollars. Contrast that to individual health and dental plans where you are asking an insurance company to pay for claims that are frequent, and for a lot smaller amount. When you are doing that a lot more of the costs ends up being administrative instead of actual “insurance”. Insurance companies are of course also not selling these plans out of the goodness of their hearts, so a profit component has to be built into the premium charged. All in all, on average, the insurance company will base their rates on what they estimate paid claims to be + roughly 40%. Put another way, if you get back from them $1000 in paid claims in a year, they are going to want to be charging you $1400 in premium. There will be winners in the mix, those that tick off the right boxes and hit enough of the various category annual limits will be happy, at least temporarily that they got back more than they paid, but in general a lot more will lose.

Then why does it work for company group benefit plans? For a few reasons. First of all, as the name suggests, it is a benefit that the company provides as part of the employee’s overall compensation package to attract and retain good employees. So, the employer is paying some or all of the premium, and the company gets to write off that cost as a business expense for tax purposes. There are also economies of scale that go into a group plan, and the cost per person or per family that an insurance company has to charge is a lot less for a company with 500 employees than it would be for a company with 10 employees – and the cost for an individual plan is going to be even higher.

So what’s the answer? For self employed individuals with their own corporations, we recommend Private Health Services Plans or PHSP’s. The fees are less and structured properly it is all deductible for the Company for tax purposes. Unfortunately, for anyone who doesn’t either work for an employer that has a benefits plan or has their own company that they can do a PHSP, the best option might just be to set aside an emergency fund to cover those larger expenses – and be thankful that we live in Canada where a majority of our health costs are covered by our government plans!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Employee Benefit Plan Cost Sharing with Employees: What are Your Options?

Fri, 05 Jan 2018 00:00:00 GMT

Its very common to have some form of Employee Benefit Plan cost share with employees in your business. Cost sharing ensures employees understand and appreciate the total cost of a plan, and spend the benefit dollars they have access to wisely.

Two Forms of Employee Benefit Cost Sharing
Cost share comes in two main forms: premium share, and co-insurance (only partial reimbursement) of submitted claims.

Premium share takes a number of forms. The more common employee benefit premium sharing options include the:

Employee paying 50% of their monthly premium,
Employee paying for Life, Long Term Disability, while the company pays the remainder

Tax Advantages of Employee Benefit Cost Sharing
There are some tax advantages to how employee benefit premiums are shared. The business can pay the entirety of the extended health and dental premium, and no taxable benefit has to be charged to the employee. If the employee pays 100% of Long Term Disability premium, claim payments when disabled are tax free (otherwise they are fully taxed as regular income).

Co-insurance cost sharing
Coinsurance features of Employee Benefit plans means high users effectively pay more. The more of each claim that an employee has to pay, the lower the premium will be for that benefit. Coinsurance levels vary from 100% (meaning claims are 100% paid and the employee pays nothing), to as low as 50% (common as the level for major dental coverage or orthodontics).

A well thought out mix of premium cost share and coinsurance cost share levels ensure that an Employee Benefit plan is affordable for the owner, and that employees participate and appreciate plan costs and design.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

Why Insurers Require 100% of Eligible Employees to Enrol in an Employee Benefit Plan?

Fri, 01 Dec 2017 00:00:00 GMT

There are many factors that Insurers require in order to provide your business with a long term and viable Employee Benefit plan. One main criteria is anti-selection. Typically employees can choose to go on a Benefit plan and those who need to claim health expenses will join. Often healthy employees who don’t anticipate high heath expense claims will decide not to go on the plan. Insurers try and avoid anti-selection since a mix of low and high claiming employees is needed in order to make a plan financial viable for the insurer and therefore beneficial to the employer.

From your position as the business owner, having employees choose whether or not to go on the plan is an “administration nightmare” considering some employees would want to not join, then join later when they have claims, then go off again. And getting on the plan in the future is also not simple. If an employee is not enrolled when you they were eligible, they are treated as a late applicant, with full medical underwriting, and severe restrictions in dental claiming in the next 12 months even if medically approved.

The worst case for the employee and employer is when an employee does not enrol in a Health Benefit plan and then becomes disabled or dies. This is a potential legal liability for the business owner, as they could be sued by the employee/employee’s estate claiming they were not told about enrolling in the plan and what happens if they did not enrol.

It’s therefore far better to make the plan a condition of employment, explained when you hire them, forms completed at time of hire, and automatically submit paperwork when they reach the end of the eligibility waiting period.

