Canada Gazette, Part I, Volume 147, Number 40: Air Canada Pension Plan Funding Regulations, 2014

October 5, 2013

Statutory authority

Pension Benefits Standards Act, 1985

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue

On January 30, 2014, the funding relief provided to Air Canada under the Air Canada Pension Plan Funding Regulations, 2009 will expire. Following this date, absent any further relief, Air Canada would have to fund the deficit of its defined benefit pension plans in accordance with the minimum standards for funding under the Pension Benefits Standards Act, 1985 (PBSA) and the Pension Benefits Standards Regulations, 1985 (PBSR). These rules would require Air Canada to make significant special payments to its pension plans. New funding relief regulations would support the continued existence of a financially viable Air Canada, which is in the best interests of plan members and beneficiaries of the company’s pension plans.

Background

Under the Office of the Superintendent of Financial Institutions Act, the PBSA and the PBSR, the Office of the Superintendent of Financial Institutions (OSFI) regulates and supervises private pension plans in federally regulated businesses such as banking, telecommunications and interprovincial transportation. OSFI is also the regulator for pension plans established in respect of employment in the Yukon, the Northwest Territories and Nunavut. Air Canada’s defined benefit pension plans are subject to the PBSA and the PBSR.

The PBSA requires that federally registered pension plans fund promised benefits in accordance with prescribed tests and standards for solvency that are set out in the PBSR. Defined benefit pension plans must file actuarial valuations; 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.

Actuarial valuations are conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated on the valuation date, while “going concern valuations” are based on the plan continuing in operation. If a valuation reveals a solvency deficiency, the PBSR require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency. 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 normal costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the prescribed period (i.e. 15 years for a going concern deficiency and 5 years for a solvency deficiency).

One of the main objectives of federal pension regulation is to set out standards for funding and investments of pension plans so that pension plan assets are sufficient to meet pension plan obligations; thus, the rights and interests of pension plan members, retirees and other beneficiaries are protected. Nevertheless, the PBSA recognizes that pension plans may, at times, find themselves in deficit positions as a result of a variety of factors such as changes in actuarial assumptions resulting in actuarial losses to the fund and downturns in the financial markets. These deficits may be too large for employers to absorb at once. The PBSA allows a plan to carry a deficit with the provision that the plan sponsor (the employer) makes payments aimed at making up the shortfall within a period of five years.

Due to financial challenges related to Air Canada’s pension obligations, two sets of special funding relief regulations were implemented in 2004 and 2009. The Air Canada Pension Plan Solvency Deficiency Funding Regulations (2004 Regulations) allowed Air Canada to amortize solvency deficiencies in the company’s pension plans over a period of 10 years, rather than 5 years. As a result of the passing of the Air Canada Pension Plan Funding Regulations, 2009 (2009 Regulations), the airline opted out of the 2004 Regulations and the solvency deficiency was funded in accordance with the 2009 Regulations. The 2009 Regulations were based on a memorandum of understanding negotiated and agreed to by Air Canada, the five unions and the Pionairs (the group that represents the retirees). These Regulations provided Air Canada with financial flexibility in the short term in the form of a moratorium on special payments until the end of 2010, followed by fixed annual contributions in respect of special payments for 2011, 2012 and 2013. The 2009 Regulations expire on January 30, 2014.

New funding relief regulations would support the continued existence of a financially viable Air Canada, which is in the best interests of plan members and beneficiaries of the company’s pension plans. An agreement respecting pension plan funding arrangements and other requirements applicable to Air Canada for the years 2014 to 2020 was concluded between the Minister of Finance and Air Canada in May 2013 (Agreement). The Agreement states that the Minister of Finance is prepared to recommend to the Governor in Council that special regulations offering further relief to Air Canada from 2014 to 2020 come into force following the expiry of the existing Regulations. The Agreement also provides that, as a condition of relief, the company agrees that increases in executive compensation will be frozen at the rate of inflation, special bonuses will be prohibited and limits will be imposed on executives’ incentive plans. In addition, Air Canada will be subject to a series of covenants and undertakings, including the prohibition of dividends and share repurchases, and no implementation of pension plan benefit improvements without regulatory approval.

Objectives

The objective of the proposed Air Canada Pension Plan Funding Regulations, 2014 (the proposed Regulations) is to provide funding relief to Air Canada for the years 2014 to 2020.

Description

The proposed Regulations would grant funding relief to Air Canada from 2014 to 2020. During that period, Air Canada would be exempt from funding its defined benefit pension plans according to the funding rules prescribed by the PBSR.

