Situations where a letter of credit can be included in solvency assets include.
- where it is used in lieu of solvency special payments; and
- where the plan sponsor opts out of the solvency funding relief regulations and includes the face value of a funding relief letter of credit as a solvency asset.
The total face value of all letters of credit included in solvency assets cannot exceed 15% of the solvency liabilities of the plan as determined at the valuation date.
Where a letter of credit is still being used to fund a plan under the solvency funding relief regulations, it cannot be included as a solvency asset of the plan. There is already a method of considering the letter of credit by allowing the letter of credit to reduce over time by the amount that the solvency payments that were initially delayed through the funding relief regulations are paid to the pension fund. Including the letter of credit in the solvency assets would effectively result in double-counting of that letter of credit.
In accordance with paragraph 9(8)(d.1) of the
Pension Benefits Standards Regulations, 1985, in calculating the average solvency ratio, the solvency ratios at the prior valuation date (SRt-1) and the second prior valuation date (SRt-2) shall be adjusted
- to increase the solvency assets at the prior valuation date and the second prior valuation date by the face value of all letters of credit included in the solvency assets on the valuation date; and
- to reduce the solvency assets by the face value of all letters of credit included in the solvency assets on the prior valuation date or second prior valuation date, as the case may be.
In practice, this would involve
- identifying the face value of letters of credit (FVLoC) included in solvency assets at the current valuation date (FVLoCt), the prior valuation date (FVLoCt-1) and the second prior valuation date (FVLoCt-2);
- adjusting SRt-1 for the difference between FVLoCt and FVLoCt-1; and
- adjusting SRt-2 for the difference between FVLoCt and FVLoCt-2.
Cash payments made to reduce the face value of a letter of credit do not impact the previously described adjustments. These cash payments should be treated as special payments in the calculation of the average solvency ratio, as described under paragraph 9(8)(c) of the PBSR.
Average Solvency Ratio Calculation – Numerical Example
The following table illustrates the calculation of the average solvency ratio where letters of credit are used:
|
Prior Second Valuation Date |
Prior Valuation Date |
Current Valuation Date |
| | ($000s) | |
Market Value of Assets | $8,300 | $8,300 | $8,300 |
Face Value of Letters of Credit in Effect on the Valuation Date | $150 | $100 | $200 |
Termination Expense Provision | ($160) | ($160) | ($160) |
Solvency Assets (A) | $8,290 | $8,240 | $8,340 |
Calculating Adjustment Due to Special Payments: | | | |
Payments Made to Reduce LoC Balance Prior to Current Valuation Date (B) | | | |
Second Prior Year | $50 | n/a | n/a |
Prior Year | $0 | $0 | n/a |
Special Payments (Includes Payments in (B) Above): | | | |
Second Prior Year | $392 | n/a | n/a |
Prior Year | $226 | $226 | n/a |
Present Value of Special Payments at Current Valuation Date
(C) | $618 | $226 | |
Calculating Adjustment Due to Difference in Face Value of Letters of Credit: | | | |
Face Value of Letters of Credit at Current Valuation Date (D) | $200 | $200 | $200 |
Face Value of Letters of Credit at Valuation Date (E) | $150 | $100 | $200 |
Adjustment Due to Difference in Face Value of LoCs (F) = (D) – (E) | $50 | $100 | $0 |
Adjusted Solvency Assets (G) = (A) + (C) + (F) | $8,958 | $8,566 | $8,340 |
Solvency Liabilities (H) | $10,000 | $10,000 | $10,000 |
Adjusted Solvency Ratio (G)/(H) | 0.8958 | 0.8566 | 0.8340 |
Average Solvency Ratio | | | 0.8621 |