The turnout for this year’s traditional RRSP sales season appears to have been quite good, despite a negative savings rate in Canada and more than $367 billion in untapped contribution room. The long-term future of the season, however, appears to be less rosy, as RRSP contributions from baby boomers start to decline.

The RRSP season was in its final days as Investment Executive went to press. It will be months before a definitive tally will be released, but there are already many signs it was a busy campaign.

First, mutual fund sales were quite strong to open the year. In mid-February, the Investment Funds Institute of Canada reported that funds recorded net sales in January of $1.6 billion, which is two and a half times greater than the total for January 2005. However, the 2005 period was exceptionally weak. A very strong February 2005 pulled the sales total for January and February 2005 up to almost $6 billion.

This year, the total for the first two months can be expected to end up in similar territory. Based on historical data from IFIC, January’s net sales typically represent about 26% of the total for the first two months. This would put a reasonable estimate of RRSP season sales at about $6.1 billion for this year.

Bill Holland, chief executive officer of CI Financial Inc. in Toronto, says he saw RRSP season sales consistent with last year’s totals. “The RRSP season is OK,” he says, adding that mutual funds seem to be the chief beneficiaries.

“The mutual fund business is doing well, but it seems to be predominantly the banks,” he says.

The banks have been garnering the bulk of new fund flows for the past year or so, and Holland says that appears to be continuing. He says many of the large independents, apart from CI, may well still be in net redemptions. “The overall health of the independent part of the industry is, I think, still suspect,” he says.

Holland predicts that bank-owned RBC Asset Management Inc. and TD Asset Management Inc. probably will lead the season by a fair margin. CI is doing well because of overall strong investment performance in its funds, he says. Other firms with strength in energy-related products, he adds, such as Dundee Wealth Management Inc. and Acuity Funds Ltd., will also have impressive sales this year.

One positive that Holland sees is a broadening of asset-allocation decisions by investors. As a group, domestic equity funds have been in net redemptions for some time, but the recent strength in Canadian equity markets finally seems to be catching the attention of mutual fund investors once again. Holland notes that CI’s Canadian equity funds are selling well this year and the banks will do well in their Canadian equity funds this season. Outside of the banks, he expects sales will be flat to marginally positive.

IFIC notes a similar brightening of prospects on the foreign equity side occurred in January, when the industry managed to record $133 million in foreign equity net sales, ending a string of 21 straight months of net redemptions.

Although decent mutual fund sales would seem to augur well for the RRSP season overall because they still represent a large chunk of RRSP season savings, they are no longer the only game in town for the average mainstream retail investor.

Funds now face much more competition from rival products than they did in the past. Competitors include everything from simple deposits and individual securities to wrap accounts and alternative investment funds (segregated funds, hedge funds and exchange-traded funds). Income trusts have emerged as an asset class unto their own, and structured products have become popular with retail investors, too.

Taxpayers contributed $25.2 billion to their RRSPs in the 2004 tax year, says Statistics Canada, and about $6.9 billion went into mutual funds in the traditional RRSP season. Of course, not all is going into RRSPs. Many RRSP contributors are making investments throughout the year, and not all of it comes flowing in at the end of the contribution period. Nevertheless, the numbers give a rough idea of where mutual funds stand as a portion of RRSP season volumes.

Measuring the volume of investment into other products is an even trickier problem, but there are hints out there. For one, trading volumes have been booming in the past few months. Janet Comeau, manager of corporate communications with Canadian Depository for Securities Ltd. in Toronto, says trading volumes have been strong throughout the past year, but particularly in recent months. Records were broken in October, then in January and again in February. On Feb. 7, CDS recorded a record 457,091 equity exchange trades.

@page_break@In its most recent three-month period, November through January, CDS saw 19.1 million exchange trades (encompassing the Toronto Stock Exchange, TSX Venture Exchange and Canadian Quotation and Trade Reporting System Inc. [the last is more familiarly known as the CNQ]). That total is almost double the 11.8 million trades CDS handled in the same period in 2005, and the 10.9 million trades it saw through the same period in 2004.

Overall investment fund processing volumes are up notably as well. FundServ Inc. reports that in the Jan. 1 to Feb. 23 period, Canadian-dollar payments were up by 24.7% from the same period last year, and U.S. payments were up 38.5%.

Clearly, investors are piling into the market in one way or another. Some of the money is flowing through mutual funds, some is direct investment and still more is coming through other products.

Wrap accounts have been gaining popularity in the past few years. Holland says the fund companies’ wrap products seem to be selling fairly well again this year, a fact that will be captured by the mutual fund sales data. Wraps that hold a more diverse selection of assets are harder to measure.

