Vol. 143, No. 16 — August 05, 2009

Registration

SOR/2009-211 July 24, 2009

PENSION BENEFITS STANDARDS ACT, 1985

Air Canada Pension Plan Funding Regulations, 2009

P.C. 2009-1188 July 24, 2009

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to subsection 9(1), paragraph 10.1(2)(b) (see footnote a), subsection 12(3), paragraph 28(1)(b) (see footnote b) and section 39 (see footnote c) of the Pension Benefits Standards Act, 1985 (see footnote d), hereby makes the annexed Air Canada Pension Plan Funding Regulations, 2009.

AIR CANADA PENSION PLAN FUNDING REGULATIONS, 2009

INTERPRETATION

1. (1) The following definitions apply in these Regulations.

“Air Canada pension plan” or “plan” means a defined benefit plan that was established before April 1, 2009 in respect of which Air Canada is the administrator. (régime de pension d’Air Canada)

“beneficiary” means a member or a former member of the plan or any other person who is entitled to pension benefits under the plan except

(a) a former member who has transferred all of their pension benefit credits under section 26 of the Act; and

(b) a former member for whom the administrator has purchased an immediate or deferred life annuity. (bénéficiaire)

“solvency deficit” means the amount by which the liabilities of a plan, determined on the basis that the plan is terminated or on a basis that is certified by an actuary to be reasonably approximate to a termination basis and taking into account any significant increases or decreases in benefits to the plan members as a result of the termination, exceed the aggregate of the value of the assets of the plan, determined on the basis of market value. (déficit de solvabilité)

“solvency ratio” means the lesser of one and the ratio of the assets of the plan as determined in accordance with the definition of “solvency deficit” to the liabilities of the plan as determined in accordance with that definition, based on the most recent actuarial report filed with the Superintendent pursuant to section 12 of the Act. (ratio de solvabilité)

“special payment” means a payment made under section 7. (paiement spécial)

(2) Except as otherwise provided in these Regulations, words and expressions used in these Regulations have the same meaning as in the Pension Benefits Standards Regulations, 1985.

APPLICATION

2. These Regulations apply in respect of Air Canada pension plans.

SOLVENCY STANDARDS

3. The funding of a plan shall be considered to meet the standards for solvency if the funding is in accordance with these Regulations.

INFORMATION TO BE FILED WITH SUPERINTENDENT

4. A plan may be funded in accordance with these Regulations if the following information is filed by the administrator with the Superintendent no later than August 14, 2009:

(a) an actuarial report that values the plan as at January 1, 2009;

(b) a statement by Air Canada confirming that the collective bargaining agents have not objected to the funding of the solvency deficits of the plan in accordance with these Regulations on behalf of more than one third of the members of the plans who are represented by collective bargaining agents and that less than one third of all other beneficiaries have objected in writing to that funding; and

(c) a certified copy of a resolution of the board of directors of Air Canada agreeing to the funding of the plan in accordance with these Regulations.

EXEMPTION

5. If the information referred to in section 4 is filed with the Superintendent in respect of a plan,

(a) subsections 8(1) and (2) of the Act do not apply in respect of the plan except in relation to

(i) moneys in the pension fund,

(ii) amounts deducted by the employer from members’ remuneration but not remitted to the pension fund, and

(iii) contributions and special payments that are accrued and due to the plan but not remitted to the pension fund in accordance with section 8;

(b) section 9 of the Pension Benefits Standards Regulations, 1985 does not apply in respect of the plan; and

(c) section 18 and paragraph 21(d) of the Air Canada Pension Plan Solvency Deficiency Funding Regulations do not apply in respect of the plan.

NORMAL COSTS

6. A plan shall be funded in each plan year by a contribution equal to the normal cost of the plan.

SPECIAL PAYMENTS

7. (1) No special payment is required to be made in respect of the period beginning April 1, 2009 and ending December 31, 2009 and in respect of the 2010 plan year.

