The Minister of State (Finance) Kevin Sorenson today proposed new regulations which will amend the Pension Benefits Standards Regulations, 1985 (the Regulations). Among other things the proposed regulations include amendments to the pension investment rules in Schedule III to the Regulations. The proposed amendments have been released for public comment, with a 30 day consultation period commencing on September 27, 2014.
The first significant change is to the test under the 10% rule. The 10% rule is a diversification requirement which limits the amount that can be invested in any one entity or group of entities to 10%. Under the current rules, the test is based on the book value of the pension fund. Under the proposed amendments, the test will be based on the market value of the fund.
The second significant change is to the exceptions to the “related party rules”. The related party rules prohibit a plan administrator from investing in or lending money to or entering into transactions with “related parties” as defined in Schedule III, subject to certain exceptions. Under the proposed amendments, the existing exceptions to the related party rules are being repealed and replaced with a new set of exceptions. In particular, a widely relied on exception – an exception for transactions which are nominal or immaterial to the plan – has been eliminated.
Other changes to the related party exceptions are as follows:
- A plan administrator may 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.
- A plan may invest in investments which involve the purchase of a contract or agreement in respect of which the return is based on the performance of a widely recognized index of a broad class of securities traded at a marketplace.
- There are also exceptions for:
- Investments in “investment funds” in which investors other than the plan administrator and its affiliates may invest, and are invested, and that comply with the requirements applicable to a plan as set out in Schedule III;
- An unallocated general fund of a life insurance company;
- Securities issued or fully guaranteed by a government in Canada; and
- A fund composed of mortgaged back securities that are fully guaranteed by a government in Canada.
In addition, the proposed amendments would make the following consequential and/or housekeeping changes:
- the definitions of “mutual fund” and “pooled fund” are repealed and replaced with the term, “investment fund”;
- the definition of “public exchange” in Schedule III is repealed and replaced with a new defined term – “marketplace”;
- the undertaking requirements have been amended to remove the requirement that the undertaking be filed before the investment is made.
Plan administrators have five years from the date the changes come into force to comply with the new rules.
In addition to federally regulated pension plans, the proposed amendments to the pension investment rules will apply to most Canadian jurisdictions, as Ontario, British Columbia, Alberta, Saskatchewan and Manitoba have adopted Schedule III “as amended from time to time”.