Good afternoon and good morning, everyone. Thank you for joining us for our reshaping the future webinar series, Agility amongst Fragility. I'm Yusuke Khan. I'm the investments leader for Canada at Mercer. And I'm joined today by my colleagues, Jeremy Woo, a senior consultant in our talent and career practice. And Larissa Zubek, a partner in our benefits team.

So just wanted to get started with our agenda today. And I think it's always interesting at this time of the year to begin with the discussion on markets, just the outlook of what is happening from a macroeconomic perspective. The idea here really isn't to try to read the tea leaves or to make any bold projections. It's really about thinking about the longer-term forces and trends that we think will drive investors and their portfolios over the coming years.

So how can we begin a conversation on the macro environment without talking about interest rates? And look at this. Wow. It's hard to believe that the yield on the 10-year Canada bond fell as low as 0.4% back in 2020 before hitting 4.4% in the fall of last year. So that's a 10-fold increase in the yield of the 10-year Canada.

Now, rates have declined quite a bit in the last two months of 2023 before rising somewhat in the first couple of weeks of 2024. But just take a step back and think about how difficult it is for businesses, for pension plans, for individuals to make any decision around borrowing, around investing when there's such uncertainty around interest rates.

Now, why did the rates decline so significantly in the last couple of months of 2023? We'll get to that in more detail in a second. But, essentially, there was a sense that, perhaps, this current tightening cycle was coming to an end, and that there was a path towards a normalization in interest rates and inflation.

Now, equity markets love that, as you can see below with the S&P 500 up nearly 23%. And even here in Canada, the S&P, TSX60 up around 12%. So what caused this sudden shift in sentiment in the last few months of 2023? Well, the gentleman here on the right had a lot to do with it so. The chairman of the Federal Reserve in the US adopted a quite a sudden dovish pivot in its messaging, signaling that the interest rate cuts are likely to come in 2024.

Now, that message has been echoed to varying degrees by other developed market, central banks, including here, our Bank of Canada governor. But needless to say, that has led-- called consensus forecasts around interest rates and inflation to price in a much more dovish scenario for 2024.

Now, it's important to think about when we talk about the consensus forecast, that doesn't mean that everyone agrees that all economists are on the same page. It is an average. Some will have perhaps more positive views. And some will have negative views. But if you believe in the wisdom of the crowds, there is certainly been a shift in sentiment towards maybe the scenario of a soft landing for 2024.

So I'm just looking at the GDP data here. So growth in 2023, I would say, in many ways, exceeded the expectations. So the economy did generally deliver better results than many had anticipated now in the third quarter and the fourth quarter of this year. There's some talk about whether there has been or we are in a technical recession.

But, by and large, looking at forward looking forecasts of GDP, we can see that currently the market consensus is for a modest level of growth. So positive GDP growth in the 1% range or so. Now, this is what the market is pricing. Some might consider this to be overly optimistic. Others might feel that things are actually looking quite well.

But, by and large, if this can be achieved, positive GDP growth while also bringing inflation back under control and towards the 2% target, then 2024 might end up being just that, the year of normalization. There's still, obviously, a number of clouds that we need to keep an eye on from an economic perspective in Canada. Certainly, there's challenges around high debt levels around housing shortages, certainly, and productivity growth concerns as well.

And on the inflation front, yes, we can see clearly on the chart that the trajectory is back towards-- call it-- the target as set forth by the central bankers. But there are potential risk scenarios we need to think about from potential protectionism.

So as we all know, 2024 will be an election year in the US. We're seeing, unfortunately, some continued political tensions and disruptions, perhaps, to the shipping and goods in the supply chain. So those factors can have, perhaps, some influence on inflation.

However, there are some deflationary forces also that can come into play. A moderation in the price of energy. We saw that in the most recent CPI print in Canada, where lower gas prices have helped over the last year. And, certainly, a topic of great interest today is the impact of artificial intelligence on, perhaps, labor shortages and labor costs.

So just as a sidebar, I think there's a lot that could be said about artificial intelligence and the impact that that will have on our businesses, on our lives. But needless to say, that there will be important public policy questions that will need to be asked and answered around intellectual property rights, around the privacy regulations that may come into play.