In the hedge fund world, Jim McGovern, managing director and CEO of Arrow Hedge Partners Inc. in Toronto, says sales at his firm have been solid, if unspectacular. He says hedge funds are facing a handful of headwinds in Canada, including a couple of high-profile scandals. Investment performance has also been an issue for hedge fund managers worldwide. He adds, however: “Hedge fund managers based in Canada have had very solid numbers and are attracting a good amount of money.”

He says the biggest factor dampening hedge fund flows is the hot Canadian equity market. Investors tend not to fret about achieving absolute returns when the domestic index is hitting new all-time highs. The other challenge for hedge funds is the immense appetite for yield that Canadian investors seem to have, which is reflected in the ongoing popularity of income trusts, and the pre-eminence of income-focused funds in mutual fund investors’ asset-allocation decisions.

The seemingly insatiable appetite for yield has its roots in some of the corporate scandals that rocked the mainstream equity world in the early part of the decade. The events sent many investors scrambling for safety, and sparked the drought in sales for pure equity mutual funds that only now seems to be easing.

Many investors who remain risk-averse at a time when interest rates remain very low are looking for alternatives beyond traditional deposits. Their interest has boosted the fortunes of assets such as bond, balanced, dividend and income funds. It has also helped sustain the income trust phenomenon, and given life to newfangled structured products such as principal-protected notes.

As a result, PPNs have taken their own place in the traditional RRSP season marketing blitz, and it appears to be paying off for some firms.

“Overall, we’re seeing a very healthy RRSP season shaping up,” says Brent Artemchuk, director of corporate communications for One Financial Corp. in Toronto, which offers PPNs. “We’ve more than doubled our volume year-over-year.”

Artemchuk attributes the success of PPNs to a number of factors, from greater market acceptance for the asset class overall to the company’s own efforts.

“We think this [doubling] is due to an increased profile of PPNs in the marketplace, the fact that as retirement vehicles PPNs provide excellent protection, and an aggressive sales and marketing campaign on our part,” he says.

Although players in a variety of product sectors vouch that they are doing relatively well this RRSP season, there are storm clouds gathering over the long-term future of the industry’s traditional sales season and, indeed, the Canadian economy. The threat comes from our aging population, which may provide a boost to retirement savings in the next few years. Beyond that, the future looks challenging.

One problem is that there remains a large, persistently untapped segment of the population: people who aren’t contributing to RRSPs at all. The latest data from Statistics Canada, from 2004, show about 5.6 million people contributed to RRSPs, representing 38% of eligible taxpayers. The proportion has hardly changed since 1992, when 36% of eligible taxpayers contributed.

It appears that the RRSP option works for only a minority of the population.

If so, then year-over-year sales growth is largely limited to wringing more money out of that relatively fixed group.

More troubling is the view that workforce growth is expected to slow dramatically in the coming decades. A recent report from the Organization for Economic Co-operation and Development estimates that over the next 50 years, if current labour-force participation rates remain constant, the Canadian workforce will grow by less than 5%. By comparison, from 1950 to 2000, the labour force in Canada grew by almost 200%.

In other words, the organic growth previously enjoyed by the mutual fund industry is almost certainly near an end.

Already, those in the leading edge of the boomer generation are getting to the age at which they are contemplating early retirement. As they start moving into retirement, a large number of potential contributors will be moving off the industry’s radar. By 2050, the proportion of retirees in the population is expected to rise to more than 45% from the current 20%.

That development highlights the clear limitations to the current retirement savings structure. For the industry to thrive in the long run, it’s going to need more than the current RRSP.

Vehicles such as tax-prepaid savings plans may provide a much better savings alternative for lower-income workers, bringing a very underserved part of the workforce into the world of saving and investing. Reform RRSP rules could allow people to contribute for longer, and at much greater levels.

Moreover, structural changes that aim to improve productivity and increase incomes are essential to an economy facing a serious demographic challenge. A beneficial side effect would also be more savings and investment.

In the interim, however, there is some good news. RRSP contribution limits are heading higher. Already it is the higher income earners, those most likely to be constrained by limits, who are both the biggest contributors and the most likely contributors.

Statistics Canada reports that in 2004, 76% of those with incomes of more than $80,000 contributed to an RRSP, and they scrounged up an average contribution of more than $9,500. Therefore, the increasing contribution limits should provide some opportunity for growth at the margins.

The other trend that bodes well for RRSP season growth, in the short term anyway, is — oddly enough —the aging of the population. Although higher income is one factor that correlates positively with contributions, the same is true for age. Taxpayers between the ages of 55 and 64 each contributed about $5,200 to their RRSPs in 2004, compared with the $3,460 that was contributed by those aged 25 to 34.

One reason is that incomes tend to rise with age. Households also have more latitude to save as they get older and big fixed expenses such as mortgages are paid off. Therefore, as the population ages, there should be more scope for total contributions to rise. IE