Canada relaxes real estate pension investing rules

The government has eliminated its previous 5%, 15% and 25% cap on pension plan investments in real estate and Canadian resource properties, with expectations the rule could result in rising allocations to the asset class.

Canadian pension plans exposure to the real estate asset class could increase after the government finalised new regulations which scrapped previous caps on investments.

The Canadian department of finance last week ruled that it would eliminate previous regulations that limited public pensions from investing no more than 5 percent of its portfolio in a single parcel of real estate, and allocate no more than 25 percent of its portfolio to the asset class. The rules also apply to Canadian resource properties (real estate related to petroleum, natural gas or hydrocarbons extraction and operations), and abolished a cap on such investments exceeding 15 percent of a pension portfolio.

The investment rules, which have not been reviewed in fifteen years, were originally set under market conditions that do not reflect the present environment.

The Canadian department of finance

The government – which will formally publish the regulations on 7 July – said the changes were the first for 15 years with the old rules “cumbersome and no longer required” and “originally set under market conditions that do not reflect the present environment”.

The department of finance however backed off from lifting restrictions on pension funds holding more than 30 percent of the voting shares in a single entity, despite lobbying by Canadian plan sponsors.

In a regulatory impact analysis, the government said the status quo was “appropriate at this time for prudential reasons” adding that “removing the 30 percent rule will increase the potential for pension plans to own and operate companies”.

The Canadian department of finance, however, said it would modify a 10 percent “concentration” rule, which limits pension funds from investing no more than 10 percent of its portfolio in any one deal, “in future regulatory amendments”.

Pension plans in Alberta, British Columbia, Manitoba, Saskatchewan and Ontario will be affected by the changes, and are expected to amend their investment strategies as a result.

Toronto-based law firm Osler, Hoskin & Harcourt said in a briefing note that plan sponsors would “reconsider the limits in their plan’s statement of investment policies” but could also “increase [their] allocation to [the real estate and resource properties] asset classes”.