Effective January 1, 2013, certain Ontario employers will be
able to use letters of credit to fund their pension plans'
Provisions permitting letters of credit were
added to the Ontario Pension Benefits Act (the PBA) in
late 2010 when Bill 120 was passed, but they did not come
into force pending the publication of the regulations necessary to
make them operative. Now that the regulations have been filed, the letter of
credit provisions have been proclaimed in force effective January
The PBA contemplates that the employer (not the administrator)
will obtain the letter of credit, and includes the following
restrictions governing letters of credit:
letters of credit may not be used by multi-employer pension
plans (MEPPs) and jointly sponsored pension plans (JSPPs);
a letter of credit cannot exceed 15% of a plan's solvency
while fees and expenses associated with enforcing a letter of
credit may be payable from the pension fund, any expenses
associated with obtaining, holding, amending or cancelling a letter
of credit are not.
The bulk of the rules, however, are set out in the regulatory
framework which was finalized in November of this year, including
the following provisions:
Requirements for the Letter of Credit: The
letter of credit must meet certain requirements set out in a
Schedule to the regulations, including:
be an irrevocable and unconditional standby letter of
payable in Canadian currency to the pension fund trustee, in
trust, for the pension fund;
make the issuer contractually liable to pay out money under its
terms if payment is demanded by the trustee;
be subject to a trust agreement (which itself must address
specified requirements) between the issuer and the administrator of
the pension plan;
have an effective date that is on or before the date the first
payment is due; and
have an expiry date no later than one year after its effective
Determination of Amount: The amount of the
solvency liabilities must be determined in accordance with
Deadlines: A letter of credit, an amended
letter of credit, a replacement letter of credit or a notice of the
renewal of a letter of creditor must be provided to the trustee
within specified time periods.
Regulatory Filings: The plan administrator
must give the Superintendent notice that a letter of credit has
been provided (or amended, renewed or replaced) by filing certain
a certified copy of the letter of credit or notice of renewal
as applicable; and
a certificate indicating that the letter of credit complies
with the PBA, the regulations and the Income Tax Act.
Demand for Payment: A trustee must demand
payment of the amount of the letter of credit in certain
circumstances, including where the letter of credit doesn't
meet the requirements noted above, the plan is going to be wound
up, the employer is subject to bankruptcy or insolvency
proceedings, or as otherwise provided in the trust agreement.
Over the past few years, there has been much interest in
amending the PBA to give employers greater flexibility when funding
solvency deficiencies by permitting the use of letters of credit.
Now that letters of credit are finally available to employers with
underfunded plans, it will be interesting to see how many take
advantage of this option.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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