IDA Wealth Watch IN THIS ISSUE...

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1 IDA Wealth Watch FEBRUARY 005 INVESTMENT DEALERS ASSOCIATION OF CANADA IN THIS ISSUE... With RRSP season entering the home stretch, we thought it fitting that this edition of the IDA Wealth Watch focus on studying previous RRSP investor behaviour. We identify RRSP investment trends and interpret their impact on investors, and the financial services industry in general. The primary areas we look at include; contribution, withdrawal, and investing patterns. We also examine demographic, geographic, and socioeconomic factors to see what impact, if any, they have on RRSP investing behaviour. We conclude our report with a discussion of some of the concerns our study raises.

2 First introduced by the Federal Government in 1957 as an incentive for Canadians to save during their working years for their retirement, RRSPs have grown to become a vital component of Canada s retirement income system. According to Statistics Canada, as of 00, RRSPs, together with government sponsored pension plans (CPP/ QPP), and employer sponsored registered pension plans (RPP), represented over $1.1 trillion in total retirement assets of Canadians. This represents an estimated one quarter of household networth. RPPs contain the majority of these retirement assets, approximately two-thirds, compared to just over a quarter for RRSPs. Value of Assets ($ in billions) CANADA'S RETIREMENT INCOME PROGRAMS CAGR 0.1% CPP/QPP 1990 CAGR 5.7% RPPs 00 CAGR 7.% RRSPs This is predominantly due to the nature of the two programs. Though access to RPPs is limited mainly to individuals whose employers or labour unions offer such a plan, contributions to the plan must be made regularly. RRSPs however, though accessible by most Canadian workers, involve voluntary contributions, leading to variations in the amounts of individuals contributing to their RRSP and the total dollar amounts contributed. According to Statistics Canada data collected from income tax returns filed in the spring of 00, nearly 6 million Canadians made an RRSP contribution for 00. Though down only slightly from the previous year, it continues to show the prevailing downward trend in the numbers of Canadians contributing to RRSPs, and still indicates that only about one-third of eligible Canadians contribute to RRSPs. The $7.6 billion contributed in 00 did however represent a slight increase from the prior year, bucking the trend from 001 and 00. TOTAL NUMBER OF RRSP CONTRIBUTORS (In millions) Who is Contributing? Looking deeper into some of the RRSP contribution statistics, we try and make sense of who is contributing, or perhaps more importantly, who isn t contributing, and why. Not Just the Wealthy RRSP CONTRIBUTORS AND CONTRIBUTIONS $ $ Number of RRSP Contributors SOURCE: Statistics Canada $ $ Total Dollars Contributed $ RRSPs are not solely being used by the wealthy. 75% of RRSP contributors in 00 had an employment income of $6,100 or less including 0% with an income of $0,000 or less. Middle and lower income households are therefore also utilizing RRSPs. Part of the reason is that a growing percentage of Canadian workers are not covered by an employer pension plan. Some of these individuals are therefore utilizing RRSPs as a means to create what can be considered their own personalized pension plan. Additionally lower income individuals, who are more dependent on government retirement programs, may be increasingly skeptical on the soundness of such programs come retirement given the enormous stress these programs will be facing due to an aging population. Proactive individuals are taking precautions by using RRSPs to accumulate retirement savings. Though higher income earners may realize greater immediate tax benefits from the tax deductions RRSP contributions provide, the tax sheltered growth and the peace of mind of having a retirement savings plan in place are additional Total RRSP Contributions ($ in billions) IDA WEALTH WATCH - February 005

