A report commissioned to review the Canada Savings Bonds program recommends winding it down as it no longer provides value to the government, or interests investors. However, the Finance department insists that the CSB product is safe.

“We are assessing the Retail Debt Program in the context of a much-improved fiscal situation and a broader array of investment opportunities for Canadians,” Minister of Finance Ralph Goodale said. “The option of eliminating the Canada Savings Bonds Program is not on the table as part of this review. We are looking to update and improve our retail debt strategy, not to end Canada Savings Bonds.”

As part of the review, the consulting firm Cap Gemini Ernst & Young was hired to assess the performance of the program and make recommendations on strategic options for the future. The Department of Finance released this report today.

CGEY concluded that the Retail Debt Program faces challenges and is losing relevance to the government and investors, due to the decreased need for government borrowing and increasing competition from the financial services sector. It finds that retail debt was an expensive source of funds and estimate the cost of the program was about $1 billion from 1997 to 2003. And, it says that it has less social value than in the past.

To investors, CSBs have lost importance, with only 1% of total investable assets being held in savings bonds today compared to 8.3% in 1987, it says. “In the future, savings bonds will continue to be marginalized by investors,” it predicts, “Future demographic and behavioural changes will lead to diminished relevance of Program products to those who have the largest share of investable assets.”

The study notes that product development has tried to keep pace, but “the features are not sufficiently differentiated to secure a significant market share in the face of intense innovation and competition in the market”. It also says that: product origination faces difficult challenges, and customer service is good but expensive.

The study concludes that the CSB program has not performed within the changing wealth management environment, that it has failed to meet important performance targets, the organizational structure does not enable effective delivery, and its so-called ‘franchise value’ (the intangible value to government that the program provides, beyond its role as a financial intermediary bringing together borrower and investor) is diminished.

Based on its assessment of the program’s value and viability, CGEY recommends “reducing the savings bond portfolio in the most cost effective manner possible, while maintaining a satisfactory level of service for existing investors.”

“This option is based on the assessment that the franchise value of the program no longer exists because it no longer promises a future source of funds or a vehicle for maintaining a profile with Canadians. The Rundown Option is based on the premise that the Program is unsustainable, and is costing government and Canadians more than it provides. Another premise is that to ease transition of bondholders moving to other investments, some grandfathering of existing relationships should occur,” it says. “To achieve this cost effectiveness, sales of new issues would cease, as would product development, new payroll enrolments, and broad marketing efforts.”

“The Cap Gemini Ernst & Young report is one element of the overall review of the Retail Debt Program,” Goodale said. “My officials are assessing the report’s conclusions, as well as the views of Canadians on updating the Canada Savings Bonds Program.”

Goodale added, “I want to make it very clear that there are no changes being made to the Canada Savings Bonds Program at this time. This year’s series of bonds will go on sale in the fall, and there is no change to the services being provided to existing Canada Savings Bond and Canada Premium Bond holders.”

Responding to the study’s conclusions, the Finance Department reports that it is conducting public opinion research to assess the attitudes of Canadians towards the program and potential changes to it. The research conducted thus far indicates that a majority of Canadians continue to be attached to the program as a convenient and secure savings vehicle. At the same time, the research also shows that a majority of bondholders and non-bondholders agree that the program should be adjusted to current circumstances.

Finance is also undertaking analysis of expected future costs and benefits of the program over the next 10 years under a number of different program designs. It notes that even if wholesale markets are adequate to deal with the government’s funding needs in the current environment, the Retail Debt Program offers an alternative and diversified source of funds, and that there is an insurance value in keeping this channel open. There are also benefits to providing Canadians with a secure investment vehicle that helps them save.