Ottawa’s proposal to consider eliminating the 30% limit for pension funds investing in a company could dramatically improve the country’s infrastructure environment, according to one expert.

In last month’s federal budget, the government said it will hold public consultations with the country’s federal pension funds to consider eliminating the current 30% limit for holding voting shares of an individual company.

“Canada is home to some of the world’s largest and most experienced private sector infrastructure investors,” the budget documents state. “These investors include pension funds. To reduce red tape and improve the investment climate in Canada, the government will undertake a public consultation on the usefulness of the rule that restricts pension funds from holding more than 30% of the voting shares of a company.”

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Jason Campbell, principal in Eckler’s investment practice, says the proposed change is entirely tied to promoting infrastructure.

“Spending in the last decade or two has not kept up with the need to maintain and expand our infrastructure,” he says. “That 30% limit has kept many of the mid-to large-sized pension plans out of investing in Canadian public-private partnership (P3) deals, primarily because of the amount of equity going into those deals.”

Campbell notes that if you can only invest 30% in any proposed deal, “That’s pretty small relative to the total assets of those plans. So this would be a way to allow them to put bigger cheques to work and hopefully encourage more Canadian private investment in infrastructure.”

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“If it works the way the government thinks in terms of stimulating more investment by larger pension plans, it will create a more competitive environment, for investors looking to get capital into this space,” he adds. “More competition will make it more challenging to get your investment done. But at the same time from a taxpayers’ perspective, it should help to ensure better pricing on some of these deals. “

Large pension funds have been advocating the scrapping of the 30% limit for years. But not everyone is convinced that it’s a good idea.

Ian Russell, president and CEO of the Investment Industry Association of Canada, notes that pension funds don’t pay tax, which could lead to an uneven playing field in corporate Canada, with significant concentration and voting control among large tax-exempt pension funds.

Ian Lee, assistant professor at the Sprott School of Business at Carleton University in Ottawa, says there are some compelling arguments for getting rid of the limit, noting that Canada is the only OECD country that puts restrictions on pension funds in terms of maximum ownership.

Lee says that puts Canada at a competitive disadvantage in terms of attracting foreign capital.

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But he says the ownership issue could lead to a potential conflict of interest. Does a pension plan with full control of a company represent the interests of shareholders or retirees?

This being Canada, there may be room for compromise, such as raising the limit, but keeping it below 50% so that pension funds can’t have control of any given company or project.

“If moving the limit to 50% will move the needle in getting some of the mid-sized pension plans investing more into this space, then I think that’s something the consulting process will consider,” says Campbell.

“But we don’t even know when the consultation process will begin, so we don’t have a lot of clarity on that.”

Copyright © 2018 Transcontinental Media G.P. Originally published on

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Government need not be concerned about the availability of partnering capital on P3s. Float the projects and the money will be there, the 30% limit notwithstanding.

The limit is there to help pension asset fiduciaries manage risk, when they are unable to do so themselves. Big brotherish? To be sure, but two infrastructure investment hazards are valuation and liquidity. Increasing the permissible direct holding % magnifies those risks, which compounds in direct proportion to the allowable allocation in a plan’s SIP.

Tuesday, June 16 at 10:41 am | Reply

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