The federal government’s decision to eliminate the 30% foreign content limit on investments in pension plans and RRSPs is good for pension funds, but bad for providers of clone funds, says consulting firm Watson Wyatt Worldwide.

“The impact will not actually be as large as it might first appear. Pension funds and RRSP investors already had the ability to get around the 30% foreign content limit by investing in ‘clone’ funds that provide exposure to foreign markets but are classified as Canadian content,” the firm said in a written comment.

“Providers of clone funds will be the big losers, as these funds have higher fees than traditional indexed funds. Pension plans and plan members will be winners if the change, as expected, allows the funds to earn a bit higher return or reduce their costs.”

The commentary adds that investors with RRSPs will be able to invest more of their money outside Canada, and may be able to reduce their investment costs.

Watson Wyatt says it is unlikely that many pension funds will pull completely out of Canadian investments. “In countries such as the United Kingdom where there has been no foreign content limit, the average foreign content is still around 40%, as there is always a ‘home country bias.'”

Watson Wyatt says he ending of foreign content restrictions presents an opportunity for pension funds to invest in bonds issued by other countries. Up until now, most funds have used their limited foreign content on foreign stocks. Now that bias will be eliminated and funds can shop the world for bonds more easily. RRSP holders will also have this opportunity, but are less likely to utilize it.”