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Sep 1, 2015

How Will The Federal Election Affect Your Retirement Savings Plan

by Kyle Prevost

t’s the most wonderful time of the year Kyle Prevost

With politicians promise-making

And everyone smile-faking

It’s that electoral time of the year

It’s the hap-happiest season of all

With insincere greetings and caucus meetings When your MP comes to call…

It’s the hap-happiest season of all

With all of Canada so eager to delve into another electoral season that they wish summer would just hurry up and pass already, it’s no wonder that election goodies are being tossed about so willy-nilly recently.

For personal finance enthusiasts, the newly passed legislation and promises of more to come on the horizon are like waking up on Christmas morning and seeing far more under the tree than one dreamed. Between lower taxes, income-splitting, and enhanced Universal Childcare Benefits, Canadian families look to be doing pretty well with this most recent round of vote buying political policies.

At the forefront of the political tug-of-war is the question of how to provide Canadians with the best tools to ensure they have a smooth transition into retirement. With the recent announcements that TFSA annual contribution limits have increased to $10,000 per annum and that Ontario’s government will be implementing a provincially-run pension plan (that would run alongside the current Canada Pension Plan) we see two very different visions of how to best help Canadians prepare for their golden years. It seems like the federal government might now be looking at an ideological middle ground and hasproposedthepossibleimplementationof a voluntary contribution option to the CPP (as opposed to the mandatory plan being implemented in Ontario).

Most Canadians don’t really care to follow the partisan mudslinging and/or statistics-fuelled spin games that often accompany these announcements. They learned long ago to take political promises with a large grain of salt. What everyone really wants to know is usually quite simple: How will this affect me and how can I use it to get the most for myself? If we see the newly increased TFSA contribution limit stick around and a voluntary CPP contribution model enacted, Canadians will have some very interesting choices to make when it comes to how to best save for their retirement.

So, one might reasonably ask, “Would most Canadians benefit from voluntarily contributing to the CPP over and above their mandatory contributions?” The statistically indisputable answer is yes, but the question we asked is probably the wrong one. The real question is, “Would you benefit from voluntarily contributing to the CPP versus implementing your own investment plan within your TFSA and/or RRSP?” Now things get a little more grey.

If we’re being honest with ourselves Canadians are pretty bad at this whole saving-and-investing thing. I’m not alone in believing that much of our indecision and incorrect general practices stem from our lack of financial literacy. The general bafflement and glazed-over eyes that result when concepts such as mutual funds, bonds, ETFs, hedge funds, and stocks are mentioned is quite worrisome and leads many well-meaning folks into the aptly named paralysis-by-analysis trap. For the great mass of Canadians who don’t subscribe to monthly financial publications, a voluntary CPP option is likely a great idea. Unfortunately it’s also an option that is quite likely to be largely ignored.

When compared to the average returns Canadian investors get through our mutual funds (the most expensive to own in the world) or trying to pick our ownstocks, the solid annual returns of the CPP Investment Board look pretty attractive. The Board currently manages roughly $265 billion in assets and are coming off their strongest year ever, boasting an 18.7% annual return. The 10-year average return hovers around 8%. It can be argued that in addition to using tried and true passive indexing strategies, the CPPIB also has access to large-scale foreign infrastructure investments and other options that many Canadians can’t invest in through our normal retail investing channels. Many Canadians could do a lot worse than simply voluntarily handing their money over every month to the CPPIB and focusing more on other aspects of personal finance such as increasing income, decreasing expenses, and becoming more tax- efficient. It’s certainly a preferable strategy to the current dominant ideology of not investing in anything except for a bigger house with marble countertops.

But we come back to the question of what would be best for you. Would you be better off using DIY investment strategies within the shiny new TFSA and old dependable RRSP? I think for most people who don’t mind doing a little reading, the answer is yes. A few years ago the CPPIB switched from a passive investing model to today’s more aggressive mix of actively managed assets. The strategy has produced some ups and downs so far and, as a dedicated passive investor, I am dubious as to the prospects for long-term outperformance of the broad market. While we have no way to know if the new army of CPPIB managers will produce results that beat market averages, we know for sure that they will command a much larger payroll than that of yesteryear. The CPPIB now commands a fee of somewhere in the .8% to 1% range, depending on what you include in that figure. A broadly diversified basket of ETFs will cost significantly less to manage, and of course owning your own stocks and bonds comes with no management costs at all. It is important to remember, though, to include transactional costs (buying and selling those ETFs and stocks/bonds) when deciding what strategy fits you best.

There are other considerations to take into account as well when comparing the DIY path to the CPPIB-managed journey. Would the voluntary CPP contributions have similar estate rules to the current CPP program? If that’s the case, then effectively losing all of those contributions upon death is a major concern for many people, whereas if your life’s savings were invested in privately-held accounts obviously it could be transferred upon your passing as you saw fit. Right now the voluntary CPP idea is just that – something being batted around with those pesky details to come at a later time, if at all.

The good news for those who are intrigued by the hands-off solution of the voluntary CPP contribution, is that an avenue already exists for you to test drive this retirement saving option – the Saskatchewan Pension Plan (SPP). Despite its name, the SPP is open to contributions from all Canadians who have room in their RRSP. You can contribute up to $2,500 to this plan annually and you’ll get the same tax benefits as you would for any other RRSP contribution. While the SPP isn’t nearly as big as the CPP ($298 million in assets under management) it still offers an appetizer to what the full voluntary CPP meal might look like.

Personally, I’ll stick with my vanilla couch potato portfolio that I set up within my RRSP and TFSA through my discount brokerage of choice. That being said, if the CPPIB were able to roll out an easy-to- implement way to invest through them, I would likely recommend that option to a ton of people I run into on a daily basis. The key factors would simply be the ease of use and the relative barrier to entry that seems to flummox so many Canadians.

When listening to all of the bright and cheerful political party ads over the next few months, think about which government bribes promises might benefit you most if they come to fruition. Planning ahead will allow you to hit the ground running no matter what the outcome on election day.

Kyle Prevost is a business teacher and personal finance writer helping people save and invest at and His co-authored book, More Money for Beer and Textbooks, is available in book stores.