The proposed Regulations would prescribe that Air Canada, in addition to making normal cost payments, make payments into its defined benefit pension plans of at least $150 million annually, with an aggregate minimum amount of $1.4 billion required over seven years. The total payments would be distributed so that the amounts to be paid to each plan would be in proportion to the solvency deficiency of that plan over the aggregate deficiency of all plans subject to the proposed Regulations. Members would continue to accrue benefits and Air Canada would continue to make payments covering normal costs.

According to the proposed Regulations, Air Canada would have the ability to elect to opt out of the proposed Regulations by notifying the Superintendent of Financial Institutions. This would result in all Air Canada defined benefit pension plans being subject to the funding rules generally applicable to federally regulated pension plans. If such an election is made, requirements under the Act and the PBSR would apply to that plan. As a result, for the plan year during which Air Canada elects out, if amounts owed under the PBSR exceed amounts required under the proposed Regulations, the excess would be required to be paid by Air Canada for that plan year. In the event that a plan is terminated, the requirements would be similar, that is, the full amount of payments under the proposed Regulations for that year would be owed immediately, after which the PBSR payment rules in case of termination apply. The difference in this case is that the proposed Regulations would no longer apply to the plan that is being terminated but would continue to apply to the other plans.

The proposed Regulations would prescribe a solvency ratio of one applicable to the provisions of the PBSA that prohibit plan amendments in certain circumstances. These prohibition provisions apply to amendments that would have the effect of granting a benefit improvement unless the plan’s solvency ratio is above the prescribed level, set at one, and the amendment in question would not reduce the ratio below that level.

In addition to the disclosure requirements under the PBSR (e.g. a statement to plan members including contributions made to the plan and benefits accrued), Air Canada would be required to provide information to members and retirees on the plan’s solvency deficit; the fact that the plan is being funded in accordance with the proposed Regulations; the payments, other than the normal costs, to be made under the proposed Regulations; and the payments that would have been required under the PBSR.

“One-for-One” Rule

The “One-for-One” Rule does not apply, as the proposed Regulations do not impact administrative costs to business.

Small business lens

The small business lens does not apply, as the proposed Regulations do not impose costs on small business.

Consultation

The payments schedule set out in the proposed Regulations is part of the Agreement signed by Air Canada and the Minister of Finance. Air Canada’s unions and the Pionairs have been supportive of the company’s request for further solvency funding relief for its pension plans. The terms of the funding relief were submitted to the unions, non-unionized employees and Pionairs. Fifty-two objections were raised, out of a total of 27 000 employees and 23 000 retirees.

Rationale

After the expiration of the funding relief provided under the Air Canada Pension Plan Funding Regulations, 2009, without further relief, Air Canada would have to fund its pension deficit in accordance with the funding rules generally applicable to federally registered pension plans (which require that a solvency deficit be fully amortized over five years). These rules would require Air Canada to remit significant amounts to the pension plans.

The proposed Regulations reflect the funding relief arrangement set out in the Agreement. The amounts of the required solvency payments and the seven-year timeline would allow for a substantial reduction in the solvency deficit while accounting for the company’s financial capacity. The opting-out provisions would allow Air Canada to elect to be subject to the normal funding rules under the PBSR, should changes in market conditions or other developments significantly improve the funding position of its pension plans.

The continued existence of a financially viable Air Canada is in the best interests of plan members and beneficiaries of the company’s pension plans. Air Canada is the country’s largest airline and contributes significantly to the Canadian economy.

Implementation, enforcement and service standards

The Superintendent of Financial Institutions, under the direction of the Minister of Finance, is responsible for the control and supervision of the administration of the Act. As a result, the Superintendent would be responsible for monitoring and enforcing the proposed Regulations.

Contact

Leah Anderson
Director
Financial Sector Division
L’Esplanade Laurier, 20th Floor, East Tower
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Email: Leah.Anderson@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to subsection 9(1) (see footnote a), paragraphs 10.1(2)(c) (see footnote b) and (d) (see footnote c), subparagraphs 28(1)(b)(iv) and (b.1)(ii) (see footnote d), subsection 29(6) (see footnote e) and section 39 (see footnote f) of the Pension Benefits Standards Act, 1985 (see footnote g), proposes to make the annexed Air Canada Pension Plan Funding Regulations, 2014.

Interested persons may make representations concerning the proposed Regulations within 21 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Leah Anderson, Director, Financial Sector Division, Finance Canada, L’Esplanade Laurier, East Tower, 20th Floor, 140 O’Connor Street, Ottawa, Ontario K1A 0G5 (email: Leah.Anderson@fin.gc.ca).