Now, obviously, we can imagine that many of the advantages, perhaps, taking away some of the more repetitive tasks that humans used to perform, but there are also some of the negative impacts that policymakers, I'm sure, will have their hands full with, such as the potential for the unprecedented spread of disinformation, deep fakes, frauds. So I think that is something that we should keep a close eye on. And what's the policy response to artificial intelligence? And I think we'll talk about it a little bit in our presentation as well.

Now, I did want to come back to inflation, and just take a step back and look at the-- really the history, what we've been through over the last few years. So looking back at the 2020, we can see that inflation was quite low, and even negative in certain quarters. Without surprise, the economy was closed during the pandemic.

Then we saw inflation pick up as the economy reopened. We were told that the inflation would be transitory. It ended up perhaps being not so. But you can clearly see the green bars there. So that's goods inflation. With the great reopening, people went out and bought furniture, went out and bought cars, barbecues. And there were significant disruptions to supply chains still. And that was reflected in inflation.

Now, I think more recently, things are generally in stock at the store. And how many barbecues can one purchase? But what happened perhaps is people stopped buying barbecues and decided to start going to the restaurants, started perhaps eating out more. And those are the pink bars you see here in the chart. And that is the service sector inflation.

And that's a reflection of some of the wage-related inflation that we've seen in the services sector. Now, I think the purple bars here are definitely worth mentioning. And that's inflation from energy, which had a significant impact on inflation in those years.

Now, the price of oil was somewhere about $40 a barrel in 2020. If you recall, there was a period when it was actually negative. But let's say that it was about $40 towards the end of 2020. That rose as high as $120 a barrel following the Russia-Ukraine conflict. And that was hugely inflationary.

Think about Europe, in particular, where the price of natural gas, of electricity really shot through the roof. But that has actually, perhaps, normalized quite a bit. And oil is quite a bit cheaper today than it was. Yet, there's still some volatility as we've seen in the past few days. But the price of energy has actually been a contributor to reducing inflation mostly in the last year.

Now, the light blue bars, that's food. I think we've all experienced the sticker shock of going to the supermarket and questioning, how is it possible that a box of cereal or a can of Coke could cost so much? But we did experience that high inflation in food.

I think there's an important point to be made here that when we talk about inflation normalizing, that will be back to target to 2% inflation. Inflation is calculated over-- is a year-over-year change in prices. So inflation normalizing doesn't mean that prices are going to go back down to where they were back in 2020. It's actually that they will stay high, but, perhaps, rise at a slower pace.

So if you think about that, that has significant impact from the perspective of a retiree living on a fixed pension. And sometimes maybe that is something that is not fully understood by plan participants. Now, the last point I wanted to make is that the gray bars, and that's shelter. We are all aware in Canada of the significant pressure on shelter and rents and home ownership. And that has been an increasingly important contributor to inflation.

And actually, if you exclude shelter costs, inflation in Canada is actually back down close to central bank targets. Now, why is shelter so important? I show here on the left-hand pie chart, the basket of what is considered the CPI basket. So you see the headlines in the media. Inflation is 2.9% or 3.4%.

The CPI-- well, the CPI is calculated by Statscan based on a basket of different goods and services that they believe is representative of a consumption for a typical Canadian. Now, obviously, not all Canadians will consume and buy the same things. There will be great dispersion based on where you are at in your life, your career, and your family situation certainly.

But needless to say that shelter represents a 28%, 29% of the CPI basket. So any inflation in that area will have significant impact. So that 6% inflation in shelter we saw last year was a significant contributor. But we see that areas-- other areas, inflation is actually, perhaps, back down towards more normal levels. Or we see a path towards normalization in those areas.

Now, I did want to spend maybe a minute or two talking about housing and affordability. This will be an important public policy challenge. Many first time homeowners are now priced out of the market due to high prices to begin with, but also high interest rates and mortgage costs, if you were to buy a home. So that is certainly been a challenge, and something that has the attention of our policy makers.

But there is a bit of a two-edged sword to this. Think about, perhaps, an individual nearing retirement, who own their home, perhaps, outright. The value of their home is a significant portion of their retirement nest egg. And if we were to see the kinds of corrections in housing prices that would be needed to bring the market back into balance, well, that would be a significant impact on the perceived wealth or the real wealth really of those individuals. So that will be an important policy consideration.

