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

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  • George H. Pink

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.

Suggested Citation

  • George H. Pink, 1989. "Government Restriction on Foreign Investment by Pension Funds: An Empirical Evaluation," Canadian Public Policy, University of Toronto Press, vol. 15(3), pages 300-312, September.
    • Handle: RePEc:cpp:issued:v:15:y:1989:i:3:p:300-312
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    References listed on IDEAS

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    1. McDonald, John G, 1973. "French Mutual Fund Performance: Evaluation of Internationally-Diversified Portfolios," Journal of Finance, American Finance Association, vol. 28(5), pages 1161-1180, December.
    2. Dybvig, Philip H & Ross, Stephen A, 1985. "The Analytics of Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 401-416, June.
    3. Nicholas A. Michas, 1984. "Pension Funds: More Diversification," Canadian Public Policy, University of Toronto Press, vol. 10(1), pages 47-53, March.
    4. Dybvig, Philip H & Ross, Stephen A, 1985. "Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 383-399, June.
    5. Guy, James R F, 1978. "An Examination of the Effects of International Diversification from the British Viewpoint on Both Hypothetical and Real Portfolios," Journal of Finance, American Finance Association, vol. 33(5), pages 1425-1438, December.
    6. Laurence Booth, 1987. "The Dividend Tax Credit and Canadian Ownership Objectives," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 321-339, May.
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    Cited by:

    1. David Burgess & Joel Fried, 1999. "Canadian Retirement Savings Plans and the Foreign Property Rule," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 395-416, September.

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