Pension reform has been a hot topic in Canada over the past several years. One of the topics heavily debated in the context of pension reform has been the pension investment rules that govern Canadian registered pension plans.

In Canada, the pension investment rules generally are governed by provincial law, although many of those laws adopt the rules that apply to federally-regulated pension plans, as set out in Schedule III to the Pension Benefits Standards Regulations, 1985 (“Schedule III”). While there are some differences in the investment rules amongst jurisdictions, generally the rules include a qualitative aspect (in all cases, prudence), economic conflict-of-interest rules (addressing investments in or transactions with related parties), and a number of quantitative rules for investment.

The focus of debate has been the quantitative rules for investment.

The 30% Rule: One of the hotly-debated quantitative rules is the so-called “30% Rule”, which (subject to a number of exceptions) generally provides that the administrator of a pension plan may not invest the assets of the plan in securities of a corporation to which are attached more than 30% of the votes to elect directors. The larger Canadian plans that make direct investments have roundly criticized the 30% Rule indicating, among other things, that complying with this rule increases their costs of investing. In a recent statement, the federal government announced that it has no present intention of changing the 30% Rule, stating that the 30% Rule “remains appropriate at this time for prudential reasons”.

Nevertheless, changes are afoot with respect to other quantitative rules.

The 5%, 15% and 25% Rules: Effective July 1, 2010, the federal government repealed the quantitative rules set out in Schedule III relating to real estate and Canadian resource properties (the so-called “5/15/25% Rule”). In doing so, express acknowledgment was made that, in a prudent person environment, these rules were considered “unnecessarily cumbersome and no longer required”. For those provinces that adopt Schedule III as amended from time to time, these changes took effect on July 1, 2010. For other provinces, these changes will only be effective if and when the applicable provincial regulations are also changed.

The 10% Rule: Subject to a number of exceptions, the so-called 10% Rule prohibits a pension plan from investing or loaning more than 10% of its assets, on a book value basis, to any one person, any two or more associated persons, or any two or more affiliated corporations. In a “Backgrounder” published by the federal Department of Finance (“Finance”) in October 2009, it was announced that the 10% Rule would be amended to change it from a book value test to a market value test. Finance also stated that a further exception to this rule would be implemented, namely to permit more than 10% of plan assets to be invested in pooled investments over which the sponsoring employer does not exercise direct control (e.g., mutual fund investments). In the Regulatory Impact Analysis Statement published by Finance relating to the repeal of the 5/15/25% Rule, Finance stated that the changes to the 10% Rule, as well as a general prohibition on pension fund investment in the shares of its sponsoring employer, will be addressed in future regulatory amendments.

In August 2010, Ontario (the home jurisdiction of the majority of Canadian pension plans) announced that it intends to adopt the federal changes to the pension plan investment rules and continue to review the appropriateness of the 30% Rule for pension investments for Ontario plans.

Stay tuned.