Letter of credit limits for federally regulated DB plans
On April 29, 2017, the Federal government posted draft regulations to amend the Pension Benefits Standards Regulations 1985 (the “PBSR”). The amendments will change the maximum amount of a letter of credit for a federally regulated defined benefit (“DB”) pension plan from 15% of assets to 15% of solvency liabilities, as determined at the last actuarial valuation. They also make some minor updates to the unlocking rules for federally regulated locked-in accounts held at financial institutions.
Letter of credit amendments
Currently, sponsors of federally regulated DB plans may use a letter of credit to replace solvency special payments, up to an aggregate limit of 15% of the market value of the DB plan assets, as determined at the most recent plan year end.
The proposed amendments to the PBSR would change the aggregate limit to 15% of the solvency liabilities of the DB plan as at the valuation date of the most recently filed valuation report. Changing the basis for the aggregate limits from assets to liabilities could grant plan sponsors additional opportunities to use letters of credit and permit them to take greater solvency payment reductions.
Locked-in account amendments
The proposed amendments would also clarify unlocking and transfer rules for life income funds, restricted life income funds and locked-in registered retirement savings plans (collectively termed “locked-in accounts”). These proposed changes include provisions that:
- clarify that funds in locked-in accounts may be transferred to pension plans that are provincially regulated and pooled registered pension plans; and
- provide that a locked-in account must permit owners to unlock benefits in situations where life expectancy is considerably shortened, as opposed to making it an option that financial institutions may offer.
The proposed changes will be helpful to federally regulated DB pension plan sponsors who wish to maximize the amount of their letters of credit.
Interested persons may make representations concerning the proposed amendments to the PBSR by May 29, 2017.