Examining the Evidence
Prepared by the CAW Research Department
6. LSFs and Workplace Pensions
One of the lesser-known potential problems associated with LSFs is their use in some workplaces as a replacement or supplement for an occupational pension plan negotiated between the employer and the union. This risk is particularly high in locations in which a payroll deduction system for funding LSF contributions has been implemented. The tendency may arise for many workers to view this form of saving in an RRSP-style financial instrument to be a logical or adequate means of providing for their post-retirement income.
The problems with any RRSP-style pension plan are well-known, and unions in Canada have consistently and vociferously opposed individual-account RRSP pension funding (preferring the more secure and collective approach of group defined-benefit programs). But LSF investments are particularly inappropriate as a form of pension funding, by virtue of the unique financial risks associated with direct venture investments in small companies. These investments by their nature are illiquid, difficult to evaluate, and subject to default risks in the case of the bankruptcy of specific companies or problems in the broader economy. This fact is usually acknowledged in the prospectus documents of the LSFs. For example, the Working Opportunities Fund prospectus states bluntly that "an investment in Shares is only appropriate for investors who are able to make a long-term commitment and who have the capacity to absorb a loss of some or all of their investment." This means that venture investments are clearly inappropriate for the funding of retirement income for the vast majority of working people in Canada (who will need every penny of retirement income they can get). But this hasnt stopped LSFs from advertizing their funds in the context of retirement planning. There is a significant risk that many low-income workers (especially those without defined-benefit workplace pension plans) could be attracted to LSFs as a form of retirement saving because of their lower (subsidized) up-front cost. If those same low-income workers are counting on those LSFs for any significant portion of their retirement income, they may be in for a painful surprise. It is incumbent on the sponsors and promoters of LSFs to make it clear in their promotional literature and sales packages that LSF investments should not in general be considered as a form of retirement savings, and in no way should replace the provision of adequately funded occupational pension plans in unionized workplaces.