Now, I don't think anyone is really forecasting such material or major changes in home prices. But that is something that is definitely worth keeping an eye on. Now, the last piece of the puzzle and really important to the discussion today is around wages and wage inflation, in particular. We think it's really important because wages in our view fundamentally drive inflation. So if wages grow faster than productivity growth, then prices do tend to rise.

Now, we have seen the severe labor shortages. We have some data from the US on the left-hand pane. But I think we can speak to a similar experience in Canada. Now, some of the more severe labor shortages may be starting to correct. We're starting to see more slack in the labor market. And that, perhaps, will help cool some of the overheated parts of the labor market.

But looking at the chart on the right here, so this is growth in average hourly wages. We show here figures for both Canada and the US. The Canadian figure is calculated by Statscan. These levels of wage increases are quite high and are still perhaps not entirely consistent with a 2% rate of inflation. So more work is required there. And we're definitely keeping a close eye on that wage figure.

Now, with that, maybe, that's a good segue to pass it over to my colleague, Jeremy, who will share some of his perspectives from a talent and career perspective.

Thank you so much, Yusuke. And you're right many risks on the horizon for the Canadian economy most certainly have an impact on both employer and employee expectations for the upcoming year.

So on this next slide here, let's start with some context. And then we'll spend the next few slides going into greater detail about each of these. So this past year, as many of you have experienced, has been one of continued transition. We saw that last year, employers made significant investments in their workforce. And 2023 saw the largest pay increase since the 2008 financial crisis.

And not only that, but employers have invested in the employee experience and the entire total rewards package. And labor shortages have somewhat eased. And that has made workloads, at least, a bit more manageable. But workload and mental health continue to be on the top of the list of stressors for employees.

That being said, the big news here is that financial stressors remain high. And concerns over the economy are starting to grow. And the ability to retire and the ability to meet monthly expenses are at the top of the list for employee concerns and their unmet needs. ,

And finally, the last trend that we wanted to talk about today is that employees will want to understand what they can expect to get for their efforts. Employees want an opportunity to build trust with their employers during these uncertain times. They want to know what their path is, what their potential is, and, ultimately, how that links up to their compensation as well.

And we'll dive into that a little bit towards the end of this section. But first of all, let's start with the headline news around salary increase budgets. And at the top of the page here, you see that total salary increase budgets are estimated to soften in 2024 alongside inflation. But they're still well above those pre-COVID levels. And the softening is a bit what Yusuke was just describing a couple of slides ago.

But let's take a look at the longer-term story on the left-hand side of this slide. So this is showing us average total salary increases in Canada from 2019, so the pre-pandemic world, right through the pandemic, until our forecast for 2024.

So in 2019, the total average salary increase budget in Canada was sitting at around 2.9%. And it was relatively stable for at least four or five years before that, ranging usually between 2.5% to 3%.

Right before COVID, Mercer ran another compensation salary increase survey. And the increase was looking at about 2.6% at that point. Then COVID hit. And that decreased a little bit down to 2.3%. So outside of that 2.5% to 3% range. So definitely a noticeable drop during the heart of the pandemic.

That continued along into 2021 as well, where it was still hanging out around that 2.3%. And then 2022 saw the beginning of the Great Resignation. And a lot of those labor challenges, short-term labor pain, if you will, that we saw coming out of the pandemic. That's when we saw a pretty large rise in pay increases at around 3.4%. And at 2023, with increased inflation, that really spiked at 4.1%. And, again, that was the highest we've seen since the 2008 financial crisis.

For 2024, where some of those labor shortages easing and the inflation picture looking like it will also ease, we see that softening slightly to 3.6% as a forecast. But I think it's really important to note here that that 3.6% is still far above the pre-pandemic norms and that 2.5% to 3% range.

So it is quite interesting to see that despite those challenges easing, there are still inflationary pressures, but also pressures in terms of the talent market, especially, with the niche areas of the workforce.

So that's the national picture. If we look on the right-hand side of the screen, we do see that there is some minor variation in estimated budgets across the country. So you'll see that the salary increase forecast for 2024 range from a low of around 3.2% in the national capital region around Ottawa, right up to 4% in greater Calgary. And some of those areas that are above the national average are Calgary, Vancouver, and Montreal.

In particular zoning in on Calgary, that's largely fueled by higher than average salary increase forecast for the energy sector, which continued to lead the country in terms of salary increase budgets. For those of you in Toronto, in the GTA, more or less anchored around the national average of around 3.6%.

