The extent to which letters of credit (L/Cs) can be used in defined benefit pension plans operating in the Canadian province of Ontario may be increased.

Currently, L/Cs can be obtained by the province's defined benefit pension plans from a financial institution in lieu of solvency funding payments for up to 15 per cent of the plan's liabilities.

Consultation paper

A recently issued consultation paper however proposes that an unspecified increased percentage of solvency liabilities could be L/C backed.

The consultation paper, "Review of Ontario's Solvency Funding Framework for Defined Benefit Pension Plans" is open for comment until 30 September 2016.

L/C background

Ontario introduced the L/C funding rule into solvency planning nearly ten years ago as a part of an action plan for reversing the decline in defined benefit pension plans (DC World News, 26 November 2007).

The L/Cs are now used by plans to secure solvency deficiencies and provide plan sponsors with additional flexibility without decreasing benefit security for plan members.

Funding rule

The L/C funding rule essentially means companies may take up to ten years to make solvency payments provided they put up an 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).

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