Ontario Regulation 364/12 (the LOC Regulation) was filed November 15, 2012 and amends Regulation 909 under the Pension Benefits Act (Ontario) (the PBA) with respect to the use of letters of credit in the funding of a pension plan’s solvency deficiency. The LOC Regulation along with section 55.2 of the PBA will permit the use of letters of credit in the funding of up to 15% of a plan’s solvency liabilities. If a letter of credit is used for such purpose, interest payments on the solvency deficiency will be required to be paid, calculated in accordance with the LOC Regulation, unless the letter of credit includes the amount of such interest payments.
Section 55.2 of the PBA has been proclaimed in force for January 1, 2013, at which time the LOC Regulation will also come into force.
Employers to Whom the New Letters of Credit Rules Will Apply
The new letter of credit funding option will apply to all employers who are required to make payments into a pension plan that provides defined benefits, except:
- Certain employers listed in the LOC Regulation to whom special regulations already apply;
- Jointly sponsored pension plans;
- Multi-employer pension plans; and,
- Public-sector pension plans (unless otherwise prescribed).
Requirements for the Letter of Credit
The letter of credit must be an irrevocable and unconditional standby letter of credit made payable to the trustee of the pension fund, in trust for the pension fund. It must be issued by a bank, a credit union, a caisse populaire, or a co-operative credit society, each being defined in the LOC Regulation with reference to certain applicable legislation. Further, the issuer must be a member of the Canadian Payments Association, cannot be the employer or an affiliate of the employer, and must have an acceptable credit rating as set out in the LOC Regulation.
The LOC Regulation sets out specific terms that must be provided for in a letter of credit. For example, a letter of credit must expire not later than one year after it takes effect (it can, however, be renewed or replaced). It must be payable in Canadian currency, comply with certain International Chamber of Commerce rules, and make the issuer contractually liable to pay out money under its terms if payment is demanded under it by the trustee of the pension fund. When the trustee demands payment under the letter of credit, the issuer is required to promptly pay the face amount of the letter of credit to the pension fund without further inquiry.
Triggering the Letter of Credit
The LOC Regulation requires the trustee to demand payment on the letter of credit if any of the following circumstances exist:
- The letter of credit does not satisfy the requirements of the PBA and regulations thereunder or the requirements of the Income Tax Act (Canada);
- The administrator of the pension plan gives written notice to the trustee that the employer intends to wind up the pension plan;
- The Superintendent issues an order requiring the wind up of the pension plan;
- The employer is subject to bankruptcy proceedings;
- An application or petition has been filed under the Winding-up and Restructuring Act (Canada) by the employer or against the employer;
- The trustee is required to demand payment pursuant to an agreement between Ontario and a designated jurisdiction whose pension benefits legislation applies to the pension plan (for example, the trustee is required to demand payment pursuant to the Agreement Respecting Multi-Jurisdictional Pension Plans); or,
The trustee is otherwise required to demand payment pursuant to the terms of the trust agreement under which the letter of credit is held. In particular, the LOC Regulation requires the trust agreement under which a letter of credit is held to require the trustee to demand payment:
- if the administrator (and in some cases the employer) notifies the trustee that any of the circumstances in numbers 1 to 5 above exist;
- if another person notifies the trustee that any of the circumstances in numbers 1 to 5 above exist (in which case the trustee must notify the administrator, the employer, and the Superintendent of same), and after 31 days the administrator has not notified the trustee that the circumstance does not exist; or,
- fourteen days before the letter of credit expires, unless the amount of the letter of credit has been paid into the pension fund, the letter of credit has been renewed or replaced, or the letter of credit has been reduced and the amount by which it has been reduced has been replaced by another letter of credit, paid into the pension fund, or is no longer required to be paid.
The LOC Regulation also sets out the timelines for putting a letter of credit in place, and for amending, renewing or replacing a letter of credit. For example, a letter of credit put in place to cover solvency deficiency special payments (i.e., under s. 5(1)(e) of Regulation 909) must be provided to the trustee of the pension fund at least 15 days before the first instalment of the special payments to which the letter of credit relates is due. The LOC Regulation also requires that solvency liabilities must be determined as of the valuation date of the actuarial valuation report most recently filed under sections 3, 4, 13 or 14 of Regulation 909, and that certain amounts must be excluded when calculating the amount of solvency liabilities. Further, the LOC Regulation sets out certain notification requirements to the Superintendent.