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.

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