(2) The amount payable to each plan for a plan year is equal to the amount determined by the formula

A × B/C

where

A is the lesser of

(a) the maximum past service contribution permitted under the Income Tax Act for the plan year, and

(b) one of the following amounts:

(i) in respect of the 2011 plan year, $150,000,000,

(ii) in respect of the 2012 plan year, $175,000,000, or

(iii) in respect of the 2013 plan year, $225,000,000;

B is the amount of the solvency deficit of the plan as at January 1 of the plan year; and

C is the aggregate amount of the solvency deficits for all plans as at January 1 of the plan year.

(3) An actuarial gain shall not be used to reduce the amount of any special payments due to the pension fund.

REMITTANCES

8. Payments to a plan shall be made as follows:

(a) the normal cost contributions shall be paid as an equal percentage of the anticipated remuneration to be paid to the members during the plan year and shall be paid monthly and not later than 30 days after the end of the month;

(b) the special payments shall be made in equal monthly instalments, with each instalment being due 30 days after the end of each month;

(c) the contributions of plan members shall be remitted to the administrator not later than 30 days after the end of the period in respect of which contributions were deducted; and

(d) the administrator shall immediately pay into a plan any amount remitted to the administrator.

SOLVENCY RATIO

9. For the purpose of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level is the solvency ratio calculated on the basis of the most recent actuarial report filed in respect of the plan with the Superintendent in accordance with subsection 12(3) of the Act.

RIGHTS TO INFORMATION

10. The following information is prescribed for the purposes of subparagraph 28(1)(b)(iv) of the Act:

(a) the amount of the solvency deficit as shown in the last actuarial report filed with the Superintendent;

(b) the fact that the plan is being funded in accordance with these Regulations;

(c) the amount of payments, other than normal cost, that was required to be paid to the plan in the plan year covered by the statement;

(d) the amount of special payments that would have been paid to the plan in the year covered by the statement if the plan had been funded in accordance with Part 1 or 2 of the Solvency Funding Relief Regulations, 2009 and section 9 of the Act;

(e) if the solvency ratio of the plan is less than one,

(i) the value and description of the ratio,

(ii) a description of the measures the administrator has implemented or will implement to bring that ratio to one, and

(iii) the extent to which the member’s benefit would be reduced if the plan were terminated and wound up with that solvency ratio; and

(f) if the solvency ratio is greater than or equal to one, a statement that the plan is fully funded based on the most recent solvency ratio of the plan.

CEASE TO BE IN FORCE

11. These Regulations cease to be in force on January 30, 2014.

COMING INTO FORCE

12. These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive Summary

Issue

Air Canada is unable to make the special pension payments it owes to its ten defined benefit pension plans under the current minimum funding requirements for federally regulated pension plans as set out in the 1985 Regulations. Air Canada has indicated that potential lenders are unwilling to provide it with new financing if pension payments continue under the present rules.

Air Canada has also indicated that the funding relief offered under the Solvency Funding Relief Regulations, 2009, which were published in the Canada Gazette on June 24, 2009, would not provide sufficient funding relief to permit the continued operations of Air Canada.

As such, Air Canada requires pension funding relief to satisfy the requirements from potential lenders in order to obtain the necessary new financing to sustain its operations.

Description

Under the Pension Benefits Standards Act, 1985 (hereinafter, the Act), the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunication, banking and interprovincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. OSFI supervises some 1 350 pension plans or about 7% of all pension plans in Canada, representing about 12% of trusteed pension fund assets in Canada; 446 of the federal plans are defined benefit pension plans. A defined benefit pension plan provides a pre-determined monthly retirement benefit to an employee based on the employee’s earnings history, years of service and age. The defined benefit pension plans of Air Canada are subject to the Act.

The Act requires that federally registered pension plans fund promised benefits in accordance with standards set out in the 1985 Regulations. Defined benefit pension plans must file actuarial valuations every three years, or more frequently as required by the Superintendent of Financial Institutions (the “Superintendent”). Where these valuations show a pension plan’s assets to be less than its liabilities, special payments must be made into the plan to eliminate the deficiency over a prescribed period of time, as described below. One of the main purposes of regulation is to set out standards for funding and investment of pension plans to ensure that the rights and interests of pension plan members, retirees and other beneficiaries are protected. In particular, regulation is intended to ensure that pension plan assets are sufficient to meet pension plan obligations.