Ottawa, September 26, 2013

JURICA ČAPKUN
Assistant Clerk of the Privy Council

AIR CANADA PENSION PLAN FUNDING REGULATIONS, 2014

INTERPRETATION

Definitions

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

“Air Canada pension plan” or “plan”
« régime de pension d’Air Canada » ou « régime »

“Air Canada pension plan” or “plan” means a defined benefit plan administered by Air Canada that was established before May 2, 2013, excluding a multi-employer pension plan.

“solvency deficiency”
« déficit de solvabilité »

“solvency deficiency” means the amount by which the solvency liabilities of a plan that are determined by means of a solvency valuation of the plan, exceed the aggregate of the market value of the assets of the plan related to the defined benefit provisions that is determined by means of the solvency valuation of the plan.

Interpretation

(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

Air Canada pension plans

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

APPLICATION OF THE PENSION BENEFITS STANDARDS REGULATIONS, 1985

Continuation of application

3. (1) Unless otherwise specified, these Regulations do not have the effect of rendering the Pension Benefits Standards Regulations, 1985 inapplicable.

Exception

(2) However, section 9 of the Pension Benefits Standards Regulations, 1985, with the exception of subsection 9(14), does not apply in respect of Air Canada pension plans.

Special payment

(3) For the purposes of subsection 9(14) of the Pension Benefits Standards Regulations, 1985, a reference to “special payment” includes a reference to the amount required to be paid in accordance with paragraph 5(1)(b).

Other payment

(4) For greater certainty, the amounts required to be paid in accordance with paragraph 5(1)(b) are “other payments” for the purposes of paragraph 10(2)(d) of the Pension Benefits Standards Regulations, 1985.

FUNDING

Solvency standards

4. The funding of any plan is considered to meet the standards for solvency if the funding is in accordance with the provisions of these Regulations.

Funding during each plan year

5. (1) Every plan must be funded in each plan year by

• (a) contributions that are equal to the normal cost of the plan;
• (b) the amount that is determined under subsection (2); and
• (c) the amount that is required to be paid by an employer under a defined contribution provision in that plan.

Special payment

(2) For the purposes of paragraph (1)(b), the amount required to be paid to each plan for a plan year is equal to the amount determined by the formula

A × B⁄C

where

A is $150,000,000;

B is the amount of the solvency deficiency of the plan that is determined during the plan year, or in the case where there is no solvency deficiency in any plan, is the amount of the solvency liabilities of the plan that are determined during the plan year; and

C is the aggregate amount of the solvency deficiencies of all plans that are determined during the plan year, or in the case where there is no solvency deficiency in any plan, is the aggregate amount of the solvency liabilities of all plans that are determined during the plan year.

Funding for 2020 plan year

(3) Unless the whole of the pension plan is terminated or unless Air Canada provides notice in accordance with subsection 6(1), the plan must also be funded, for the 2020 plan year, by the amount that is determined under subsection (4), and that amount must be paid by December 31, 2020.

Special payment

(4) For the purposes of subsection (3), the amount required to be paid to each plan for the plan year is equal to the amount determined by the formula

A − B

where

A is equal to the aggregate amount that would have been required to be paid to the plan in accordance with paragraph (1)(b) for the plan year and the preceding plan years that are after the 2013 plan year, if the amount set out in the description of A under subsection (2) had been $200,000,000 instead of $150,000,000; and

B is the aggregate of the amounts that were required to be paid to the plan in accordance with paragraph (1)(b) for the plan year and the preceding plan years that are after the 2013 plan year and the amounts paid for that plan year and those preceding plan years that were in addition to the contributions and amounts that were required to be paid in accordance with subsection (1).

Interest rate

(5) If an employer fails to make the payment to the plan that is referred to in subsection (3) within the period that is set out in that subsection, the interest rate that is to be paid on the amount that must be paid in accordance with that subsection is the one that was used to determine the solvency liabilities.

Discontinuance of funding — notice to the Superintendent

6. (1) If, within 30 days before the beginning of a plan year, Air Canada provides written notice to the Superintendent indicating its choice to discontinue funding of all the Air Canada pension plans under these Regulations for that plan year, these Regulations, except this section, subsections 1(1), 3(3) and (4) and section 12, cease to apply to the plans on the last day of the plan year in which the notice has been provided.

Discontinuance of funding — notice to members and beneficiaries

(2) Within 30 days after notice is provided in accordance with subsection (1), Air Canada must notify all plan members and beneficiaries in writing indicating that it has chosen to discontinue funding of all the Air Canada pension plans under these Regulations and indicating the plan year for which its choice will begin to apply.

