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Changing Pension Investment Rules: Part I - DB Plans

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Pensions and Benefits Bulletin

Changes to Canadian pension investment rules are coming into force, at both the federal and Ontario level. This bulletin addresses changes generally affecting defined benefit plans. For changes affecting plans with member-directed investment, stay tuned for our upcoming bulletin, Changing Pension Investment Rules: Part II - Member Choice Accounts.

Federal Schedule III

Most of the changes to the federal rules will become effective on July 1, 2016. The changes will automatically apply to plans regulated by Ontario, British Columbia and Alberta, since each of them adopts Schedule III to the federal Pension Benefits Standards Regulations, 1985 (Schedule III) as amended from time to time. The rules of most other provinces either adopt or track Schedule III, while Quebec has different rules with similar overall effect.

Recall that Schedule III sets out restrictions on dealings with related parties and two quantitative limits: a maximum of 10% of plan assets may be invested in one entity or a group of related entities (10% limit) and a plan may not invest its monies in securities of a corporation that carry more than 30% of the votes to elect directors (30% limit). 

Revised 10% Limit

The 10% limit will now be calculated for loans and investments combined, on the basis of market value rather than book value. The changes also confirm that the test applies when each investment is made, not on a continuous basis. 

The existing exemption from the 10% rule for investments in mutual and pooled funds is modernized by use of a new definition of "investment fund", which includes funds organized as corporations, trusts or limited partnerships. For investments in an investment fund or segregated fund to be exempt from the 10% limit, that fund must itself comply with the 30% limit and the 10% limit. Canadian investment funds that are qualified for public distribution and many other Canadian and international funds have diversification requirements that meet the 10% limit and control restrictions that meet the 30% limit.

The exemption from the 10% limit for an investment in an index fund is being supplemented by an exemption for derivatives related to an index.

30% Limit Unchanged For Now

The 30% limit has been retained, but earlier this year the federal government announced a public consultation on the usefulness of the rule. For now, each plan is expected to ensure that it does not exceed the 30% limit on an aggregate basis, including all direct investments and investments through funds.

Related Party Restrictions

Loans to and the holding of investments in securities of a related party, as well as transactions with a related party, are still prohibited unless an exemption applies. This restriction continues for 12 months after the other party ceases to be related, though now the rule will be slightly different during the 12 month period than while the party is related.

The exceptions to the related party restrictions are being revised significantly. Plans will no longer be permitted to invest in securities of a related party, including any participating employer, by acquiring those securities on a public exchange. Instead, plans may invest in related parties through investment funds and segregated funds in which others also invest, if the fund itself complies with the 10% limit and the 30% limit. Unless another exception applies, existing direct investments in related parties must be eliminated by June 30, 2021.

Plans will continue to be permitted to enter into a transaction with a related party if the value of the transaction is nominal or the transaction is immaterial to the plan. Transactions with related parties for the operation or administration of the plan, other than loans and investments, may still be made on market terms.

Ontario Changes Regarding SIPPs

As of January 1, 2016:

  • The written statement of investment policies and procedures (SIPP) for every plan must include information as to whether environmental, social and governance (ESG) factors are incorporated into the plan's investment policies and procedures and, if so, how. This does not require the plan to incorporate ESG factors in its investment policies and procedures. If ESG factors are incorporated, it must be on a basis consistent with applicable fiduciary duties. See the investment guidance note (IGN-004) regarding ESG disclosure, finalized by FSCO in October 2015. 
  • The SIPP for every Ontario-regulated plan must be filed by March 1, 2016. By that date, each plan must update its SIPP as necessary. Any amendment from time to time must be filed within 60 days. The Superintendent also requires that the SIPP be made available to members and other prescribed persons.
  • For the first time in Ontario, adherence to the SIPP is required by law, unless it conflicts with legislated requirements. It is important that the SIPP be drafted to expressly provide any required flexibility, or else the SIPP must be amended to accommodate any proposed investment that does not comply with the SIPP.

Other Ontario Developments

This year, Ontario has become active in providing guidance on pension investment matters by publishing IGN, including IGN-001 regarding buy-in annuities for defined benefit plans and IGN-002 regarding prudent investment practices for derivatives.

Last year, Ontario published a draft exemption from the federal 30% limit for infrastructure corporations related to projects in Ontario, but that has not yet been finalized.


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