Savings bonds here to stay, says finance minister

(September 3, 2004) The federal department of finance is looking into possible reforms to the Canada Savings Bond (CSB) program, officially called the Retail Debt Program, after a report commissioned by the government recommended scrapping the bond program altogether.

“We are assessing the Retail Debt Program in the context of a much-improved fiscal situation and a broader array of investment opportunities for Canadians,” said Finance Minister Ralph Goodale. “The option of eliminating the Canada Savings Bonds Program is not on the table as part of this review. We are looking to update and improve our retail debt strategy, not to end Canada Savings Bonds.”

CSBs have long been laggards in terms of performance, with last year’s issue offering an annual compound rate of just 2.79% — and that’s only if the investor holds the bond for the full 5-year term. Furthermore, the bonds no longer seem to serve their original purpose from an investor point of view.

“Investor breadth is accomplished through the recent ‘retailization’ of marketable debt through money market and bond mutual funds, which has also increased domestic ownership of debt,” says the report, written by Cap Gemini Ernst & Young and delivered to the federal government in January.

Part of the “problem” for the CSB program is heightened investor sophistication and the proliferation of financial advice. According to Cap Gemini Ernst & Young, the 1990s saw financial planner certifications grow at a rate of 35% per year.

“Investors are exhibiting greater diversification in their investment portfolios, embracing alternative investments, and taking advantage of access to global markets,” the report says. “In addition, greater interaction with professional investment advisors has provided investors with a higher level of understanding of the benefits of investing and financial planning than ever before.”

While the options for savings have increased, the tendency of Canadians to save has declined. Once a nation that prided itself on squirreling away spare cash, Canada has moved toward U.S.-style consumer debt.

Canadians have been moving away from CSBs over the years, with total investable assets held in them dropping from 8.3% in 1987 to just 1% at the time of the study.

Another problem the CSB faces is its distribution channel. Traditionally, the bonds were largely sold through banks, which are now increasingly promoting in-house products, rather than selling CSBs.

While the government has introduced Internet purchases and payroll deduction, these sales methods are most popular with younger investors who rarely hold the bonds for their full term, using them instead as high yield savings accounts.

But even this niche is coming under attack, as low-fee high-interest virtual bank — such as ING Direct and President’s Choice Financial — offer even more convenience with only slightly lower interest rates.

“More than simply marketing the importance of saving for the future, financial service providers also develop and deliver mechanisms for addressing consumer anxiety about increasing debt loads and the risk of insufficient savings,” the report says. “In this context, the program’s savings messages are viewed as a duplication of the efforts by the financial sector, and as a source of confusion and contradiction at the point of customer interaction.”

“Analysis of historical trends in the non-marketable retail debt portfolio suggests that the program has lost its importance as a source of funds to government,” concludes the report.

In fact, the report says that despite the low annual rate of return for investors, CSBs are more expensive for the government than borrowing on the open market.

“Pricing savings bonds lower than wholesale debt, the discount was not covering administration costs or the full value of the optionality inherent in the products’ design,” the report says. “Recently balanced budgets have allowed the government to borrow in wholesale markets at more favourable rates than previously available when Canada had higher national debt levels.”

The Cap Gemini Ernst & Young report offers four options the government could take, including re-launching, refocusing or fine tuning the basics of the program, but says the research supports only one option: winding down the program altogether. But even if this option makes the most sense economically, Canada Savings Bonds may be too well entrenched in the national psyche to make their elimination politically feasible.

“The Cap Gemini Ernst & Young report is one element of the overall review of the Retail Debt Program,” Goodale said. “My officials are assessing the report’s conclusions, as well as the views of Canadians on updating the Canada Savings Bonds Program.”

“I want to make it very clear that there are no changes being made to the Canada Savings Bonds Program at this time,” added the minister. “This year’s series of bonds will go on sale in the fall, and there is no change to the services being provided to existing Canada Savings Bond and Canada Premium Bond holders.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(09/03/04)

Steven Lamb