Government Restriction on Foreign Investment by Pension Funds: An Empirical Evaluation

George H. Pink

Canadian Public Policy, 1989, vol. 15, issue 3, 300-312

Abstract: Under the Income Tax Act, Registered Pension Funds, including Registerd Retirement Savings Plans (RRSPs), may invest no more than 10 percent of their assets in foreign securities and property. Financial theory states that restricting the opportunity for diversification should result in inferior investment performance. This study tests the effects of the 10 percent restriction on the investment performance of a sample of Canadian mutual funds, some of which are subject to the restriction (RRSP eligible), and the ramainder of which are not (RRSP ineligible). Results show that investment performance of RRSP ineligible funds is superior to that RRSP eligible funds and of a Canadian stock market index. They also indicate that an RRSP ineligible fund investment has a substantially higher terminal value than an RRSP eligible fund investment. The study concludes that the 10 percent restriction is not in the best financial interests of pension plan participants.

Date: 1989
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