Opinion: Pilots & Pensions

Let’s fix pension funding rules instead of trashing defined benefit plans
It’s time to examine more closely the causes of these pension deficits
and the many possible solutions available, before arbitrarily gutting
pension plans and slashing benefits.


Much attention has been paid to the recent strike at Air Canada and the government’s almost instantaneous decision to legislate an end to the dispute.

While the government’s intervention in supposedly free collective bargaining is worrisome, little attention has been paid to the much larger issue that gave rise to the dispute in the first place: pension solvency deficits and what to do about them.

Corporate voices have been singing a steady chorus for some time.

“Defined benefit pensions are unaffordable.

We have to get rid of them because they’re a threat to our competitiveness.”

While government has been quick to take up this call, it’s time to examine more closely the causes of these pension deficits and the many possible solutions available, before arbitrarily gutting pension plans and slashing benefits.

First of all, these drastic measures are being proposed against a backdrop of unprecedented economic circumstances.

Long-term interest rates are at their lowest since immediately post-Great Depression.

Coupled with the depressed asset values of pension trusts resulting from the derivative-fuelled market meltdown of 2008/2009, this has created large deficits and demands for increased contributions under current funding regulations.

However, with almost every forecaster calling for a gradual rise in interest rates from their historic lows, we should pause to consider whether we are taking drastic action in a worst-case scenario when what may be required is a measured response to evolving circumstances.

The situation was certainly exacerbated by the perfect storm of stresses that hit the Canadian aviation industry last decade, including the largest terrorist attack in history (9/11), the most significant health pandemic in this country since polio (SARS) and the largest market collapse since the Great Depression.

The concomitant downturn in corporate revenues, as usual, affected the aviation sector most drastically.

Under these circumstances, it is no wonder that Air Canada’s pension trust assets shed value.

None of these factors had anything to do with paying out “unaffordable” levels of benefits.

Consider as well that the same corporations who are now declaring pensions “unaffordable” were quick to take funding holidays when the economic conditions boosted their pension assets into surplus positions.

Canadians should remember that Air Canada’s shareholders made a conscious decision to gut the airline’s assets in the corporate restructuring of 2003/2004.

The controlling shareholders were busy asset-stripping the airline to the tune of about $4-billion while these pension deficits were emerging.

While corporate sponsors are hardly blameless for the current pension deficit problem, government also bears responsibility for pension regulations that place maximum stress on pension plan sponsors precisely when they are least able to cope with increased demands for cash.

The current low discount rate and five year amortization schedule combine to pump up the required contributions from plan sponsors who are already struggling with reduced cash flows resulting from other economic forces.

Conversely, over-funding limits in the current pension regulations prevent companies from salting resources away to meet these rainy day needs.

These limits ensure that pension plan assets rise and fall in a “sine wave” banding from slightly above requirements to drastically below 100 per cent funded.

These funding regulations are targeted at funding solvency deficits, which are notional to begin with.

Solvency deficits are determined by taking a “snapshot” of pension plan assets and liabilities, then determining how much funding would be required to purchase annuities to pay out benefits to plan members, should the pension plan be terminated.

In making this calculation, certain assumptions are made. One of these is the discount rate, which assumes a rate of return on the investment of plan assets.

Under current regulations, we assume a rate of return of less than five per cent. But in this historically low level of returns, is it not fair to ask if this assumption is a bit too conservative, given the pressure it is applying to cashstrapped fund sponsors?

Even if they were forced to wind up, large pension trusts would be unable to purchase the huge number of annuities that the discount rate is designed to emulate.

They would remain invested in a basket of different types of securities, just as they are today. The long-term rate of return on this basket of instruments is closer to double what our solvency test assumes.

Why then are we planning for the impossible?

What’s the solution?

Given the current pension funding crunch, it is high time that the government re-examined and overhauled its pension funding regulations in a meaningful way.

Some combination of discount rate adjustments, extension of amortization schedules, along with a significant increase to over-funding limits, should be seriously examined.

The changes to solvency funding rules resulting from the government’s review process of 2008/2009 have been woefully inadequate.

The fact is that our pension funding rules will continue to place undue stress upon plan sponsors at exactly the worst moments.

Left unaddressed, we will continue to hear the now-familiar refrain from ideologues and big business that “defined benefit pension plans are simply unaffordable” and they will continue to use this brief segment in time to justify the gutting of Canadians’ retirement incomes in the name of competitiveness.


Defined benefit pensions are an important part of retirement planning for many Canadians. They can and should continue to be so for many years to come.

We shouldn’t be throwing away key components of Canada’s retirement system based upon the unprecedented events of the last decade and the inevitable swings in market performance.

Instead, we should be fixing the federal funding regulations so pension plans can withstand such shocks when they happen again in the future.

Captain Paul Strachan is president of the Air Canada Pilots Association.

The Hill Times

Published on:Publié :
Aug 01, 201101 Aug 2011

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