Flaherty moves to shelve investment restrictions

The proposals are part of a comprehensive package of reforms that were announced last October and will affect pension plans registered under the Pension Benefits Standards Act, 1985 (PBSA) with the Office of the Superintendent of Financial Institutions (OSFI), as well as those outside of OSFI.

The draft regulations propose three key changes.

Restrictions on investments
The proposed regulation would eliminate some of the limits on investments that are currently in place for pension plans—specifically the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments.

The government’s regulatory impact statement suggests that further modifications are in the works regarding the 10% concentration limit and the general prohibition on pension fund investment in the shares of its sponsoring employer. However, the 30% rule—which limits a pension plan from owning more than 30% of the voting shares of a single entity—will remain, said Flaherty.

“Specifically, the government believes that removing the 30% rule would increase the potential for pension plans to own and operate companies,” he said.

“Because most Canadian jurisdictions have adopted the federal investment rules for purpose of harmonization, this proposed change would have an impact on most pension plans in Canada,” writes Louise Greig in an Osler Pensions & Benefits blog. “However, not all jurisdictions have adopted the federal investment rules in a way which would make the changes apply automatically. Ontario, for example, adopted the investment rules as they read on Dec. 31, 1999, so any changes to the rules made by the federal government would have to be specifically adopted by the Ontario government.”

Solvency funding
The government proposes to adopt a new standard for establishing minimum funding requirements on a solvency basis that will use average—rather than current—solvency ratios to determine minimum funding requirements. The goal is to mitigate the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements.

“These amendments will allow sponsors to better manage their funding obligations and give them greater flexibility in terms of investment allocation, in order to fulfill their funding obligations,” said Flaherty, in a statement.

The new rules will apply to valuations with an effective date of Dec. 31, 2009.

Contribution holidays
The proposed regulations would allow plan sponsors to take contribution holidays only when there is a solvency margin (in excess of full funding) of 5% of the plan’s solvency liabilities. The solvency margin would not be required to be funded, and solvency funding requirements would continue to be based on an objective of bringing the solvency ratio of the pension plan to 1.0.

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