The Department of Finance Canada has launched a consultation on Friday on the idea of revising or scrapping a rule that limits federally regulated pension plans to own a maximum of 30% of a company’s voting shares. In particular, the government is seeking feedback on the “ongoing usefulness” of this restriction and input of the implications that could flow from relaxing, or eliminating, the restriction.
Historically, the rule “was intended to limit [pension] plans to a more passive role and to reduce the risk of exposure to business failure,” by preventing pension funds from acquiring controlling stakes in corporations. Yet, in recent years, pension plan managers seeking attractive investment opportunities are increasingly taking on “an active management role,” Finance Canada’s consultation paper notes.
Pension plan managers are being driven to take more active stakes by the demand for stronger returns given the combining factors of an aging population and the low-return environment that has prevailed since the global financial crisis.
As of 2014, pension investments in sectors such as private equity and infrastructure, which often involve taking large stakes in companies, was up to 13% of pension assets from 1.5% in 2000, the consultation paper notes. To get around the rule, pensions have been utilizing “elaborate financial, legal, and organizational structures,” which effectively allow them to control a corporation despite owning less than 30% of the voting shares, Finance Canada’s paper states.
“In recent years, large pension plans have requested that the federal government repeal the rule. They argue that controlling stakes allow for improved investment returns and complain that working around the rule imposes significant administrative and legal costs as well as other difficulties,” the consultation paper says, adding that it also limits investment opportunities in foreign markets.
In addition, these restrictions do not exist in most other countries around the world, the paper notes, and that Canada is the only country among the seven countries that collectively control 90% of global pension assets with such a rule.
The paper indicates that several provincial committees have already recommended repealing the rule. Finance Canada is contemplating whether it’s time to move away from this longstanding restriction as part of an ongoing effort to modernize the regulatory framework for pension plans.
In addition to prudential considerations, altering the rule will likely also have tax implications and may impact the fairness and efficiency of the tax system, the consultation paper states.
The government is seeking feedback on all of these issues. The deadline for submissions is Sept. 16.
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