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Canada: Ready For Stable Value?

Given Stable Value's popularity in the U.S. market, many firms have started exploring the possibility of promoting Stable Value abroad. Often, this initiative is driven by multinational plan sponsors that wish to replicate U.S.-based investment choices for their employees in foreign countries. Every new country that has been explored, however, has presented challenges. Myriad accounting, regulatory, environmental, and cultural factors have made it difficult to enter these markets in any meaningful way. This article looks at one promising foreign market - our friendly neighbor to the north, Canada.

Three primary retirement savings vehicles

According to the most recent information available from Statistics Canada, the government statistical agency, Canadians have accumulated total retirement assets of C$1.15 trillion (approximately USD 859 billion at current exchange rates) in three primary retirement savings vehicles: employer-sponsored Registered Pension Plans (RPPs); individual and group Registered Retirement Savings Plans (RRSPs); and government-sponsored Canada and Quebec Pension Plans (C/QPP). RPPs total 69 percent of Canadian retirement assets; RRSPs (both individual and group) account for 25 percent of the market; and government-sponsored C/QPPs hold the remaining 6 percent.

A closer look at RPPs

RPPs are employer-sponsored plans to which the employer must contribute by law (the contribution limit will increase to $2,000 annually by 2005). RPPs can be offered under either a defined benefit or defined contribution structure. The defined contribution RPP structure (also known as Money Purchase Plans) most closely resembles the primary Stable Value market in the U.S. - employer-sponsored 401(k) plans. Both types of RPPs are registered with the Canada Customs and Revenue Agency. The broad rules and restrictions governing RPPs are similar to U.S. regulations for 401(k) plans. As in the U.S., there has been a gradual shift in Canada from defined benefit RPPs to the lower cost defined contribution RPPs. This shift is driven primarily by the general trend toward downsizing and cost-cutting among Canadian businesses over the last decade. In 2003, according to Mercer, 80 percent of RPPs were defined contribution.

A closer look at RRSPs

RRSPs, first introduced in 1957, are essentially personal, self-directed retirement funds offered by financial institutions such as, banks, insurance companies, or mutual fund houses. Employers can also offer RRSPs on a group basis (in addition to RPPs), which provides individuals with the convenience of payroll deduction and offers some economies of scale. Even if individuals participate in an employer-sponsored RPP, individual and group RRSPs offer supplemental retirement savings benefits, similar to U.S. IRA accounts. For example, annual contributions are tax-deductible (up to a limit scheduled to increase to $18,000 by 2006) and earnings accumulate tax-deferred. RRSPs are frequently invested in mutual funds or in bank products. All registered mutual funds, however, must be marked to market according to Canadian GAAP, with no exceptions. Insurance companies, usually ones with an established local presence, provide some guaranteed options at the individual level similar to the annuity business in the U.S. Manulife, Transamerica Life, and Sun Life are among the more well-known providers.

Investment Issues

The Income Tax Act mandates foreign assets in many of these programs to be limited to 30 percent of the total assets. Generally, U.S. fund companies that have been successful in attracting assets have been those with an affiliate that is domiciled in Canada. Not having a local presence often inhibits providers from entering the market because of currency exposure.

Is there an opportunity for Stable Value?

For Stable Value providers wishing to expand beyond U.S. borders, Canada shows some promise. First, the Canadian retirement market is generally similar to the U.S. DC market, and it is large and growing. The current total asset figure of $1.15 trillion represents nearly a two-fold increase over the $594 billion charted in 1990. By far, the largest share of this total is held in employer-sponsored RPPs, even though their importance has declined somewhat relative to RRSPs since 1991.

Second, based on anecdotal information (some of which is a few years old), Stable Value firms who have tried their luck at entering this market since the 1980s have met with sporadic success - mostly for small pools of money or for specific plans - so there is precedent for Stable Value funds operating in Canada within a DC framework, as we know it domestically. Third, GICs are well known as a savings vehicle in the Canadian retail world.

Other factors, however, appear to mitigate these positives. For example, defined benefit, union and governmental plans dominated the landscape early on; and though this is changing, it has prevented Stable Value providers from establishing a strong foothold in the market to date. Also, the Canadian market is fairly complex from an administrative perspective and tends to be serviced by large, bundled insurance providers who offer the full gamut of services, thus limiting opportunities for firms specializing in Stable Value. Finally, interest in conservative options in general has been somewhat limited, as well.

Does the opportunity exist today to develop the Stable Value market in Canada? On balance, the answer is, probably not, at least on a large scale. Nevertheless, Canada's potential remains attractive and the general trends appear to be favorable, suggesting the market bears close watching. Over time, as the retirement landscape continues to evolve, a better opportunity for Stable Value may present itself.

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