Effective January 1, 2013, certain Ontario employers will be able to use letters of credit to fund their pension plans’ solvency deficiencies.
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 1, 2013.
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 liabilities; and
- 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 credit;
- 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 date.
- Determination of Amount: The amount of the solvency liabilities must be determined in accordance with specified rules.
- 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 documents, including:
- 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.