So Paul, I wanna talk about Empower because I get a lot of questions on Empower. But I do wanna say sort of as a preface, you know, results at Great-West have been quite consistent and strong, including Q1 and Q2 as well. So you know, I think that's important to kind of put out there before we get into the discussion of you know, some areas where I'd say investors have some questions. And so Empower definitely is a part of the business, an important part of your strategy, but definitely investors are pushing back on understanding this business in a deeper way.
So, you know, one key pushback on Empower is really this idea that, you know, between aging demographics and constant fee pressure in the DC market, the question is, isn't this a business in structural decline? And, I know you disagree, so the question really is, what do people have wrong if they kind of present that view?
Yeah. Well, I'll take it up to the highest point and say that when we look at that business and the channels we have to drive value growth, we see it as a significant contributor ongoing to our medium-term objectives, our 8% to 10% earnings growth, our ROE targets, and the like. And you know, it's because it's not about relying on a single aspect of the business, it's the diversity of aspects. To start with, there's no doubt that if you look at demographics, you see an aging population with more people sort of moving into retirement than coming into the workforce. Those that move into retirement have higher balances, those that come into the workforce, lower balances. So you do see, at a member level, a declining net assets.
But that's frankly one of the dynamics why we like the market, because we believed it was a market that was gonna consolidate, and we believed there were so many other opportunities to capture value. The first opportunity is trying to drive organic growth at a plan level in a market that is consolidating, where there's fewer competitors, where you're at scale, where you have a more competitive value proposition, and where you actually have a better cost position. And what we've seen over the last number of years, even during integration, was we were a net gainer in the marketplace as business was trading. So we were seeing organic growth at a plan level. That softened a little bit in 2024 because of a couple of large mandates, lower margin mandates that we lost.
But we fundamentally believe that growing organically at a plan level can outstrip member level. The other thing, a point I'd make, is that a lot of these assets are exposed to market level. So if you actually look at the overall assets exposed, the AUM, it's been growing at 6% to 7% per year. So, notwithstanding the dynamic of flows at a member level, you've got a growing market because of exposure to markets, and obviously there'll be volatility there. We have an opportunity to grow more from the perspective of organic growth. Then, finally, I would go back to cost. And when you think about cost, when you get to the point of having 18 million to 20 million participants, you can spread that cost, you can automate more.
And we actually believe that, you know, one of the winning hands for those competitors who stay in the business and invest in it in the right way, will be to drive down your cost per participant. And you made reference to a margin compression. That's happening in all wealth businesses. We think the cost play far outstrips that. So if you add up, you know, cost advantage to drive margin, if you add up winning more on an organic basis at a plan level, and if you sort of add up the discipline of that. And that's even before we talk about the wealth opportunity. So take our platform today. There's CAD 130 billion of assets that rolls off the platform each year as participants either move into retirement or they're changing jobs.
We've invested heavily in the relationship we have with plan members while they're in plan, such that they're far more apt to roll over to our products when they're rolling to an IRA, and that opportunity for capture is significant. We see that as one of the largest growth opportunities. And, you know, a key to thinking about this business is to think about it on a segmented basis as well. So, we call it the core market, but the small end of the market tends to be the most profitable part of the business, similar to our Selectpac business in Canada. We have a high, high focus on that market because we like the margin, we like the profitability, we like the customer relationship we have, the advisor relationships. You move to the larger end of the market, the margins tend to be narrower.
We're very disciplined on our pricing to make sure that we're always making a contribution when we write a large case. But that's where the rollover opportunities are larger. You have larger institutions, long-term employees, large balances in their 401(k), and the rollover capture opportunity there is high. So when we think about the market, we want to be very disciplined from a segment-by-segment basis. But the value capture opportunity is such that we believe it will be a significant contributor to our earnings growth for the foreseeable future. And that's without M&A.
Okay. We'll get to M&A because I think you still believe in consolidation-
Yeah
... in this space.
We do.
But just following up in terms of, you know, how to think about flows, you know, I think in Q2, net outflows was an area that investors looked at.
Yeah
... and weren't so happy with. I guess a more fundamental question, the DC business is it important to see consistent net inflows here? Is that sort of a goal? And how crucial is that in order for you to be able to hit your broader financial targets? Is that an important driver of that?
I would say that over time we'd like to see positive flows, and that would be winning at a plan level basis to overcome some, you know, part natural participant shift that I talked about before. But we're gonna see volatility. So if you have a large case that you win in a given quarter, you'll have, you know, a strong net flow, and people will celebrate, you know, pop the champagne. You could have another quarter where you lose a large mandate, and it could drop that. I would say think about it more over the three to five-year period, that over time we fundamentally believe we can grow that business, and that's pre-M&A, organically. But you've got to be investing in the business to do that. You've got to be investing in, you know, lower costs.
