A $1 Trillion Opportunity Disrupt RRSP Apathy; Action & Investment Fueling Social Innovation

By R. Brent Lang

Environmental, Social & Governance change harnessed via untapped resource to boost social innovation/enterprise sector; injecting significant catalyst dollars into our economy.

How might we provide impetus for Canadians to fully utilize their Registered Retirement Savings Plan (RRSP) contribution amounts to provide sufficient safety net whilst boosting social innovation across Canada?

Canadians become enthusiastic at the measure of their impact through investing in Innovation – capital flowing to creative, adaptable solutions to societal problems.

Adaptive Cycle:

Development: RRSP developed in 1957, new innovation.

Growth: Canadians utilized their pensions first, and roughly 30% other Canadians supported RRSP savings

Maturity: Roughly 20% (1 in 5) Canadians contribute to RRSP. Fewer than ever are receiving pensions.

Stakeholder Analysis:

Key stakeholders are Minister of Finance as well as Minister of Innovation, Science and Economic Development (http://www.ic.gc.ca/eic/site/062.nsf/eng/home), Navdeep Bains office, to Federal and Provincial authorities. Canadian banks and credit union, universities; Canadians from coast-to-coast.

Framing the Opportunity:

The Baby Boomer demographic wave enters retirement, simultaneously the largest wave, Millennials will re-shape Canadians’ relationship to money, power and happiness via strategic, deliberate investment into Clean Money savings and growth vehicles to ready themselves for the future. The question has been developed and now I will engage Federal and Provincial authorities, along with readers of The Canadian Business Journal and the investment, banking and credit union landscape to gauge the optimal approach to utilizing Innovation to motivate Canadians to be willing, passionate participants of RRSP savings via Impact Investing.

Only one in five Canadians will contribute to an RRSP. In excess of 24 million Canadians have more than $1 trillion in combined unused RRSP contribution room, which equals an average of $42,000 per Canadian. This staggeringly large figure ($1.01 Trillion) has ballooned from $683 billion in 2011. In fact, CBC News states “RRSP deadline and FAQ 2016” published Jan 2, 2016 that $1.03 trillion is the amount Canadians have saved in RRSPs, according to Investor Economics. It is easy to see that an amount – roughly equal – for what Canadians have saved and what they were still capable of saving in the RRSP vehicle.

The research group, Pollara, carried out a study for Bank of Montreal in February, 2017 that concluded one in five Canadians have withdrawn money from their RRSPs to cover living expenses or debt, a clear sign that a rising cost of living and heavy debt burdens are putting financial pressure on households. The study also found “Canada is experiencing a case of “savings inequality”, as fewer people are adding to their retirement savings, but those still saving are able to save more.

In Statistics Canada’s report, “Trends in RRSP Contributions and Pre-retirement Withdrawals, 2000 to 2013” link in appendix the author, Dr. Derek Messacar, states “Several trends are interesting to note.

First, the number of contributors declined gradually by approximately 16% over this period (2000-2013). Second, the number of RRSP withdrawers increased over the period, from approximately 900,000 in 2000 to 1.3 million in 2013. Third, the slight decline in RRSP use over the last few years coincided with an increase in the number of individuals aged 25 to 54 who contributed to a TFSA, from 2.0 million in 2009 to 3.0 million in 2013, there were about 1.6 million TFSA withdrawers, slightly more than one-half the number of contributors in that year; about $0.47 was withdrawn from TFSAs in 2013 for every $1.00 contributed in that year. Hence, both the frequency and magnitude of TFSA withdrawals are significantly larger than for RRSPs”. Nationally, the median RRSP contribution in 2015 was $3,000, unchanged in recent years.

A Canadian resident earning $80,000 would receive a tax return of $13,000, by fully-utilizing the RRSP contribution room, of $42,000. This illustration becomes even more enticing later as innovation is applied.

There is apathy amongst Canadian savers; confused in the froth of messaging, perhaps; uninspired.

Are Canadian’s lacking the financial commitment to fund their retirement by deferring taxable income via this savings vehicle? Are the investment choices just not palatable enough? Would things change if there was a #CleanMoney solution to drive responsible investment opportunities?

Re-frame the tax benefit of acting upon the unused RRSP contribution as an ‘Asset Plus’; you’ll have the asset in your RRSP plus a significant tax deduction based on that contribution amount.

Increased longevity is a fact. We need to fund a retirement that can meet these additional years.

A recent report from Statistics Canada reveals 67% of Canadians have unused RRSP contribution room and this figure is startling large; more than $1 trillion dollars. For reference, Canada’s GDP for 2017 is $1.75 trillion.

