Time to scrap the other 30% rule.

The world is full of wacky, outdated laws. In Anniston, Ala., for instance, it’s against the law to wear blue jeans on Noble Street. In Switzerland, it’s illegal to wash your car on Sundays. And in Canada, pension funds can’t elect more than 30% of the directors of any public or private company, even when they own more than 30% of the company.

Few of our readers are likely to run afoul of the first two laws. But some of Canada’s largest pension funds have a big problem with the third one.

“It’s commercially bizarre because you put up 100% of the equity, but you can only vote 30% of the shares to elect the directors,” says Michael Nobrega, president and chief executive officer of OMERS.

“You have to wonder why the rule was put in place,” says Claude Lamoureux, who heads the Ontario Teachers’ Pension Plan.

It’s more than simply the mystery behind why the rule was implemented that bothers Lamoureux and Nobrega. As Canada’s largest pension funds buy up large corporations, they’re forced to build complex financial structures to circumvent the rule. “[The rule] is costing us more than it should. And sometimes it slows things down,” says Lamoureux.

And Nobrega says that it’s keeping funds from earning the best available returns. “We believe that these rules tend to be a drag of up to 150 to 200 basis points annually on investment returns of pension funds.” What also irks the funds is that the rule puts them at a disadvantage with foreign investors, who aren’t governed by the law.

Both Lamoureux and Nobrega say they’ve raised the issue with both the federal and provincial governments over the past number of years. But neither man is expecting action anytime soon.

In the meantime, the rule is preventing pension funds from making deals that would benefit their members. For OMERS, the regulatory gymnastics required to acquire companies has meant it’s stayed away from at least four or five investment opportunities, says Nobrega. And it will likely keep the fund out of future deals as well. “We’ll likely pass on the very large transactions. Unwinding large transactions that the regulator finds too complex may result in a significant financial loss.”

Lamoureux suspects the rule was put in place to prevent pension funds from taking undue risk. But he says the prudent person rule is all that’s needed to keep plans in check.

Perhaps it’s time for our policy-makers to exercise some prudence of their own and do away with an antiquated and onerous law.

Don Bisch is the editor of BENEFITS CANADA. don.bisch@rci.rogers.com

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© Copyright 2007 Rogers Publishing Ltd. This article first appeared in the August 2007 edition of BENEFITS CANADA magazine.