Canadians returning to RRSP Investments following recession: CIBC
World Markets Inc.
Women and younger investors more likely to contribute
TORONTO, Feb. 8 /CNW/ - After largely standing on the sidelines during
last year's recession, Canadians are once again turning to RRSPs to
bankroll their retirement plans - with women and younger investors
leading the way, finds a new report from CIBC World Markets Inc.
The report notes that higher disposable incomes, rising savings rates,
renewed confidence in the stock market and lack of confidence in
government and corporate retirement plans is leading Canadians back into
mutual funds and other RRSP plans.
"The impressive improvement in the stock market since March 2009 almost
guarantees that the current RRSP season will fare better this time
around, with more money likely to find its way into income and equity
mutual funds," says Benjamin Tal, senior economist and author of CIBC's
latest Consumer Watch report. "If history is any guide, RRSP
contributions usually dance to the tune of the stock market. Investors
are already testing the waters, with total net purchases of mutual funds
rising for (the last) three months."
He notes that while the recent softening in the equity market will keep
investors cautious, the dramatic decline in the overall volatility of
the stock market has helped raise Canadians' risk tolerance in recent
months. He adds that the lack of good investment alternatives in a world
of low interest rates makes the decision to dive back into the stock
market that much easier.
Mr. Tal dismisses any concerns that Canadians will not have available
cash to increase their RRSP contributions this year. "Helped by the
recent improvement in the labour market and a boost to income from tax
policies introduced in the 2009 budget, overall disposable income in
Canada has risen by almost 3.5 per cent (at an annual rate) in the six
months ending September 2009 - miles above the performance seen in the
previous six month period.
"And for the first time in many years, this extra cash is being saved
not spent. The savings rate in Canada has risen notably during the
recession, and at just under five per cent it is currently at a
nine-year high. This means that Canadian households now sit on over $17
billion more in savings compared to the same period last year."
He notes that this trend is most visible in chequing account balances,
which rose by almost 50 per cent since the start of the recession, but
have since eased up as investors become confident enough to start
redeploying this cash. The redeployment trend is even more visible in
the mutual fund space where money market balances have been falling over
the past six months.
"By far, the most popular destinations for this cash are bond and income
funds, which have seen a cumulative increase of more than $12 billion
since mid-2009," adds Mr. Tal. "Dividend-based funds appear to be of
particular interest, given their relative attractiveness in today's low
interest rate environment. In fact, although investors typically don't
realize it, reinvested dividends play a more important role than capital
gains in long-term portfolio growth. Since the mid-1950s, dividends have
accounted for more than 60 per cent of total returns generated in the
Canadian equity market. And this trend is likely to continue - Canadians
are still sitting on no less than $90 billion of excess cash."
The return to RRSP investments is a big change from last year when the
number of Canadians who contributed to their RRSP fell by 1.8 per cent.
Even those who managed to take advantage of this retirement investment
vehicle ended up cutting their average contribution by 0.4 per cent.
This resulted in an overall decline in total RRSP contributions of 2.2
per cent for 2008 - the largest drop in six years.
Mr. Tal notes that buried in those changes last year were two new
demographic trends that will reshape and strengthen the RRSP market in
the long term - greater contributions by women and more participation by
younger investors.
In 2008, approximately 24 per cent of taxpayers aged 24-65 made a
contribution to their RRSP, with the distribution clearly skewed towards
wealthier and older people. A commonly held belief regarding RRSP
contributions is that older people have a higher tendency to contribute
to RRSPs as they get closer to retirement. Mr. Tal notes that, in
absolute terms, it is true that the RRSP participation rate among
Canadians aged 45-55 is much higher than among the 25-35 age group. But
he adds that older people, on average, also earn much more than younger
people, and thus have more capacity to contribute.
"When comparing contribution rates among different age groups with the
same income level, we found that, in most cases, Canadians aged 25-35
have a higher propensity to contribute to their RRSPs than Canadians
aged 45-to 65," he says. "In other words, if they have the means to do
so, younger Canadians are more inclined to contribute to RRSPs than
their older counterparts.
"That interesting finding provides us with a useful window on the
future. In many ways the increased propensity of young Canadians to
contribute to their RRSPs reflects their cynical view of the
sustainability, or relevance, of the Canada/Quebec Pension Plans, as
well as the role employer sponsored pension plans will play in their
retirement."
Mr. Tal notes that while employer-sponsored plans are by far the largest
component of the retirement pie, their relative importance is on the
decline. Based on recent Statistics Canada data, the number of
employer-sponsored registered pension plans fell from over 18 million in
1991 to less than 10 million in 2008. And those pension funds cover
fewer and fewer Canadians, with the coverage ratio (as a share of total
employment) falling by almost 10 percentage points over the past two
decades.
He adds that many corporations continue to face significant costs in
meeting their pension obligations, with the Mercer Pension Health Index
- a measure of the ratio of pension funds' assets to their liabilities -
still down by close to 20 per cent from its level in 2007. "This reality
will no doubt work to change the cost structure of many pension funds
and, in fact, is already happening given the notable decline in the
share of defined benefit plans provided by corporate Canada. In that
environment, RRSP investments will need to play an increasingly
important role in the Canadian retirement landscape."
In terms of the mix between men and women, the share of female RRSP
contributors surged in 2008, as women generally fared better
economically during this past recession. But despite this improvement,
the RRSP participation rate among men is still higher than women (53 per
cent vs. 47 per cent), but that does not mean that women are less
inclined to contribute to RRSPs. In fact, a closer look at the data
suggests that the opposite is true.
"The reason why men contribute to their RRSPs more than women is that,
on average, women still earn 20 per cent less than men," says Mr. Tal.
"So the higher participation rate among men is not a gender issue, but
an income issue. If we compare the RRSP participation rate among men and
women in the same income group, we find that the propensity of women to
contribute is actually higher."
The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/cwrrsp-022010.pdf