Canada Savings Bonds sales to continue, despite KPMG recommendation to stop
Program costs $58M to run and is no longer a 'net source of funds' for Ottawa
Ottawa has no plans to stop offering Canada Savings Bonds, despite the recommendations of a government-commissioned report from an arm of consultancy KPMG that recommends cancelling the program.
In a report, the consultancy says "there is currently no valid economic rationale for the retail debt program," better known to Canadians as Canada Savings Bonds and Canada Premium Bonds, which allow citizens to loan money to the government with interest for small time periods.
"For a time they were a great opportunity for people to save money using a simple to understand product that paid reasonable interest," is how Dan Bortolotti, an investment adviser with PWL Capital in Toronto described them. "But that time has possibly passed."
The program was formed in 1946, born out of a precursor designed to raise funds for the war effort, but has shrunk dramatically. The total value of all funds in the program was as high as $55 billion in 1987, but that has declined to about $7.7 billion in 2013. That's less than one per cent of all the insured retail savings instruments in Canada that year.
Far from being a source of funds, the program now costs Ottawa more money to run than it takes in. All in all, it costs Ottawa $58 million a year to run, not including the cost of interest payments, KPMG said.
"It is no longer a net source of funds for the government, since it has been necessary since 1987 to borrow on the wholesale market to fund the net yearly redemptions," KPMG said.
Despite the recommendations of the report, the Department of Finance said Thursday it has no plans to close the program.
"While noting KPMG's recommendations, the government recognizes that approximately 2.5 million Canadians continue to hold over $6 billion of government of Canada retail debt products, and over a million Canadians today still purchase Canada Savings Bonds and Canada Premium Bonds, demonstrating Canadians' continuing interest in the program," Stephanie Rubec, a spokeswoman for the Finance Department, said in a statement.
Low risk, low return
It's no coincidence that the program peaked during a time when interest rates were in double digits in the 1980s, when the prospect of safely loaning money to the government while getting a guaranteed return of more than 10 per cent for 10 or more years was attractive.
In 1981, for example, one could buy a Canada Savings Bond and earn 19.5 per cent interest, guaranteed.
Today, however, in the face of low interest rates that have dragged down both the cost of borrowing and the return on savings, the appeal has diminished. The one-year return on the batch of Canada Savings Bonds offered in April is a comparatively meagre one per cent — which means an investment of $1,000 on April 1 of this year would net someone a profit of $10 in a year's time.
That's below the current inflation rate, and less than what's offered at most high-interest savings accounts at banks, which are just as safe in terms of investments because they are 100 per cent backed by the Canada Deposit Insurance Corporation for up to $100,000.
Some versions of the bonds didn't even lock in the same returns over time. A Canada Savings Bond Series 547, issued in 1992, saw its annual return drop from six per cent when it was first offered, all the way down to 0.50 per cent in 2013 when it matured.
Bortolotti says low interest rates hastened their irrelevance, but Canada Savings Bonds won't return to prominence even if and when rates come back, because investors have so many other options now that didn't exist 20 or more years ago to achieve the same low-risk return.
Ottawa says the vast majority — 88 per cent — of Canada Savings Bonds sales now come through payroll deductions, where employees automatically save money by putting money into them through their place of work.
Unfortunately from the government's perspective, that's also one of the most expensive ways of managing the program, as it incurs costs for things like call centres and other administrative overhead. The KPMG report says as many as 220 people are employed to run that program. By that math, it takes one employee to run every $35 million worth of savings bond debt under management. In other countries with similar programs, that ratio is closer to $100 million to $300 million per employee, KPMG notes.
If the government doesn't want to cancel the program, at the very least it could eliminate the payroll sales channel to make the program more efficient and start a "no-frills version" that would eliminate the ability of Canadians to buy bonds through deductions from their paycheque, KPMG suggests.
That would allow the government to continue to provide Canadians with access to government bonds while reducing costs related to the program.
"The only channels maintained would be cash sales channels," the report said. Among other things, this would allow "a gradual downsizing of the call centres as the payroll sales channel gradually winds down."
Bortolotti says that if Ottawa opts to halt the payroll deduction option, he hopes employers will replace that with something comparable, because for many people they serve as a forced savings program that is "simple and automatic and without distractions."
Rubec said the government is assessing potential efficiencies to reduce program costs, but that it planned to maintain its existing distribution channels.
This isn't the first time Ottawa ignored a recommendation to wind down the system. In 2004, the then-Liberal government was advised by consultants to do so and save $650 million over the next nine years but shelved the plan. The subsequent Tory government has done the same ever since.