Actuarial valuations of defined benefit plans are conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated, while “going-concern valuations” are based on the plan continuing in operation. If a solvency valuation reveals a shortfall of plan assets to plan liabilities, the 1985 Regulations require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency over five years. Where a deficiency exists on the basis of a going-concern valuation, the 1985 Regulations require special payments to eliminate the going-concern deficiency over 15 years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the relevant time period.

The Air Canada Pension Plan Funding Regulations, 2009 (hereinafter, the Regulations) apply to the ten defined benefit pension plans sponsored by Air Canada. These pension plans are as follows:

 1. Air Canada Pension Plan

 2. Air Canada Executive Pension Plan

 3. Air Canada Pension Plan — Pilots

 4. Pension Plan for Air Canada International Association of Machinists and Aerospace Workers Employees Formerly Employed by Canadian Airlines International Ltd.

 5. Pension Plan for Air Canada Canadian Auto Workers Members Formerly Employed by Canadian Airlines International Ltd.

 6. Pension Plan for Air Canada Management Formerly Employed by Canadian Airlines International Ltd.

 7. Pension Plan for Cabin Personnel, as Represented by the Canadian Union of Public Employees, of Canadian Airlines International Ltd.

 8. Pension Plan for Air Canada Pilots formerly employed by Canadian Airlines International Ltd.

 9. Executives of Canadian Airlines International Ltd.

10. Pension Plan for Dispatch Employees, as Represented by the Canadian Airline Dispatchers Association, of Canadian Airlines International Ltd.

In May 2009, Air Canada approached the Government for special funding relief for its ten defined benefit pension plans. Without this relief, Air Canada indicated that its viability would be in doubt. Air Canada indicated that its ten defined benefit pension plans had an aggregate solvency deficit of $1.17 billion as at January 1, 2008 and had an aggregate solvency ratio of 90% at that time. The aggregate solvency deficiency of the plans as at January 1, 2009 is approximately $2.85 billion, with a solvency ratio of 76%. The increase in the deficit is largely the result of the weak performance of the equity markets in 2008.

On June 14, 2009, Air Canada signed a memorandum of understanding (also referred to as the “MOU”) with the five unions that represent its workers — International Association of Machinists and Aerospace Workers, the Canadian Auto Workers, the Canadian Union of Public Employees, the Air Canada Pilots Association and the Canadian Airline Dispatchers Association — as well as the retiree group the Air Canada Pionairs in connection with the proposed funding relief measures for Air Canada’s pension plans. The Regulations reflect the terms of the MOU, which are outlined below:

• A moratorium on special payments extending to December 2010;
• After December 2010, special payments will be limited to the following amounts: $150 million in 2011, $175 million in 2012 and $225 million in 2013; and,
• The deemed trust provisions of the Act will not apply to amounts deferred under these regulations.

Benefits would continue to be accrued during this period, and Air Canada would continue to make the necessary current service contributions, which are approximately $175 million in 2009. Air Canada would also make the $85 million contribution for past service costs in respect of the first quarter of 2009.

Compared to the regular framework, the Regulations are expected to result in a cash savings for Air Canada of approximately $355 million in 2009. In addition, compared with the regular five year schedule, and assuming no changes in interest rates or other factors, the Regulations are estimated to result in the deferral of approximately $2.3 billion in special payments until 2013.

Air Canada is seeking these changes in order to reduce its annual pension payments to a level that would facilitate its ongoing operations in the near-term. The continued existence of a financially viable Air Canada is in the best interests of the beneficiaries of the company’s pension plans. Without these measures of pension funding relief, the viability of the company would be in doubt, and could be expected to result in the termination of the plans and a loss or reduction of plan benefits to beneficiaries.

Member and retiree consent is an important element of the Regulations. The consent provisions provide that no more than one third of active plan members and one third of retirees and non-unionized workers — as separate groups — object to the funding relief outlined in the Regulations. The objections of unionised workers will be made by the bargaining agent.

