Canada to End 30% Stake Limit for Pension Fund Investments

Canada's federal government has announced its intention to remove the 30% stake limit for pension funds investing in domestic companies. This move, outlined in the 2023 fall economic statement, aims to encourage greater domestic investment by pension funds, fostering economic growth and secure pensions for Canadians. The 30% rule, implemented to limit pension plans' exposure to individual business failures, has been a contentious issue for years, with pension plan sponsors and industry experts advocating for its removal.

The removal of the 30% stake limit could have significant implications for Canadian pension funds and the broader economy. Large pension funds, such as the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers' Pension Plan (OTPP), could increase their holdings in high-performing domestic firms, gaining greater oversight and accountability of their assets. This could also lead to a decrease in private equity fees, as pension funds become less reliant on external partners.

However, the removal of the 30% rule also presents potential risks. Pension funds may become more exposed to individual business failures, and adjustments around tax policy for pension plans may be necessary. The government's fall economic statement proposed that large federally regulated pension plans will be required to publicly disclose their investment distributions, both by jurisdiction and asset type per jurisdiction, to the Office of the Superintendent of Financial Institutions (OSFI). This increased transparency could help address concerns about tax equity and fairness.

The government's working group, led by former Bank of Canada Governor Stephen Poloz, will explore how to influence greater domestic investment opportunities for Canadian pension funds, including the removal of the 30% rule for domestic investments. The working group's efforts will focus on several specific investment areas, with the goal of meeting Canadian pension plans' fiduciary and actuarial responsibility, spurring innovation, and driving economic growth.

In conclusion, the removal of the 30% stake limit for Canadian pension funds investing in domestic companies could have significant benefits, such as increased investment in high-performing assets and reduced private equity fees. However, it also presents potential risks, including greater exposure to individual business failures and the need for tax policy adjustments. As the government's working group continues its exploration, it will be crucial to weigh these factors and ensure that the changes ultimately benefit both pension funds and the Canadian economy.