So thinking about salary budgets and moving on to those unmet needs beyond purely salary increase budgets, we see here on this really interesting slide that unmet needs of Canadian employees vary by age. But financial concerns really do top the list in every age cohort.

So I notice there's a lot of color here. But a couple of things that I want to draw out here. So first of all, you'll notice the number one unmet need or concern of Canadian employees across all age groups is financial. But we do see that financial concern vary a bit, depending on the age group.

So from about 18 to 44, those age cohorts are most concerned about covering monthly expenses. The impact of inflation has been critical for a lot of workers. So they're worried about food, housing, the everyday expenses. Whereas, when you look at the age set from 45 to 65 plus, that ability to retire becomes a top concern.

So still very much financially related, but a slightly different take on it. And that being said, for those 45 to 65, covering monthly expenses still is in the top five concerns, certainly. So there is still concern for that as well.

So financial concerns abound, but bubbling just underneath that and within the top three concerns across all age cohorts is work-life balance. We see that as the number two or number three concern across all age cohorts. I think that's interesting. A lot of the stereotype has been younger workers more concerned about work-life balance, when in actual fact, we see this as a worry across age cohorts, across demographics, across Canada that workload and work-life balance are clearly top of mind for employees.

So moving on to the next slide here, we see that in an uncertain world, employees are seeking transparency. As Yusuke was saying, the world is more uncertain now than perhaps it's ever been. And there's a lot of fragility in the economy and the geopolitical situation in the world. So even though employers have been quite reluctant to share information about compensation, about career opportunities, employees are really craving that.

And we see here on this slide that around 40% of employees say that they're unlikely to apply for a job without compensation information in the posting. Employees really want to know what their pay opportunity is, what their earning potential is, and where they can really go in that job.

69% of employees say that they know their pay range. But this is despite very few employers openly communicating that information. And, in fact, if you look on the right-hand side of the slide, you'll see that there's quite a discrepancy here. Only 28% of employers say that they communicate their ranges. Yet, 69% of employees say that they know their pay range.

So, obviously, they're getting their information from somewhere. 59% of employees say that they've researched their pay ranges through employer job postings. And that rises to an astounding 70% for employees below the age of 35. Employees are getting this information from somewhere, even if it's not for their employer.

So it's important to think about the fact that if they're not getting the storyline that they need out of their employer, they're finding it elsewhere, and someone else is controlling that storyline.

And, finally, a really interesting generational divide. Over half of Gen Z employees say that they share their compensation information with their colleagues compared to just 40% over the age of 35. This is quite a generational shift from one to the other. And we see that Gen Z is much more open to sharing their wages and wage information with their peers. And that's changing the way that our employees are obtaining and consuming data on compensation, career opportunities, and jobs.

So it's an uncertain world out there. Employees want more information on what their earning potential is and what their opportunities are. And governments have responded with regulatory action, and demanded greater pay transparency out of employers. This has been happening in the US for quite some time. And now, it's gaining momentum in Canada as well. And most notably, British Columbia recently joined. Nova Scotia and PEI in jurisdictions where pay transparency is actively enforced.

And more discussions are ongoing in Ontario, Manitoba, and Newfoundland and Labrador. And we expect some significant progress to be made this year, and in the coming years as well. So clearly, this is top of mind for not just employers and employees, but for the regulatory forces as well.

So let's talk a little bit about market realities and considerations for actions, as we close out the section on career and talent. So the market reality, as Yusuke was talking about, was that salary budgets are expected to soften alongside inflation and a generally more fragile economic picture.

So our consideration for action here is to be agile. Exercise caution during the annual comp cycle that's coming up for many of you. But also set aside a healthy off cycle adjustment pool. And deploy that if the talent constraints arise. Make sure that you're exercising caution because we don't know where the economy is going to go. But we also don't know, for example, if niche talent will be in short supply. Or, for example, if there is a good deal of inflation, and you need to hang on to those key performers.

Second of all, financial concerns are clearly top of mind for employees in an uncertain world. Employers can't fix everything. But you can help employees strategize so that they can focus on their work and focus away from the financial concerns. Consider programs that drive both short-term and long-term financial stability for your employees, and develop a holistic financial well being strategy to support employees as well.

