Most employers who sponsor defined benefit pension plans in Ontario can use a letter of credit to fund solvency special payments, up to a maximum of 15% of the pension plan’s solvency liabilities.
Employers that want to use a letter of credit will have to notify the Financial Services Regulatory Authority of Ontario (FSRA) and the pension fund trustee. Other important considerations, requirements and instructions are below.
For detailed requirements, review the Pension Benefits Act (PBA), Regulation 909.
- About the letter of credit
- Renewing a letter of credit
- Changing a letter of credit
- Reducing a letter of credit
- Required notifications: FSRA, trustee and plan members
- Paying the letter of credit
Employers can use a letter of credit for future scheduled solvency special payments that have been set out in a valuation report already filed with FSRA. The letter of credit cannot be used for existing payments that are in arrears.
The letter of credit must:
- Be an irrevocable and unconditional standby letter of credit
- Be issued by an approved financial institution
- Contain certain information specified in the regulations
- Be made payable to the pension fund trustee, not the employer
- Have an effective date that is on or before the date the first payment is due
- Have an expiry date no later than one year after its effective date
Employers can use more than one letter of credit for future scheduled payments, but combined they cannot exceed 15% of the plan’s solvency liabilities based on the most recently filed valuation report. There are certain liabilities that are excluded from this limit.
For plan funding purposes, the letter of credit cannot be included when calculating the going concern assets or solvency assets of the pension plan (but may be included in any solvency asset adjustment).
Which financial institutions can issue a letter of credit?
A financial institution can issue a letter of credit if it:
- Is a member of the Canadian Payments Association
- Is a bank, credit union, caisse populaire or a cooperative credit society
- Has a credit rating that meets the prescribed level on the date the letter of credit is issued or renewed
The financial institution cannot be the employer or an affiliate of the employer.
Fees and expenses
Fees and expenses for obtaining, holding, amending or cancelling the letter of credit cannot be paid from the pension plan. However, fees and expenses for enforcing the letter of credit may be paid from the pension plan.
Interest will be charged on any solvency special payment covered by a letter of credit. Unless the letter of credit covers interest payments, the interest must be paid in cash into the pension plan by the expiration date.
Employers can renew the letter of credit at least 15 days before the expiration date. The amount in the renewal cannot exceed 15% of the plan’s solvency liabilities based on the most recently filed valuation report.
A letter of credit can provide automatic renewals, but notifications and requirements in the regulations must be met. For example:
- Employers must file a Letter of Credit Certificate (Form 11) with FSRA within five days of receiving the renewed letter of credit.
- The financial institution’s credit rating must meet the required level at the time of the renewal.
An automatic renewal can also provide for automatic increases if it is set out in the original letter of credit.
Employers can change an existing letter of credit through an amendment or replace it with another letter of credit from a different financial institution. A copy of the amended or replacement letter of credit must be provided to the pension fund trustee and FSRA.
Employers can reduce the amount of a letter of credit before or on its expiry date if either of the following applies:
- They have paid into the pension plan to reduce the letter of credit and the reduction equals the payments made into the pension plan.
- The most recently filed valuation report shows that 85% of the plan's solvency liabilities, minus all of the plan's solvency assets (both after smoothing) is less than or equal to the present value of all letters of credit held for the pension plan after the reduction.
Employers must notify the pension fund trustee that the letter of credit is reduced and whether the reduction meets the requirements listed above.
- Employers must provide a copy of the letter of credit and other required documents to the pension fund trustee at least 15 days before the first installment of the solvency special payment is due, and when replacing, renewing and amending the letter of credit.
- Plan administrators must provide FRSA with a copy of the letter of credit (or replacement, renewed or amended letter of credit) and a Letter of Credit Certificate (Form 11) within five days of receiving the letter of credit.
The timing is crucial. The letter of credit can only be used to cover an upcoming special payment if it has been provided to the pension fund trustee at least 15 days before the payment is due.
Plan members right to inspect the documents
Copies of any letter of credit, related trust agreement and certificate filed with FSRA must be made available for inspection by the pension plan’s members and others as set out in the PBA, section 29.
How to file a letter of credit with FSRA
1. Download Form 11: Letter of Credit Certificate.
- Right-click on the link and choose Save link as to download the PDF form to your computer or drive.
- If there are multiple letters of credit, you will need to complete a Letter of Credit Certificate for each one.
2. Fill out the form electronically.
- Access the User guide (PDF or accessible version).
3. Ensure you have the following:
- The completed Form 11: Letter of Credit Certificate
- A certified copy of the letter of credit
- Any other required documents outlined in Part E of the form
4. File the package through the Pension Services Portal.
Requesting payment from the financial institution
The pension fund trustee must request that the financial institution pay the amount of the letter of credit to the pension plan in the following circumstances:
- The letter of credit does not satisfy the requirements of the PBA and regulations or the requirements of the Income Tax Act (Canada).
- The pension plan administrator or the employer notifies the pension fund trustee that they intend to wind up the pension plan.
- FSRA issues an order to wind up the pension plan.
- The employer is subject to bankruptcy proceedings.
- An application or petition has been filed under the Winding-up and Restructuring Act (Canada) by the employer or against the employer.
- The employer has not provided a renewed or replacement letter of credit at least 15 days before the expiration date of the original letter of credit.
- The pension fund trustee does not need to take action if the employer has paid the amount specified in the letter of credit into the pension fund.
When an employer must pay
If the financial institution does not pay the amount of the letter of credit when the pension fund trustee requests it, the employer must immediately pay that amount into the pension fund. The employer must then provide written notice to FSRA that the financial institution did not pay the letter of credit, and that the amount has been paid into the pension fund.
What if an employer applies for creditor protection?
Once the pension fund trustee is made aware that an employer has applied for creditor protection under the Companies’ Creditors Arrangements Act, the pension fund trustee must follow the terms of the trust agreement and their fiduciary responsibilities outlined in the PBA.