Ontario Moves to Eliminate the "30% Rule" for Pension Fund Investments

In a surprise statement buried in its recently released 2015 Ontario Economic Outlook and Fiscal Review, the Ontario government has announced that it intends to eliminate the "30% rule" from Ontario pension legislation in order to "open up new investment opportunities and tap the capacity of the pension sector to contribute more to economic growth."

The 30% rule prohibits pension administrators from directly or indirectly investing the assets of the plan in securities of a company to which are attached more than 30% of the votes that elect the directors of the company. The rule applies regardless of whether the investment is being made in Canada or elsewhere.

The 30% rule is currently included in federal pension legislation and in the pension legislation of almost every province in Canada. In April 2015, the previous Harper government announced that it would undertake a public consultation on the usefulness of the rule in federal law, but that consultation has not yet begun.

Over the years, pension funds have developed complex investment structures to acquire greater than 30% of the equity of a company in a 30%-rule compliant manner. However, these structures increase transaction costs without any corresponding benefit to the pension fund or the plan beneficiaries.

The Ontario government intends to release a description of the proposed regulation eliminating the 30% rule for consultation in early 2016.

What You Need To Know

• Although this appears to be a very welcome development for large Ontario pension funds that engage in direct investing, we will not know until the draft regulation is released whether the proposal would result in a complete elimination of the 30% rule or whether it might be eliminated only for certain pension funds (for example, a fund asset-size threshold which results in the 30% rule continuing to apply to smaller pension funds) or only for certain types of investments or subject to certain conditions.
• Even if the Ontario government does eliminate the 30% rule, it has emphasized that pension plan administrators will still be required to exercise a fiduciary standard of care, diligence and skill in the administration and investment of the pension fund.  In addition, plan administrators must continue to comply with other pension fund investment rules, including related party restrictions and the 10% concentration limit.
• Unless and until other Canadian governments follow suit, the 30% rule will continue to apply to pension plans governed by the legislation of other provinces or federally.

To discuss these issues, please contact the author(s).

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