The fact of the matter is employees are seeking transparency and clarity during these uncertain and fragile times. This is a fantastic opportunity for employers to build trust, prepare for pay transparency, whether it's active today in your jurisdiction or not. Take this chance to educate employees on compensation. Empower career navigation so that they understand their path and refine your narrative around career and rewards.

Use this as an opportunity to build trust, build retention, and really build transparency with your workforce so that they're comfortable in knowing their potential and their opportunity within your organization.

And, finally, transparency is increasing. And that's due to both legislation and employee expectations. So now's the time to get your house in order. Ensure rigor in your pay practices, including your job architecture and salary structures that consider both the market and internal equity as well. You want to make sure that when you go to your employees, that the ranges that you're putting on job postings are fair for sure. But that they're also market competitive too. And that you're ready to compete in the work-life balance that is still ongoing.

So with that, I'll hand things over to Larissa to chat a little bit more about this perspective from the benefit side. Larissa?

Well, I think you Jeremy. So as Jeremy and Yusuke discussed, inflation cooling, I like to take the next few minutes to discuss how inflation rate relates to benefit programs to set the stage for us.

So the illustration that you see on your screen shows the average renewal of benefit plans on one line and CPI on another line from the years 2017 through 2023, along with our prediction for 2024.

Consumer inflation has jumped to levels not seen for many years. But inflation has been decreasing towards late 2023. And as Yusuke mentioned, expected to continue to decrease. The benefit renewal trends that you see on your screen are adjusted for the pandemic shutdown, where there were no claims for most health and dental services in 2020. And there were suppressed demands in varying degrees through different regions through the remainder of late 2020 through 2021.

2022 was an unusual year with an average renewal landing at around 4.4%. And for 2023, due to increased utilization and cost, we saw the average renewal around 7%. So with the exception of the spike in inflation in 2022, the average benefit plan trend has been higher than CPI, in the range of 5% to 8%.

So our inflation discussion of benefit programs today is not new. But the focus on it is simply because we are seeing upward pressure on both health and dental provider costs and employee utilization. Employees are using their plans, their benefit plans more often. But given the higher cost of living, employees are also reevaluating and cognizant of their total spend, including their benefit payroll deductions related to their plan choices, as well as their cost sharing.

Additionally, employers are more risk averse in their potential exposure to health costs and are looking for organizations or the employers to adapt benefit programs to support their well being and the inflationary pressures through smart benefit design that we're going to talk about.

On the flip side, employers are under increased pressure to control benefit costs. But at the same time, attract talent with benefits as part of their employee value proposition. While benefit plan designs have been relatively static for years, more agility is now needed to update benefits regularly based on employee expectations and preventive care to proactively control costs.

A good starting point for us today will be to understand some of the key health issues that may impact your cost and the frequency of claims.

So on to the next slide. If we look at what's impacting the cost of the benefit plans, there are a lot of reasons why benefit programs are leading plan sponsors or employers to think more strategically. And we've categorized these cost impacts into four categories-- the drugs, medical and dental, government programs, and mental health.

The drugs are the-- and specifically referring to biosimilars here, if they're available through your employer plan-- should continue to yield financial savings in 2024. We've all heard of Ozempic. It's been everywhere in the news. And Ozempic quickly supplanted Remicade as the number one drug in Canada. This showed how fragile our benefits program can be.

While insurers have strict protocols around some off-label drugs like Ozempic, the Ozempic craze did crystallize two things in the benefit world. Drug plans need to be designed and evaluated for risk exposure to expensive drugs for more common conditions.

And number two, employees are actively looking for ways to manage their health. In the case of Ozempic, which is for obesity, which is classified in Canada as a chronic disease.

Health and dental providers are-- the third being the health and dent-- Sorry. The second being the health and dental providers are continuing to experience higher operating costs. And so this tends to lead to higher paramedical, reasonable, and customary fees, and higher dental fee guides, which we've all experienced this past year. And those will continue to exert pressure on our benefit program costs.

Additionally, employers will need to consider the impact of new government programs. As the new Canadian dental care plan rolls out, it may impact your talent attraction and benefit strategy, where your population may include lower income employees, such as in the retail or service industry. The other thing to keep in mind is the new pharmacare program, which is promised some time in March. Depending on how the legislation is positioned, employers may need to consider any budgetary impact in how to support the health and well-being of your employees.

Last, but not least, we've also seen an impact to disability, specifically, the mental health, and higher incidence due to the pandemic, and other social political stressors stressors, as well as the delays and backlog in diagnostics and care. Organizations should consider focusing on mental health support, whether it's through training or digital delivery.

Now, turning some of these cost impacts into opportunities and action plans, the first step that we would recommend would be to assess the risk. Are you, as an organization, transferring the right amount of risk for the size of your population? Have you looked at your funding types? How about your pooling levels in light of the increase in pooling charges that we've seen across the country?

The other thing we would recommend is, have you considered the risk associated with your benefit plan administrators? Do you have an administrative compliance checklist? Does the reporting and governance of benefit plans meet the needs of the organization? And last, but not least, do you know if your plan is getting at the source of the cost drivers, especially, any kind of chronic disease? Those being whether it's obesity and/or mental illness. And have you seen a return on your investment in well-being?

So this along with diagnosing your risk and cost drivers, it is also important to determine which KPIs, which key performance indicators, should be tracked. Do you know the underlying trends behind your benefit claims data? And how do you know your employees are engaged?

It's important to evaluate your program to maximize economies and reduce costs, and understand how employee benefit platforms and policy aligned with ESG goals. For example, you may want to consider ways in which employee well-being, diversity, inclusion, and sustainability can be promoted through benefits.

Last, but not least, we would recommend create a roadmap and strategy for both short and the long term. Start with approaches that are non-intrusive at first, such as assessing your health and dental funding arrangement. Then only move to cutting benefits, once the non-intrusive strategies are exhausted.

We would also recommend that coupled with this, you think about the use of digital well-being or artificial intelligence. With that said, I'm going to turn it over back to Yusuke. Thank you.

Well, thank you, Larissa. And maybe staying on the topic of benefit plans and perhaps retirement benefits and planning, just wanted to spend a few moments on priorities we're seeing within the defined contribution marketplace.

And the theme really for 2024 is eroding financial security. I think we've heard quite a bit today around the uncertainties under the economy-- around the economy, inflation, and some of the challenges that we're facing. But, certainly, high cost of living has had an impact and will be a challenge for employers-- employees, I'm sorry, to make their savings contributions to their plan. So there's some work to be done in that area as well.

So what has that meant for employees? In the survey that Jeremy referenced earlier, we did see that the ability to retire is actually one of the top three unmet needs of, particularly, the generation nearing retirement. In the same survey, we found that there's been an increase of 25% in the level of financial stress by employees. And there's actually quite a bit that employers can do to help employees navigate this period of uncertainty.

Now, staying on the topic of change, we expect 2024 to be a year where we will see some action from a guidelines and, perhaps, a regulatory perspective. After many years of very little in the way of new guidance, we expect to see information come out and guidelines to be issued around areas, such as member education, tools, perhaps, transparency in plan benefits and considerations.

So I think it will be important for employers to stay ahead of that change and make sure that they're well prepared for whatever the change in the environment might be. So switching gears maybe a little bit. And I just wanted to spend a few moments talking about the DB pension plans.

So we saw that interest rates did decline significantly in the last couple of months of 2024. But many DB pension plans still find themselves in the really enviable position of a surplus. And in a recent survey we conducted, we found that many DB plan sponsors are considering using the surplus for a contribution holiday.

But other options are also being considered, such as retaining the surplus for potential future volatility. Also, enhancing benefits, perhaps, and paying some plan expenses. So considering an off cycle valuation is also something that you may wish to consider.

Plans are very well funded. And this might be an opportunity to further lock in that surplus position for the next three years. So please, do speak to your consultant about whether this makes sense for you, if you haven't already done so.

I think the third point here around investment strategy is also really important. I showed some slides around how really dramatically the landscape has changed, particularly, the interest rate that landscape. Some of the relationships that, perhaps, we had gotten used to over the last several years, even the last decade may now have shifted. So it might be a good time to rethink your asset allocation strategy and see if it remains appropriate in light of the new reality and, perhaps, shifting expectations and assumptions that need to be taken into consideration.

Finally, and similar to DC pension plans, we do expect there to be some regulatory guidance coming in 2024 covering areas, such as pension risk management. So please do keep an eye on that and stay ahead of any changes that may be coming.

