Pension deficit not to blame for Air Canada’s troubles, says federal regulator

(April 9, 2003) Air Canada’s $1.3 billion pension plan deficit did not force the airline into bankruptcy protection, according to the Office of the Superintendent of Financial Institutions, the regulator responsible for federal pension plans.

Testing earlier this year revealed the possibility of a deficit, OSFI says. The regulator then asked Air Canada to put $200 million into the pension plan over a period of time to cover service costs for the current fiscal year and to stop taking contribution holidays.

OSFI also asked the airline to communicate details of the pension shortfall to plan members and to file another report on the status of the plan later this month.

Air Canada agreed to OSFI’s requests before filing for bankruptcy protection last week, said OSFI superintendent Nicholas Le Pan in an appearance before a Commons committee in Ottawa. “I believe our acceptance of their proposal removed immediate pension funding as a reason for the company to file for bankruptcy protection.”

OSFI requires federal pension plans to submit valuation reports every three years but has the authority to ask for such reports at any time, if circumstances warrant. As of 2001, Air Canada’s plan had a $915 million surplus. The airline blames stock market declines and low interest rates for the current deficit.

Pension plan payments are on hold while the airline is under bankruptcy protection, OSFI said, although Air Canada will continue to administer the plan. Any restructuring would have to be approved by the regulator.

If Air Canada does declare bankruptcy, pension fund assets would be distributed under the terms of the Pension Benefits Standards Act. “Pension funds are not an asset of the company,” OSFI noted. “An administrator would be responsible for the plan and OSFI would be required to approve distribution of pension assets.”

However, because pension entitlements are based on the value of the plan versus its liabilities, an underfunded plan would mean that members would only receive a portion of their benefits.

And there’s no chance Ottawa will bail out plan members, since the government does not guarantee federal pension funds. “Fundamentally, pension plans represent an agreement between the employer and its employees and the federal government has no role to play in backstopping private sector arrangements,” OSFI says.

“The ultimate impact on benefits may not be known for many months,” Le Pan concluded.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca