In the most recent development in federal pension reform, the federal Department of Finance released its proposed amendments to the Regulations to the Pension Benefits Standards Act 1985 (the "Regulations") for comment.
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 investment requirements.
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 legislation.
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.