One area of enrolment flexibility employees do have is for Extended Health, Visioncare and Dental. If an employee can show they already have coverage through their spouses plan, they can “waive” or not take those benefits. They still have to take all other benefits they don’t get though their spouses plan. That would include Life Insurance, Accidental death/loss of use, critical illness long term and short term disability.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

3 Tips On Who is Eligible to be Enrolled in Your Employee Benefit Plan

Wed, 01 Nov 2017 00:00:00 GMT

The first thing to know is that, you as the business owner decide what eligibility looks like, when you set up your Employee Benefit Plan contract with any insurer, such as BF Partners. Employee Benefit plan eligibility has a few components:

Waiting period (how long someone must work for you before they go on the plan)
Minimum hours per week worked on average (usually 25 hours)
Employee must be a member of an eligible class of employee (you could make the plan only eligible for office/management staff and not available for other workers)

Employee Benefit Plan Eligibility has some flexibility, primarily around the waiting period. For example, if you have a 3 month wait for new employees, you can waive that to zero days if you hire a key employee. Zero days is the only option other than the normal waiting period though, you cant choose 1 month instead of the 3 months in the contract.

Bottom line? Set up your eligibility criteria to ensure your plan is appreciated soon by the people you want to attract and retain. Overly strict criteria can create negative feedback from current and potential employees, defeating the point of having a plan.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

The Tax Benefits of Employee Health Plans

Sun, 01 Oct 2017 00:00:00 GMT

Coverage for the owner is treated for tax purposes the same as any other employee, as long as:

1) the owner is actually an employee of the company and not just a shareholder and

2) the owner’s coverage is reasonable and could be given to an employee with the same level of duties and responsibilities as the owner. You can’t give yourself as an owner, coverage an employee would never get- this moves into the realm of a shareholders benefit instead of a benefit of employment.

Insured benefits are treated slightly different by CRA.

Premiums for Life Insurance and Accidental Death/Loss of use coverage are considered taxable benefits of employment if paid by the company.

Long Term Disability premiums can be partially or fully paid by the employer, but that means at claim time, any disability payments are fully taxed as regular T4 income. If the LTD premiums are 100% paid by the employee, claim payments are tax free

So, what’s the best way to share premium costs with employees?

From a tax perspective, the most efficient way is:

1) employer pays 100% of Medical, Drug, Dental and Visioncare premium costs: fully tax deductible for the business, no taxable benefit for employee.

2) employee pays 100% of Life, AD+D and Long Term Disability premiums: creates tax-free Long Term Disability claim payments, and avoids the taxable benefit on Life and AD+D premiums.

Many times, this split of costs ends up close to 50/50, which is a common cost share in a small business benefit plan.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

What Can be Included in Business Benefit Plans

Fri, 01 Sep 2017 00:00:00 GMT

Benefit Plans come in all shapes and sizes. Common items include:

Dental Coverage: cleanings, fillings, scaling, tooth extractions, root canals, gum disease treatments and more are included in a basic dental plan. Additional coverage can be added for crowns, bridges and dentures, and even further to include orthodontic treatments for children.
Extended Health Coverage: prescription drugs, paramedical services such as chiropractors and massage therapists, medical devices like sleep apnea machines, semi-private hospital, ambulance and out of country travel coverage are all items generally covered. Vision care for glasses, contacts and eye exam costs can be added.
Optional Insurance benefits can include Life Insurance and Income Replacement Disability Insurance, Accidental Death/Loss of Use, Dependent Life, Short Term Disability and Critical Illness.

Key components for Small Business to take advantage with employee benefit plans include:

Affordability and Sharing – Group insurance rates are usually less expensive than comparable individual supplementary health insurance rates so analyse what savings are created when you introduce a plan. You may wish to share the costs of the play with your employees.
Flexibility – Group Plans usually have less restrictions than individual plans on items like preexisting conditions, the addition of new family members, and restrictions based on poor health histories, are non-factors in a group insurance plan at enrolment.
Tax Benefits – Premium dollars spent by an employer are tax-deductible for the business, and the employees (including owners!) receive the claim reimbursements tax-free. One of the only win-win scenarios in the Tax Act

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

The Cost of Advice - The Big Unveil!

Fri, 01 Sep 2017 00:00:00 GMT

I don't think it will come as a surprise to any of our clients that we get paid for what we do. Maybe it will for some though, because apparently studies lately have shown that 50% of investors don't know they pay fees at all, while 75% don't understand the fees they pay.

If you are in the camp that knows that there are fees you may have wondered how much we get paid, and come January, at least for clients that have funds invested through our investment dealer Assante Financial Management Ltd., you will find out! End of December statements that will be out mid January will show the dollar amount of fees that were paid to the dealer, in our case Assante. This applies mainly to mutual funds, but if we have placed other investments for you through Assante the commission that was paid to Assante for those investments will be disclosed as well. The other important addition you will see on your statement is your personal rate of return. The personal rate of return is important because it shows your rate of return for your entire account, not just for each fund that you hold.

This initiative from the Government has two main goals that we agree with whole heartedly; 1) tell investors how much they have made on their investments on a % basis – ie you have averaged 8.4% a year after fees over the last, say, 5 years. 2) tell investors how much they paid in fees, as a $ amount per year. The only caveat we would have is that what will be shown is not the total amount of fees you paid, just the fees for the dealer and advisor.

