Pension managers call for elimination of foreign content limit

(January 9, 2003) Two Canadian pension associations are asking the federal government to scrap the 30% foreign content limit on registered pension plans. A study commissioned by the Association of Canadian Pension Management and the Pension Investment Association of Canada concludes that eliminating the foreign content rule could be worth as much as $3 billion a year for Canadians with company pensions or RRSPs.

Ottawa’s foreign property rule (FPR) places a 30% ceiling on the proportion of assets RPPs and RRSPs can invest outside Canada. A limit of 10% was set in 1971. It was increased to 20% by 1994 and raised to 30% in 2001.

The study, written by University of Western Ontario economics professor David Burgess and associate professor Joel Fried, estimates that increasing the foreign content limit to 30% from 20% may have added as much as $1 billion annually to the value of Canadian retirement savings and has reduced risk through increased diversification.

“At 30%, the cost of the FPR remains at between $1.5 and $3 billion annually,” the report says. “This cost is ultimately borne by the millions of Canadians who are members of employer pension plans or save for their own retirement through RRSPs.”

Furthermore, concerns about the negative effects of relaxing the rule have simply not materialized, the report says. “Increasing the limit to 30% from 10% had no measurable impact on the exchange rate or the cost of equity capital in Canada.”

As an example of how the foreign content rule has impacted Canada’s capital markets, the authors point to Nortel Networks’ domination of the Toronto Stock Exchange in 2000 and 2001. Since Nortel was one of the few ways Canadians could participate in the technology boom, RPPs and RRSPs were hit especially hard when the bubble burst and the value of Nortel shares plunged. “The Nortel effect reflects the consequences of the FPR in forcing pension managers to act imprudently,” the study says.

“We believe that the current short, medium and long-term economic environments are supportive for eliminating the foreign property rule,” says ACPM president Keith Ambachtsheer. “We do not think there would be any material effects on the Canadian dollar, the balance of payments, job creation, the ability of Canadian governments and corporations to raise capital or the cost of capital in Canada,” he adds.

“The study confirms that raising the limit in the past has significantly increased the value of Canadians’ retirement savings,” says PIAC chairman Russell Hiscock. “It also shows that the complete elimination of the FPR would bring further benefits to millions of Canadians without imposing material costs on any constituency.”

ACPM represents 700 pension professionals while PIAC represents more than 135 Canadian pension funds.

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Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca