There was mixed reaction to the federal government’s announcement yesterday to tax income trusts.
The Ontario Teachers’ Pension Plan(OTPP)said it was pleased that the decision did not discriminate against pension funds. It expects it will be challenging to find investments that will replace the income and cash flow trusts have provided, but is confident its investment team will find them.
“The four-year implementation period for this new policy will enable us to make any necessary adjustments to our portfolio relatively gradually,” the OTPP said in a statement.
Paul Malizia, a principal at Hewitt Associates, said plan sponsors will struggle to find investments that are similar to trusts. For sponsors that invested heavily in the sector, they’ll have to reassess their positions.
He doesn’t think plan sponsors did any selling today, nor would they have the ability or the capacity to sell except for some of the larger funds, like the OTPP or OMERS.
The S&P/TSX income trust index dropped 12.4% and investors suffered about $20 billion in paper losses. A number of trusts lost as much as 20% of their value and the S&P/TSX composite index fell 294 points to close at 12,050.
“I guess this took the world by surprise,” said Scott Perkin, president of the Association of Canadian Pension Management and couldn’t speculate on what will happen to income trust investments. “Pension fund strategies may or may not change.”
He added that the other announcement about income splitting for pensioners was good. However, not everyone shared that opinion.
“One significant problem with the government’s plan is that while they are addressing pension splitting,” said George Kesteven, president of the Canadian Association of Income Funds, “it completely ignores the millions of other Canadians who have been investing in RRSPs and pension plans for years.”
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