Example:
~ Jim invests $100,000 in an equity mutual fund through us
~ the fund’s fee is 2% a year, that fee is called the “Management Expense Ratio”
~ 2% of $100,000 is $2000, and that is the total fee paid for the year for owning that fund
~ of that 2% fee, typically 1% gets paid to the dealer, and of that the dealer takes their cut and pays the balance to us. So in this example $1000 is paid to the dealer, and that is what will be shown on the new statements

Points to keep in mind:
1) None of the fees are new, what is new is they are being disclosed in a way that makes it more transparent for investors.
2) So far the regulators haven’t required the insurance industry to make the same disclosure for segregated funds that they offer.
3) There is a cost for advice, just like there is cost for any other service, what is a valid question is what is the value I am getting for that service?
4) For some of you the fee and rate of return disclosure might still not make 100% sense, and we’re happy to go through it with you so it does.

What we do to earn our fees:
Each situation is different, but here are some of the things we do that you might not be aware of:
~ Help you to articulate your goals and create a plan.
~ Change the plan over time as changing life circumstances dictate.
~ Help you to navigate the complex world of investing.
~ Keep communication lines open, especially in down markets, helping you stick to your plan.
~ Monitor and adjust investments in your portfolio.
~ Coordinate with other financial professionals such as your accountant and lawyer.

So please review the new statement when you get it, and if you feel that you aren’t getting value for the fees you are paying, or if you feel there is something more that we should be doing for you, let us know!

Principal Residence Exemption Changes
If you are lucky enough to own a home in Canada, especially in Vancouver, then you have enjoyed a very nice appreciation in the value of that home over the last number of years. You are no doubt aware that if that home is deemed as your principal residence, and you are to sell it, that the gain that you have made is tax free through the use of the Principal Residence Exemption (PRE) section of the Income Tax Act.

Recently the Federal Government tightened rules on the PRE with the intention of making the benefit available only to Canadian residents. For some reason the phrase “closing the barn door after the horse has left” comes to mind, but I digress... To make that change happen the Government has imposed additional tax reporting and changed parts of the Income Tax Act. Here is how you may be affected:

~ Now, if you sell your home you will have to report the disposition on your tax return. Previously, if the entire gain was sheltered by the PRE you didn’t have to report it. The first implementation of the new rule will require homeowners who sold their home any time during 2016 to report it on their 2016 tax return.

~ If the disposition isn’t reported there isn’t an immediate penalty, but CRA will have an indefinite period to reassess the disposition and possibly disallow the exemption.

If you sold your home during 2016 speak to your tax advisor!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Should You Cut your Annual Limit for Prescription Drugs to $500?

Fri, 30 Jun 2017 00:00:00 GMT

Did you know that exploring how a traditional “drug” plan can be integrated to a broader health and wellness plan is a growing trend? Have you heard that this trend is growing based on research that integrated health and wellness plans can lead to increased employee satisfaction and lower plan costs? This article explores traditional benefit plan design in relations to this trend and let’s you discover the facts from real research data.

The Paradox

When the goal of a benefit plan is to assist in attracting and retaining quality employees, and assist those employees in achieving and maintaining a high level of overall health, a different look at the drug versus Paramedical/wellness spend might be well worthwhile. With group plans, there is an intriguing paradox between how drug spending versus paramedical spending (and Wellness spending in general) is sometimes perceived. In a typical group plan, prescription drug claims will represent 60-80% of total health spend and paramedicals (like physio and massage therapy) will represent 10-20% of overall health spend. Most plans spend virtually nothing on wellness initiatives such as smoking cessation, weight loss, healthy eating and exercise.

Treatment Perspectives

In general, our society condones the use of drugs and views the use of other treatment modalities that can be just as therapeutic in a much less favourable light. All drugs have side effects; some are good and some are not. There are few side effects from counselling or physiotherapy other than improved wellbeing, increased mobility and functionality and decrease in pain, which in turns increases productivity.

Benefit Plan Design

From a benefit plan design perspective, spending money on drugs is often acceptable. Spending money on paramedicals is much less acceptable. Traditional group plans that have no annual or lifetime limit on the drug reimbursement amount are the norm. For example, if an employee is being prescribed Soliris, and the plan design says 100% reimbursement, the employee pays zero and the entire $600,000+ annual cost of that drug is paid by the plan. Comparatively, an employee who needs regular massage therapy for a back condition to maintain their ability to work will in most plan designs be limited to $500 per year reimbursement most employers in our experience seem to be comfortable with their employee’s drug spend (state source or note it’s from your experience). We know that prescription drugs are necessary, and can potentially change the course of a disease. We also know that spending money on paramedical practitioners and other wellness initiatives can significantly change the course of a disease and accelerate an employee’s recovery from injuries. However, the perception seems to be that a small amount spent on paramedicals and wellness is OK, but much more than $500 per year gets into the “abuse” range, while prescription drug spend of thousands per year is considered average and acceptable.

