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© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the March 2005 edition of BENEFITS CANADA magazine.
The demise of the FPR is welcome news for pension funds.
By Jim MacDonald

Well, let’s hear it for a minority government. Federal Finance Minister Ralph Goodale stunned the pension world when he scrapped the 30% Foreign Property Rule(FPR)last month. Institutional investors had lobbied Ottawa for years to eliminate, or at least raise, the foreign content limit on registered pension plans and RRSPs, saying it was outdated, unnecessary and costly. This time, a finance minister acted on that argument, and Goodale put an end to the 34-year-old FPR in one sentence.

“To expand the investing universe for Canadians and offer them the potential to achieve greater diversification and a more secure future, we will remove the foreign property limit—effective immediately,” he said in his budget speech.

All of a sudden, the world is now the investment oyster for pension funds.

“We thought that they were going to do something with the Foreign Property Rule, but we suspected that they would just raise the limit further,” said Scott Perkin in Toronto, president of the Association of Canadian Pension Management (ACPM). “We were quite pleasantly surprised that they decided to eliminate it altogether.”

The ACPM and the Pension Investment Association of Canada (PIAC)argued for some time that the FPR cost Canadians between $1.5 billion and $3 billion annually in foregone income and higher administration fees.

“The biggest gain is with the administrative difficulties and complexities on some funds that have found ways around the rule without going offside as far as the law. They now have a big and costly administrative burden removed,” said Russell Hiscock in Montreal, chair of PIAC’s government relations committee.

Hiscock and Perkin do not expect to see significant shifts in asset allocation strategies in the near future in the wake of the FPR’s demise. Institutional investors are not expected to rush to exit their Canadian investments. It’s likely Canadians will set a natural limit to how much they invest outside the country. Indeed, many developed countries do not have foreign content restrictions, and their average voluntary limit is around 40%, said a budget commentary from Watson Wyatt Worldwide.

“I think what it means for Canadians in general is, hopefully, better returns at a lower cost,” said Perkin.

Institutional investors(including the CPP)now have a larger, and less costly, investment universe, which is an opportunity to enhance the diversification and risk management of pension fund portfolios. This flexibility is welcome given that many defined benefit funds are underfunded. For defined contribution plans, a broader range of investment options is now available to plan members.

The removal of the FPR will help Canadians save money for retirement, help employers sponsor sustainable pension plans and help the feds by cutting a wasteful constraint on tax-deferred savings plans. That’s a major accomplishment for a minority budget.

Jim MacDonald