When a rule or regulation reaches the end of its usefulness, it’s safe to toss it. And that time has come for the rule restricting federally regulated pension plans from holding securities of a corporation to which are attached more than 30 per cent of the votes to elect the corporation’s directors.
That’s the message from the CBA’s Pensions and Benefits Law Section to the federal government in response to Finance Canada’s consultation on the rule under section 11 of Schedule III to the Pension Benefits Standards Regulation 1985.
The rule can safely be eliminated, the Section writes, because “the existing requirements of the Pension Benefits Standards Act, its regulations and regulatory guidelines governing the investment of plan assets are sufficient to ensure that pension plans acquire more than 30 per cent of the voting shares of a corporation only where it is prudent and appropriate in the circumstances of the particular plan.”
The original intent of the rule was to keep pension plans from becoming active investors, and to reduce the plan’s exposure to risk. The Section says this is no longer always an appropriate approach, with factors such as increased longevity, low interest rates and market volatility increasing the need for pension plans to seek out investments that will provide strong, stable returns.
“One way to achieve these objectives in some cases is by taking an active role in plan investments,” the Section says. “In our experience, the number of pension plans taking such action has increased in recent years for a variety of reasons, including the development of structures for complying with the 30 per cent Rule.”
Eliminating the rule won’t bring a rush of active investors, the Section predicts – smaller, less sophisticated plans that are traditionally passive will likely remain so.
The consultation document also asks about the tax policy implications of removing the 30 per cent Rule. The Section argues that the 30 per cent rule was never intended to serve as a tax policy tool, and that it would be inappropriate to tie tax changes for pension funds and their investments to the elimination of the rule.
“The tax policy concerns expressed in the consultation document appear to be premised on the assumption that ownership of 30 per cent of the voting shares of a corporation necessarily results in control of the corporation’s business activities. This is simply inaccurate in many cases,” the Section says.
The Ontario Ministry of Finance is also considering whether to eliminate the 30 per cent rule from the Pensions Benefits Act in that province. You can read the OBA Pensions Section submission online.