You've got to be investing in better client experience, better member experience, better experience at rollover. So I don't think it's in any given year or quarter, I'm not gonna get fussed about flows. What I want to do is make sure that we've got the right value proposition to be a net winner when we go head-to-head with all of the different, you know, remaining competitors in the marketplace.
I want to maybe as an appetizer to the M&A discussion, just talk about Prudential. You just completed integration of that full-service retirement business, and you achieved better retention rates than you initially expected. So definitely you know that is an impressive thing to be able to deliver. The question is, how did you achieve those better retention rates, and are they replicable for future acquisitions?
Yeah, interesting. Good question. So when you enter into these acquisitions, you've really got to be singularly focused on client retention, right, on a profitable basis. So you can't price your way into, you know, unprofitable business, so retain at a profitable basis. We outperformed. You know, when we set a target that was sort of low- to mid-80s in terms of retention of assets and retention of clients, that would've been best demonstrated practice in the marketplace, and it would've been our best demonstrated practice in the marketplace. We actually outperformed, and we reached sort of mid- to high 80s, and, like, it was great. And if you compare that to some of our U.S. competitors and you see, you know, outcomes that they would've had, they wouldn't have been anywhere in the 80% category.
That comes out of two things: one, the discipline I talked about, but also having really effective muscle, automation, people who are good at executing on acquisitions and integrations. And when you think about it, you know, we'd just come off the MassMutual integration. We'd achieved all our goals in terms of retention, you know, synergy capture. You roll the team onto the MassMutual under the Prudential acquisition, the muscle was there, the discipline was there, the levels of automation. And you know, one of the dynamics, and we can go there if you'd like to, is that when you think about the relative market, we're on a single system. We're more automated than a lot of competitors, notwithstanding the fact we still have 12,000 employees in the organization, so there's a lot of people there serving, but highly automated.
Automated ways to actually move from very often multiple systems from the carrier you're moving from to a single system and drive down costs meaningfully. So when you're capturing, you know, CAD 160 million/CAD 180 million in synergies on these, it's because you have a far lower cost model. So I'd say from a standpoint of win rates, you're moving someone to a lower cost, you're moving someone to a better client experience, and you've got to remember that every one of those clients is going to do at least a market check to say, do they want. They're going to go through a conversion no matter what. They're either going to convert to you, or they're going to convert to someone else because they are leaving that, the platform that they're on.
You have to be competitive, and I'd say we get more competitive with each acquisition. We get more competitive with the automation efforts we've got, and over time, I think, you know, we could continue to perform at this level. But you've got to have the discipline, and a lot of it is the profile of the case. If you acquire a business, let's say, that's really complex, it might be harder to hit those, you know, mid-80s, but we like our systems, we like our processes.
And then the, you know, moving towards just the this bigger M&A question in this space, you know, you even said it here in terms of believing in further consolidation, and I think you touched on some of the reasons why, you think that is a trend that's likely to continue.
Yeah.
But maybe just give you an opportunity to kind of-
Yeah
... set the story.
Yeah. I think there's kind of two core trends. One trend is, it is a business that you've got to find ways to take cost out, to, you know, strengthen margins. To overcome margin compression, you need scale to do that. There's a lot of sub-scale players. If you don't have the scale, it's hard to invest in technology in the way you need to. That's number one. The other, which is maybe a bit more of a past model, but it still exists, a lot of competitors have made their mark through proprietary asset capture on the different, you know, DC mandates that they've got.
Increasingly, there's a lot of, you know, regulatory pressure. There was the fiduciary standard in the States, where it's really pressing on plan sponsors to not have a high proprietary, you know, asset offering, but it needs to be an open architecture asset offering. That's what we've got. So we've got scale, we've got an open architecture asset offering. I think it's a better. I'm gonna say it's a better future-proof offering than those that will get consolidated.
Right. And in terms of the actual environment for consolidation now, in terms of the deal flow that you're seeing and valuations, can you give us any sense of where we are now?
Yeah. We've not seen a lot of trade since we've closed on Pru, so, you know, the best indicator would be the dynamics that happened on Pru. We keep a very close ear to the ground on, you know, potential activities that go on in the marketplace. We think there will be more consolidation. Having said that, we've really turned our attention to, you know, rebuilding our capital position. We've driven down our leverage ratios, and we've also. We're back to investing in the value proposition for our entire client base. Because when you do actually go into these acquisitions, you tend to pull back a little bit on, you know, investing for the broad client base as you focus on the acquisition.
