The Financial Crisis and Individual Retirement Savings

There’s been a fair bit of coverage recently about the big hit to defined benefit pension plans as a result of collapsing equity markets. That’s not a pretty sight, and many plan sponsors face serious short to medium term difficulties in financing their plans as funding deficits increase. But, most pension plan members can still count on getting the pension they have planned on and paid into.

What about people (and that’s now most people) who are on their own? A recent StatsCan paper suggests that 59% of RRSP (and RRIF) assets are in variable return assets (mainly mutual funds, plus some direct ownership of stocks and bonds) and just 25% are in predictable assets (GICs, treasury bills.) The balance are in mixed assets. Twice as many people hold mutual funds in their RRSPS as hold much safer GICs.

The Investment Funds Institute of Canada (IFIC) provide data on retail mutual funds of the kind held in RRSPs, outside RRSPs and in defined contribution pension plans. I’m told that probably about 60% of all retail mutual funds are held in RRSPs.

In January, 2008 – before the current crisis -46% of retail mutual funds were invested in equity funds ($307 Billion) and another 36% was invested in mixed funds, with just 17% in bond funds and money market funds. Assuming mixed funds are one half equities, that means equities come in at over 60% of the total.

The bottom line here is not an exact figure… but RRSPs (totalling $600 Billion in 2006) would seem to be quite heavily tilted to equities.

We don’t know what is happening to RRSPs specifically, but between January and October the total equity holdings of all retail investment funds fell by $79 Billion, of which just $7 Billion represented net redemptions. Balanced funds took a hit of $29 Billion.

The total value of all retail investment funds fell from $671.6 Billion in January, to $571.4 Billion at the end of October (with gross sales and redemptions just about cancellign each other out.) That’s a decline of 15%… and the carnage continues as November unfolds.

It’s not a good time to be on your own.

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