As long as the funding of Air Canada’s pension plans is governed by the Regulations, the plans will be subject to special terms and conditions set out in the Regulations. For example, certain actuarial methods must be used by the plans during the period and no plan amendments that would have the effect of granting benefit improvements shall be implemented during the period in which the Regulations are in force.

The funding relief ends on January 30, 2014, after which Air Canada will be subject to the same rules as other companies.

A condition of the Regulations being brought into force, and available to Air Canada, is that there be appropriate disclosure of information to the beneficiaries of Air Canada’s defined benefit pension plans and evidence that plan beneficiaries consent to Air Canada funding its defined benefit pension plans in accordance with the Regulations.

Regulatory and non-regulatory options considered

Air Canada’s pension obligations are placing significant stress on its ability to continue operations. Without funding relief, the company’s available cash would drop below minimum amount that is necessary for it to operate, which would not be conducive to the long-term viability of the company.

To reduce its pension contributions without funding relief, the company could choose to terminate the pension plans in an under-funded position, or apply to the Superintendent for a reduction in accrued benefits. In either of these alternatives, however, plan members and retirees would face a significant reduction in benefits. As such, either of these approaches may not necessarily be in the interests of plan members and beneficiaries. Furthermore, termination of the pension plans in an underfunded position could lead to claims by beneficiaries against the company, which could result in the company’s bankruptcy.

Air Canada has indicated that while pension restructuring remains a long-term objective, unions will not agree to such a deal at this time. Former Ontario Superior Court Judge the Honourable James Farley, Q.C., who was named by the Government to mediate between Air Canada, its unions and retiree associations, has validated this view.

Rationale

If it funds its pension plans under current requirements, Air Canada would face the situation of having its available cash drop below the minimum amount that is necessary for it to operate and could be forced into bankruptcy. The company believes that its best potential for survival as a going concern is to fund its pension plans according to the provisions of the Regulations.

The alternative of terminating its pension plans or reducing accrued benefits will result in members and beneficiaries facing a reduction in benefits. Some members and retirees may believe that their interests are better protected with an immediate reduction in benefits versus the uncertainty associated with the temporary suspension of special payments and uncertain future of the company. Individuals not represented by a collective bargaining agent have the opportunity to individually object to the proposal. The consent process for these active and deferred vested members and retirees is ongoing, and will conclude by July 18.

An assessment under the strategic environmental assessment policy has been conducted and concluded that there are no important environmental effects.

Benefits and costs

Benefits

As Canada’s largest air carrier, Air Canada provides extensive service to a wide number of Canadian and international destinations. The Regulations provide Air Canada with deferral of funding of $355 million in 2009 compared to the regular rules. Doing so will permit Air Canada’s required cash balance to remain at a level that supports the ongoing operation of the business. It also gives the company, the unions and retirees time to negotiate provisions of a sustainable pension plan.

Air Canada is a key player in Canada’s airline industry. Air Canada has 81 monopoly routes, including 49 domestic and 32 transborder. The airline has 51% of the domestic market share and also provides one-third of all international seat sales to and from Canada. If Air Canada fails, there could be serious disruptions to the 2010 Olympics, for which Air Canada is the official airline. In addition, Air Canada owns landing rights in key international airports, including Heathrow (London, UK), LaGuardia (New York) and Frankfurt (Germany).

Air Canada’s failure would result in travel disruptions, job losses and other indirect economic costs. Air Canada estimates that it is responsible for nearly $20B in indirect contributions to the Canadian economy. There would be a very difficult short term adjustment as the other Canadian airlines are not in a position to provide the services that Air Canada currently provides, especially for international travel.

In addition to its 22 000 current employees, Air Canada has 23 000 retirees. As such, it is important to consider that pension legislation and regulation is intended to protect member and beneficiary interests to the greatest extent possible. These regulations recognise that in this situation, the best protection for these parties is allowing them to make an informed choice. If plan members consent to this arrangement, they will have opted to assume more risk in the short term with a view to supporting the continuation of the sponsor’s business operations over the longer term.

