Article

Note: In order to remedy a deficiency of Can.$174,300 in its pension plan under British Columbia pension legislation, Butler Brothers Supplies Ltd. caused a Canadian chartered bank to issue an LC in the amount required to meet its obligations under the plan. The opinion stated that "[i]nterest accrues on this letter of credit at the rate of 6.25% per annum."

The Superintendent of Pensions, however, rejected the use of an LC as an asset of the pension plan and directed payment of the deficiency by installments in accordance with the provisions of the Pension law. The Superintendent stated that while "the letter of credit will obligate the bank to make payment to the Plan in the future, the Plan currently is not the owner of that payment. Accordingly, we believe that the letter of credit does not constitute an asset of the Plan." The Superintendent based its refusal on the conclusion that the LC is not a "'payment into a pension plan', as required by both the Act and the Regulation."

Employer petitioned for judicial review of the Superintendent's decision. The British Columbia Supreme Court, Wilson, J., dismissed the petition.

Employer argued that the LC "becomes identical to cash to its full face value at the moment it is given ... ." The court ruled that "the Superintendent is correct. ... [T]he letter of credit is an asset ... with a condition. ... [I]t is an asset which the plan may realize upon if, and only if, the plan is terminated. I read the wording of the Act to mandate a current contribution to the plan, without conditions ... ."

Comment: The opinion is confusing in several respects. In the first place, the court refers at several points to a "line of credit" in a way that is either a typographical error or that suggests that there was something else afoot unexplained by the opinion (E.g. "the Superintendent rejected the notion of a line of credit."). In the second place, the opinion states that the LC "paid interest". Something is wrong here. LCs do not "pay interest". If there was an increase in amount equivalent to interest, it must be because either the LC was fully collateralized and the interest on the collateral was "passed through", or the LC amount increased proportionately with the company obligated to reimburse for these increases (or some combination of the two). In the third place, it is unclear what was required by the BC regulation. If it was that the funds had to be available, the LC is as good as the issuer and many governmental entities accept an LC in lieu of cash. On the other hand, as suggested by the reference to interest, if funds had to be deposited in a pool, the LC would not achieve that result. One wonders, though, if either the court or the agency really understood what was being proposed. The confusions in the opinion do not inspire much confidence in that respect.

[JEB/lhd]

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