A British Columbia court has upheld the ruling of its pension regulator, declaring that a firm cannot make up a funding deficiency in its pension plan with a letter of credit.

In the case, Butler Brothers Supplies Ltd. sought a judicial review of a decision of the Superintendent of Pensions of B.C., which ruled that a proposed letter of credit does not qualify as an “asset” for the purposes of the Pension Benefits Standards Act.

The plan reported that it is fully funded on a going-concern basis. The actuarial value of assets exceeds the actuarial liability by $97,900 and no going-concern amortization payments are required. However, there is solvency deficiency of $174,300.

The solvency deficiency is calculated on the presumption the plan was terminated Dec. 31, 2002. However, the plan was not terminated, then, and there is no intention of termination.

To address the solvency deficiency, the firm deposited a letter of credit from a Canadian chartered bank in the amount required to meet its obligations to the plan. “Seemingly, that was a practical and eminently sensible way to protect the plan in the circumstances,” the judge wrote. “But the Superintendent did not see it that way. The Superintendent rejected the notion of a line of credit, and directed payment of the solvency deficiency… money paid by instalments.”

It seemed the court wanted to rule in favour of the firm. Indeed, the judge, Justice R. D. Wilson, wrote, “As compelling and attractive as I find the petitioner’s argument to be, I conclude that the Superintendent is correct.”

“Assuming the letter of credit is an asset, it is an asset with a condition,” he concluded. “That is to say, it is an asset which the plan may realize upon if, and only if, the plan is terminated.” He said the wording of the legislation suggests that contributions to make up solvency deficiencies can’t be conditional. “To put it another way, the legislation proscribes the conditional funding of solvency deficiencies. It places the entire risk on the employer. Regrettably, the petition is dismissed.”