Canada's actuaries have presented the Ontario government with an action plan for reversing the decline in defined benefit pension plans.

One of the measures proposed in the plan is for letters of credit (L/Cs) to be used to improve solvency and add flexibility to pension plans.

Defined benefits

In a submission to the Ontario Expert Commission on Pensions, the Canadian Institute of Actuaries suggested legislative and regulatory measures.

The measures are designed to reverse the decline of defined benefit pension plans and preserve them as a key part of Canada's retirement income system.

Actuaries' perspective

The actuaries say that in their view, defined benefit pension plans are too important to the financial security of Ontario's current and future pensioners to allow their continued decline.

"Ontario should not give up on defined benefit pension plans -it needs to fix them, " one actuary said.

L/Cs recommended

In its presentation to the commission, the institute outlined how Canada's patchwork of regulations, legal decisions, tax rules and changes in accounting standards has led to the decline of defined benefit pension plans.

One of the measures recommended is for irrevocable L/Cs to be used by plans to secure solvency deficiencies and provide plan sponsors with additional flexibility without decreasing benefit security for plan members.

L/C funding rule

Several Canadian provinces are currently considering the use of L/Cs in pension schemes. (DC World News, 31 October 2006).

The L/C funding rule essentially 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).

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