Benefits July 25, 2012

Canadian Health Benefit Plan Cost Increases Slow

July 25, 2012 (PLANSPONSOR.com) - The increase in cost of Canadian health benefit plans significantly slowed for a second consecutive year, according to a survey.
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Buck Consultants said insurers lowered their expected inflation costs for health benefit premiums from 14.4% in 2011 to 11.7% this year. This overall trend includes prescription drugs, medical expenses, hospital coverage and dental care.

Inflation factors for prescription drugs—the fastest-increasing expense paid by group insurance plans—has dropped to 12.1% this year from 14.2% in 2011.

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“This is due to two important factors,” said Sandra Pellegrini, leader of Buck’s Canadian Health and Productivity consulting practice. “In 2010, several provinces implemented generic drug pricing reforms that reduce their cost. Also, the patents expired for several blockbuster pharmaceuticals (such as the top-selling cholesterol drug Lipitor in 2010, Plavix in 2011, and Crestor, Advair and Symbicort in 2012), opening the door for lower-cost generic substitutes.”

The survey shows a downward trend in dental cost inflation across the country (from 8.2% last year to 8.0% this year). Use of dental services—which is sensitive to economic conditions—has gone down, perhaps reflecting increased employee confidence in job retention and availability of benefits.

Hospital inflation factors have seen an overall decline in inflation rate since 2008, but increase slightly this year, from 8.2% to 8.4%. “This may represent the impact of an aging population and the related incidence and duration of hospital stays, despite the continuing shift from inpatient to outpatient care,” said Pellegrini.

“Buck’s 2012 Health Care Trend Survey has some good news for employers,” said Joseph Ricciuti, Buck’s managing director in Canada. “The drug, health and dental cost trend factors are lower again in 2012. While costs are still increasing more than inflation, it is important that employers keep to the strategies they are starting to implement on the supply side—through deductibles and claims management—and the demand side—through wellness programs and work-life balance initiatives—in order to continue to tightly manage the costs of their benefits programs.”

The 12th annual Canadian Health Care Trend Survey analyzes the health cost trend assumptions that factor into the premium-rate setting of nine major Canadian insurers. 

The complete survey report is available here.

Administration July 25, 2012

Vanguard Principal Advises Against 'Rearview Mirror Investing'

July 25, 2012 (PLANSPONSOR.com) - Exchange-traded fund (ETF) sponsors are compensating for the lack of live data on new funds by using an index’s back-tested data to predict future performance, according to a report.
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Vanguard’s study, “Joined at the Hip: ETF and Index Development,” found that these estimates are often unreliable. While 87% of the indices outperformed the broad U.S. stock market for the time in which back-tested data were used, only 51% did so after the index was launched.

Past performance data are not necessarily indicative of future results, but investors are making investment decisions based on this nonetheless. Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, said that he thinks this decisionmaking strategy is a mistake.

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“I think there’s too much rearview mirror investing,” Dickson told PLANSPONSOR. “Nobody would suggest driving your car with a rearview mirror because you’re going to run into the wall that’s right in front of you.”

In investing, that wall is underperformance, which many ETFs experience after an index goes live.

The performance of the 370 indices against the total U.S. stock market might look strong at an annualized excess return of 10.31%. But that percentage is based on back-filled data. After the index-live date, the performance of the indices was an annualized excess return of -0.93%.

This raises the question: Why does the performance before the index-live date look so strong?

The reason for this is ETF makers are cherry-picking the indices that have recently performed well to track.


 

“There’s an inherent selection bias,” Dickson said. “Nothing sells like past performance.”

In addition, providers are increasingly releasing ETFs soon after indices are launched, leaving little time to collect live data. Vanguard found half of the 1,000-plus indices studied  were less than six months old before an ETF was launched to track them. Dickson said this leads him to believe there might be a relationship between ETF and index creation.

“Indexes are being created with an ETF in mind,” Dickson said. “That is, an ETF sponsor actually may ultimately be the genesis of the index idea, and then talks with the index provider, who will brand it and license it.”

More than half the indices use back-tested performance data in lieu of or in addition to live-performance data. Naturally, ETF sponsors only choose market funds that have done well according to back-tested data.

“As any plan sponsor will attest, whether it’s past live performance or back-tested, you never see bad historical information,” Dickson said. “You only see that from your existing managers—never a prospective manager.”

But an index’s positive past-performance can lead investors to assume it will also perform well in the future. Dickson said this is not the case.

“The winners in the past are just as likely as any strategy to be winners or losers in the future,” he said.

Dickson said differentiating back-filled data and live date can be a challenge. In the study, researchers found that information through footnotes on index fact sheets on providers’ websites.

“Even then it wasn’t always clear when the live date was versus any back-filled data,” Dickson said.


 

 

 

Different Back Test Rules 

While securities regulations prohibit the use of back-tested performance data for most U.S. mutual fund and ETF sponsors, index providers are not held to the same rules.

Should mutual fund and ETF sponsors should be given the same rules? “I’ll leave it up to the regulators to decide what or even if they’re able to do anything about it," Dickson said.

Dickson suggested that before investing in an ETF, investors should observe the long-term endurance of the investment and see if it fits into their investment plans. Also, they should not view indices as objective and unbiased representations of market segments.

“Instead, recognize that indexes are being created because those areas have performed well and that facilitates the marketing and development of new investment products—largely ETFs—that track those areas,” Dickson said.

ETFs are popular with investors. More than $1.2 trillion is invested in about 1,400 U.S.-listed ETFs as of March 31, according to Strategic Insight’s Simfund, an Asset International company.

Dickson said ETFs are projected to grow at double the rate of traditional mutual funds.

Click here for the full report.

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