We're back to that, and making sure that we've got the most competitive value proposition we can have.
And in terms of, you know, just the overall M&A landscape, you know, I'm just curious about the outlook for your personal wealth business as well, in terms of-
Yeah
... you talked about that as being a very important part of the-
Yeah
... the strategy. Is M&A something that's important to think about there as well?
I would say M&A could be important both on the defined contribution, on personal wealth, maybe in some other, you know, periphery services that would sort of wrap our arms around both the sponsor and also plan participant level. From the standpoint of thinking about wealth, the Personal Capital acquisition was fundamental to us because it provided us with a hybrid digital wealth offering, highly competitive one, that we use, you know, in the market to directly approach consumers, but we also use it embedded in the plan and embedded at rollover. That was fundamental, and that requires, by the way, that requires licensed advisors because when you say hybrid, it's digital, but it's also advice over the phone. In some cases, you can have a personalized advisor.
We're building a sales force to achieve that, a licensed sales force. We're up to about 1,000 advisors that support us on both the in-plan and at rollover. I would say we could see opportunities to extend capabilities, so an acquisition that would extend capabilities beyond what we've got there. I would also yet see acquisitions that would allow us to maybe extend that sales force base. At this stage, I don't feel like it's a necessity here and now, but I'd say we'd be looking in both those spaces, the DC, continuing to roll up that marketplace in a very disciplined way, but also continuing to think about ways to strengthen that wealth offering, because that is the long game. There's a real long game opportunity there.
I think you touched on it, but just to put a finer point on it. I mean, I think sometimes, you know, people focus on the Personal Capital deal and, you know, they view what you're building on the wealth side at Empower as very tech focused, and maybe it is, but they don't... It's necessarily- I guess, the pushback sometimes is that it's too tech focused, that it's-
Yeah
... it's all computers and no people, and...
Yeah, and I'd say absolutely not. I mean, Empower has over 12,000 employees. We were up to 1,000 advisors. We continue to hire. It is a business where you've got to find ways to, you know, your cost to serve has to be competitive, and you've got to have a competitive value proposition. The reality is, people do want access to information and insight readily at any point in time, whether it's on their phone or their iPad or their computer.
But then they're looking to access to an individual to help guide them when they're making decisions, and this, I think, is the best of both worlds, where you're investing in the technology that gives people easy access, ready access, but you're giving people access to a human, where they can get a human in the loop to help them through some of the life's decisions that are tough decisions.
And then just wrapping it up, going back to the DC market in terms of... you talk about, you know, not that much deal flow recently. Is there a particular catalyst that you're waiting for, that is out there to kind of get this going again, or is it just about being patient and over time your thesis will play out here?
I think it's being patient, but I'd say the other one is making sure that we're well-positioned to execute on it. So you wanna make sure that you've got your house in order, you wanna make sure you've got the resources available to access that. We're at a point, though, where we can be really disciplined, right? Like, we're at, you know... We're a one of two scale players with a considerable gap between ourselves and the rest of the marketplace. So it's not like we need to do an acquisition to achieve scale, to get at the cost opportunities that we want to. We will do it because it's value- creating. So I would say, I would think more about discipline than a catalyst.
We will use discipline, and we, to the extent that we see an attractive opportunity, we will, you know, we'll approach companies, but for the time being, we're pretty patient.
Understood. Wanna shift gears, talk about the seg fund business in Canada. On the Q2 call, you talked about strengthening your seg fund proposition in Canada, and reinforcing the unique benefits of these products for customers. You know, seg fund in Canada still net outflows. So what's making this product so attractive to you right now?
Yeah, so the comments I made there were in the context of a broad, wealth offering that we have in Canada. So we think about seg funds, we think about mutual funds, we think about, you know, private asset management, private investment counsel, we think about, you know, securities. That is a continuum of products, and they all have different, you know, profiles. They meet different investor needs over the investor life cycle. One of the things that we believe is that the seg fund and its unique features are not well understood by enough advisors, and then by definition, enough clients. So when you think about those unique features, there's creditor protection, which can be really important to small businesses. There is bypassing probate. It's like life insurance proceeds, bypasses probate.
There is both death benefit and maturity guarantees. Those features can fit the profile of particular investors, and we see the opportunity to make sure that as people think about their overall wealth, you know, how they manage their wealth. Make sure that they understand that, and if I think about the range of advisors who would promote seg funds, you've got a lot of traditional insurance advisors who it would've been their mainstay. As the market has evolved, as you pointed out, you see some outflows, and that's because you see people repositioning maybe large seg fund books into mutual funds, but there's also a lot of very wealthy Canadians who could benefit from seg funds and from some of their features.
