The measures included in the most recent iteration of the
federal government's reform package are primarily relevant to
sponsors of defined benefit pension plans, as they focus on changes
to pension fund investment requirements, and the rules regarding
contribution holidays and solvency funding. That being said, the
changes to the pension fund investment requirements will affect
many provincially regulated pension plans which are also subject to
federal investment requirements.
Please see our previous Focus on Pensions/Benefits publications
for our prior discussion of the changes to federal pension
standards legislation: November 2009, April 2010.
Changes to pension investment requirements
We note that once finalized, these changes will likely apply to
pension plans registered in Alberta, British Columbia, Manitoba,
Saskatchewan and Ontario, which have adopted the federal pension
The proposed Regulations repeal the quantitative restrictions
applicable to investments in real estate and Canadian resource
properties. Currently, a pension plan may not hold more than 5% of
its portfolio in a single piece of real estate or Canadian resource
property, total investment in real estate and Canadian resource
property cannot be more than 15% of a pension plan's portfolio,
and combined investment in real estate and Canadian resource
property cannot constitute more than 25% of the pension plan's
portfolio. The Department of Finance in its "Regulatory Impact
Analysis Statement" states that this change is in response to
representations from plan sponsors and service providers indicating
that these quantitative limits are unduly restrictive where a
general prudence requirement governs pension plan investments.
The Department of Finance confirms that it intends to implement
both the previously announced change to the 10% concentration rule
(i.e. presumably restricting pension funds from investing more than
10% of the market value instead of the current
book value in any one investment), as well as the
prohibition on investment in the shares of a sponsoring employer,
in upcoming regulatory amendments.
Also noteworthy is the federal government's statement that
it does not intend to remove the restriction on pension funds
holding more than 30% of the voting shares in any single entity,
despite representations by plan sponsor and service providers that
this restriction is no longer relevant in a world where pension
fund investments are held to a prudence standard. The federal
government's decision to maintain this restriction is based on
its view that its removal would "increase the potential for
pension plans to own and operate companies".
In a nutshell, this means once the Regulations are finalized,
pension plan sponsors (including sponsors of many provincially
registered pension plans) should review their statement of
investment policies and procedures to determine whether changes to
pension plan investments would be appropriate.
Changes to rules for contribution holidays
The proposed changes would only allow federallyregulated plan
sponsors to take "contribution holidays" where the
solvency ratio of a plan is greater than 1.05. Currently, where the
solvency ratio of a plan is equal to 1.0 (or is "fully
funded"), a contribution holiday is allowed. This change may
not have a significant impact for plan sponsors recovering after
the recent economic downturn, but may have greater relevance in the
future as pension plans return to surplus positions.
Changes to the solvency funding rules
The amendments to the plan funding rules will change the average
of solvency ratios over three years as the basis for determining
minimum funding requirements. Prior to the proposed change, the
Plan's current solvency ratio is used to determine funding
requirements. Solvency deficiencies will continue to be amortized
over five years. Interestingly, this change to the use of an
average solvency ratio will only be used for funding purposes; the
current solvency ratio would still be used for purposes other than
funding as required under federal pension standards
Particularly with respect to the changes in federal investment
requirements, the release of this most recent round of reforms to
the federal pension regulatory framework indicates that, despite
the submissions of plan sponsors, reform will not go as far as plan
sponsors may have hoped.
For further information on this, and the other proposed reform
to federal pension standards legislation, please contact a member
of our Pensions/Benefits Group.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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