To re-frame this, $1 trillion is a juicy figure to all financial Industry players – in my opinion, the National Credit Union framework could capitalize on this via an Impact Investment model offering equity and term-deposit options. “Patient Capital”, diversified portfolios with enough Impact Investment content to make a difference – not just exclusion of “sin stocks” but a portfolio that truly embrace Principles for Responsible Investment.

Would having one’s savings deducted at source (employee or business owner) using pre-tax dollars help? Would payroll deduction – like certain workplace charitable giving programs increase utilization of RRSP room?

The Dark Side of Canadians’ Net Worth

Debt-to-household-income ratio rises in third quarter, household net worth: Total household credit market debt grew to $2.11 trillion in the third quarter, up 1.4 per cent from the previous quarter. The increase came as mortgage debt increased 1.5 per cent to $1.38 trillion, while consumer credit rose 1.2 per cent to $620.7 billion.

Education is a start, but igniting passion and purpose can prioritize savings in a younger worker, new homeowners or those raising children. To save is necessary but often this is not “budgeted”, so it is only at contribution deadline time aka RRSP season or tax time that the thought turns to action. Budgeting is easy – sticking to the budget is hard when wants and needs – or emergencies – exceed present-moment ability.

Academia looks into this more deeply – Dr. Messacar, a Statistician for Statistics Canada, and Adjunct Professor, Department of Economics, Memorial University, and visiting scholar at the Retirement and Savings Institute of HEC Montréal (business school of Université de Montréal), wrote March 27, 2017, in The Effects of Education on Canadians’ Retirement Savings Behaviour, “The data show that both savings and home values increase with the highest level of schooling attained… The analysis indicates that high school completion boosts retirement savings rates by 2 to 6 percentage points annually – an effect that persists remarkably over the life cycle.”

“There is a large literature in economics that estimates the returns to education. Previous studies have found that staying in school longer can lead to higher labour market income; lower rates of substance abuse, incarcerations, and criminal activity; better health and happiness; and longer life expectancy. However, the extent to which education affects how individuals prepare for retirement in an underexplored empirical issue.” “Individuals with a terminal high school diploma or a trades certificate are grouped together because their savings patterns are similar. Savings rates in tax-preferred accounts also increase with educational attainment.”

Development and marketing of a new product designed to bridge-the-gap; to align the need to save with the desire to save, based on Environmental, Social and Governance values. Credit unions align with this thinking – if only the “value” locked-up in this RRSP contribution room could be catalyzed.

Another “frame” for how big this problem/opportunity is can be defined as +$1 Trillion unused RRSP contribution room is nearly as large as the entire Canadian mutual fund industry combined.

Is the motivation for this “Giving”, or “Investing”? The Millennial generation could be big supporters of this.
The investment structure can be debated however examples of previously tested structures are below. To make this work, in my opinion, a funding source should be available to citizens with a goal to provide approval to those who can manage the loan, but also can show the tax return can manage their external savings or credit obligations in a positive way due to this investment.

As example, someone carrying $5,000 in credit card debt could see the net tax return from a $15,000 investment equals $5,000, thus saving them not only the minimum monthly payment (roughly $150), but also the compound interest that could be several thousand dollars. The investment, should it qualify for RRSP eligibility and a 30% provincial tax credit, can be invested in social housing projects or as New Market Funds’ Managing Director, Garth Davis suggests, a balanced portfolio with ample liquidity options if needs or retirement liquidity is required.

Davis is also correct in pointing out that such lending toward this innovation can be have a multiplier effect on the deposits of the institution, cementing relationships that could last a lifetime – a very valuable prospect for this industry – a loan book and a wealth management book. I’ve sought input from the following influential business minds too; Gene Blishen, Director, Vancity Community Foundation and former General Manager, Mt. Lehman Credit Union. Mr. Blishen provided this, “What stood out very starkly was the $1 trillion figure.

There is potential in building something from a diverse and varied base instead of ‘hitting the homer’ with small number of large fund builders. When you speak of credit unions I would look at the seven cooperative values and possibly tie those that are specifically applicable i.e. democratic principle.

By moving your direction into a “stated values” based direction you may get more traction and a greater buy in. You have left the purpose generalized to some extent as there are emerging issues that could prove very valid i.e. establishing a land trust to combat affordable housing. It definitely resonates as a social innovation.”

Mr. Matthew Brown, Director Tax Programs, Investment Capital Branch, BC Ministry Jobs, Trade and Technology offered this, “A couple of issues I’ll bring to your attention regarding VCCs, although you might already be aware of them if you’re familiar with companies –both Eligible Business Corporations, and VCCs – that have been registered in the Venture Capital Program. One issue is that venture capital investing is high-risk and therefore not appropriate for a wide-range of BC investors. In fact, most registered companies do not issue a prospectus, but instead issue shares to “exempt investors”. Which as you know are usually high net worth investors, and those with sophisticated enough investment knowledge of the risk regarding both the return of capital and return on capital.