We're doing work to make sure that there's the right education, there's the right awareness, we've got automation of the products, we've got competitive products with diversification, to make sure that it finds its way to the customers who really needs it. And I'd, I'd say it's almost like a move away from potential concentration of seg fund ownership with some clients, to making sure that it reaches the clients who really need them. And that's, that's our view.
Got it. I wanted to talk about Canada and the group business. I think in the past, you've talked about leveraging the group business to build richer end- client relationships. I think that's, that's a theme that that you've touched on for a while now. But can you talk about a little bit more in depth what you mean by that, and what you've put in place to drive that.
Yeah
... that outcome?
Yeah. Well, the easiest starting point there is on the group retirement side in Canada, where similar to the Empower Personal Wealth, we've got a rollover strategy in Canada that we refer to as Next Step. So, you know, the majority of group retirement savings in Canada is either a defined contribution plan or a group RRSP, and people will roll into a registered product where they'll, you know, something like a Registered Retirement Income Fund at retirement. We're going through the same processes of automation, the same processes of customer relationship capture, to really drive that asset capture at rollover. So that would be number one, if you think about extending the group business, and that's a pretty simple example.
When you go to the group benefit side, you know, the opportunities there are very broad, and if you think about overall health and wellness, but also financial wellness. So, you know, you can think about health and wellness, and there's things like digital health and the like, but there's financial wellness. And when you're dealing with mid-market Canada, a lot of those people don't have an advisor. And so they probably assume, and if nobody talked to them, that what they've got on their group benefits plan, which is maybe 1x earnings for life insurance, they're looked after. This is an opportunity for us to reach more of those people so they can look at the additional offerings we have, whether that's additional life insurance, whether it's critical illness. We have a group Registered Education Savings Plan.
We've got a range of products, things like pet insurance and the like, where these are individuals who are not accessing all of those services through an advisor, and how do we close that gap through advice? So we're doing the same thing. We're building out a sales force, a licensed sales force, that's helping those plan members. Early days, but I see significant opportunity because any time you've got part of the market that's underserved, you've got to think about ways to serve it in a cost -competitive and an effective basis.
And in terms of the time horizon of that, like, how long-
That's a long game. So, but on the other hand, we're seeing high growth.
Yeah.
So we've seen strong growth in our NextS tep rollover capture over the last two years. We've seen significant growth in our voluntary additional voluntary life and critical illness additional health products we're selling to people at retirement. But I'd say that's a long game. But when you think about it, very large client base on our group platform, the largest in Canada, and so a large opportunity. But you know, I would say that's a 5 to 10 year growth opportunity for us.
Wanted to talk about Europe. Obviously, it's an area of significance for Great-West. It's also an area of differentiation relative to your Canadian peers. And the fundamental question, and I hear this a lot, is just: How core is your European business, really? And maybe as a related question, you know: Why is Great-West in Europe? Like, how does it all fit together?
The starting point, we're there because when we acquired Canada Life, there was an opportunity to, you know, not an opportunity, what the Canada Life operation in Canada came with was a European operation. We did a deep dive into those businesses, and we saw strength and opportunity across Europe. And so we made a focused effort to strengthen and make sure that those businesses would be strong contributors. If you think about the European business, it's hard to describe it as a in the collective. It's easier to describe it as three unique businesses in Ireland, the UK, and Germany. If you go to Ireland, the Irish Life business is a lot like Canada Life in Canada.
It's diversified across a range of products, it's diversified across a range of channels, leading market shares, and opportunities to actually grow and expand. Now, notwithstanding the fact that it's not a large market, we've got deep penetration, we've got large market shares, and we're growing through things like extending through the Allied Irish Bank joint venture. So we're reaching a broader population of individuals with both wealth and insurance products through that strategy. We're growing a wealth business because Irish Life did not have a strong wealth platform, and the wealth business is wealth is growing in Ireland, and wealth businesses are growing in Ireland. So we've been rolling up smaller wealth players into our Unio platform.
So you take Irish Life and you say, "That is a growth engine," and it'll be organic growth and what I'll call extension growth into these other markets.... If you go to the UK and Germany, the UK and Germany, we tend to be far more focused on areas where we think we have strategic advantage. In the UK, we didn't believe we had a path to leadership in individual protection. We divested that business, we exited that business, and we've really focused on the group benefits business, where we have leading market share, but also the pension risk transfer business, where we've invested in capabilities and we're seeing strong results coming.
That allowed us to do, I'd say, three things: number one, focus the business on areas where we can win. Secondly, take cost out, which will contribute to the bottom line. And thirdly, optimize capital for cash generation. So we like the shape of our UK business. We've got a great management team there right now. And then Germany is a very focused business. It's very focused in pension savings through the broker market. So each of those businesses are adding value, and each of them has either a leadership position or a path to a leadership position. And you say, "Why do we like it?" I like diversification. You don't want all your eggs in one basket. Diversification is key.
When you think about the stability of an insurance book with the runoff of earnings, that, that's a good contributor relative to, you know, repricable group benefits businesses or wealth businesses. So I like the diversification. We like Europe.
When you talk about diversification, you're talking about insurance risk, earnings, like-
Yeah
... is it all those things?
Yeah, insurance risk earnings along with wealth management earnings, along with benefits earnings, and also even diversification of markets. You know, Europe, Ireland is a great growth market for us right now. So overall, I like the diversification of the portfolio.
So it's... Well, you talked about Germany specifically. Of all the businesses, Germany seems to be, you know, the most narrowly focused.
Yep.
And so maybe, you know, you touched on it, but maybe go into a little more detail there.
Yeah.
Like, it doesn't seem to be, there doesn't seem anywhere to go there in terms of, you know-
Yeah
... branching out. Is that really key to the strategy-
Yeah
... that you have in Ireland and the UK as well?
So if you think about Germany, we were at a relatively small market share in what we'd call the broker, you know, the broker pension savings market. We've grown that share where I think we're top five, six player. Opportunities to go further, we have, you know, top marks for our service and our capabilities with brokers. The brokers control about a third of the overall pension savings marketplace in Germany, and we see increasingly the government offloading that where people will increase their private savings. The savings rate in Germany is about 11% per year, so there's a significant opportunity just organically to stay focused there. The other opportunity, though, is the growth of the group pension savings or defined contribution pension savings in Germany.
We never really had capabilities until we re-platformed our business in Germany over the last four years. We're now participating in the defined contribution recordkeeping part of the marketplace pension savings. And you've got 3.5 million small businesses in Germany, very low penetration rate, big opportunity. So it's not as narrow as you'd think. There's a growth opportunity both within the, you know, retail pension savings, and there's growth opportunity there. We'll continue to look to ways to try and broaden that business, but sometimes you don't wanna distract yourself with the next shiny thing when there's, you know, lots of opportunity within the areas where you're working, and we see lots of opportunity there.
In the few minutes remaining, I just wanted to talk about, you know, the broader mix of businesses that you have. You provided good disclosure in terms of breaking out your businesses, in terms of workplace solutions, wealth and asset management, and insurance and risk solutions. And within that, I think that was that was at the most recent investor day. You talked about insurance and risk solutions targeting it to go to 30% of base earnings by 2027, from 37% in 2023. And that's part of the strategy to emphasize capital light businesses. And question is: is there, at some point, is there too little insurance in Great-West Lifeco? And so how do you view business mix from the perspective of insurance specifically? How much is the optimal amount of insurance business within Great-West Life?
Yeah. Yeah, so I might approach it in a slightly different way. There's the growth opportunities we see in the wealth space, there's growth opportunities we see in the group space, whether it's retirement or benefits, and growth opportunities we see in the individual insurance and the reinsurance space. And when we look at those opportunities, what I'll call profitable growth opportunities, we see higher natural growth for us based on our capabilities, our market positioning in those wealth and in those group businesses than we do in individual insurance. But that 30% will still be growing because we intend to, we're intending to grow, you know, that 8% to 10% longer term growth. That still means growth for individuals, so that's not a pullback. That's just a focus on where we see profitable growth.
Secondly, as I think about those businesses, those businesses are great diversifiers. They're diversifiers from the standpoint of, you know, different forms of income, as you pointed out. It gives us some regional diversification, but also gives us expertise. When I look at our reinsurance businesses, when I look at our pension risk transfer team in the UK, when I look at the team we've got in the U.S. that looks after some of our, you know, some of the general account products and solutions, when I look at it in Canada, even, and including seg funds, all those businesses rely on insurance expertise. So we wanna maintain that muscle. We just recognize that over time, as we think about the highest growth opportunities, we will see slower growth there. We see it as more competitive markets, more commoditized markets.
But we like the diversification, we like the cash generation, and we like the expertise that it provides for us. So, you know, I would not see us... You know, that's not an exit strategy. That's a strategy where each of these businesses we wanna manage with the right level of discipline in the context of an overall portfolio.
Perfect.
Good.
We'll leave it there. We're out of time. Always great catching up with you, Paul. Thank you so much.
That's great. Thank you so much.