Plan sponsors may wish to consider whether this investment news has any implications for the investment options available within their plans. Sun Life Assurance Company of Canada purchases units of the funds listed below. They are established as segregated funds under the Insurance Companies Act (Canada).
BlackRock Asset Management Canada Ltd. (“BlackRock”) made an important change to the LifePath target date funds (LifePath), beginning in November 2022. BlackRock announced that they completed the transition in October 2023 and provided Sun Life with a transition report in January 2024.
As we communicated to plan sponsors on April 1, 2022, and again on June 9, 2022, BlackRock replaced several of LifePath’s underlying funds with funds that provide exposure to MSCI’s Extended ESG Focus indices (ESG Focus indices). Previously, LifePath used broad market capitalization-weighted equity indices (e.g. S&P/TSX Composite, S&P 500). We also communicated this change to impacted plan members in summer of 2022.
The transition took about twelve months to complete, due to the size of the equity assets being transitioned and BlackRock’s objective of minimizing market impact and other transaction costs. BlackRock transitioned more liquid markets, such as U.S. equities, first and over a relatively short period of time. BlackRock transitioned less liquid markets, such as Canadian small capitalization equities, over longer time frames. Overall, BlackRock estimated that they transitioned C$28 billion in equities from the legacy indices to the ESG Focus indices.
BlackRock confirmed that with this transition, the investment objective of LifePath, as well as the glidepath, overall asset allocation, and investment management fees have not changed. The firm believes that applying a sustainability lens to the LifePath funds’ asset allocation process allows for the construction of portfolios that seek to deliver on investors’ financial and sustainability objectives.
Tax impacts in non-registered plans
The transition occurred over two tax years (2022 and 2023), as expected and communicated to plan sponsors and members. We provided plan members in non-registered plans with an additional update on the transition and potential tax impacts, in December 2023.
Trading Costs
Following the transition, BlackRock completed a review of the trading activity. Trading costs ranged from 1.3 basis points for the BlackRock LifePath Retirement Fund to 3.9 basis points for the BlackRock LifePath 2055 and 2060 funds. Longer-dated funds had higher trading costs because they hold more equities.
Performance
The LifePath funds experienced normal, expected, tracking variance during the transition. BlackRock updated the composition of the LifePath benchmarks on a monthly basis between November 2022 and October 2023, to correspond with the progress of the transition. Tracking variance was 7 basis points or less for all LifePath funds between October 2022 and December 2023 (with the exception of the new and smaller LifePath 2065 fund, which had tracking variance of 15 basis points).
Background
MSCI’s ESG Focus indices overweight companies with high MSCI ESG ratings and underweight companies with low MSCI ESG ratings, as well as exclude companies in certain industries (ex. tobacco, controversial weapons) or with significant ESG-related controversies. Overall, the ESG Focus indices generally have a similar risk and return profile to the traditional MSCI capitalization-weighted parent indices. Here is what LifePath equity indices have changed:
| Asset Class | Old Index | New Index |
|---|---|---|
| Canadian Equities | S&P/TSX Composite | MSCI Canada IMI ESG Extended |
| Large Cap U.S. Equities | S&P 500 | MSCI USA ESG Extended Focus |
| Small Cap U.S. Equities | Russell 2000 | MSCI USA Small Cap ESG Extended Focus |
| International Equities | MSCI EAFE | MSCI EAFE ESG Extended Focus |
| Emerging Markets Equities | MSCI Emerging Markets | MSCI Emerging Markets ESG Extended Focus |
BlackRock expects the ESG Focus indices to track these parent indices within +/- 0.50% for U.S. and international equities and +/- 1.0% for Canadian equities and emerging markets.
Our View
Generally, we view this large transition (up to 90% of equity assets in the later-dated target date funds) as successful, given the relatively low transaction costs and reasonable tracking variance for the LifePath funds over the transition period.
We’ll continue to monitor the performance of the LifePath funds, and the underlying ESG Focus funds. In addition, we monitor the performance of the ESG Focus funds relative to their new benchmarks, as well as the ESG Focus indices relative to their legacy market-capitalization-based indices. It will take several years to fully assess the performance impact of BlackRock’s decision to transition the equity components of LifePath to the ESG Focus indices.
Questions?
Please contact your Sun Life Group Retirement Services representative.
