© Copyright 2000 Rogers Media. The following article first appeared in the March 2001 edition of BENEFITS CANADA magazine.

Industry

By Andrea Davis

New investment rules for Ontario pension plans

Pension plans in Ontario are having to adapt to new investment rules. As of Jan. 1, 2001, plans in Ontario have had to comply with the federal investment rules set out by the Office of the Superintendent of Financial Institutions (OSFI). While the federal rules appear similar to the old investment regulations, there are significant differences, says Nancy Chaplick, a partner in the pension and benefits department of Osler, Hoskin & Harcourt LLP in Toronto.

"When you apply the [federal] rules, you apply them not only to what you own directly but also to what you own indirectly, which is a change from the prior rules," she says. "For example, if you own an investment through a mutual fund or a pooled fund, you have to look through those [investments] and determine whether you exceed the percentage limitations. You have to count indirect ownership. That's quite a big deal for plans."

There are likely to be interpretation issues with the new federal rules. "A lot of plans with sophisticated investment structures are finding the rules dealing with investing through subsidiary corporations more restrictive than they were before," says Chaplick.

For example, a pension plan cannot own more than 30% of the shares in a company that entitles it to vote for the directors. An exception to this rule is that pension plans can hold more than that number of shares of a real estate corporation if that corporation meets certain criteria and files a document called an undertaking with the superintendent of financial institutions. "You have a lot of plans investing through subsidiary corporations which now have to be satisfied that those subsidiaries comply [with the rules]. In addition, they have to file undertakings, which they never had to do before and we think a lot of plans aren't aware of that," says Chaplick.

Another change is that pension plans must now have a Statement of Investment Policies and Procedures. Under the old provincial rules, this document was known as the Statement of Investment Policies and Goals. "Some plans might think it's just a question of changing the name and that they're really the same thing. Much of it is similar, but there are different aspects," says Chaplick.

She believes that now that Ontario has opted into the OSFI rules, the regulations will come under more scrutiny. "I think it's generally recognized that there are serious deficiencies in the rules and they were designed more for defined benefit plans so they don't really work that well for defined contribution plans. A lot of [the rules] are just outdated and don't work in today's investment environment. There's some internal inconsistencies and provisions that don't seem to have a logical policy justification."

There is a transition phase for the new rules. Any new investments made after Jan. 1, 2001 have to comply with the OSFI rules. Investments held on Dec. 31, 2000, that complied with the old rules and became non-compliant on Jan. 1, 2001, can continue to be held in the portfolio until Dec. 31, 2004. If the investment is not compliant by that date, pension plans must divest themselves of it on Jan. 1, 2005.

Responsibility for monitoring compliance with the new rules lays with the plan's administrator. "If you invested illegally, it could be a breach of your fiduciary obligations. And that could subject you to all kinds of civil actions. It [raises the valid question] of your ability to make the investment in the first place," says Chaplick.

TSE realigns sectors

The Toronto Stock Exchange has decided to scrap its 14-sector system in favour of a 10-group global classification--a move industry experts say is both positive and inevitable.

"It's probably changed for the better in the sense that the indices will better reflect the global marketplace and Canada's part in it," says Gordon Powers, president of The Affinity Group, an Ottawa-based financial services consulting firm. "When these [indices] are renovated, there's going to be more options and more balance."

Sharon Wilson, head of manager research at William M. Mercer in Toronto, agrees. "There are some sectors, like the industrial products, that were so big and had so many different types of securities in them, that the current sectors weren't as meaningful, so this should help."

"For anybody who is following an overall broad mandate, it really shouldn't have that much of a difference for them because they are still going to hold the same stocks. And those managers that are a bit more focused on a sector basis might have to do some shifting around to line up right. But I don't think it's a big deal," she adds.

Pension fund managers will have to reassess their investment policy statements and make sure they're consistent with the new sectors, Wilson says. "Everybody sees it as an inevitability and nobody really has any concerns about it," she adds. "It makes us more consistent on a global basis, which is always a help because we are such a small component of the larger market."

Established by U.S.-based Standard & Poor's, the 10 new groupings will be: energy; materials; industrials; consumer discretionary; consumer staples; healthcare; financials; information technology; telecommunications services and utilities. The realigning of the sub-indices is scheduled to take place over the next year.

--Young Um

Merger plans on hold

The Ontario government has put plans to merge the Ontario Securities Commission (OSC) and the Financial Services Commission of Ontario (FSCO) on hold. A spokesman for the Ministry of Finance tells benefits canada that the government is hoping to introduce legislation some time this spring that will merge the two regulatory bodies. Originally, the province hoped to have legislation passed by the end of 2000.

Last fall, the government released a discussion paper on the proposed merger, Improving Ontario's Financial Services Regulation: Establishing a Single Financial Services Regulator, outlining how the new body would operate. It received lukewarm response from the pension industry.

Job advancement key benefit

The majority (85%) of companies surveyed in a recent global study believe that career advancement opportunities will be one of the key benefits for employees by 2003. The study, conducted by consulting firm Towers Perrin and the Economist Intelligence Unit, is based on 227 responses from senior managers at global corporations in North America, Europe and Asia, discussions with 35 senior executives in Toronto, New York and London and personal interviews with more than 40 senior executives at companies in North America and Europe.

The notion of pay for performance is becoming a reality, says the survey, with more companies planning programs that reward employees based on company performance and individual contribution. At the same time, traditional rewards, such as base pay, retirement plans and health benefits, remain important fundamentals that companies must get right to compete for and retain key talent. Other findings in the survey include:

• 85% of companies surveyed say challenging work will be a key reward for employees by 2003. Only 65% of those surveyed say their current rewards program is effective in providing challenging work for employees.
• 80% rank learning and development programs as a critical or important reward in focusing employees on business results by 2003. Only 50% say their current rewards program is effectively meeting this demand.
• 80% say variable pay and annual bonuses will be a key benefit by 2003, while only 58% of those surveyed believe their current program is effective in this regard.

The research results also reveal that companies' current focus on improved profitability (which 35% of survey respondents cited as critical or important in executing the business strategy), cost management (cited by 24%) and growth by acquisition (cited by 24%) will give way by 2003 to an emphasis on innovation, e-commerce sales solutions and new products and services.

This new focus on innovation, new product development and client relationships could make attracting and retaining key employees even more difficult for human resources (HR) staff.

"Things like what the work environment is really like, what learning and development opportunities are available [are important to employees]. It will be much more of a challenge for HR people," says Jim Murta, a principal with Towers Perrin in Calgary, adding that HR professionals need to become marketers of their company. "In the past, HR was responsible for the delivery of programs. Nowadays, they have to be one of the forces that's marketing the company and what the company is all about and what it offers to employees and new hires."

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."