Statistics Canada recently released its findings on this country’s 2006 census, cementing a variety of concepts about the number of people at or nearing retirement. For those in the investment funds industry, the whole retirement issue poses a series of questions and challenges.
The census shows, not surprisingly, that there are more Canadians of retirement age (65 and older) than ever before, making up a record 13.7% of Canada’s population in 2006. It is predicted that percentage will almost double in the next 25 years as the bulge of the baby boomers (those born between 1947 and 1966) move into retirement and those who are already there live longer.
When it comes to longevity, the census shows the number of Canadians over the age of 80 last year topped one million for the first time, representing a 25% jump from 2001. As well, 4,635 Canadians were over age 100, up 22% from 2001, with the number of centenarians expected to triple by 2031.
There has been a general push by governments, economists and many financial institutions to get individual Canadians to do their share in saving for their retirement, cautioning them not to rely too heavily on government programs. This is especially true in light of increasing life expectancies, the drop in the number of defined-benefit pension plans and the decline in the proportion of paid workers with registered pension plans.
That’s why the Investment Funds Institute of Canada, along with other organizations, lobbied — successfully — for an increase in the age limit for the conversion of an RRSP to a RRIF. We also lobbied — again, successfully — for a bill to ensure unlimited RRSP credi-tor protection in the event of a personal bankruptcy, with no locking-in requirement.
For the financial services industry itself, longer retirements will mean creating the kinds of products that will adapt to the specific needs of this group of investors. Retirees will no longer need advice and products that accumulate wealth, but will need advice and products to help them preserve their wealth and enable them to divest their assets without the fear that they will run out of money during their lifetimes. This issue of so-called “shortfall risk” is probably one of the biggest challenges retirees will face.
The industry has already developed some new products. We’ve seen the growth of so-called “target-date” portfolios, asset-allocation funds that shift holdings from equities to more conservative, fixed-income investments as the date of the investor’s retirement (the target date) draws closer and capital preservation of the investments becomes the primary focus rather than growth. And there are also guaranteed-income products. Similar to principal-protected notes, guaranteed-income products are investment funds that guarantee the original capital of an investment is protected from any market losses. Some even offer a minimum guaranteed return each year, provided investors do not make withdrawals.
IFIC believes that the entire retirement issue is of such great importance that it is giving the topic prominence at its 2007 annual conference, scheduled for the beginning of October. How should the industry in general respond to greater calls for asset preservation and income-producing funds or “safe” growth not eroded by inflation? How will the industry deal with the shift from asset accumulation to investors cashing in their RRSPs?
Governments, regulators, industries, labour, universities, hospitals — all will feel the crunch. Those who haven’t already started to act would do well to give it top priority.
Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada. IE