Costs

No additional costs are anticipated for the OSFI to administer the Regulations as the existing supervisory regime provides the necessary information and oversight to implement them.

There will be no direct cost to members and retirees of the pension plans. However, the plan beneficiaries will be subject to increased risk associated with a solvency deficiency that is likely to increase in the short term and that may persist over a longer period.

The Regulations do not guarantee Air Canada’s long term success. If Air Canada were to cease operations in the period that the Regulations are in force, there is a strong likelihood that the funded position of the plans would be worse than what they would have been if Air Canada made the regular payments under the usual time frame. If the plans are eventually terminated, it is possible that members and retirees could recover less from the plans that they otherwise would have if the plans had terminated today.

Consultation

In June 2009, the Government of Canada appointed the Honourable James Farley, Q.C., to mediate between Air Canada, its five unions and its retiree associations in devising a sustainable path for the company’s pension plans. The terms of the funding relief have been the subject of discussions involving Air Canada and representatives of the various classes of plan beneficiaries. The Regulations accommodate the agreement reached between the parties for an immediate short term solution to the pension issues and are consistent with the MOU agreed to between Air Canada and its unions and retiree association on June 14, 2009.

The Regulations affect the funding rules of Air Canada’s ten defined benefit pension plans only. The moratorium until December 31, 2010 and pre-determined schedule of payments on its solvency deficit from 2011 to 2013, was requested by Air Canada and its unions as a means of preserving pension benefits and facilitating the company’s ongoing operations in the near term.

A condition of Air Canada obtaining funding relief under the Regulations is that Air Canada provide appropriate information to plan beneficiaries about the funding relief and its implications, and that beneficiaries have the opportunity to indicate their objection. Air Canada has set out a process to inform plan beneficiaries of the implications of the Regulations for the funding of Air Canada’s pension plans, provide beneficiaries with opportunities to express their views on the terms of the funding, and to obtain their consent, as part of the regulation making process. Air Canada’s five unions have agreed to support the proposed funding relief and on June 14, 2009, the unions entered into a MOU with Air Canada that sets out their agreement to the moratorium, schedule of payments and other items that relate to the funding of the pension plans. Support of union members for this arrangement is incorporated into the ratification process for the new collective bargained contracts.

Information packages were developed by Air Canada, and were distributed to non-unionised members, deferred vested members and retirees of the ten plans. These packages included information on pension funding issues, the elements of the proposed solution, an analysis of the proposed solution, plan-specific information on the financial position and implications of the Regulations for each beneficiary’s pension plan. The packages also included information about whom beneficiaries should contact to express their views or make enquiries, contact information for OSFI, and the Web site addresses with additional information. Ballots for recipients to indicate their objection were also provided.

The proposed relief will only be effective if not more than one-third of each group of Air Canada’s pension plan beneficiaries object in writing or electronically to such relief. Plan beneficiaries who are union members are represented by their unions. All other beneficiaries, including retirees and non-unionized workers, are self-represented. Union members had the opportunity to express their views to their representatives, but the collective bargaining agents had a mandate to consent to the proposal on behalf of unionized employees based on the ratification of collective agreements reached in June 2009. Non-union beneficiaries and retirees may object individually, in writing to an independent third party.

Implementation, enforcement and service standards

The Regulations will not require any significant change in OSFI procedures or significant additional personnel resources.

The provision of the Regulations that permits Air Canada to not make special payments alters somewhat the regulatory tools at OSFI’s disposal for the plans subject to the Regulations. In particular, many actions that could normally be taken by the regulator to protect the security of benefits involve enforcing the remittance of required payments. Nevertheless, OSFI will monitor the financial position of these pension plans closely and their compliance with applicable regulatory requirements.

Contact

Lynn Hemmings
Acting Director
Financial Sector Division
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-0553
Fax: 613-943-8436
Email: Lynn.Hemmings@fin.gc.ca

Footnote a
S.C. 1998, c. 12, s. 10

Footnote b
S.C. 2000, c. 12, par. 263(d)

Footnote c
S.C. 2007, c. 35, s. 142

Footnote d
R.S., c. 32 (2nd Supp.)

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