3 incentives for investors of any income level to make use of RRSPs. The data does however show that higher income earners, with more resources at their disposal, are providing a disproportionate share of the total dollars contributed. BREAKDOWN OF NUMBER OF RRSP CONTRIBUTORS BY INCOME SEGMENT (00) Income Segment 1 Less than $0 thousand 9% Between $0 - $0 thousand 1% Between $0 - $80 thousand 5% Greater than $80 thousand 15% BREAKDOWN OF DOLLAR OF RRSP CONTRIBUTIONS BY INCOME SEGMENT (00) Income Segment 1 Less than $0 thousand % Between $0 - $0 thousand 17% Between $0 - $80 thousand % Greater than $80 thousand 7% 1 1 contribution has also remained fairly constant, at $000 for men and around $100 for women. This imbalance undoubtedly reflects an earnings disparity between men and women. Despite substantial gains in earnings over the past couple decades, women still earn about one-third less than men on average according to 001 census data. As the earnings gap continues to narrow, we would expect to see women begin to comprise a larger share of total RRSP contributions, although other factors may play a role, such as lack of awareness or lower tolerance for market risks. GENDER BREAKDOWN OF RRSP CONTRIBUTIONS (00) Contributors 6% 5% Female Contributions Male 8% 6% The reward to RRSP saving by low income earners may be diminished by the clawback provisions inherent in certain government benefit programs such as the Old Age Security Program (OAS). Advisors should explain the full range of benefits and drawbacks as they exist for their individual client. Men More Then Women Gender does appear to have some impact on RRSP contribution patterns. The data show that men are only slightly more likely than women to contribute to an RRSP. Looking as far back as 1999, we see that the split has remained relatively balanced at around 55/5 in favour of men. However, the actual dollar contributions are skewed more heavily. In 00 for example, women accounted for only 8% of total dollars contributed to RRSPs, in line with levels from the previous five years. The median RRSP Not the Young Young people aged and under are less likely to make an RRSP contribution. This grouping comprised only % of RRSP contributors and accounted for only % of dollars contributed in 00. Perhaps not surprising given the low income levels typically associated with this group, but concerning nonetheless. Young people stand to benefit most from contributing to an RRSP. Not through the income tax deductions, but through their longer time horizons, which magnifies the benefits derived from the tax sheltered status of the plan. RRSP Investor Polls usually report a common finding: most RRSP investors wish they had started planning for retirement sooner. The question is; Why don t they? The answer might have to do more with lack of awareness rather than lack of resources. Few twenty year olds think about saving for retirement, which may seem an eternity away. Schools, parents, the media, and financial IDA WEALTH WATCH - February 005

4 services providers, are not effectively communicating the importance of saving for retirement to the young. Advisors can build their businesses, and better service their client households, by advising parents not only on their own retirement planning, but also on the need for their working aged children to come in and discuss setting up a retirement savings program with a financial professional. BREAKDOWN OF NUMBER OF RRSP CONTRIBUTORS BY AGE GROUP (00) Age Group 1 and Under % Ages 5-0% Ages 5-8% Ages 5-5 9% 5 Ages % 6 65 and Over % BREAKDOWN OF DOLLAR OF RRSP CONTRIBUTIONS BY AGE GROUP (00) Age Group 1 and Under % Ages 5-15% Ages 5-7% Ages 5-5 1% 5 Ages % 6 65 and Over % clients reduced time horizon lowers their tolerance for risk. Yet, there still exists a need for growth in the portfolios of many of these investors so that they can achieve their retirement objectives. We have seen product manufacturers and distributors respond by bringing to market an influx of products such as principal protected instruments catering to such investors. Some Provinces Lagging Ontario residents comprised nearly 0% of all Canadians contributing to their RRSP in 00, and with nearly $11.5 billion in contributions, accounted for almost % of total dollars contributed. Not surprising given that Ontario employs.5 million people more than its next closest rival, Quebec. BREAKDOWN OF NUMBER OF RRSP CONTRIBUTORS BY REGION (00) 1 ATLANTIC CANADA 5.% QUEBEC 5.5% ONTARIO 9.1% MANITOBA.5% 5 SASKATCHEWAN.8% 6 ALBERTA 10.9% 7 BRITISH COLUMBIA 1.8% 8 TERRITORIES 0. % The majority of RRSP contributors in 00, 57%, fell within the 5-5 age group, and accounted for 58% of total dollars contributed, both consistent with levels for the previous years. Older individuals aged 55 or above, though only comprising 18% of contributors accounted for 5% of dollar contributions. In 000, this age group represented only 16% of contributors and % of dollars contributed. This may be evidence that even individuals less than a decade away from retirement are opening up RRSPs, and that RRSP investors in this age group tend to contribute more on average, perhaps feeling more pressured to top up their nest egg with retirement vastly approaching. Servicing these clients will pose additional challenges for advisors, as their BREAKDOWN OF DOLLAR OF RRSP CONTRIBUTIONS BY REGION (00) 1 ATLANTIC CANADA.7% QUEBEC.1% ONTARIO 1.6% MANITOBA.9% 5 SASKATCHEWAN.% 6 ALBERTA 11.5% 7 BRITISH COLUMBIA 1.5% 8 TERRITORIES 0. % However when we look at contribution figures relative to provincial employment and disposable income levels we see a fairly more balanced distribution. Ontario, Quebec, Alberta, and B.C. have a comparable percentage of their employed making RRSP contributions, between 7% -1%. Dollars contributed as a percentage of personal disposable income in the province is also at equal IDA WEALTH WATCH - February 005

