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AC wipes out $3.7 billion pension debt

Jan. 23, 2014, Montreal - A massive pension deficit that threatened to send Air Canada on its second trip through bankruptcy protection in a decade has suddenly turned into a surplus.


January 23, 2014
By The Globe and Mail

The airline, which was staring at a solvency deficiency of $3.7-billion
in its pension plans on Jan. 1, 2013, said the plans climbed to a small
surplus position just one year later. The sharp improvement was driven
by strong equity markets, rising interest rates and changes in pension
benefits for employees.

The remarkable turnaround is the latest example of how Air Canada is
trying to transform itself from a boom and bust company into a carrier
that can generate profits throughout the economic cycle. The pension
surplus – and a plan to insulate future pension funding from the ups and
downs of equity markets – comes on top of an overhaul of Air Canada’s
fleet, a debt restructuring that has trimmed interest costs and a
dramatic reduction in operating costs.

 

News of the pension surplus
helped Air Canada’s shares jump 8 per cent to $9.67 in trading on the
Toronto Stock Exchange. The shares were among the exchange’s
best-performing stocks last year.

 

The pension deficit was slayed
by a 14-per-cent return on investments last year; changes in benefits to
employees that saved $970-million; contributions of $225-million the
airline made to reduce the deficit; and a rise to 3.9 per cent from 3
per cent in interest rates used to calculate future costs.

 

Just last November, Air Canada chief executive Calin Rovinescu said the solvency deficiency could be eliminated by 2020.

 

“It’s
incredible,” said analyst David Tyerman, who follows the company for
Canaccord Genuity in Toronto. “I’ve always built it into my target that
it would happen. It happened faster than I thought, that’s for sure.”

 

Swings
in financial markets could still impair the company’s pension-fund
returns. Interest rates have turned lower in recent weeks, and could
remain at modest levels for an extended period.

 

The federal
government helped Air Canada’s turnaround last year by relieving the
airline of the burden of paying more than $1-billion annually to restore
the health of the funds.

 

Instead, the airline was required to pay at least $150-million a year and an average of $200-million a year over seven years.

 

The
requirement could be relaxed if there are further improvements in the
health of the pension plans. That could save Air Canada as much as
$200-million a year, the rough equivalent of the cost of one of the 37
Boeing Co. 787 Dreamliners the airline has on order. The money could be
used for “shareholder value enhancing initiatives,” Air Canada said. The
pension deal with Ottawa prohibited dividends and put a cap on
executive pay.

 

Air Canada has been trying to insulate the plan
from market gyrations for the past four years by increasing the ratio of
interest-paying assets to equity assets. Equities represented about 30
per cent of the plan’s assets by Jan. 1, and the strategy is for
interest-bearing assets to be 100 per cent of the plan within three to
five years.

 

The 13-per-cent jump in Canadian equities and
32-per-cent jump in international stocks helped drive the 13-per-cent
return in the funds’ investments last year. Equity assets represented
more than 30 per cent of the plan.

 

The $970-million savings in
benefits came in part from changes to early retirement provisions for
members of the International Association of Machinists and Aerospace
Workers (IAMAW), Unifor (formerly the Canadian Auto Workers), and other
unions as well as management.

 

Before the pension agreement reached
in 2011, members of Unifor could qualify for a full pension at age 55
with 25 years service. Now they must be 55 and have worked at Air Canada
for 30 years, Jo-Anne Hannah, Unifor’s director of pensions and
benefits said Wednesday. Newly hired members of Unifor will participate
in a hybrid plan that combines defined benefits with defined
contributions.

 

“Air Canada needed real solvency funding relief,”
added Chris Hiscock, president of IAMAW local 764 in Vancouver and
chairman of the union’s Air Canada pension committee.

 

So IAMAW
members now lose almost half their pension if they retire before age 55,
compared with just one or two percentage points under previous
agreements, Mr. Hiscock said.