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Air Canada has provided an update regarding its Canadian pension plans solvency status. Based on preliminary estimates and the factors outlined below, Air Canada projects its Canadian registered pension plans at Jan. 1, 2014 to be in a small surplus position. The Canadian registered pension plans solvency deficit at Jan. 1, 2013 was $3.7 billion. Final valuations as of Jan. 1, 2014 will be completed in the first half of 2014.
The elimination of the previous $3.7 billion deficit is the result of several factors: (1) a 13.8 per cent return on investments during 2013, (2) the implementation of previously disclosed pension benefit amendments which are estimated to have decreased the solvency deficit by approximately $970 million, (3) contributions made by the corporation for the year of $225 million in respect of the solvency deficit and (4) the application of an estimated prescribed discount rate of 3.9 per cent to calculate its future pension obligations.
The discount rate used to value the pension obligations is determined pursuant to guidance of the Canadian Institute of Actuaries. The discount rate used at Jan. 1, 2013 was 3.0 per cent. Air Canada used an estimated discount rate of 3.9 per cent at Jan. 1, 2014. Every 10 basis points change in the discount rate would result in approximately a $150 million change to the solvency liabilities. The final valuation will be based on the guidance for Jan. 1, 2014 expected to be confirmed in February.
Four years ago, Air Canada began a program with the objective of materially de-risking its pension plans, and a new investment strategy with liability driven initiatives was introduced. The strategy contributed to achieving a return over the four-year period of 11.8 per cent, a first quartile performance (versus Canadian large pension plans), while lowering the overall risk profile. At present, 70.0 per cent of the pension liabilities are matched with fixed income products to mitigate a significant portion of the interest rate (discount rate) risk. It is Air Canada’s objective over the mid-term, assuming appropriate market conditions, to match 100 per cent of the pension liabilities with fixed income products.
“Air Canada’s three primary pension objectives are to ensure our employees’ and retirees’ pensions are secure, the pension solvency deficit is eliminated and that the costs associated with maintaining the pension plans remain affordable, predictable and stable,” said Calin Rovinescu, president and chief executive officer. “We have, over the past four years, made significant progress on all these objectives”.
The Government of Canada recently published the Air Canada Pension Plan Funding Regulations, 2014 (the “2014 Regulations”). These regulations are in respect of certain fixed payments under Air Canada’s domestic defined benefit registered pension plans for the period between 2014 and 2020 inclusive, and are scheduled to expire Dec. 31, 2020. As part of the 2014 Regulations, Air Canada will be required to make payments of at least $150 million annually with an average of $200 million per year, to contribute an aggregate minimum of $1.4 billion over seven years in solvency deficit payments, in addition to its current service payments. Air Canada may elect to opt out of the 2014 Regulations under certain circumstances.
Air Canada would consider opting out of the new pension regulations when the annual solvency deficit payments under normal funding rules, which are determined using deficit levels over three years, would be less than $200 million and when there would be a strong basis for confidence that its derisking strategy would make a future significant deficit unlikely to re-occur. This would result in up to $200 million per year becoming available to Air Canada for other shareholder value enhancing initiatives. Air Canada does not expect to opt out of the new pension regulations in 2014.
