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Canada gives funding relief to cash-strapped pensions

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OTTAWA (Reuters)—New rules giving some Canadian companies more time to make up pension funding shortfalls went into effect on Friday as part of the government's lifeline to cash-strapped companies crippled by the financial crisis.

The funding relief applies to defined benefit pension plans in federally regulated sectors such as airlines and telecommunications, the Department of Finance said.

The changes could affect the country's largest airline, Air Canada, which faces a cash crunch and the specter of bankruptcy.

The pensions affected by the regulations represent 7% of all private pension plans in Canada and about 12 percent of assets.

The key change introduced is an extension of the period for solvency funding payments to 10 years from five years, with the agreement of members and retirees or when the difference is secured with a letter of credit.

The sharp decline in stock prices due to the global credit crisis has led to severe underfunding of pensions. As of last December, over 80% of plans were in deficit, according to the federal government.

"Maintaining the current funding requirements over the short term in these difficult circumstances would result in continued financial stress for many plan sponsors, which could affect their business operations and ongoing viability," the government said in its rationale for the changes.

"The ongoing tightening of credit markets and economy further magnifies these difficulties. This could ultimately lead to a reduction in pension benefits ," it said.

The development had no impact on Air Canada shares on Friday because investors had already assumed the relief plan would come into effect, said analyst Chris Murray of CIBC World Markets.

Air Canada is looking to secure financing to help it ride out one of the worst downturns in the airline industry's history. It reached a tentative agreement on pension funding with most of its unionized staff on Monday.

The government's measures were included in the federal budget in January and appeared last month in the government's official newspaper.

The measures that went into effect on Friday also provide the option of extending the period for solvency funding payments by one year for shortfalls reported as of year-end between Nov. 1, 2008, and Oct. 31, 2009. More flexible rules were introduced for government-owned corporations.

Pension plan sponsors will be able to mitigate the impact of short-term volatility in market prices for assets by using asset-smoothing rules set out by regulators.