Two Canadian provinces will consider the use of letters of credit (L/Cs) in pension schemes as they work together to harmonise their pension standards.

Alberta and British Columbia will conduct a joint review of pension legislation and then decide how they will join a growing number of Canadian provinces that allow the use of L/Cs to cover pension shortfalls.

Provincial L/C arrangements

Alberta has already proposed the use of L/Cs in pension schemes but has yet to finalise its arrangements. Earlier this year, the province said it would delay the inclusion of L/Cs in its pension schemes pending further consideration.

British Columbia has said it will allow the use of L/Cs to fund solvency deficiencies in certain circumstances. Officials say that further details will be announced in the near future.

Principles of use

Last year Canada's new Conservative government said L/Cs could be used by private pension schemes of companies in Canada struggling with hundreds of millions of dollars in shortfalls in their defined-benefit pension plans.

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.