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Air Canada pensions underfunded

The cash-strapped airline says the plans' shortfall is about $1.3 billion.

By Steve Erwin

The London Free Press, April 2, 2003

TORONTO -- Air Canada revealed yesterday as it filed for protection from its creditors that its pension plans are underfunded by about $1.3 billion, forcing the insolvent airline to discuss potential solutions to the shortfall with federal regulators.

Air Canada said it has entered into an interim arrangement with the federal Office of the Superintendent of Financial Institutions, a regulator of corporate pension plans, on the company's funding obligations to tens of thousands of former and current employees and their spouses.

"It is our hope that the magnitude of the (pension plan) solvency deficits will be reduced as negotiations towards a definitive plan of compromise involving all creditors progress, but obviously no assurances can be given in that regard," Air Canada chief financial officer Robert Peterson said in a court document.

The statement was included in an affidavit presented in Toronto detailing the company's reasons for seeking court-ordered protection from its creditors, which was granted yesterday.

Air Canada said in two weeks it will bring a motion to the court proposing a restructuring of its pension plans and other retirement income arrangements.

The airline is the administrator for 10 pension plans and also has several unregistered supplementary pension plans. In addition, employees of its Jazz regional airlines also have a number of registered pension plans.

In total, the plans cover about 17,000 former employees and about 40,000 workers.

The federal regulator directed Air Canada to provide a new valuation of the plans to determine the extent of a potential shortfall and "to fund any liability as soon as possible." Air Canada was not due to provide a valuation of the plans -- which must take place at least once every three years -- until early next year.

"Air Canada is in no position to fund the deficits which new valuations of the pension plans would reveal if made in existing market conditions," Peterson warns in the affidavit.

Previous valuations had the plans largely in surplus -- meaning there was enough money to cover all retirees' benefits -- and Air Canada did not make employer contributions to most of the plans through 2001 and 2002.

However, in recent years weak economic conditions, which caused interest rates to decline and left stock markets in a free-fall, deteriorated investments in the pension plans of a number of companies, including those at Air Canada.

Estimates of the "solvency deficits" of the plans -- the amount by which funds for the plans would be short if the plans had to be wound up because of a bankruptcy at Air Canada -- showed the plans would be underfunded by 15 per cent.

That deficit amounted to about $1.3 billion at the end of January, though that number fluctuates depending on market conditions.

The Canadian Auto Workers union, which represents about 9,500 Air Canada employees, calls the pension shortfall a "major concern."

"We don't know as of this moment just how serious it is -- I've heard it's 20 or 30 per cent underfunded for CAW members," CAW president Buzz Hargrove said at a news conference in Toronto.

"I'm not at all clear about what that means to our retirees," he said.

Hargrove said he wasn't sure of the shortfall affecting the pensions for the carrier's other unions.

Summary: Air Canada revealed yesterday as it filed for protection from its creditors that its pension plans are under funded by about $1.3 billion, forcing the insolvent airline to discuss potential solutions to the shortfall with federal regulators.