5 footing for these provinces. We do see however, that the Atlantic Provinces lag the other provinces in terms of RRSP utilization, with fewer employed individuals per capita making a contribution and the dollar amount of contributions on average being smaller. $ 500 $ 000 $ 500 $ 000 $ 500 $ 000 $ 1500 NFLD PEI Nova Scotia MEDIAN RRSP CONTRIBUTION (00) Quebec New Brunswick Ontario Manitoba Alberta B.C. Yukon Saskatchewan Nunavut Northwest Territories Canada $,600 NUMBER OF PERSONS WITH UNUSED RRSP ROOM (millions) SOURCE: Statistics Canada UNUSED RRSP ROOM Number of Persons with Unused RRSP Room Total Unused RRSP Room TOTAL UNUSED RRSP ROOM ($ billions) This may reflect not only regional differences in per capita income, but also differing levels of awareness regionally to the benefits of RRSP investing. Opportunity may exist for financial services providers in these areas. What Are The Concerns? Two concerns already mentioned were the low RRSP contributor participation rate and that few young Canadians are making use of RRSPs. However other concerns also exist. RRSP Contributions Are Not Being Maximized Statistics Canada data shows that over 18 million Canadians had unused RRSP room at the end of 00, implying that less than 10% of individuals eligible to contribute have contributed their maximum. Total unused RRSP room has ballooned from approximately $50 billion in 000 to almost $50 billion at the end of 00. Many Canadians may in fact not be putting aside enough funds for retirement to provide the standard of living they hope for or are currently accustomed to. Possible explanations can be; taxburdened Canadians do not have the resources available to contribute, many believe government retirement programs will suffice, many are not aware of the potential crisis they face during retirement. It should be noted however that several hundred thousand Canadians do maximize their contributions and these individuals could stand to benefit from increased contribution limits. A commonly used rule of thumb is that approximately 70% of pre-retirement income is needed during retirement in order for individuals to maintain their pre-retirement standard of living. This recognizes that expenses such as mortgage payments, contributions to CPP/QPP, employer pension plans, or RRSPs do not continue after retirement. Individuals potentially most at risk of not achieving this 70% threshold are middle income earners. While low income earners can expect to replicate a large portion of their pre-retirement income during retirement in the form government sponsored programs such as Old Age Security, the Guaranteed Income Supplement, and Canada/Quebec Pension Plan, middle income earners, especially those without an employer sponsored pension plan, will find it difficult to replicate their pre-retirement income. IDA WEALTH WATCH - February 005 5