Now, finally, I just want to spend the last few minutes today talking about the really long-term considerations that we are discussing with clients around portfolio opportunities and some of the themes that we believe will be impactful for long-term investment strategies.

Now, I show here some of the highlights, some of the forces that we believe will be very impactful in the investment environment over the coming 5 to 10 years. We actually do publish a very good paper every year around themes and opportunities. And I encourage you to go take a look, when you have a moment. It's available on our Mercer insights community website, free of charge. So please do reach out, if you would like to sign up.

But I did want to spend maybe the last few minutes today talking about some of the areas of focus we've been spending quite a bit of time talking to clients about. I think the first one is worth mentioning. And it's important. And that's the significant dispersion in returns we've seen in the stock market.

Now, there's a little bit of-- you call it an inconsistency or contradiction here, isn't there? We talked a lot about concerns how there's a sense that something is not quite right and of unease. But at the same time, the stock markets are near all-time highs. And, generally, the economy has outperformed expectations consistently over the last year.

That being said, there's a lot of dispersion and divergence within the stock market. And we see on the right-hand pane here, the contribution to performance of the so-called Magnificent Seven US stocks, and how those seven stocks have really helped power stock markets ahead and an equally weighted index in the US, where you do not have that significant allocation, near 30% allocation in the S&P 500 to those stocks. That would have delivered actually quite a bit less than what was experienced.

Now, I think the next slide here is actually quite marking. We don't know how much bigger these seven technology type stocks plus Tesla might become. But their combined market cap is now about $12 trillion US. And that represents about half of the total market cap of all developed markets outside of the US.

Now, if you're looking at the blue box at the bottom of the chart here, on the right, you'll see that the market cap of Microsoft is actually comparable to the total aggregate market cap of all companies listed on the TSX. So Microsoft is about as large as Canada. So that is certainly food for thought.

And, perhaps, part of that discussion, what are clients thinking about in terms of asset allocation? And in our survey, we found that many investors are still considering increases to allocations to private markets as a source of additional return, yes, but as a source of diversification in the environment, I described earlier.

So private equity, private debt, private real assets, such as infrastructure and real estate remain attractive asset classes with, perhaps, some of the funding coming from public equity markets.

Now, there's a lot that can be said about private markets. But I think it's important to consider that building a private markets program is very different from managing public equities. Considerably more work is required to make sure that you have the proper portfolio construction in place, the proper procedures in place, the governance in place to make sure that you've assessed your liquidity needs, your time horizon, and that you have a program that is appropriate for your own particular circumstances.

Now, I think this slide is actually really important as well because a manager selection is extremely important in private markets. And what I show here on the bars on the left is the difference between the performance of a first quartile and fourth quartile manager across a number of private and alternative asset classes, and compare that to what you see on the right-hand panel, the dispersion amongst public market managers.

So having the right manager and having the right combination of managers, portfolio construction will be important. And, importantly, access will be important. Contrary, perhaps, to public markets, the most desired successful private equity managers pick their investors. So it'll be important to build some of these relationships to make sure that you have access to the best opportunities.

Staying on the topic of private markets, I did want to spend a minute here talking about the secondary markets and private equity, just a brief background. You can invest either directly with a manager on the primary market, or, perhaps, you can purchase an investment from another investor, who is seeking to, perhaps, dispose of their investment for various reasons. Maybe there's a plan wind up. Other reasons, which would lead them to seek a buyer on the secondary market for their investments.

Now, there are a number of advantages that we've listed here. We certainly be happy to go into any of those in more detail with you. But in the interest of time, we're seeing actually more opportunity in this area than we've seen in many years. So an area worth considering in the current environment.

I just wanted to, in the last few minutes, take a step back and look at the really big picture, risk return trade-offs that investment and pension committees need to consider, as allocation decisions are the most important decisions that the pension committee members and investment committee members need to make.

And what we show here, it's a little bit technical, but what we call the efficient frontier. And that's really what expected rate of return and risk is for various combinations of Canadian fixed income and global equity portfolios, and including the famous 60-40 portfolio, 60% global equities, 40% Canadian bonds.

So on a forward-looking basis without surprise, perhaps, looking back at 2020, this relationship was very steep. You were getting paid significant amount of additional expected return for taking on equity risk. Now, perhaps, that was because the return on bonds were so low at the time. I mentioned 0.4% on the Canada 10-year back in 2020.

But needless to say, that if you needed an expected rate of return, having a higher allocation to equities was definitely beneficial. Now, look on the blue line here how flat that relationship became in the fall of last year. With higher yields, you actually were not, perhaps, getting as much additional expected return from taking on the additional equity volatility.

So that does change somewhat the calculus around how to build a diversified portfolio. As I mentioned, rates have come down somewhat. And at the end of 2023, the purple line, we do see that the line is positively sloping again. You are getting paid for taking on additional equity risk in your portfolio.

But I think that goes to show that some of these relationships that were, perhaps, considered when you last did your asset allocation or asset liability management study, may have shifted. So if you haven't reviewed some of these assumptions and portfolio construction decisions in a couple of years, now, may be a good time to think about refreshing that analysis.

On the next slide here, I just wanted to, perhaps, bring that into a longer-term perspective. So what we show here is the so-called equity risk premium on a forward-looking 10-year basis. Basically, how much additional return are you earning from owning equities versus long-term bonds or cash.

As I mentioned, that relationship has gotten better since the fall of last year. But looking at it through history, the equity risk premium is still, in a way, lower than what it was going back many, many years.

So looking at the investment strategy, perhaps, considering other sources of return, as I mentioned, private equity or private assets alternatives is an area that the clients have been looking at. But whatever your particular circumstances might be, it could be something that is worth considering.

Now, finally, around sustainability, we conducted a survey. And we found that 70% of DB plans have indicated that they are having ESG discussions as part of their portfolio decisions, investment decisions. And for DC pension plans, 87% of respondents, organizations indicate that they're having various forms of sustainability discussions with their various stakeholders, perhaps, without the surprise. But, again, staying ahead of change in the new guidance that is expected in 2024, sustainability is expected to be one of the areas that will be addressed. So it'll be important to keep ahead of those trends.

Finally, I show here some of the reasons that DB pension plan sponsors have given for considering ESG or sustainability considerations in their investment decisions. But whatever your own particular situation might be, I think that does speak to the importance of reviewing your governance, of reviewing your strategy to make sure that it is well aligned with your objectives as an organization and best practices from an investment perspective.

So in conclusion, we presented here a few highlights from our presentation today. Thank you again, Jeremy. Thank you, Larissa. I think we do have some time for questions. So if you have any questions, please do enter them into the chat.

There's one question that came through here. And I think this is for Jeremy. The question is, what can we learn from organizations in jurisdictions, where pay transparency legislation has already been passed?

Really great question here. Thinking about in the US, especially, we've seen a lot of pay transparency legislation come through at the state level, and also at the municipal level as well. And what we really learned from those experiences is that the number one most important thing is good communication, good education on compensation, on careers, on career paths.

Employees may not necessarily agree with their compensation package. But they can gain an understanding and an appreciation and a trust that the organization is doing the best they can. If they feel confident and know and understand the employer's practices for how they set pay, how they make sure that the pay is benchmark to the market, how it's fair relative to their peers, how the performance is managed, and how that has an impact on those pay.

If employees feel confident that their employer is doing the best that they can, understand that process, then employees feel empowered to move forward with their career, and also to be retained, stay with the organization [AUDIO OUT]

I think the other piece that's really valuable in the pay transparency conversation is just making sure that you have really clean pay practices as well. So getting that compensation hygiene, if you will. Good pay structure that's market competitive, that's fair, that makes sense, that can be explained. All of those things, all of those basic hygiene practices that have been around for years really help now in the era, where employees either get paid in compensation information through their peers, or they're getting it through things like postings and other disclosures that are now required.

Great question. Thank you.

I think there are a couple of questions around whether some of the charts can be shared. We've taken notes. So we'll follow up with those that have raised their hands. There's another question here. And I think this one is for Larissa. How can an organization start incorporating ESG into benefits?

sure Thank you, Yusuke. We get this question a lot. And it may seem like a daunting task for many organizations. And just to be clear, there are no regulations as it relates to ESG and benefits. There's no mandates. And so a good place to start that we would recommend is really start with the looking at inclusive family planning and support.

Look at your policies and programs. Make sure they're relevant to all kinds of families regardless of gender or sexual orientation, single or partnered, or medical condition. Drive employees to high quality resources. Try to the best of your ability as an organization to remove any unnecessary barriers to care.