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Ontario’s proposed letters of credit regulations

On July 30, 2012, the Ontario Ministry of Finance released a summary of the proposed regulations for letters of credit (LOCs) applicable to pension plans.

Regulations are required to implement the amendments permitting LOCs found in Bill 120, which received Royal Assent in December 2010 but have not been proclaimed into force. As discussed in the November 12, 2010 issue of News & Views, Bill 120 provides that an LOC may be used in place of special payments to a defined benefit pension plan, up to a limit of 15% of a plan’s solvency liabilities.

The proposed regulatory requirements are similar to those which have been adopted in other jurisdictions that permit LOCs. The proposed regulatory requirements include the following:

  • An LOC must be issued or renewed by a bank or credit union that is a member of the Canadian Payments Association, has an acceptable credit rating as defined in the regulation, and is not the employer or affiliated with the employer.
  • The trustees of a pension fund hold an LOC in trust for the pension plan.
  • The LOC must be an irrevocable and unconditional standby LOC, payable in Canadian currency and in accordance with international rules on LOCs.
  • The effective date must be on or before both the date on which the first installment of the special payment in respect of a solvency deficiency to which the LOC relates is due and the date any lump sum catch-up payments for the year of the valuation report are due.
  • The expiry date must be specified and cannot be later than the last day of the plan’s fiscal year in which the LOC becomes effective.
  • On demand from the pension fund trustee, the issuer of the LOC must pay the amount requested, without any further inquiry.
  • The insolvency, liquidation, or bankruptcy of the employer would not affect the rights or obligations of the issuer of the LOC or the pension fund trustee.
  • If the issuer decides not to renew the LOC, a 60-day notice must be provided to the employer and pension fund trustee.
  • The LOC cannot be assigned to another issuer without employer consent.
  • A demand for payment of the LOC would be made upon default, non-renewal, or failure to comply with the legislation.
  • If the issuer fails to honour the LOC, the employer would immediately pay an amount equal to the face value of the LOC into the pension fund.
  • In the event of a default, the pension fund trustee would be required to immediately demand payment of the amount of the face value of all LOCs.
  • In the event an LOC is not renewed, the pension fund trustee would immediately demand payment of the amount of that LOC’s face value, unless:
    • it is replaced by another LOC for the same or greater face value at least 15 days before the expiry of that LOC;
    • an amount equal to the face value of that LOC is remitted to the pension fund by the employer no less than 15 days before its expiry; or
    • the face value of that LOC is reduced and there is no effect on the plan’s solvency deficiency.
  • A copy of the LOC would have to be provided to the pension fund trustee at least 15 days in advance of its commencement date.
  • A certified copy of the LOC would have to be filed with the Superintendent of Financial Services within five days after it is received by the plan administrator, along with a certification that the administrator believes the LOC complies with both the Pension Benefits Act and the Income Tax Act.

[The section on Implementation of the LOC originally published was removed on September 13, 2012. Implementation will be addressed once regulations are finalized.]

Conclusion

Comments on the proposed framework are requested by the Ministry of Finance by August 31, 2012, after which time the final regulations are expected to be issued. The commencement date for the use of LOCs in Ontario has not been specified.