Letters of credit (L/Cs) may play a key role in Canada's federally regulated private pension plans if government proposals are approved.

The measure would help pension plan sponsors meet funding needs and has been proposed ahead of talks on pension reforms between Canada's federal and provincial governments.

L/C usage

If the proposal goes through, private pension plan sponsors would be able to secure L/Cs in lieu of making solvency payments to pension funds up to a limit of 15 per cent of a plan's assets.

This is one of several measures proposed to make Canada's private pension plans less vulnerable to volatile financial markets.

Forthcoming talks

Other measures proposed include a requirement for the plan sponsor to fully fund pension benefits on plan termination.

Permission for plan sponsors, members and retirees of distressed pension plans to restructure such plans has also been proposed.

The proposals have been announced ahead of talks between Canada's finance minister, Jim Flaherty, and provincial finance ministers to reform the country's pension plan legislation.

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