On November 28, 2007, the Alberta government formally introduced long-anticipated regulations to permit the use of letters of credit to satisfy employers’ solvency deficiency funding obligations for pension plans they sponsor. The new regulations are effective immediately. These regulations follow changes made to the Income Tax Act (Canada) in 2006 to permit use of letters of credit from a tax law perspective, and measures introduced in other Canadian jurisdictions, notably in Québec and federally, since that time.

The regulations set out specific requirements for such letters of credit, along with detailed rules to be followed in order for employers to avail themselves of this new funding option. The regulations impose particular responsibilities on each of the employer, the pension plan’s fund holder and the issuer of the letter of credit.

Of note are the following features of the new regulations in comparison to similar regulations in other Canadian jurisdictions:

  • The regulations have been enacted as a permanent, rather than temporary, measure; and
  • All or any portion of a plan’s solvency deficiency may be funded through the use of letters of credit.

Plan sponsors considering using this letter of credit funding option will need to understand the detailed requirements of the new regulations before proceeding. In addition, sponsors should consider whether any changes to their existing trust or other funding agreements are necessary in order to accommodate the use of letters of credit for funding purposes.