Another issue is that in general terms nine out of ten venture backed companies will fail. Being at the high-risk end of the investment spectrum, vc backed companies don’t make good investments on which to build retirement funds. This could be problematic for those investors that had borrowed to make an investment.

A final thought is that the VCCs are RSP eligible investments, including the retail VCC funds that have operated in BC; however, the retail funds seemed to have struggled to find suitable investments in small businesses, and earn a return for their investors. Some of the funds have halted redemptions of shares which has imposed difficulties for investors who hold shares in their RSP accounts but can’t dispose of the shares.”

Questions abound on security – RRSP’s cannot be utilized as collateral or security – they are creditor proof under certain circumstances.

Before we get to the plan, we need to envision an optimal outcome:

The analogy of a beehive is useful in this illustration; the colony, nectar, honeycomb, and honey! When bees have access to abundant sources of nearby nectar they can produce the greatest volume of honey; this is called the ‘honey flow’. The honey flow is about the ability of bees to complete the creation of honey. “Mutualism” is observed – two organisms of different species sharing a mutually-beneficial relationship. The hive is the population, the bees represent the investments and the flowers represent the needs requiring innovation via investment.

Option I

Government utilizes a mechanism similar to the BC Venture Capital Tax Credit* to permit RRSP investments into a group of competing BC-based ESG VC funds. ALL BC resident investors can access funds via loan from special BC Credit Union system at prime with 120 month pay-back period. The investment must be held in a BC-based credit union RRSP account. Investors receive their RRSP contribution deduction and refund to apply against loan. The investment has a hold period of 7 years.

The BC Venture Capital 30% “refundable” tax credit also provides additional refund to circulate through BC’s economy – all the while social good is occurring via the new investments. Throughout the 84-month commitment, the VCC-holders receive updates on their investments “return on investment”, such as growth, innovation and ESG metrics of loan recipient / investee companies. Under this example, the $42,000 average amount of unused RRSP contribution room will produce the anticipated $13,020 contribution refund amount, plus an additional $12,600 “refundable” BC tax credit; resulting net cost of purchasing $42,000 of BC ESG VC fund, will be $16,380. These income tax and refundable tax credits will fuel BC’s economy.

Option II

A similar structure but a 7-year, principal-protected Social Impact Bond with competitive rate.

Option III

The BC Mining Flow-Through tax incentive – tilted on its head to provide incentive for innovation sector

Option IV

British Columbia offers Labour-Sponsored Funds Program: Labour Sponsored Funds Programs help create investment funds that are able to invest in small and medium-sized businesses with high growth potential that need equity financing to achieve success. In British Columbia there is currently one labour sponsored investment fund registered as employee venture capital corporations under the Employee Investment Act. The goal of this fund is to earn a competitive return for shareholders, through long-term equity investments in small to medium-sized businesses in B.C.’s emerging markets. B.C. investors receive a combined federal and provincial tax credit of up to 30% on their investment in a labour-sponsored investment fund.

Option V

Canada Savings Bonds – Innovation Bond to circulate investment in the sector through granting of these funds to innovation investment professionals.

Test this hypotheses against definition of Social Innovation: “Any initiative (product, process, program, projects or platform) that challenges and, overtime, contributes to changing the defining routines, resource and authority flows or beliefs of the broader social system in which it is introduced. Successful social innovations have durability, scale and transformative impact.” – Frances Westley.

The issue of “solving” social injustices is best left out of the Government’s hands, but “funding” through innovative policy is required. This solution meets the definition and is durable, scalable and transformative!

Brent Lang, CIM FCSI, is VP, International Sales, Strategic Analysis Corporation. He holds the Branch Manager, Canadian Investment Manager, Professional Financial Planning, and Fellow of the Canadian Securities Industry (FCSI), designations. He is a recognized subject-matter specialist in finance, philanthropy, and social enterprise.

This article is asking for your response and input to test this innovation and with merit, bring to life.
Project for SFU Social Innovation Certificate – R. Brent Lang, CIM FCSI
• Seeking input to prove out the “need” for this innovation
• Identify any missing actors in the system
• What solution will work is subject to more analysis – but dialogue will reveal correct path
• Feedback is appreciated. Please reply to rbrentlang@gmail.com or call 604-789-3700

Problem Framing
1) [Industry colleagues] Canadians are not saving for retirement – too much reliance on future home prices, inheritance, perhaps. CPP/OAS may not be able to support future generations*
2) [Non-industry observer] Its too hard to save, given the cost of everything to make it through the month
3) [Social Innovation definition] Prioritizing for, and supporting Canadians in providing social safety net for themselves is prudent; creating the mechanism for this change and making it urgent, is the innovation.

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