While letters of credit have been around for several years now, in today’s economy, their popularity is on the rise amongst pension plan sponsors and the governments that regulate them. According to Mary Picard, partner in FMC’s National Pensions and Benefits Group in Toronto, the use of letters of credit can be beneficial to both sponsors and members.
“It’s good news for pension plan sponsors to be relieved of having to contribute real money to their pension plans,” says Mary. “And if the letter of credit is properly established, there’s no downside for plan members.” Mary also notes that letters of credit reduce the risk of surplus building up in the pension plan in the future.
Despite the many advantages, letters of credit are not suitable for everyone. Obtaining a letter of credit can be costly with the legal and consulting expenses on top of the fee paid to the issuer. Also, given the current economic circumstances, letters of credit can be difficult to come by.
To obtain more information, read donalee Moulton’s article, Letters of credit offer relief for pension plans, appearing in The Lawyers Weekly (August 7, 2009).