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The RRSP contribute to the individualisation of financial risks, according to a study


Justine Montminy

April 5, 2018 09:45

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Plans, registered retirement savings plans (RRSPS) are tax-disadvantageous for a part of the population, since they expose investors to several types of risk, according to the Observatory of the retirement of theInstitute for research in contemporary economics.

According to the Régie des rentes du Québec (QPP), almost 6 million Canadians, including 1.5 million Quebecers, were members of either an RRSP, individual or collective, or to a pooled registered pension Plan (PRPP) in 2015. These contributions totaled approximately $ 39 billion. The régie adds that one of the factors contributing to the popularity of the RRSP is the absence of other sources of retirement income. In fact, it is the case of 22.5 % of the active population.

The Observatory highlights in the Bulletin of pension for the month of march last the financial risks caused by the individualization of this type of plan. In effect, it is indicated that these products are benefit from the financial risks on ” the shoulders of individuals.”

Risk in the management of capital

The Observatory says that the individual investors who have an RRSP or a Plan the voluntary retirement savings plan (VRSP) suggest, most of the time, private funding organizations the opportunity to manage their individual accounts.

However, even if the choice of these investments are made responsibly, the Observatory of the plans specifies that the contributors of the RRSP are penalized by an asset allocation more conservative with age, in contrast to the fonds du Régime de rentes du Québec, which ensures the maintenance of a policy of diversified investment and high growth, leading to a higher yield.

“The mutualisation of risks has enabled the Caisse de dépôt et placement du Québec (CDPQ) to display a real rate of return average annual assets of the QPP of 9.2% between 2011 and 2016, net of management fees. By way of comparison, theInstitut québécois de planification financière (IQPF), has assumed a real rate of return net of management fees of 2.75 % for a dynamic portfolio for the year 2017-2018. “

In addition, RRSPS are exposed to fluctuations in the market. According to the Observatory, the contributors are living with the risk of seeing their capital diminish because the plans are not equipped with mechanisms that can pool and distribute the financial risk.

According to Statistics Canada, people between 55 and 64 years of age who contribute more to the RRSP in Quebec, totalling 33 % of all contributions. The median employment income of the contributors was 53 to $ 750 in 2015, which is more than the median, which stood at 30 900 $. Individuals with an income higher than $ 80,000, which account for 27 % of contributors. The deduction of tax to increase retirement savings, is unequal, according to the Observatory, because it benefit people with a higher income.

Management fees “eat up” returns

The management fee significantly affect the financial returns and benefits to private financial institutions, said the Observatory. “According to theOrganization for economic cooperation and development (OECD), a fee of 2 % per year account for 37 % of the accumulation of savings, which leaves 63 % to the investor. “

According to theInstitut québécois de planification financière, management fees, RRSP contributions vary between 0.5 % and 2.5 %. The Observatory puts these fees in opposition to those of the Fund, which is 0.2 %.

“These costs are lower than those of a mutual fund can be explained by the bargaining power available to the Fund on the financial markets as well as by the absence of expense for advertising, marketing or advice to individual customers. The individualization and personalization of financial strategies entail costs. “

In its report on the performance of the investment funds, the firm Morningstar reveals that Canada is since several years in the last rank of the 25 countries studied. The Observatory indicates that, in 2011, the authors of the report had concluded that Canada stood out as not of the requirements and constraints of other countries, and that there was no reason really that the management fees are higher than elsewhere.

Risk says “longevity”

The RRSP is a capital to be withdrawn each year according to a life expectancy that is likely. Thus, if a person survives his capital, it will see this source of income dry up, and its income will be lower for the last years of his life. Women are more affected by this risk, according to the Observatory, since they generally live longer than men.

The RRSP does not modulate not the annuity as a function of the dependent child. “During periods of low income due to family responsibilities, a person who is dependent of the locked-in RRSP or a VRSP for their retirement will assess less and will therefore receive pension lower in retirement,” says the Observatory.

Statistics Canada indicates that among the 78 % of Canadians who were preparing financially for retirement in 2014, only 45 % knew the amount to save to maintain their standard of living. In addition, 22 % of Canadians and 15 % of Canadian women have shown understanding of the key financial concepts such as interest, risk diversification and inflation.

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