Of note, recent studies including Greenshields Canada 2013 drug study indicate that patient adherence to a prescribed drug treatment plan for many chronic conditions such as high blood pressure and diabetes is in many situations less than 50%, which results in huge unnecessary costs and poor patient outcomes.

Some employees (and their families) require medications to keep them at work, and prevent diseases from getting worse. Some individuals have minimal drug expenditures but place a high value and receive a high benefit from paramedical practitioners and wellness initiatives that promote health and wellness.

Initial data from the ongoing Wellness Return on Investment study being performed by Sun Life and the Ivey Business School shows that employee wellness programs save about 1.5 to 1.7 days in absenteeism per worker over 12 months, or an estimated $251 per employee per year.

In Summary

There is a great opportunity to explore how a traditional “drug” plan can be moved towards a “health and wellness” plan over time, increasing employee satisfaction, lowering costs and raising the bar! In practical terms it will always be very difficult and generally not recommended to actually reduce the annual per employee drug maximum, especially not to $500. However, new benefit dollars can and should in our opinion be directed more towards non-drug items that can positively impact an employee’s health.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

Rate Structures

Wed, 31 May 2017 00:00:00 GMT

Let’s define our two categories of benefits. Very simply pooled benefits are things like life insurance, accidental death and dismemberment, critical illness, dependent life, long term disability and out of country travel insurance. This is true insurance as you pay a relatively small premium to an insurer and transfer a big risk

You can imagine that in the unfortunate event of a long term disability claim, you have paid a premium and the insurer will pay you a monthly income benefits for as long as you are disabled. Or you pay a small premium for your group life insurance, somebody dies and the policy will pay out to the beneficiary. Insurers are well positioned to deal with these types of claims because they are relatively rare, infrequent and not likely going to reoccur (a life claim is a onetime event per person).
Insurers (while they do an excellent job) have a harder time pricing experience-rated health and dental benefits as they are small, high frequency, and low cost claims that add up over time. So health and dental rates are really just an insurers’ best guess of what your employees will claim each year plus their expenses to pay those claims.

Insurance is really for unseen events. Events that occur frequently or with some degree of predictability respond poorly to being insured.

Insurers have a relatively easy time coming up with rates for the pooled benefits as they take a look at your employee’s demographics- age and gender distribution, occupations and volumes of insurance. Groups with older employees will tend to have higher insurance costs than groups with younger employees as there is more risk associated with insuring an older workforce. Each year the insurer looks at the employee demographics and figures out a rate to insure the overall risk involved.

Health and dental benefits are priced a bit differently. Health and dental claims are experience-rated benefits. At each renewal, the insurer tallies all the small, relatively low cost, high frequency claims your employees make, factors in their administrative costs, claim inflation (called trend), reserves, commissions and profit to come up with a rate or a guestimate of what your employees are going to claim next year. However, it is an inexact science (more of an art really). Sometimes the insurer guess correctly and the plan is appropriately priced for the expected utilization, sometime they guess incorrectly and the plan is underfunded.

If the plan is underfunded and paid claims exceed the insurers’ administrative breakeven point or what is called the target loss ratio, you would expect a sizeable increase at renewal. If the plan is correctly funded and is below the insurers breakeven point you would expect the rates to be relatively stable, however we still have to factor in the expected claim inflation that is reported by the insurer, so even if a plan is well below par, the trend factors and insurer uses can still lead to an increase on renewal.

This is an overly simplified view of how an insurance company sets its rates. Life and long term disability rates are set based on employee demographics, mortality and morbidity tables. Health and dental benefits are sometimes a “guestimate”. In future posts we will explore a bit further how exactly health and dental benefits are priced and more cost effective solutions.

Medical Stop Loss Insurance: a Small Item with BIG Ramifications

Sun, 30 Apr 2017 00:00:00 GMT

Stop loss insurance caps the annual exposure of the plan to large drug and medical expenses. For example, the $40,000 annual Remicade claim above may only result in $10,000 being added to claims experience; the remaining $30,000 would be fully paid as per the plan design, but would be paid by the Stop Loss policy. The point where the Stop Loss policy takes over paying the claim is called the attachment point.

Stop Loss plan designs vary widely. Depending on a number of factors including which insurer or third Party Administrator your plan is with, the attachment point could be as low as $3,000 annual, or in excess of $15,000 annual. Some plan providers offer a number of choices in attachment point levels; others have little flexibility.

With lower attachment points, come generally higher Stop Loss premium costs, so there is a definite cost/benefit discussion that has to take place with plan sponsors when designing a benefit plan. It’s an important discussion to have: the wrong choice can cost a plan tens of thousands of dollars in unforeseen claims costs.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

The Marketing of Investments

Wed, 01 Mar 2017 00:00:00 GMT

I think we all know that every business requires marketing, and investment management is a business just like any other. Somehow it seems like the investment business should be held to a higher standard though, and marketing the latest investment du jour shouldn’t be the first order of business. One of the types of investments currently being marketed heavily are “income funds” or “payout funds”.

With interest rates as low as they are, investors, especially retired investors, are trying to squeeze as much income from their investments as possible. The idea of an income fund in itself isn’t a problem, have a fund that invests in securities that pay an income, bonds, dividend paying stocks to provide as much “income” as possible. The problem becomes when there is a fixed payout, and it is marketed as a return. As in, invest $100,000 and get $450 per month. This is a problem because the average investor is made to think that they can keep their $100,000 investment and get the $450 per month in perpetuity, but there is absolutely no guarantee that will happen – and in fact it is quite unlikely to happen. Let’s look at an actual example. This mutual fund is from a very well respected financial institution, which will remain nameless, and this fund has $3.7 billion invested in it. Let’s look at the math to what is being offered with this fund:

Current payout rate based on closing price February 17: 5.37%, payout of $447.34 a month on a $100,000 investment

Right now an index for bonds in Canada called the FTSE TMX Canada Bond Universe Index yields around 2.85%, which we can say is reasonable for what we would expect this fund to make with the 64.8% of the fund that’s invested in bonds. The little bit that is in cash we might expect to make around .5% right now. When we do the math, knowing that the bonds and cash are likely going to offer up a total of around .75% towards our total return, we find out that the return the fund needs to get from the stocks is 14.7% - or 16.4% gross before the fees are taken off. Yikes! This is telling us that in order for Mr. and Mrs. Smith to get the $447 a month and for their $100,000 principal to stay the same the fund managers are going to have to make over 16% a year on the fund’s stock investments. I would say not very likely! What is more likely is that the $447 a month that is taken out will slowly encroach on the $100,000 capital until in a few years the nest egg that they thought they were just taking “interest” from is nowhere near their original $100,000, with little hope that it will ever recover to that original amount. This isn’t a bad fund, and it is an appropriate fund for retired investors (without the unrealistic payout), it’s just the marketing of it that leaves a bit of a bad taste in your mouth. The warning before you buy this fund, or the many other similar funds out there, should be “IF YOU TAKE THE CURRENT PAYOUT YOUR PRINCIPAL WILL MOST LIKELY DROP”. Don’t get us started on so called “Low Volatility Equity Funds” that are sprouting like spring flowers out there right now!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Employee Engagement With Group Retirement Plans

Wed, 01 Feb 2017 00:00:00 GMT

Right now the buzz words in the pension/group retirement world are “employee engagement”. How do we get our employees to a) get the most out of the plan that is being offered to them, and b) appreciate the $’s and time that goes into offering this plan? If we back up and look 20 or 30 years ago it was a much simpler time. A lot more employees were covered by defined benefit pension plans (which a lot of time were mandatory), where you worked for a company for a number of years and you got paid out at retirement based on some pre-set formula such as 2% * the number of years of service * your final average earnings.

No thought was required by the employee until retirement when they had to choose what type of pension they wanted, either single life, joint life, etc. In any case no matter what they chose, the employee knew what their retirement income was going to be for life. Not the case anymore. Nowadays pretty much the only people that are covered by a defined benefit pension plan either work for the Government or a very large company. That means that the majority of the plans out there now, whether they are a Group RRSP, Defined Contribution Pension Plan, Deferred Profit Sharing Plan, or a combination, $ is being accumulated in a retirement “pot” and depending on how much the employee and the employee have put in to that pot, and how the investments in that pot have done, will determine how much that plan will provide them for an income when they retire. That brings us to back to the employee engagement part. The fact is that a majority of the members of these plans don’t have the knowledge and/or the desire to manage their own investments effectively, and to know how much they should be saving to provide for their own retirement. Most of the suppliers we use try and engage members through, in most cases, great web sites where they offer simplified ways to choose investments, tools to project how much $ they will have at retirement and what that will do for them in retirement, etc. The fact is though that a very large majority of the members of these plans don’t take advantage of the tools available to them on the plan provider’s web site. So what more can be done? While granted it is harder to do with a company that is very large or the employee group is very spread out, we find that one on one interaction with the members vastly increases the engagement in the plan. That starts with a once a year group meeting, with one on ones offered afterwards for 20 minutes for each member that signs up. With the 20 minutes we can go through with the member whatever topic they choose, whether that is choosing suitable investments in the plan, general financial planning questions, or doing a quick retirement projection. While certainly not every employee, or even a majority, will take you up on that offer of a 20 minute look at their personal situation, the ones that do find it very valuable and the word does get around. And, from an employer point of view, what you have done is gone a long way to meeting your fiduciary duty (i.e. the Federal Government’s Capital Accumulation Guidelines that a lot of employers don’t even know exist) because the member has been given multiple chances to educate themselves on the plan, and if they choose not to the responsibility for what their plan ultimately will do for them now falls squarely on his or her shoulders.

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Wealth Management: Banks 1, Everyone Else 0

Sun, 01 Jan 2017 00:00:00 GMT

After reading an interesting article in the Globe & Mail entitled “How the Big Six Won the Battle Over Wealth” it prompted me to comment. As someone who is in the industry and obviously has a vested interest in how all the different players fair, it was an eye opener, but not a shock.

We all know how powerful the banks are in Canada , and how they completely changed the trust and investment dealer businesses in the 80’s and 90’s by swallowing up most of their competitors. Now they are doing the same thing in the wealth management business – just going about it in a slightly different way. In the wealth management business, just as with a traditional bricks and mortar business, there are manufacturers and then there are distributors. Manufacturers would include the AGF and Mackenzie’s of the world that have mutual funds to sell, and distributors would include Assante and the banks. Banks are in an enviable position of being both a manufacturer and a distributor. They have their own mutual funds they sell, and they sell them primarily through their huge branch networks across the country. It is that distribution advantage that is making them clean up and is contributing big (and steady) profits to their bottom line. According to the Globe and Mail, which got their data from the Investment Funds Institute of Canada, in 2003 banks made up 25% of the sales of long term mutual funds in Canada. In 2013 their sales now represent 57% of the market.

Where does that leave the independent mutual fund manufacturer and distributor? As with any market where there are a few players with large market share there will always be room for smaller niche companies to emerge and thrive, but they better offer a compelling product/service that is discernibly different. The interesting thing about us at BFP, and associated with Assante for the sale of mutual funds, is the banks although they are a competitor of ours in some ways, they are also a partner. We have the choice to sell the banks mutual funds (and do) exactly the same as how they are sold at the bank branch level. However, for us the bank’s funds are just some of the funds in a very large shelf of products that we choose for our clients, whereas at the bank branch level you are unlikely to be offered independent mutual funds when their own funds will contribute more to the bank’s bottom line.

One example of an investment company that is one of our favorites and is thriving, thank you very much, despite having the 800 pound gorilla (okay, 5 800 pound gorillas) lurking around is Edgepoint Wealth Management, who we are proud to call one of our favored suppliers. Edgepoint was started in 2008 by a few former investment managers from Trimark who wanted to run a truly independent wealth management company. We were attracted to Edgepoint initially because we liked their philosophy on managing money and their track record, but became even more intrigued once we began to learn more about the Company and their unique characteristics such as: they hardly have a marketing budget and those cost savings are passed on to their investors through lower fees, they invest their own money in their own funds (as do we!), they view what they do as buying a collection of great businesses at reasonable prices, they keep it simple by having very few funds, and they will stay a private company and not have to cater to outside shareholders. Performance has been exceptional, but they like every other money management firm will eventually go through a period when they underperform, but we feel that with their philosophy of managing $ and their ability to attract the best in the business by being part of a truly independent business, they will consistently produce superior long term results for their investors – and that is what we think is the ultimate measure of success.

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Wellness and Cost-Containment

Thu, 01 Dec 2016 00:00:00 GMT

Part I

One of advisors’ key responsibilities is to deliver renewals. For some clients, renewals can be challenging, particularly if it means double-digit cost increases for their health and dental plans. As advisors, we can recommend tactical claims management strategies, such as changing a coinsurance variable (e.g., from 100% to 80%), increasing deductibles, or changing entitlements. But as important as these tactical changes can be, and they do have an impact on plan members benefits entitlements (which can change the employee’s claim spending behaviour), they don’t really address employees’ underlying health issues.

And it’s those underlying health issues that are the real cost drivers for a benefits plan. Although some may view increasing premiums as the problem, they’re just a symptom. What’s driving costs are employees claims (drug, medical, dental), which in general are a symptom of disease, whether temporary, acute or chronic. And more drug claims means more employees dealing with health-related issues.

As more and more employers start to make this connection, they’re looking for strategic cost-containment strategies to positively address employee health and reduce long-term costs. I spoke to Antonio Zivanovic, CEO of Corporate Occupational Solutions Inc. , a wellness provider in Vancouver, to discuss how employers can strategically focus on claims management strategies that will reduce health care costs over the long term.

Daneil Wofson: I find there’s a lot of misconception among employers about promoting fitness and wellness with employees. What is the difference between a perk-based fitness program and a corporate wellness program?

Antonio Zivanovic: A perk-based program has minimal employee and employer accountability. Employees submit receipts they believe are connected with fitness. As a result of reduced employee accountability, a perks-based fitness program doesn’t often meet the objectives of the company. It lacks measurable results-oriented components. A program like this loosely serves the needs of the individuals it was designed to serve.