Special payment

(3) Each plan must also be funded for the plan year in which the notice was provided in accordance with subsection (1) by an amount that must be paid within 30 days after that notice has been provided and is equal to the amount determined by the formula

A − B

where

A is equal to the aggregate amount that would have been required to be paid to the plan in accordance with paragraph 5(1)(b) for the plan year and the preceding plan years that are after the 2013 plan year, if the amount set out in the description of A under subsection 5(2) had been $200,000,000 instead of $150,000,000; and

B is the aggregate of the amounts that were required to be paid to the plan in accordance with paragraph 5(1)(b) for the plan year and the preceding plan years that are after the 2013 plan year and the amounts paid for that plan year and those preceding plan years that were in addition to the contributions and amounts that were required to be paid in accordance with subsection 5(1).

Solvency deficiency to be used

(4) The amount of the solvency deficiency of the plan and the total amount of the solvency deficiencies for all plans that are to be used to determine the amount required to be paid in accordance with subsection (3) are the last amounts determined before the notice was provided.

Interest rate

(5) If an employer fails to make the payment to the plan that is referred to in subsection (3) within the period that is set out in that subsection, the interest rate that is to be paid on the amount that must be paid in accordance with that subsection is the one that was used to determine the solvency liabilities.

Average solvency ratio

(6) In respect of the plan year in which the notice under subsection (1) has been provided, the average solvency ratio for each plan must be adjusted by increasing the solvency assets by the amount determined under subsection (3).

SOLVENCY RATIO LEVEL

Non-application

7. Section 9.3 of the Pension Benefits Standards Regulations, 1985, with the exception of subsection 9.3(2), does not apply in respect of an Air Canada pension plan.

Void amendment

8. For the purposes of paragraphs 10.1(2)(c) and (d) of the Act, the prescribed solvency ratio level is 1.0.

PLAN TERMINATION

Special payment

9. (1) If the whole of an Air Canada pension plan is terminated, the special payment referred to in paragraph 29(6)(b) of the Act that is required to be paid at the termination is equal to the amount determined by the formula

A + (B − C)

where

A is the amount that, in the absence of termination, would have been required to be paid in accordance with paragraph 5(1)(b) for the period beginning on the day on which the plan is terminated and ending on the last day of the plan year in which it is terminated;

B is equal to the aggregate amounts that would have been required to be paid to the plan in accordance with paragraph 5(1)(b) for the plan year in which the plan is terminated and the preceding plan years that are after the 2013 plan year, if the amount set out in the description of A under subsection 5(2) had been $200,000,000 instead of $150,000,000; and

C is the aggregate of the amounts that were required to be paid to the plan in accordance with paragraph 5(1)(b) for the plan year in which the plan is terminated and the preceding plan years that are after the 2013 plan year and the amounts paid for that plan year and those preceding plan years that were in addition to the contributions and amounts that were required to be paid in accordance with subsection 5(1).

Solvency deficiency to be used

(2) The amount of solvency deficiency of the plan and the total amount of the solvency deficiencies for all plans that are to be used to determine the amount referred to in subsection (1) are the last amounts determined before the termination.

RIGHTS TO INFORMATION

Information — subparagraph 28(1)(b)(iv) of Act

10. The following information is prescribed for the purposes of subparagraph 28(1)(b)(iv) of the Act, in addition to the information referred to in section 23 of the Pension Benefits Standards Regulations, 1985:

• (a) the amount of the plan’s solvency deficiency 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 the normal cost, that were required to be paid to the plan during the plan year covered by the statement; and
• (d) the amount of special payments that would have been paid to the plan for the plan year covered by the statement if the plan had been funded in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 during that plan year.

Information — subparagraph 28(1)(b.1)(ii) of Act

11. The information referred to in paragraphs 10(a) to (d) is prescribed for the purposes of subparagraph 28(1)(b.1)(ii) of the Act.

TRANSITIONAL PROVISIONS

Outstanding amounts

12. For greater certainty, any amounts that were required to be paid under the Air Canada Pension Plan Funding Regulations, 2009 and have not yet been paid continue to be required until they are paid and subsections 9(14) and 10(2) of the Pension Benefits Standards Regulations, 1985 continue to apply in respect of those amounts.

CONSEQUENTIAL AMENDMENT TO THE PENSION
BENEFITS STANDARDS REGULATIONS, 1985

13. Section 10.3 of the Pension Benefits Standards Regulations, 1985 (see footnote 1) is replaced by the following:

10.3 An election under section 29.03 of the Act shall not be made in respect of a plan that is subject to the Air Canada Pension Plans Funding Regulations, 2014 or the Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010.

CEASE TO BE IN FORCE

December 31, 2020

14. These Regulations, other than subsections 1(1), 3(3) and (4), cease to be in force on December 31, 2020.

REPEAL

15. The Air Canada Pension Plan Funding Regulations, 2009 (see footnote 2) are repealed.

COMING INTO FORCE

January 1, 2014

16. These Regulations come into force on January 1, 2014.

[40-1-o]