Federal Government Removes Limits on Pension Plan Investments in Real Estate and Canadian Resource Properties
Following up on its previously announced intention to modernize the rules governing investments by pension funds, on May 3, 2010, the federal government released draft regulations that will, among other things, eliminate the existing quantitative limits on pension plan investments in real estate and Canadian resource properties.
Specifically, the current provisions to be eliminated are those which prevent plan sponsors from investing more than:
- 5% of the book value of plan assets in any one parcel of real property or Canadian resource property;
- 15% of the book value of plan assets in Canadian resource properties; or
- 25% of the book value of plan assets in real property and Canadian resource properties.
Under the existing rules, real property generally refers to real estate holdings (and includes leasehold interests), and Canadian resource properties are rights with respect to petroleum or natural gas.
In the regulatory impact analysis statement, the federal government provided the following rationale for the proposed changes:
The investment rules, which have not been reviewed in fifteen years, were originally set under market conditions that do not reflect the present environment. The quantitative limits in respect of real estate and resource property are considered unnecessarily cumbersome.
Persons responsible for investing pension assets should note, however, that they will continue to be subject to the “prudent person” standard as well as the other (remaining) quantitative limits when investing plan assets.
Once passed into law, these changes to the regulations under Pension Benefits Standards Act will likely have implications across Canada, as many jurisdictions – Ontario, Alberta, British Columbia, Saskatchewan and Manitoba – have adopted the federal investment regulations for plans registered in those provinces. Also, Newfoundland and Nova Scotia have implemented very similar provisions in their pension standards legislation.
However, the changes to the federal investment regulations will not automatically apply to plans in Ontario (which adopted the federal regulations as they read on December 31, 1999), Nova Scotia and Newfoundland. The governments in these provinces will have to further amend their regulations to implement these changes, but the remaining jurisdictions (which adopted the federal regulations as amended from time to time) will be impacted as soon as the amendments are finalized.
The period for commenting on the draft regulations closes on May 29, 2010 – shortly after which we expect the regulations to come into force.
Not only do these changes require plan administrators to reconsider the limits in their plan’s Statement of Investment Policies and Procedures and related plan documents (which will be based on current quantitative limits), the elimination of the real estate and Canadian resource property limits may also necessitate a reconsideration of the allocation of pension fund investments, including a possible increase in the allocation to these asset classes.
