CANADA - The impact of the government's decision to eliminate the 30% foreign content limit on investment in Canadian pension plans will not actually be "as large as it might first appear.
Consultants Watson Wyatt said previously despite the cap, pension funds could get around the restriction by investing in “clone” funds that provide exposure to foreign markets but are classified as Canadian content.
“This was a classic case of Coase's Theorem, which says that if regulators legislate something that doesn't make sense, people find a way to get around it.
“Investors in clone funds will now be able to achieve foreign exposure at a lower cost. Providers of clone funds will be the big losers, as these funds have higher fees than traditional indexed funds. Pension plans and plan members will be winners of the change, as expected, allows the funds to earn a bit higher return or reduce their costs,” the consultants noted.
Watson Wyatt said despite the removal of the cap, it was unlikely that many pension funds would move completely out of Canadian investments due to the ‘home country bias.’
“One of the more interesting opportunities that pension funds may now explore may be to invest in long bonds and real return bonds issued by other countries. Up until now, most funds have used their limited foreign content on foreign stocks. Now that bias will be eliminated and funds can shop the world for bonds more easily,” the consultants added.
In his budget statement last week, minister of finance Ralph Goodale (pictured) said the government would scrap the 30% foreign property investment cap on pension and registered retirement savings plans (RRSPs) and increase the contribution limits on RRSPs to CAN$22,000 by 2009 and 2010 respectively.
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