Strong wellness programs should include elements that can be objectively measured to produce results. First, develop program objectives and an evaluation plan, then collect data, then analyze and compare this info and other important statistics to health and drug costs (which can be provided by the group insurer).

DW: I understand the need for a wellness program for a large employer with thousands of employees. Why would a small to medium-size employer start a wellness program?

AZ: A wellness program will reduce risk, increase profitability and productivity, and improve recruitment and retention of top candidates. It will help businesses differentiate themselves as a top employer. A wellness program will also provide a strategic long-term cost-containment strategy, while affording employees to take an active part in managing their own health care issues. As employees become more aware of those issues, they can take corrective action to minimize drug-related costs and improve their health.

DW: What risk is an employer minimizing by sponsoring a wellness program?

AZ: Very simply, spiralling health care costs. Many employers are faced with double-digit cost increases each year. If health care costs increase 15% each year, the employer’s cost will double in about five years. Unless something is done to address employee health, an employer will be faced with an untenable situation.

DW: What happens to an employee who has poor health or is dealing with a chronic illness?

AZ: An employee that has a chronic health condition, such as diabetes, depression or heart disease, may consume more medication. They’re sick and potentially absent from work more frequently, which reduces productivity and negatively affects profitability and morale. Productivity levels also drop when employees are worried about chronic conditions. There can also be a lack of engagement leading to poor job performance. It can bring a whole team down and be very toxic.

Part II

DW: I often see depression, diabetes and heart disease as leading cost drivers in employee benefits plans. If a small to medium-size employer is seeing double-digit increases, how can a wellness program help?

AZ: It’s the convenience factor of going to one vendor to coordinate all activities and initiatives and to minimize the responsibilities of the HR team in managing these programs. It’s about understanding the communication process involved in health and wellness programming, and about looking at primary disease states and medications to minimize current and projected costs based on employee demographics. A health program can educate the workforce and create awareness to address these issues. Also, great onsite health care services that typically aren’t accessed at work can be provided on an individual or group basis.

DW: What is the benefit of a biometric assessment?

AZ: Almost 60% of our society is clinically “overweight or obese.” Biometric assessments help educate, inspire and empower employees with personal health information so that individuals can take a proactive approach to managing their own health. Having people understand their health status is an important first step in making a change and addressing their issues. Education creates awareness and importance.

DW: What is the benefit of an ergonomic assessment?

AZ: Many employees often see a highly trained and skilled paramedical practitioner (such as a massage therapist) to treat their symptom (e.g., back pain). These claims show up in the plan sponsor’s paramedical spend. The treating therapist often does a great job at treating the symptoms. However, more often than not, the root cause of upper back pain and strain of a sedentary office worker can be related to a functional limitation or faulty ergonomic set-up. An ergonomic assessment can help address the root causes and reduce long-term paramedical costs by removing these challenges for an employer. I think it’s safe to say that most of us have experienced discomfort from working at the computer for extended periods of time.

DW: What prevents an employer from initiating a wellness program?

AZ: Most companies fear that they’re going to throw money haphazardly at a program like a perk-based fitness reimbursement program, or launch a wellness program and have everyone get excited about it only to have it die a few months later. The majority of programs we see today lack cohesive objectives, which are the foundation for success. HR and management frequently perceive that they’ll have increased responsibility and workload. A great wellness program will actually decrease the workload on HR and management by making it simple and streamlining efforts.

DW: What are the components of a successful wellness program?

AZ: A successful wellness program should consist of employee education sessions, biometric appraisals, ergonomic assessments, online elements and various initiatives that focus on health promotion. The characteristics of a good program will reduce risk to the client and increase productivity. The program should be delivered onsite and be complemented by some online services. At the end of the program, it should be evaluated to determine if it met the objectives that were initially laid out.

DW: Where are wellness programs headed?

AZ: Programs are trending away from giving an employee an allowance. Wise employers are moving toward educating their employees around the value of their benefits program and compensation package. A wellness program can help employees understand the cost pressures associated with their health status. It’s imperative to link objective assessments and biometric appraisals to certain cash incentives. This will help employees become aware of their current health status and ideally take responsibility for their lifestyle choices.

DW: How do employers initiate a wellness program?

AZ: I’m a big fan of running pilot projects. A great first step is to speak with your benefits consultant to determine if your wellness provider and broker can work together and share empirical data (from the insurer). Start small with a clear budget in mind. Track and measure results and then expand the offering to meet the needs of employees.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

Financial Planning for Your Future

Tue, 01 Nov 2016 00:00:00 GMT

We all know what the benefits are of lower interest rates are for those who want to borrow money. Lower interest rates mean lower mortgage rates, which equates to lower mortgage payments for those buying a house, cheaper credit to finance all sorts of other consumer purchases, and cheaper credit for companies to borrow money for investment in their businesses.

