The federal Department of Finance published on September 19, 2014 some amendments to the federal pension investment rules. These amendments implement Finance proposals that were originally announced in 2009, and are designed to modernize those rules. The pension investment rules are set forth in the Pension Benefits Standards Regulations, 1985 and affect most Canadian pension funds.1
The more significant changes are as follows:
- 10% Concentration Limit - The current rules prohibit a plan administrator from investing or lending more than 10 percent of the total book value of a plan's assets in any single entity or affiliated or associated entities. The change announced would base the calculation on "market value" instead of "book value", and thus would reflect the change in the value of investments over time. The change announced would also clarify that the limit applies to the total of debt and equity investments.
- Deeming Rule - Under the current rules, investments made by "a mutual or pooled fund or trust fund in which the moneys of the plan have been invested" are deemed to be investments indirectly made by the administrator of the plan. The language used in this phrase has been modernized to refer instead to investments made by "an investment fund, a segregated fund or a trust fund in which the moneys of the plan have been invested". The new rules define "investment fund" as follows:
- Related Party Rules - The current rules prohibit a plan administrator from investing or entering into a transaction with a related party of the plan. One exception to the current rules permits the administrator of a plan 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. This exception will be eliminated. Another exception will be modernized to allow the administrator of a plan to “engage the services of any related party for the operation or administration of the plan by means of a transaction under market terms and conditions”. New exceptions are introduced to permit an investment in (a) an investment fund or a segregated fund in which others have invested and that complies with the pension investment rules, (b) an unallocated general fund of a Canadian life insurer, (c) securities issued or guaranteed by the federal government or a province, (d) a fund composed of mortgage-backed securities guaranteed by the federal government or a province, and (e) an investment that involves the purchase of a contract for which the return is based on the performance of a widely recognized index of a broad class of securities traded at a marketplace.
"investment fund" means a fund — established by a corporation, limited partnership or trust — the purpose of which is to invest the moneys of two or more investors and the shares or units of which are allocated to each investor in proportion to the interest of the investor in the assets of the fund.
The new phrase “segregated fund” is already defined in the regulations as follows:
"segregated fund" means a fund established by a corporation that is duly authorized to operate a fund in which contributions to a pension plan are deposited and the assets of which are held exclusively for the purposes of that plan alone or that plan and one or more other pension plans.
The text of the proposed changes and related materials are available here.
1 Other amendments published at the same time are intended to improve the regulatory framework for defined contribution pension plans and improve protection for plan members and beneficiaries.
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