Air Canada 2008 Annual Report Download - page 46

2008 Air Canada Annual Report
46
9.6 PENSION FUNDING OBLIGATIONS
Air Canada’s cash pension funding contributions in 2008 and 2007 were as follows:
(Canadian dollars in millions) 2008 2007
Past service domestic registered plans $ 189 $ 134
Current service domestic registered plans 165 160
Other pension arrangements (1) 102 84
Pensionfundingcontributions $ 456 $ 378
(1) Includes retirement compensation arrangements, supplemental plans and international plans.
As at January 1, 2008, the solvency deficit in the registered domestic plans was $1,175 million. As at January 1, 2009, based
on preliminary estimates, the solvency deficit in the registered pension plans is estimated to be approximately $3,200
million. The final funding obligation for 2009 will be determined based on the January 1, 2009 valuation, which will be
completed in the first half of 2009. Based on pension funding legislation and regulations as at December 31, 2008, this
preliminary estimate of the solvency deficit would be funded over five years requiring an approximate $410 million increase
to cash funding obligations for 2009 versus 2008. For years 2010 to 2013, assuming no gains or losses in future years,
current funding legislation and regulations would require an approximate $530 million increase to cash funding obligations
versus 2008. However, several factors may impact required contributions, including regulatory developments, assumptions
and methods used and changes in the economic conditions, mainly the return on fund assets and changes in interest rates.
There can be no assurance that required contributions will be in line with preliminary estimates provided. These funding
projections are updated annually
Air Canada is actively monitoring and pursuing a number of initiatives, certain of which are beyond the control of Air
Canada, which may reduce the cash funding obligations in and after 2009 as further described below:
• TemporarysolvencyfundingreliefproposedbytheGovernmentofCanada;
• Theassetsmoothingmethod,ifany,thatcouldbeappliedtothevalueofassets;and
• A review of the legislative and regulatory framework of pension plans by the Government of Canada, which is
currently underway.
In November 2008, the Government of Canada proposed temporary solvency funding relief for defined benefit pension
plans under federal regulation. The proposed funding relief would allow plans to extend their solvency funding payment
schedule to 10 years from five years in respect of solvency deficiencies that emerged in 2008, subject to certain conditions.
In particular, both members and retirees would need to agree to the extended schedule, or the difference between the
5-year and 10-year payment schedules would need to be secured by a letter of credit. Under the proposal for funding
relief, one of these two conditions would need to be met by December 31, 2009. If agreement by plan members and
retirees or a letter of credit were not secured by the end of 2009, the plan would be required to fund the deficiency over
the following five years. This measure, if implemented by the Government of Canada, would reduce 2009 pension funding
by approximately $165 million versus the preliminary estimate of funding requirements in the January 1, 2009 valuation
report, when completed. Funding reductions in subsequent years would be dependent upon satisfying one of the two
conditions as noted above. There can be no assurance that the proposed relief will be implemented.
The Pension Benefits Standards Act and Regulations allow the use of an asset smoothing method over five years, limited
to 110% of the market value of plan assets, to determine minimum funding requirements on a solvency basis. Any such
smoothing method would also have to comply with actuarial practice and be accepted by regulators. In January 2009,
the Government of Canada announced that it will work with the body that regulates federally regulated pension plans to
consider additional funding flexibility options regarding asset smoothing. Air Canada will monitor these developments to
determine the impact, if any, on Air Canada’s pension funding obligations. Based on preliminary estimates, if a smoothed
asset value limited to 110% of market value were to be used to determine Air Canada’s minimum funding requirement,
cash funding obligations for year 2009 would be reduced by a further $85 million.