Air Canada Pension Presentation Sym Gill, Director CAW Pension & Benefits Dept. April 15, 2009
Overview Background Information Basic Plan Features Previous Bargaining & CCAA Process Update on Financial Status of Plans Air Canada s Solution 2
Workplace Pensions Registered Pension Plans (RPPs) Two major kinds: Defined Benefit (DB): employer promises a certain retirement pension; employer bears risk Defined Contribution (DC, RRSP-type): employer pays fixed amount into individual accounts; workers bear risk AC/CAIL Plans are Defined Benefit 3
Pension Plans: Defined Benefits vs Defined Contributions? Defined Benefit (DB): The benefit is specifically identified in a formula which is based on the number of years of service multiplied by a benefit rate Defined Contribution (DC): A set amount of contributions are placed to the credits of each individual and accumulates earnings. The pension is whatever amount can be purchased with these accumulated funds. 4
Why Defined Benefit Plans? Flexibility DB plans can be designed to provide subsidized early retirement, such as 85 points but with DC plans, such provisions are impossible DB plans can provide bridge benefits for early retirement, while DC plans can only do so by reducing a person s lifetime benefit 5
Why Defined Benefit Plans? The following benefit designs can be provided in DB plans but not in DC plans: Past service credits Special disability benefits Subsidized Spousal benefits Post Retirement indexing Early retirement windows 6
Why Defined Benefit Plans? Risk Investment Risk: In DC plans, the worker bears all the risk if his or her funds are badly invested. Employers have no additional obligation Annuity Risk: At retirement, a DC plan member will have their pension determined by prevailing interest rates 7
Plan Design Max Pensionable Earnings: $68,000 Annual Pension Based on variable % of earnings, over different time periods Based on best 36 months of average annual earnings 8
Plan Design Member Contributions 5.7% on pensionable earnings up to YMPE 6.0% on pensionable earnings over YMPE (YMPE for 2009: $46,300) 9
Membership At 1/1/08 AC CAIL Actives 2,714 2,373 Pensioners 1,973 972 Survivors 147 52 Deferred 160 94 10
Funded Status at 01/01/2008 AC Assets Liabilities Shortfall Going Concern $5.9 B $5.5 B +$487 M Solvency $5.9 B $6.6 B -$652 M 11
Funded Status at 01/01/2008 CAIL Assets Liabilities Shortfall Going Concern $473 M $466 M +$7.2 M Solvency $470 M $543 M -$72.9 M 12
Required Contributions (2008) AC Employer Workers Current $73.7 M $42.2 M Service Special Payments $123.6 M n.a. Total $197.3 M $42.2 M 13
Required Contributions (2008) CAIL Employer Workers Current Service $11.8 M $5.3 M Special Payments $13.8 M $n.a. Total $25.6 M $5.3 M 14
The Pension Crisis? AC claims that there is an unfunded liability of $3.2 Billion in its pension plans (10 separate plans) Reports suggest that payments due this summer may total between and $600 and $800 million 15
The Pension Crisis? Major downturn in the economy, collapse of capital markets and erosion of asset values have caused widespread difficulties for Air Canada wants to use the (shortterm) fluctuations in capital markets to press for permanent changes in pension funding rules 16
The Markets One Year Performance Indices S&P/TSX (Canadian Stocks) -32.4% S&P 500 (U.S. Stocks in C$) -24.1% DEX Universe Bond Index 4.9% DEX Long Term Bond Index 1.2% MSCI EAFE (Foreign Stocks) -34.0% DEX 91 Day T-Bill Index 2.4% 17
2009 Regulations for Temporary Solvency Funding Relief Government of Canada Temporary Rules Extend the solvency funding period by one year for deficiencies reported as of year-end between Nov.1, 2008 and Oct. 31, 2009. Extend the solvency funding payment to 10 years from 5 with the agreement of members and retirees. 18
2009 Regulations for Temporary Solvency Funding Relief Extend the solvency funding payment to 10 years from 5 when the difference is secured with a letter of credit. Allow asset smoothing above 110 per cent with the difference in payments subject to a deemed trust 19
Air Canada Permanent Proposals Joint Submission to Federal Dept. of Finance re 2009 Pension Plan Consultation Paper Companies: Air Canada, Bell Canada, Canada Post, CNR, CPR, MTS Allstream, NAV Can. 20
Permanent Proposals Solvency deficit amortization period to be permanently increased from 5 to 10 years for current and future solvency deficiencies, without any conditions Discount Rate: Government introduces a regulation to prescribe the discount rate based on a benchmark AA corporate bond index 21
Permanent Proposals Asset Smoothing; should accept caps higher than 110% without a deemed trust applying Exclude indexing from the calculation of solvency liabilities for payment purposes Eliminate concept of partial plan terminations change vesting to 1 year Increase excess surplus limit on employer contributions from 10% to 25% 22
Permanent Proposals Support full funding on plan termination but allow up to 5 years must be treated as unsecured debt and not rank ahead of any other unsecured debt Annual valuations Greater disclosure of funded status, investment strategy and funding policy No benefit improvement if fund status is under 85% 23
What Do We Need? Temporary Funding Relief Extend amortization to 10 years; but with (i) members consent, (ii) future gains applied to shortening the amortization period, not further reducing payments, and (iii) a special pension charge under the Bankruptcy and Insolvency Act (Canada) that would secure the difference between five and 10 year solvency funding should a company go bankrupt. 24
What Do We Need? Discount Rates: Must use interest rate with reference to a realistic cost of annuities in the market under current conditions. Asset Averaging: Agree to permit averaging the value of the pension assets over 110% of market values with the following conditions; (i) must be secured by a deemed trust and, (ii) should be limited to up to five years and used consistently for a period of at least 3 years 25
What Do We Need? Exclusion of Indexing from Funding: All benefits should be subject to funding Funding on Wind UP: Should be required of all plans, already the norm in other in other Provincial jurisdictions 26
What Do We Need? Annual filing of valuations: Agree with proposal and urge that when material change occurs, interim valuations should be required Contribution Limits; Support proposal to increase excess surplus threshold in the Income Tax Act to 125% of going concern liabilities 27
What Do We Need? Disclosure & Information: All relevant financial information about the pension plan should be available to plan members and union. This information should also be available to former plan members and retirees upon request. 28
What Do We Need? Pension Guarantee/Insurance: A mechanism needs to established at the Federal level which would guarantee or insure a minimum amount in the event of bankruptcy SG:nmcope343 29