Canadian corporate pension plans would be banned from investing directly in their sponsoring company stock under a draft of federal regulatory changes announced late last month.
The change involves the Canadian government's related-party rules. Another regulatory change would shift how investments are valued under Ottawa's 10% limit on single-entity holdings, to one based on market value rather than the current book value.
Both measures, which apply only to companies operating nationally in sectors such as banking and telecommunications, are seen as “modernizing” pension fund accounting and investing, said David Zanutto, partner and investment consultant at Mercer (Canada) Ltd., Calgary, Alberta.
If the proposals are adopted, pension plans with sponsoring company stock investments will have to divest the stock within five years. “This will help protect pensioners by ensuring that their pensions are invested in a safe and responsible manner,” according to the Canadian Ministry of Finance in a statement outlining the proposed changes. Currently, sponsoring company stock is considered as other individual security investments, with the 10% holding limit. Mr. Zanutto said most Canadian companies have a “minimal” amount of their pension fund assets invested in their company stock, so the change will have no effect on their overall asset allocation.
Still, the company stock change will affect pension funds, said Anna Zalewski, associate with the law firm of Osler, Hoskin & Harcourt LLP, Toronto, legal adviser to several Canadian pension plans. “We're still working through the ins and outs of the draft,” Ms. Zalewski said. “While the market-value test is a welcome change, the changes in the related-party rules would add some costly and burdensome elements,” including changes in compliance procedures the cost of replacing company stock with other investments, and the as-yet-unknown “unintended consequences” of the changes, she said.
“There'll be documentation reviews, investment policy reviews, there's a lot of documentation that will have to be done,” added Jana Steele, partner at Osler Hoskin.
The regulatory changes would allow for two exceptions to the sponsoring company stock ban. Defined benefit plans could still invest in their company stock through a pool managed by an external money manager covered by both the 10% single-holding limit and the Canadian government's existing rule that caps holdings in a company at 30% of shares eligible to cast votes for the firm's directors. Defined contribution plans' individual investment options would be held to the 30% rule.
“It's early days,” said James Clark, vice chairman of the Ontario regional unit of the Association of Canadian Pension Management, Toronto, which represents 400 Canadian public and corporate retirement plans with more than C$330 billion (US$295 billion) in combined assets. “We have a policy committee that considers all such changes, and this is so hot off the blocks that it hasn't even been put on the agenda. But we will definitely provide comment on this.”
However, Mr. Clark said ACPM members are in favor of the change to market-based valuation of securities rather than book value, which he said was “the bane of pension funds' existence.”
“I think the government sees an inherent conflict between the desire of managers of a company to boost the value of their stock, and the fiduciary responsibility of a pension fund,” said Andrew Harrison, managing partner at the law firm of Borden Ladner Gervais LLP, Toronto, which advises money managers. “Pension funds are seen as operating as separate trusts, as separate entities from the company. I think there are worries about how they interact with the company's stock.”
But the change to market valuation of securities is “liberating” to pension funds and money managers, said Mr. Harrison, because it would mean investors — most of whom already track investments by market value — will have only one valuation to calculate.
Mr. Zanutto said most Canadian pension plans do not run up to the 10% investment limit on any holdings. “Most pension funds have more than enough diversification so that this isn't an issue,” he said.
Provinces in Canada generally have responsibility for establishing laws related to investments and pension funds, but some authority over pension funds nationwide has been placed under the federal government through the 1985 Pension Benefit Act, which grants the Canadian Finance Ministry the power to create and enforce pension regulations over companies that operate nationally, said Mr. Zanutto.
