The Canadian province of Ontario has published a new letter of credit (L/C) regulation under its Pension Benefits Act (PBA).

The new regulation, which comes into force on 1 January 2013, amends an existing one with respect to the use of L/Cs in the funding of a pension plan's solvency deficiency.

Solvency liabilities

The new regulation along with other aspects of the PBA permit L/Cs to be used in the funding of up to 15% of a plan's solvency liabilities.

If an L/C is used for such purpose, interest payments on the solvency deficiency must be paid, calculated in accordance with the regulation, unless the L/C includes the amount of such interest payments.

Applicability and terms

The new L/C funding option will apply to most employers who are required to make payments into a pension plan that provides defined benefits.

The L/C must be an irrevocable and unconditional standby L/C made payable to the trustee of the pension fund.

Issuer and expiry

A bank, a credit union, a caisse populaire, or a co-operative credit society must issue the L/C.

It must expire not later than one year after it takes effect, although it can be renewed or replaced.

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