What’s next, seizure exemption?

By Gérard Bérubé

The elimination of the 30% limit on foreign content for pension plans and RRSPs had long been demanded to no avail. Then, just when no one expected it and its proponents lost all hope, it happens. However, the legislator needs to address a more important issue: potential seizure of retirement assets accumulated in RRSPs.

The efficiency measure in Ralph Goodale’s February budget, intended to eliminate the 30% limit, is quite narrow in scope. Even before the limit was eliminated, it could be exceeded without constraint, using derivative, hybrid or synthetic instruments. While there were additional fees for using these instruments, pension plans directed only an average of 24% to 26% of their assets to foreign investments.

For individuals, only 5% of RRSP holders reach the foreign content ceiling, while 35% have no foreign content. Stéfane Marion, assistant chief econo-mist at National Bank Financial, says that in the UK where there is no foreign content limit, 82% of savings are invested locally. In Australia, which also has no limit, individuals invest only 20% of their savings abroad. For institutions, foreign content hovers at 36% in Australia and less than 40% in the US, which has no restrictions on foreign investments.

There seems to be some restraint where foreign investments are concerned, or a slight bias toward local content, a reminder that international diversification introduces an additional risk — the exchange risk — without guaranteeing higher returns. According to consulting firm Morneau Sobeco’s 2004 review, the annualized yield of the S&P500 index was 3% over one year, -5.7% over three years and -5.8% over five years when converted into Canadian dollars. For the same period, in Canadian dollars, the performance of the benchmark index for international shares was 11.5% over one year, 1.7% over three years and -4.9% over five years. For Canadian shares, the annualized yield was 14.5% over one year, 8.3% over three years and 5.7% over five years.

There is no capital exodus on the horizon, even if the Canadian market represents a mere 2.5% of the global market cap and 2% of the required capitalization. After all, the benefits are paid in Canadian dollars, curbing the exchange risk a manager can absorb.

This being said, the legislator faces another challenge. If, for the sake of efficiency, the government has decided to scrap the foreign content limit, then for reasons of both efficiency and fairness, it will have to squarely address the issue of exemption from seizure, currently restricted to supplemental pension plans and locked-in RRSPs. The current debate focuses on RRSPs, which account for only about 40% of Canadians’ retirement savings. Yet two-thirds of Canadians do not have access to supplemental pension plans (other than public plans). For an increasing number of self-employed workers and professionals, an RRSP is the only way to accumulate retirement assets, while many SMEs use group RRSPs.

The question arises because case law and a growing number of court decisions are allowing RRSP assets to be seized. Immunity from seizure has become an exception that only a court can recognize or ratify.

Exemption from seizure was generally restricted to RRSP products offered by insurance and trust companies and was contingent on the designation of a beneficiary in the event of death. In addition to these conditions, the plan holder had to opt for a lifetime or fixed-term annuity. This option no longer exists, or at least recent court decisions have tightened the criteria. An RRSP issued by an insurance firm can no longer offer this protection, which now covers only trusts, insurance contracts and pensions. Even shares in labour-sponsored funds will no longer escape the clutches of creditors.

So total confusion reigns and unless the legislator steps in to clear up the rules, a smorgasbord of schemes and stratagems for circumventing case law will appear. Sooner or lat-er the government will have to get involved, but forget about absolute immunity, if only because of the accumulation of unused contribution room. What about creditors’ rights with respect to so-called catch-up contributions if immunity from seizure were to put these funds out of their reach? Of course, the government could intervene and restrict creditors’ right to seizure. The Canadian Association of Insolvency and Restructuring Professionals has already suggested the three-year rule, whereby only the portion of the RRSP contributions made in the three most recent years would be subject to seizure. But is this the right solution? Only the future will tell.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal