Inside T. Rowe Price’s first Canadian target date funds

Canada’s longevity crisis is forcing innovation in defined contribution (DC) plans. According to Statistics Canada, life expectancy for the average Canadian at birth is 81.55 years old. The trouble is, the longer we live, the longer our life expectancies get. The average Canadian who makes it to age 65 will live an average of 20.77 more years — until they’re almost 86. If they make it to 75, StatsCan says they will live until 88.22 on average. Canadians aged 85 are expected to live until they’re 92.21. That means someone retiring at age 65 with a DC pension plan doesn’t needs to expect an average of 5 extra years of life and — statistically speaking — the longer they live the longer they’ll live. This is the core of longevity risk for pensions.

It was with a view to that longevity risk that T. Rowe Price launched its first Canadian target date funds, available for DC pension plan members through Canada Life’s group retirement services core platform. Lauren Bloom, Head of Canada at T. Rowe Price, talked through the funds and the problems her firm sought to help solve with them. She explained some of the differentiators for these strategies, including the US institutional knowledge that the Baltimore-headquartered firm can pull from. Perhaps most notably, these funds are designed to flow through retirement, not just to retirement, as a means of directly addressing longevity risk.

“What differentiates the T. Rowe offering from a lot of the funds that are available in Canada today is the allocations are going to continue to be adjusted up to 30 years past retirement,” Bloom says. “The target date series is made up of globally diversified building block strategies that are purposely selected with a holistic approach to risk management.”

The idea of an asset mix that flows through retirement is pulled from T. Rowe’s extensive experience in the US DC market, which is somewhat more established than the Canadian space. They found that one of the key aspects of managing longevity risk for plan members is to allow them to continue to grow their nest egg while they are in retirement. That growth element should help to address the risk of outliving ones savings or having to compromise on lifestyle goals to ensure savings don’t run out.

While T. Rowe Price is pulling from their extensive US experience in these products, Bloom notes that they have refined these strategies to suit the Canadian market. They pulled from Canadian demographic data, including life expectancy, savings rates, lifetime growth and earnings. They also factored in the impact of Canada Pension Plan benefits. Their ‘glide through’ approach, Bloom says, is therefore meant to extend to 30 years past the retirement date of an individual.

From an asset management perspective Bloom explains that T. Rowe is balancing between passive and active management strategies within the fund, seeking both alpha and efficiency. Their allocations to Canadian fixed income are relatively substantial while their Canadian equity allocations are somewhat closer to Canada’s place on the MSCI world index. As a result they carry less Canadian equity exposure overall.

There are some limits to T. Rowe’s offering in Canada now because they’re not a record keeper. They’re partnering with Canada Life instead, which Bloom emphasizes as a value driver for both firms. She notes, though, that T. Rowe’s place as a record keeper in the US allows them to build income-paying strategies into their target date funds.

For plan sponsors, the idea of a target date fund that glides through retirement means educating plan members. While automatic enrolment in target date funds had solved some of the core issues of DC plans in previous years, members may need to be educated on the fact that they’ll retain some equity exposure and some additional risk into their retirement years. An understanding of why that allocation is necessary and what this sort of strategy is meant to achieve could go a long way in ensuring plan members feel confident in retirement. Bloom drives home the fact that while plan sponsors work to educate members, T. Rowe will have a presence to help them.

“It’s a true partnership,” Bloom says. “Canada is a key strategic growth market for T. Rowe Price, we’ve expanded the number of resources we have on the ground here in Canada. We have someone specifically dedicated to the Canadian DC market from a sales and service perspective. We have others on the team who have been industry leaders within the DC space. We want to make sure we are educating plan sponsors, consultants, advisors, brokers, and record keepers on why we have designed the product we have. It’s an all-encompassing, team-based approach.”