You add up all those factors and it means a big boost for the economy. What about the retirees though? How are they affected? Because we are still feeling the effects of the financial crisis and dealing with governments around the world with too much debt, interest rates are being held artificially low to try and spur demand. That’s a double whammy for the retiree: 1) the rate of return on their guaranteed investments is at a historic low. In 1982 you would have required less than $200,000 to provide $25,000 a year in interest income, now you would need over $1.1 million; 2) while inflation is under control it is still there, especially with prices for expenses such as food, which are often a big part of a retiree’s budget, increasing significantly. What really matters for all investors in fixed income investments, but arguably more so with retirees is, what is the real interest rate. The real interest rate is the rate of return less the rate of inflation, and for the last couple of years that number has been below 0% for deposit investments for the first time since 1976 (1). Retirees are faced with the unenviable choice of either making do with less – in some cases a lot less, or taking more risk with their investments than they might be comfortable with.

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.

Mandatory Generic Substitution

Sat, 01 Oct 2016 00:00:00 GMT

A Plan Design Change Whose Time Has Arrived

In the ever evolving drug plan environment, the latest “option” (and it’s not an option with a number of carriers, it’s their new standard processing format) is to make the substitution of a generic drug for a prescribed brand name drug mandatory, rather than optional. This type of processing has many advantages from a cost perspective, but it does come with some process issues that employers and employees need to understand.

The point of changing to this style of claims processing is to ensure the lowest cost drug is being prescribed. A generic drug is “a drug product that is comparable to a brand/reference listed drug product in dosage form, strength, route of administration, quality and performance characteristics, and intended use”. As most plans require the employee to pay a portion of the cost of a prescription, lowering costs benefit both the employer and the employee. In BC, generic drugs are by law only allowed to be priced at a maximum of 25% of the original price of the brand name drug, before the brand name drug came off patent.

The issue has been growing in recent years as many prescriptions are being filled with brand name drugs when a generic is available. This is generally done by the doctor writing “no substitution” on the prescription: that way even if a generic is available, a brand will be dispensed by the pharmacist. In recent BFP client studies up to 10% of prescriptions were for brand name drugs when a generic substitution was available. SunLife has noted an increase of 138% in the fill rate of brand name Lipitor where a generic is available (brand cost $2.34 per dose, generic $0.56 per dose in Ontario). Because of this growing issue, carriers are quoting ever higher discount rates if the plan has mandatory generic substitution: recently we have seen as high as 6% claims reduction being quoted.

The new mandatory generic standard means even if a doctor writes “no substitution”, if a brand name drug is dispensed the plan only pays the generic equivalent cost, leaving the employee to pay the sometimes substantial difference if they really want the brand name drug.

But, what if for medical reasons you really need a brand name drug? In clinical studies, only 0.4% of patients had any medical issue with taking a generic instead of a brand, and that is due to the different non-active filler ingredients used in the generic compared to the brand. Sometimes, a generic can be tolerated when a brand can’t because of the same reason; different fillers. In any event, most claim payors will have a process where a detailed medical form can be completed by the employee’s doctor, and if approved, that specific employee will be allowed to be fully reimbursed for the brand name drug.

Mandatory generics are a plan design change we support, as it lowers costs for both employer and employee, without changing the medical outcome of an employee’s claim situation. Please contact us if you’d like to discuss this topic further.

Mark Bajus - CEBS, CLU, CFP - is the Director, Group Benefits for BF Partners. Learn more about Mark.

Impact of Lower Interest Rates on Insurance

Thu, 01 Sep 2016 00:00:00 GMT

Although the average person is probably not going to shed a lot of tears knowing that insurers profits are lower because of lower interest rates, lower profits inevitably have a trickledown effect to the actual consumer, and that has started to be the case in Canada if we look at life insurance in particular.

If we simplify look how life insurance companies make money, they take the premiums that we pay and invest them, hoping that the total premiums paid in plus what they make on those premiums by investing them, will be more at the end of the day than what they eventually have to pay out as a death benefit. Lately, with interest rates being so low, their profit margins have been squeezed. The result has been quite a change in the market place for life insurance, as well as other long term insurance products, including the following recent announcements:

Standard Life totally exiting the individual insurance business in Canada.
RBC Life Insurance suspending sales of their Term Life 100, Universal Life, Long Term Care, Quantum disability insurance, and 3 types of critical illness insurance.
Manulife increased rates on critical illness insurance products by 30%, and level cost permanent policies by up to 12%.
Sun Life has pulled out of the variable annuity and individual life insurance business in the U.S. altogether.
Canada Life’s Universal Life premium on their level cost of insurance option has increased on average by 10%.

At the risk of sounding like a sales pitch, if you are thinking about buying some form of permanent insurance over the next while, now is the time because we haven’t seen the end of the rate increases!

Paul Bajus - CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners. Learn more about Paul.