Law Times

Page 12 august 24, 2015 • Law Times www.lawtimesnews.com Potential change to 30% rule among considerations in pension realm By JuliuS Melnitzer For Law Times o a large extent, the investment space for pension funds has in the last decade ref lect- ed the exponential growth of the major Canadian funds. "Low interest rates forced most of them to diversify their portfolios, so they all turned to things like direct investing, pri- vate equity, and infrastructure," says Mitch Frazer, of Torys LLP in Toronto. "And they've been investing in every corner of the Earth, from infrastructure in Australia to a lottery corporation in Eng- land and even airports in the Middle East." As it turns out, pension funds' needs are a particularly good fit for long-term investments. "The payment arrangements on many infrastructure projects, for example, are a good match to pension funds' liabilities," says Kathryn Bush of Blake Cassels & Graydon LLP. As their returns show, the funds have been doing a good job with their expanded mandate. "About 10 or 12 Canadian pension funds, like Teachers, OMERS, CPPIB, and the Caisse, are major players who are to a degree the envy of pension funds around the world," says Frazer, naming some of the largest funds. Indeed, investment profes- sionals from around the world are checking out the Canadian pen- sion scene. "We've got the best governance structure anywhere and we sub- ject our funds to significant scru- tiny," he says. As it turns out, the Canadian funds had little choice but to look abroad. "With the billions of dol- lars these funds have to invest, global investment was the only answer," says Frazer. "They've moved from making more direct investment to setting up their own private equity funds and to acquiring stakes in major entities, either on their own or by partnering with each other or other major players." It's not inaccurate, then, to classify Canada's big funds as ma- jor economic players. "Their activities are bringing major attention to the Canadian economy as a whole, as well as paving the way for other Cana- dian companies to invest glob- ally," says Frazer. To be sure, there are still limitations on pension fund in- vestment. "The biggest one is the 30-per-cent rule, which provides that pension funds may not own more than 30 per cent of the shares in a corporation that are eligible to vote for directors," says Frazer. "That's one of the reasons why you see individual funds partnering with others." The 30-per-cent rule, how- ever, is currently under review at the federal level. "The federal government for- mulated the rule well before pub- lic sector plans started making direct investments," says Frazer. "The theory was that pension funds were there to provide a long-term stream of income and were not meant to be active inves- tors." Nowadays, however, many of Canada's large funds have hun- dreds of investment professionals dedicated to ensuring they maxi- mize the returns to beneficiaries. "So there's an interesting debate about whether the rule should be modified," he says. "What we might see are ex- emptions and thresholds that preclude the rule's application, particularly to larger funds." Ontario, for example, has already implemented an ex- emption to the 30-per-cent rule for funds investing in the prov- ince's infrastructure. Still, Frazer cautions, the rule may not change or may re- main in place only for offshore investments. "The most likely outcome, I believe, is that the 30-per-cent limit will be in- creased subject to stepped-up fiduciary duties," he says. In another development, gov- ernments are encouraging asset pooling among the funds over which they have jurisdiction. "Ontario, for example, has en- acted such legislation, and I think you're going to see the Ontario Pension Board and the WSIB [Workplace Safety & Insurance Board] pooling their assets to turn two $20-billion funds into a single $40-billion fund," says Frazer. "It can work out well be- cause a $20-billion fund is mid- size, but $40 billion gets you to a whole other level and leaves more room for diversification." LT FOCUS Order # 804218-65203 $426 2 volume looseleaf supplemented book Anticipated upkeep cost – $319 per supplement 4-6 supplements per year Supplements invoiced separately 0-88804-218-3 Shipping and handling are extra. Price(s) subject to change without notice and subject to applicable taxes. 00227VI-A48891 Cited by the supreme court of Canada Canadian Employment Law Stacey Reginald Ball "The most comprehensive text on employment law in Canada. It is carefully constructed and accurate." 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"The decision to fund the employer's contribution with company stock was made when the stock in question was not a plan asset and therefore the decision was not a fiduciary act." Pfeil v. State Street Bank and Trust Co. is noteworthy for the Sixth Cir- cuit Court of Appeals' ruling that pension legislation that protects 401(k) retirement plan fiduciaries from liability where participants exercise control over their individual accounts under the plan didn't apply. "The court stated that control by plan participants over the alloca- tion of pension assets across a range of investment options does not exempt fiduciaries from their duty to use 'prudence when designat- ing and monitoring the menu of different investment options that [are] offered,'" says Bush. When it comes to fee-based claims, Santomenno v. John Hancock Life Insurance Co. involved allegations that the service provider to two 401(k) retirement plans was a fiduciary that had charged excessive fees. But the Third Circuit Court of Appeals held that the service pro- vider wasn't a fiduciary merely because it presented a menu of invest- ment options to plan trustees. In Loomis v. Exelon Corp., the Seventh Circuit Court of Appeals ruled that pension plan administrators had no obligation "to scour the market to find and offer the cheapest possible fund." They hadn't, there- fore, breached their fiduciary duties by offering retail mutual funds in- stead of wholesale or institutional investment vehicles to participants. "The Americans have got out the door quickly on fee-based litigation, and I think we'll see more litigation in Canada on that issue," says Bush. "Nowadays, fees are high, returns are low, and members are grouchy." Bush also notes claims based on plan descriptions. In Kirkendall v. Halliburton Inc., plan participants alleged Halliburton had improp- erly reduced retirement benefits. The Second Circuit Court of Appeals, however, held that Hal li- burton's conduct didn't constitute an amendment to the plan within the meaning of the governing legislation. And when it comes to miscellaneous claims based on fiduciary duty, Adams v. Anheuser-Busch Co. Inc. dealt with the issue of whether the terms of a plan provided participants with a right to enhanced benefits. The plan provided for enhanced pension benefits for plan participants "whose employment with [an Anheuser-Busch company] is involuntari- ly terminated within three (3) years after [a] Change in Control." The District Court found the plaintiffs hadn't been "involuntarily ter- minated" as they had found jobs with a successor corporation. The Sixth Circuit Court of Appeals, however, reversed the District Court, ruling that the plan administrator's decision to deny the enhanced benefits was "arbitrary and capricious." LT Fee-based litigation predicted for canada Continued from page 11

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