6 Middle income earners will increasingly have to rely on their retirement savings to bridge the gap. Currently, contribution limits are too low to allow middle and upper income earners to accumulate the savings required over their lifetime to achieve the 70% replacement threshold. Contribution limits have not kept pace with inflation, and they are currently much lower than similar programs in other countries. The government argues it can not afford to further increase contribution limits due to the loss of tax revenue it would represent. However the government would not be losing tax revenue, merely deferring it to future periods when individuals begin to withdraw from their RRSPs or RRIFs, periods when federal treasuries are also more likely to be in need of these revenues. The IDA and other financial services associations are actively pursuing RRSP contribution limit increases with the federal government. RRSP Withdrawals On The Rise Though the percentage of taxfilers contributing to RRSPs has only seen a modest increase over the years, the percentage of taxfilers withdrawing funds from their RRSPs has increased considerably, from.8% to 6.7% for the period according to a Statistics Canada study. This also translates to an increase of over 80% in the actual numbers of individuals withdrawing money over the period, from 570,000 in 199 to approximately 1 million in 001. Percentage of Taxfilers Contributing to an RRSP RRSP WITHDRAWERS AND CONTRIBUTORS 0% 5% 0% 5% 0% 15% 10% 5% % 5% % Percentage of Taxfilers Making a withdrawl from an RRSP The study also finds that this practice of RRSP withdrawals is not restricted to lower-income groups. Approximately 0% of middle income individuals were observed to make at least one RRSP withdrawal during the study period. This figure excludes withdrawals under the Homebuyers Plan and Life Long Learning Plan, unless defaults on repayments occurred. Other concerns pointed out in the study are that individuals are unlikely to repay their withdrawals back into their RRSPs and that individuals closer to retirement, aged 50-59, represented 0% of all those withdrawing money in 001, up from 17% in 199. Though it is difficult to determine why people withdraw money from their RRSPs, major socioeconomic or life events with financial implications may be possible causes. The study notes that several life events were associated with an increase in the likelihood of withdrawing money from an RRSP. This included the loss of a spouse, the loss of a job, and the start of a new business. Advisors who know of clients experiencing, or about to experience, such a life event, shouldn t therefore be surprised to receive an RRSP deregistration request from these clients. The withdrawal patterns indicate that increasingly, individuals are using their RRSPs as a means by which to smooth income fluctuations during their non-retirement years as opposed to their intended purpose of accumulating savings for retirement. Registered Pension Plan Membership At Low Levels Though the number of workers covered by a Registered Pension Plan (RPP) has been increasing, it has not been able to keep pace with the growth in the Canadian work force. As a result, the percentage of Canadian workers covered by a RPP today is lower than it was ten years ago. Taxfilers contributing to RRSP Taxfilers withdrawing from RRSP Source: Canada Revenue Agency, PA/RRSP file, Statistics Canada Report: Using RRSPs before retirement IDA WEALTH WATCH - February 005 6

7 Percentage of Canadian Workers Covered by a Registered Pension Plan 6% 5% % % % 1% 0% 9% CANADIAN WORKERS COVERED BY REGISTERED PENSION PLANS the low interest rate environment, Canadians are borrowing and spending more, meaning they are less likely to be capable of setting aside savings for retirement. Some of the spending has gone to purchase assets such as real-estate or reinvesting in their homes through renovations, investments which may provide some level of benefit during retirement, though still exposing them to the risk of adverse supply shocks to this market. Disposable Incomes vs Personal Savings Rates 8% Research Paper: Pension Plans in Canada This implies that more individuals will have to make do without the comfort of an employer pension at retirement, having to rely solely on government programs and accumulated savings or assets. The government needs to further assist individuals in the accumulation of retirement savings Personal Disposable Income Per Person (dollars in thousands) Personal Disposable Income Per Person Personal Savings Rate Personal Savings Rate (Percent) Additionally, the maximum pension payable from RPPs, which was frozen for many years, will still not provide sufficient income for many individuals to reach 70% of their pre-retirement income. ANNUAL PENSION BY YEARS OF SERVICE Years of Service (Applicable in 00) Canadians' Pre-Retirement Income: Final Year $50,000 $10,000 $15,000 $0,000 $5,000 $0,000 $5,000 $70,000 $1,000 $1,000 $8,000 $5,000 $,000 $9,000 $90,000 $18,000 $7,000 $6,000 $5,000 $5,000 $6,000 $110,000 $18, $7,500 $6,667 $5,8 $55,000 $6,167 $10,000 $18, $7,500 $6,667 $5,8 $55,000 $6,167 ANNUAL PENSION AS A PERCENTAGE OF EARNINGS Years of Service (Applicable in 00) Canadians' Pre-Retirement Income: Final Year $50,000 0% 0% 0% 50% 60% 70% $70,000 0% 0% 0% 50% 60% 70% $90,000 0% 0% 0% 50% 60% 70% $110,000 17% 5% % % 50% 58% $10,000 1% 1% 8% 5% % 9% Source Retirement Income Coalition (RIC) Most Investors Don t Have Retirement Plans The RRSP and economic data we have studied leads us to believe that many investors do not have a proper retirement plan in place. A look at mutual fund sales for example clearly shows that the first months of the year exhibit the greatest activity. Though we would like to think these purchases belong to investors trying to get a head start on the year, we believe it predominantly to be investors scrambling to beat the RRSP cut-off date, indicative of investors with a poor, or without, a retirement plan. The problem is further compounded by the fact that the personal disposable incomes of Canadians are only growing modestly while our personal savings rates have plummeted. Given IDA WEALTH WATCH - February 005 7

