Far-reaching amendments to the Alberta Employment Pension Plans Act have come into effect. The amendments either ensure that Alberta is in step with standards in other jurisdictions or place the western Canadian province ahead of other jurisdictions, according to law firm, Blake, Cassels & Graydon (Blake's).

The Toronto-based lawyers note, however, that letter of credit (L/C) funding rules that the province's December 2005 draft amendments had originally envisaged have not yet been proposed, although Blake's expects Alberta to prepare a separate amendment for L/Cs later.

Solvency payments

The Canadian government legislated in 2006 to allow private pension schemes to use L/Cs to cover solvency payments needed by many Canadian companies struggling with hundreds of millions of dollars in shortfalls in their defined-benefit pension plans.

In essence, the L/C funding rule means companies may take up to ten years to make solvency payments provided they put up a L/C sufficient to cover any shortfall. Previously, companies had only been allowed a period of five years to make up solvency payments. (DC World News 4 May 2006).

Wise delay

Blake's says it may be "wise" for Alberta not to introduce what they see as "far reaching" new L/C arrangements for the moment. They suggest that the province may be well advised to wait and see how two other pension regulatory authorities - the federal pension jurisdiction and Québec - fare in the process of implementing L/C rules.

The L/C rules have proved controversial in Alberta, according to the Canadian lawyers, who nevertheless "speculate they will go ahead, but only once certain concerns raised in the consultation process, including by trust companies and other fundholders, are addressed".

Potential difficulties

Detailed regulations need to be enacted to provide processes for dealing with L/Cs says Blake's. They point to potential difficulties managing L/Cs with floating face values, as the size of the solvency deficiency changes.

They also point out that financially weaker employers will have insufficient credit to pledge to obtain an L/C in the first place.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.