Why liquidity and transferability can matter just as much as investment returns inside an Individual Pension Plan.

An investment can be valuable.

It can generate attractive income. It can continue making distributions. Its underlying business or assets may be performing exactly as expected.

And it can still become a problem.

That problem may not become apparent until years after the investment was originally purchased — when an Individual Pension Plan (IPP) is being transferred, restructured or wound down and one of the investments inside the plan cannot simply move to the institution receiving the other assets.

Suddenly, the conversation changes.

The question is no longer simply:

“What is this investment worth?”

It becomes:

“Can we actually move it when the retirement plan needs to move?”

That distinction is an important one for incorporated professionals and business owners using more sophisticated retirement structures.

Because investment return is only one part of good retirement planning.

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A Problem You May Not See Coming

When an investment is originally selected, the natural focus tends to be on its investment characteristics.

What return might it generate?

How much income does it produce?

What are the risks?

How does it fit within the overall portfolio?

Those are important questions.

But an asset held inside an IPP does not exist independently of the pension plan surrounding it. An IPP investment transfer can become considerably more complicated when one or more underlying holdings cannot be accepted by the receiving institution.

At some point, the owner may want to change investment managers or financial institutions. The pension plan itself may need to be restructured. Retirement may be approaching. The plan may eventually be terminated or its benefits settled.

And that’s when another characteristic of an investment can become extremely important:

Portability.

Some publicly traded securities can generally be transferred relatively easily between institutions.

Certain private investments, exempt-market securities, limited partnerships and other alternative holdings can be considerably more complicated.

The receiving institution may not custody the security.

Its platform may not support that type of asset.

Additional documentation or valuation information may be required.

There may be restrictions on redemption or transfer.

Or there simply may not be an active market in which the investment can readily be sold.

None of those things automatically means the investment was inappropriate.

But they can matter enormously when the financial structure holding the investment needs to change.

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Liquidity and Transferability Are Not the Same Thing

This distinction is easy to miss.

An investment may be illiquid because there is no readily available market in which it can be sold.

An investment may be non-transferable to a particular institution because that institution cannot or will not custody it.

Those are different problems.

A private investment, for example, could continue to have economic value and generate income while being difficult to sell.

At the same time, another investment might theoretically be transferable but still not be acceptable to the particular custodian receiving an IPP.

So when we’re evaluating an asset inside a long-term retirement structure, we should be asking more than whether the investment is good.

We should also ask whether the structure and the investment remain compatible over time.

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The Receiving Institution Matters

This is where an important misconception can arise.

A registered pension plan may be permitted under the applicable rules to transfer amounts to another qualifying registered arrangement. CRA specifically provides rules governing direct transfers from registered pension plans, including transfers to another RPP, an RRSP or RRIF in qualifying circumstances. Canada

But that does not mean every investment currently owned by the pension plan must be accepted by the receiving financial institution.

Those are two different questions.

One concerns whether the registered-plan transfer itself is permitted.

The other concerns whether the specific underlying asset can be held by the receiving custodian.

That second question may depend on the security itself, the receiving institution’s platform and policies, valuation requirements, documentation, eligibility and other administrative considerations.

This is why an IPP transfer that appears straightforward when looking at the account’s total value can become considerably more complicated once the individual holdings are examined.

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A High Return Doesn’t Solve a Portability Problem

This is where the planning gets particularly interesting.

Suppose an investment continues to generate an attractive distribution.

From a pure investment-income perspective, the instinct might be:

Why would we want to get rid of it?

And perhaps we don’t.

But if that asset is preventing or complicating a larger retirement-plan transition, the yield cannot be considered in isolation.

Imagine two investments.

One earns somewhat less but can be valued, sold and transferred relatively easily.

Another produces considerably more income but has limited liquidity, uncertain redemption timing and can only be held by certain custodians.

Which is better?

There isn’t enough information to answer.

Because return is only one dimension of the decision.

The answer depends on what the money ultimately needs to do.

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Complexity Isn’t the Same as Sophistication High Return Doesn’t Solve a Portability Problem

Private and exempt-market investments are sometimes presented as providing access to opportunities unavailable through conventional public markets.

In appropriate circumstances, they can broaden an investment universe and provide exposure to assets or strategies that may be difficult to access through traditional securities.

But being private does not automatically make an investment superior. Nor does complexity itself create return.

If an investor accepts reduced liquidity, fewer custodial options, limited transferability, more complicated valuation or restrictions on redemption, those trade-offs should be weighed against the actual benefit the investment is expected to provide.

That benefit might be higher expected return, diversification, income, lower correlation with public markets or access to a particular asset class.

But the comparison should be made against the real alternatives available to the investor — not against an assumption that a private investment is inherently more sophisticated simply because it is private.

In some circumstances, conventional publicly traded investments or liquid alternative strategies may provide exposure to similar investment objectives while offering greater liquidity, more frequent pricing and easier portability.

That doesn’t make the private investment inappropriate. It simply means the additional complexity and restrictions should provide a sufficiently compelling benefit to justify accepting them.

Return is what you receive. Restrictions are part of what you pay.

Complexity should have to earn its place in the portfolio.

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Seven Questions Worth Asking About an Investment

For assets being considered inside an IPP or another long-term retirement structure, we think about more than expected performance.

1. Return

What is the investment expected to earn or distribute?

2. Risk

What could cause the investment to lose value or fail to meet expectations?

3. Liquidity

How readily can the investment be converted to cash?

4. Valuation

Can its value be determined reliably when required?

5. Custody

Which institutions are actually able and willing to hold the investment?

6. Transferability

Can the asset move to another institution or registered structure if circumstances change?

7. Exit

How, when and under what conditions can the investor ultimately leave the investment?

Put together:

RETURN → RISK → LIQUIDITY → VALUATION → CUSTODY → TRANSFERABILITY → EXIT

An investment does not necessarily need to score perfectly on every measure.

But the investor should understand the trade-offs before those trade-offs become urgent.

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What Happens When an IPP Needs to Move?

This is where individualized advice becomes particularly important.

Depending on the pension plan, the investment and the reason for the transition, the possible path could involve selling or redeeming an investment, arranging an acceptable transfer, coordinating with another custodian, or timing different components of a larger transition differently.

There can also be important tax and pension considerations.

CRA’s rules provide for certain direct transfers from registered pension plans, but the applicable destination and tax treatment depend on the type of pension provision and circumstances. For defined-benefit RPP amounts transferred to certain registered arrangements, prescribed transfer limits can also apply. Canada

The terms of the pension plan matter as well. CRA states that transfers into and out of an RPP must be provided for by the terms of the registered plan. Canada

That’s why an IPP transition isn’t simply an investment-account transfer.

It can require coordination among the financial advisor, pension administrator, actuary, investment custodian and, where appropriate, tax and legal professionals.

The objective is not merely to move assets.

It is to preserve the integrity of the retirement strategy while navigating the investment and pension-plan requirements surrounding it.

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Sometimes the Best Solution Is Patience

An asset that cannot be transferred today does not necessarily have to be treated as worthless or immediately disposed of.

There may be circumstances where the better strategy is to understand the investment’s redemption provisions, expected liquidity events and available custodial alternatives — and then coordinate the larger pension transition around those realities.

In other situations, reducing or exiting the holding may be appropriate when an opportunity becomes available.

The important point is that a liquidity problem should be managed as a planning problem, not an emotional one.

An investment being inconvenient to transfer does not automatically make it a bad investment.

But neither should an attractive return cause us to ignore the restrictions attached to it.

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The Better Time to Ask Is Before You Buy

Most of these questions are easier to answer when there isn’t a transfer already underway.

Before placing an alternative or private investment inside an IPP, RRSP or another long-term registered structure, consider asking:

How is this investment redeemed?

Is there a secondary market?

How frequently is it valued?

Who can custody it?

Can it be transferred in kind?

What happens if I change financial institutions?

What happens if the pension plan itself eventually needs to change?

And perhaps the simplest question of all:

How do I eventually get out?

That question isn’t pessimistic.

It’s part of prudent investment planning.

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The Investment Has to Fit the Structure

Individual Pension Plans can provide sophisticated retirement-planning opportunities for incorporated professionals and business owners.

Sophisticated structures, however, can introduce sophisticated considerations.

The best investment for an ordinary non-registered account may not necessarily be the best investment for a pension plan.

And an investment that makes sense during the accumulation years may eventually create complications when the owner’s retirement objectives change.

That’s why we believe investment selection should be considered within the context of the entire financial structure surrounding the asset.

Performance matters.

Income matters.

Tax treatment matters.

But so do liquidity, valuation, custody, transferability and exit.

Because eventually, nearly every long-term investment strategy reaches a moment when accumulation gives way to transition.

And when that happens, the ability to move an asset can become just as important as the return it produced while you owned it.

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Planning an IPP transition?

If you have an Individual Pension Plan and are considering a transfer, restructuring or broader retirement transition, understanding the investments inside the plan is an important part of understanding your options.

Delta Creek Financial Advisors works with incorporated professionals and business owners to coordinate investment, retirement, insurance and corporate planning decisions within the broader financial plan.

Independent Advice. Built Around Your Life.

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This article is provided for general information only and should not be considered tax, legal or accounting advice. Individual circumstances vary. Tax and corporate planning decisions should be reviewed with the appropriate professional advisors.