8 $ Billions 8.0 Net Monthly Sales of Mutual Funds (000-00) J F M A M J J A S O N D Source: IFIC Without a proper plan in place, we are concerned that many investors do not have an accurate picture of what their retirement income needs will be, or what amount of annual savings will be necessary to provide this required level of retirement income. Investors need to become better informed and to consider meeting with a financial professional to put a retirement plan into place. The IDA will be publishing a retirement planning guide to help educate investors on some of the basic principles involved. Please look for it in the coming months on our website; IDA WEALTH WATCH - February 005 8

9 Wealth Market Monitor October 00 - January 005 October 6 th TD Waterhouse Canada Inc., launches its Private Giving Foundation. The program enables individuals to establish an endowment fund to support causes that matter to them. Donors start with a minimum contribution of $10,000 in cash or securities. October 1 th BMO Financial Group and its U.S. subsidiary, Harris Bank, announce a definitive agreement to purchase Indiana based Mercantile Bancorp. Inc. The acquisition will increase the Harris community-banking network to 189 locations and expands the 50-plus network of Harris ABMs. November th Industrial Alliance Insurance and Financial Services Inc. signs agreement to acquire BCL- Edmond de Rothschild Asset Management from Laurentian Bank and La Compagnie financière Edmond de Rothschild Banque. The agreement includes a distribution agreement whereby Laurentian Bank will distribute R Funds acquired by Industrial Alliance to its clients, along with the Industrial Alliance mutual funds. November 1 th Rockwater Capital Corporation announces it has entered into an agreement to acquire KBSH Capital Management Inc. KBSH is a discretionary money manager with approximately $6. billion in assets under management for pension, institutional, and private clients. November 18 th Dundee Bancorp Inc. announces that its wholly owned subsidiary, Dundee Wealth Bank/Banque Patriomoine Dundee, has been granted a charter from the Minister of Finance as a Schedule I Bank. November th Fidelity Investments Canada Limited announces the reduction on fees to its mutual funds. Fidelity says it will make the reductions available through; lower management fees or other expenses on units purchased with a front end load, automatic conversion of back end load units to lower fee front end load units 7 years after purchase, and a launching of a low load option for every fund. November 9 th National Bank of Canada and The Canada Life Assurance Company announce the signing of a definitive agreement to distribute banking products and services through Canada Life s distribution channels. Through the agreement, Canada Life will be able to offer a range of loan products, including investment and RRSP loans, all distributed under the National Bank banner. November 0 th Scotiabank s international business continues to grow with the signing of a Memorandum of Understanding to purchase a controlling share of Mexico s third largest mortgage finance company, Hipotecaria Credito y Casa (CYC). CYC has about 800 employees and 11 offices in 1 Mexican states. December rd Skylon Advisors Inc., a unit of CI Fund Management issues the final prospectus for its Yield Advantage Income Trust. The Trust is a closed-end fund and is unique as it proposes to sell securities directly through FundSERV, without the use of an underwriting syndicate. The cost savings will be used towards paying a % sales commission to advisors, considerably higher than the norm for such issues. January 11 th AGF Funds Inc. launches a new low-load purchase option on its mutual funds and raised the distributions on two of its core balanced funds. January th The Financial Services Commission of Ontario approves the proposed $.5 billion merger of Niagara Credit Union and HEPCOE Credit Union. The merger will create the largest credit union in Ontario and the third largest in Canada. IDA WEALTH WATCH - February 005 9

10 CALGARY Suite Fourth Ave. S.W. Calgary, Alberta TP 0J1 Tel.: (0) 6-69 Fax: (0) HALIFAX TD Centre, Suite Barrington St. Halifax, Nova Scotia BJ K9 Tel.: (90) Fax: (90) -069 MONTRÉAL Bureau 80 1 Place Ville Marie Montréal, Québec HB R Tel.: (51) Fax: (51) TORONTO Suite King St. W. Toronto, Ontario M5H T9 Tel.: (16) 6-61 Fax: (16) Jack Rando Capital Markets Analyst jrando@ida.ca VANCOUVER Suite 15 P.O. Box West Georgia St. Vancouver, BC V6B N9 Tel.: (60) 68-6 Fax: (60) Ce rapport est aussi disponible en français sur demande. The Investment Dealers Association of Canada is the national self-regulatory organization and representative of the securities industry. The Association s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets.