A Profile of LSF Investors


Labour-Sponsored Funds:
Examining the Evidence

Prepared by the CAW Research Department
February 1999

5. A Profile of LSF Investors

The LSF industry is funded through the subsidized personal contributions of individual private investors. As indicated above, the degree of total subsidy for these contributions is perversely greater for high-income earners than for average Canadian workers. None of the LSFs (including the "true" labour funds) restricts their investments to union members; all market themselves to the public at large, and all emphasize the tax savings of LSF investments as the primary incentive for making an investment.

Contrary to Bay Street rhetoric about the phenomenon of "personal investing," the simple fact of the matter is that most working people in Canada do not own any significant stakes in stocks, bonds, RRSPs, or other financial instruments. This is for the simple reason that most Canadian families have virtually no extra income left at the end of a year to make this type of investment. To the extent that average Canadians save at all (so that their net financial wealth grows over time), this almost exclusively takes the form of paying off their residential mortgages. Incredibly, the average saving rate of Canadian households actually fell to below zero during the spring of 1998, so that average Canadians now are dipping into their total savings (rather than adding to them). When we also consider that high-income households continue to save a significant portion of their incomes, this implies that average working Canadians, on the whole, cannot be big savers. For their retirement security, the greatest share of our population must rely on public pensions and (for the lucky ones) occupational pension plans.

"[Labour fund] credits have principally benefited middle-class, upper-middle class and, God forbid, even ‘rich’ investors. Lower-income earners don’t invest in vehicles like this because they don’t need the tax credits and they certainly don’t have the money.... In other words, by creating an attractive investment environment by effectively lowering the tax rate for upper-income investors, jobs were created and government revenues actually increased. This is precisely the rationale for the proposed tax cuts for higher-income earners recommended by the [B.C.] business summit."

- Michael Campbell, conservative columnist,
Vancouver Sun, December 15, 1998.


It is therefore not surprising that the vast majority of financial investments in Canada are made by wealthy individuals— again in contrast to the self-serving rhetoric of the financial industry, which likes to claim that everyone now "plays the markets." Less than half of Canadians own any RRSPs whatsoever, and this ownership is concentrated very strongly in the upper income brackets. In 1995, for example, just 28 percent of Canadian taxfilers paid into an RRSP—but 77 percent of all taxfilers with income greater than $80,000 paid into an RRSP. Taxpayers earning over $80,000 accounted for 21 percent of all RRSP contributions in 1995, even though they made up just 2.7 percent of taxfilers. Ironically, since these high-income investors are subsidized at a higher rate than are average Canadians, this small elite snapped up an even larger share (about 30 percent) of the roughly $12 billion in tax deductions that Canadian governments doled out that year to subsidize this private investment system. Most high-income earners regularly exhaust their RRSP contribution room, and in addition make significant unsubsidized investments; therefore the share of the well-off in total financial investments is much higher than indicated by these statistics. No official statistics on the distribution of wealth are collected, but it is safe to conclude that well over one-half of all financial wealth in Canada is owned by the richest 10 percent of the population.

Given the dominance of the wealthy in Canada’s overall financial investment industry, should we expect the LSF industry to be any different? Clearly in English Canada the vast majority of LSF contributions are made by the same high-income individuals who dominate other financial vehicles. They are the ones with the spare cash and the specialized knowledge to take full advantage of the tax benefits offered by LSF placements. The "rent-a-union" funds account for almost 90 percent of all LSF assets in English Canada, and they are clearly financed mostly by high-income investors. It was the rent-a-union funds which were hardest hit, for example, by the 1996 reduction in the maximum annual subsidized investment from $5000 to $3500. Most workers cannot afford an annual RRSP contribution in excess of $3500 anyway (indeed, many workers were not allowed $5000 in RRSP room in the first place, especially those who also enjoy coverage by a workplace pension plan), and so the investment activity of average workers should not have really suffered because of the lower limit.

In contrast, the alliance of "true" LSFs claims that their contributions come from real workers. A news release issued by the Labour Sponsored Investment Funds Alliance in September, 1998, claimed that "union members account for about half of the total contributions and Canadians with average incomes account for most of the remainder." In fact, none of the funds formally collects information on the income levels of their contributors, so the second half of their claim is unsupportable. To be fair, some of the "true" funds sponsor workplace-based marketing campaigns to solicit contributions from members of affiliated unions, and thus these funds probably have a higher degree of worker participation than other investment vehicles. But that doesn’t mean that "average workers" account for most of the actual invested funds.

For example, the Solidarity Fund claims that 62.5 percent of its contributors are members of affiliated unions. But the larger contributions made by high-income individuals mean that these union members account for a smaller share (about one-half) of the Fund’s total contributions. Thanks to its extensive institutional sales network in the workplaces of participating unions, union-member investments certainly make up a higher proportion of Solidarity Fund sales than for any other large LSF in Canada. If we assume that one-third of the contributions to other "true" LSFs come from affiliated union members (this is optimistic), and that no more than 5% of investments in the "rent-a-union" funds come from affiliated union members (this is very optimistic), then we can conclude that less than 30 percent of the total assets in Canadian LSFs were contributed by members of affiliated unions.

" Labour funds are still perfect for the rich and the desperate."

- Duff Young, financial columnist, Globe and Mail, January 31, 1998.

Other indirect evidence suggests that even the "true" LSFs are highly dependent on contributions from high-income individuals who have no connection to the labour movement whatsoever. All of the "true" funds welcome contributions from unaffiliated, high-income earners. The "true" funds joined the "rent-a-union" industry in lobbying hard for the higher maximum subsidy—a change that will only benefit individual investors with high incomes and hence enough RRSP room to take full advantage of the increased maximum investment. In 1995, the average RRSP contribution made by taxfilers with incomes less than $80,000 was $3150. (This doesn’t count the 15 million Canadians earning less than $80,000 who made no RRSP contribution whatsoever.) Even if these individuals put every penny of their RRSP into LSF investments, they still would not have been affected by the reduction in the maximum annual placement from $5000 to $3500. In order to fully benefit from the expanded investment ceiling, an investor must be contributing over $400 per month to their LSF account. How many "average workers" contribute over $400 per month to any investment? If the "true" LSFs hope to benefit from higher investment ceiling, this can only be a recognition of the important role of high-income non-union-members in underpinning the LSF industry.

Another piece of evidence is provided by the difference between the experience of the two "true" LSFs in Ontario (First Ontario and Canadian Venture Opportunities) and those in other provinces. Despite an intensive marketing campaign among members of the four sponsoring unions, with total membership of 180,000 workers, and complementary marketing efforts in other labour constituencies, the First Ontario Fund during fiscal 1997 raised just $8.5 million in net new share issues (after deducting redemptions). The First Ontario Fund thus raised about $47 during 1997 for each member of its sponsoring unions (see table). In the wake of its extremely poor financial performance (losing about 40 percent of its value in recent years), the Canadian Venture Opportunities Fund fared even worse: it raised just $300,000 in new share subscriptions during 1997, from a provincial membership base of some 150,000. Together the two "true" Ontario funds raised an average of $27 per affiliated member in the province. Both funds welcome contributions from unaffiliated high-income earners, but clearly most of that wealth in Ontario has flowed into the "rent-a-union" funds. In other provinces, however, the "true" LSFs have a monopoly on LSF contributions, and hence they have captured all of the unaffiliated contributions. As a result, these funds exhibit a much higher apparent contribution rate, even though income levels in Ontario are higher, and personal investing more prevalent, than elsewhere in Canada. The Solidarity Fund raised almost $600 per affiliated QFL member during 1997, Working Opportunities $65 per affiliated BCFL member, and the Crocus fund $137 per MFL member. On average, the "true" funds outside of Ontario raised $320 per affiliated member in 1997–twelve times as much as the per-member fund-raising rate within Ontario.

Membership and Sales of the "True" LSFs

Affiliated Membership

Net 1997 Shares Sold

Sales per Member

"True" LSFs with a "monopoly" on non-union contributions
Solidarity Fund

500,000

$290.9 m

$582

Working Opportunities Fund

450,000

$29.2 m

$65

Crocus Fund

86,000

$11.8 m

$137

TOTAL "MONOPOLY"

1,036,000

$331.9 m

$320

"True" LSFs which must "compete" for non-union contributions
First Ontario Fund

180,000

$8.5 m

$47

Cdn. Venture Opportunity Fund

150,000

$0.3 m1

$2

TOTAL "NON-MONOPOLY"

330,000

$8.8 m

$27

Net sales equal new share issues less redemptions. Data for N.B. Workers Investment Fund not meaningful because of recent start-up.
  1. Excludes $1.5 million Class C share purchase by Dundee Bancorp conducted as part of its appointment as new manager of the fund.

The slow pace of investment in Ontario’s "true" LSFs has occured despite the fact that Ontario’s share of the total LSF industry is actually disproportionately high relative to the rest of the country: Ontario accounts for 37 percent of Canada’s population, and 43 percent of all LSF investments. Of course, the stark difference between the performance of the "true" funds in Ontario and outside of Ontario is not solely due to the contributions of high-income, non-union investors (the Solidarity Fund’s high contribution rate is also clearly due to its extensive institutional base in unionized workplaces in that province), but those unaffiliated contributions have certainly been important. Clearly, the "true" LSFs which have fully benefitted from the contributions of high-income earners with no connection to the labour movement have garnered donation rates many times higher than the two "true" funds which—through circumstance, not through choice—have not benefitted so greatly from this private wealth.

In summary, it can be concluded quite conservatively that most LSF assets in Canada were invested by high-income individuals with no connection whatsoever to the labour movement, and who quite likely oppose the work of unions in every other facet of the economy. These contributions were not made in the name of "labour"; they were made in the name of tax deductions for individuals who have already profited mightily from the right-wing direction of Canada’s economy over the last two decades. If the "true" LSFs are genuinely interested primarily in garnering contributions from union members, they are all free to limit contributions to members of the sponsoring organizations. The fact that none have chosen to do so is testimony to the important role played by the private investments of high-income, non-union individuals.

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