LOADING

Type to search

Pensions and Air Canada

GB Geo-Blog

Pensions and Air Canada

The call center and airport customer service employees of Air Canada, who are members of the CAW, may go on strike. The major obstacle to a settlement appears to be the impasse over pensions. Air Canada wants to reduce pension benefits for all employees covered by the defined benefit plans, and enroll all new employees into defined contribution plans. The union and its members understandably oppose these changes.

If the union members do go out on strike, who is to blame? The answer is simple, although not obvious. The blame should fall entirely on a judge and actuaries.

Many years ago, a judge in Canada concluded that any “surplus” in defined benefit plans belonged to employers since they sponsored such plans. This decision was wrong!

The pension benefits were and are deferred compensation for employees, and as such, the assets in defined benefit plans belong to employees. But because of the erroneous ruling, companies have periodically extracted so-called “surpluses”, or have reduced their annual contributions when the surpluses exceeded certain levels. These actions inevitably led to future problems when the pension plans slipped into a deficit/underfunded position, as is currently the case at Air Canada and many other companies with similar pension plans.

The judge’s decision exacerbated the problems created by actuaries who advise companies in structuring these pension plans. Actuaries have made absurd assumptions, particularly with regards to long-term returns on pension fund assets. The assumed long-term returns tend to exceed realistic returns, and thus have resulted in systemic underfunding except during periods of strong rallies in equity markets. During these bull markets, which are usually followed by flat returns in equities or worse yet, sharp declines – bear markets – pension plans appear to be over-funded (in a surplus position).

Putting together poor advice and a foolish judicial decision and we get into an impasses such as the one between Air Canada and its employees.

When the pension plan was over-funded, Air Canada did take a contribution holiday, which produced better financial results. When the realized returns declined below the assumptions built into the pension plans, which is what we should expect since investment returns do fluctuate, the pension plans became underfunded requiring additional contributions by companies such as Air Canada. Moreover, the need for additional contributions generally occurs during periods of weak economic conditions; that is, at times when companies are under financial pressure anyhow. Not surprisingly, Air Canada is not in a position to increase its annual contributions at this time. Indeed, the company is unlikely to ever be in the position to fully fund the pension plans because of the initial and continually overly optimistic actuarial assumptions.

If the unions insist on maintaining pension benefits, it will have to sacrifice current wages for its members if Air Canada is to avoid a new bankruptcy filing. The union’s anger should not be focused on Air Canada’s management. Instead, the CAW and other unions whose members are in defined benefit plans should turn their anger and legal resources against the actuarial consultants and the courts that have not overturned the initial decision on the ownership of the pension fund assets.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.

Categories:
Tags:

Leave a Comment

Next Up