Air Canada 2013 Annual Report Download - page 48

2013 Air Canada Annual Report
48
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 January 1, 2013 was 3.0%. Air Canada applied a prescribed discount rate of 3.9% at
January 1, 2014. Every 10 basis points change in the discount rate would result in approximately a $150 million change to the
solvency liabilities. 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%, a first quartile performance (versus Canadian large pension plans), while lowering the
overall risk profile. As of December 31, 2013, 70% 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% of the pension liabilities with fixed income products.
Pension funding obligations are generally dependent on a number of factors, including the assumptions used in the most
recently filed actuarial valuation reports for current service (including the applicable prescribed discount rate used or assumed
in the actuarial valuation), the plan demographics at the valuation date, the existing plan provisions, existing pension
legislation and changes in economic conditions (mainly the return on fund assets and changes in interest rates). Actual
contributions that are determined on the basis of future valuation reports filed annually may vary significantly from
projections. In addition to changes in plan demographics and experience, actuarial assumptions and methods may be changed
from one valuation to the next, including due to changes in plan experience, financial markets, future expectations, and
changes in legislation and other factors.
In July 2009, the Government of Canada adopted the Air Canada 2009 Pension Regulations. The Air Canada 2009 Pension
Regulations relieved Air Canada from making any past service contributions (i.e. special payments to amortize the plan deficits)
to its domestic defined benefit registered pension plans in respect of the period beginning April 1, 2009 and ending
December 31, 2010. Thereafter, in respect of the period from January 1, 2011 to December 31, 2013, the aggregate annual
past service contribution was the lesser of (i) $150 million, $175 million, and $225 million in respect of 2011, 2012, and 2013,
respectively, on an accrued basis, and (ii) the maximum past service contribution permitted under the Canadian Income Tax
Act. Current service contributions continued to be made in the normal course while the Air Canada 2009 Pension Regulations
were in effect.
In December 2013, further to an agreement reached with Air Canada in March 2013, the Government of Canada formally
approved the Air Canada Pension Plan Funding Regulations, 2014 (the “2014 Regulations”) under the Pension Benefits Standards
Act, 1985 in respect of special payments required to be made to amortize the deficit under Air Canada's defined benefit plans
applicable to the period between 2014 to 2020 inclusively, expiring December 31, 2020. According to the terms 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 $1,400 million over seven years in solvency deficit payments, in addition to
its pension current service payments.
Under the agreement reached with the Government of Canada in March 2013, in respect of the plan years during which
Air Canada funds its plans pursuant to the 2014 Regulations, Air Canada is subject to a series of covenants and undertakings,
including a prohibition on dividends and share repurchases, as well as certain limitations on executive compensation
arrangements. As requested by the Government of Canada, Air Canada has also agreed to use reasonable efforts, during the
negotiations of the next collective agreements with Air Canada’s Canadian-based unions, to seek to include in those collective
agreements provisions which would have employees contribute fifty per cent of their pension plan normal costs, and has
agreed not to implement pension plan benefit improvements without regulatory approval.
Air Canada may elect to opt out of the 2014 Regulations and have past service payments in respect of all Air Canada pension
plans, collectively, determined in accordance with normal funding rules.
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 the airline’s derisking strategy would make a future significant deficit
unlikely to re-occur. Air Canada does not expect to opt out of the 2014 Regulations in 2014.