Pension governance considerations

 
At the contracting stage, private fund managers will often be met with a variety of due diligence and documentation requests from a potential Canadian pension plan investor or their investment manager as part of any proposed investment. This article seeks to provide some context for, and demystify the reasons behind, these requests.

Key considerations

Registered pension plan (RPP) administrators have fiduciary obligations and must adhere to a prudent person standard when investing pension plan assets. RPPs are also subject to the Income Tax Act and minimum standards pension legislation, both of which contain restrictions on how pension plans can invest their money¹. A violation of the investment rules or limits could result in a revocation of the pension plan’s tax-exempt status and/or fines, penalties or other regulatory action. It is these rules and the potential consequences of breaching them that cause RPP administrators to seek certain protections in their arrangements with fund managers.

Here is a list of common issues RPP administrators consider when engaging with a private assets manager:

• Standard of care. The RPP’s administrator may ask the fund manager to commit to adhering to the same standard of care when investing the plan’s assets as the administrator (that is, the prudent person standard).
• Compliance with the RPP’s Statement of Investment Policies and Procedures (SIPP). RPPs must have a SIPP or similar policy and are required to invest their assets in accordance with that policy. RPPs might ask the fund manager to confirm that the plan’s assets will be invested in a manner that does not contravene the SIPP.
• Compliance with legislated pension investment rules and regulations. RPPs might ask the fund manager to explicitly confirm that the fund will always be invested in a manner that does not run afoul of these rules. The RPP administrator may also request certain monitoring and reporting by the manager to help manage compliance at the pension plan level. Key rules include:
  • The 30% rule. The 30% rule applies to direct or indirect investments in securities issued by a corporation that carry more than 30% of the votes that may be cast to elect the directors of that corporation. Note that although the federal government announced in the 2024 Fall Economic Statement that it intends to remove this restriction on federally regulated plans for eligible investments in Canada, the change has not yet been enacted. If and when it is, then based on the announcement, non-Canadian investments will continue to be subject to the 30% rule. We understand that the federal government is consulting with the provinces about the exemption’s application to provincially-regulated plans in jurisdictions that have adopted the federal investment rules. 
  • The 10% rule. This is a rule that prohibits a plan administrator from investing or lending more than 10% of the total market value of a plan’s assets in or to any single entity or affiliated or associated entities, subject to certain exceptions. 
  • Related party rules. Related party rules restrict the administrator of a plan from directly or indirectly lending the plan’s money to a related party or using those funds to acquire securities of a related party, or entering into a transaction with a related party on behalf of the plan unless an exception applies.

If private fund managers wish to attract Canadian pension plans as investors, understanding the investment rules governing registered pension plans and why the interested RPP administrator or investment manager may ask for certain assurances or seek to put in place compliance and reporting requirements will help smooth the way to a successful investment.