Canadian Investment Review

Time to scrap the 30% rule?

Written by Staff on Wednesday, September 21st, 2016 at 4:55 pm

Low SignIn its response to a consultation launched in June, the Association of Canadian Pension Management says the federal government’s “30-per-cent rule” needlessly inhibits pension plan administrators in the search for appropriate investment returns, and creates unnecessary costs and lost opportunities.

The Department of Finance’s consultation, which closed on Sept. 16, asked for viewpoints on whether it should keep, relax or scrap the 30-per-cent rule, which currently restricts the percentage of voting shares federally regulated pension plans are permitted to hold in a company.

The rule, according to the ACPM, was established on the presumption that pension funds should only be passive investors, and that they needed to be insulated from potential losses should a business fail. “However, that logic now appears tenuous, and its results for Canadian pension fund investors suboptimal,” wrote the ACPM.

The reasons the association sets out for this includes:

“The current low interest rate, low growth environment has now persisted to an extent that it can be characterized as the ‘new normal’ with which pension administrators must contend in the funding and investment of their plans,” wrote the ACPM. “Long-term expected rates of return are expected to persist at lower levels than seen in decades for many years to come.

“As a result, pension administrators need the ability to seek active investments in order to find higher return opportunities than may be available to passive investors, within the particular plan’s risk tolerances. Those opportunities are often available in private and alternative asset classes, such as private equity, infrastructure and the like, where an active approach and control in excess of that permitted by the [30-per-cent rule] might be most appropriate in managing the risk that such categories of investments carry …”

The consultations also sought views on the tax-policy issues associated with the growth of active investments by pension plans, including whether there are any tax-policy concerns relating to tax-exempt pension plans’ ability to acquire controlling positions in taxable corporations.

ACPM said there is no indication that the 30-per-cent rule was conceived as a means of implementing tax policy and queried whether it’s reasonable or appropriate to analyze the rule from a tax-policy perspective, noting that the rule is a very “imprecise” and “unreliable” means of addressing the potential tax-policy concerns identified in the consultation.

“While the [30-per-cent rule] may make it more difficult for a pension fund to extract earnings from a business if it prevents the pension fund from having legal control of the business entity, the fund may still obtain practical control through commercial agreements. As a result, removing the [30-per-cent rule] in and of itself is unlikely to have any material impact on the Canadian tax base.”

Read the ACPM’s full response to the consultation here.

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