Will Canada's Flag Carrying Airline Survive?

[Riverwind]

Pension plans are an agreement between employers and employees. An agreement that both have freely entered into.

If a company sets up a defined benefit plan for its employees then there a long list of regulations that apply. I believe one of those regulations the employer is liable for any deficit. This is wrong. Group pension plans are fine but the company should only be required to make regular payments based on total payrool just like the employees but the beneficies are liable for any deficit.

Even if I am wrong and a company could choose to offer a pension plan without the liability, Air Canada used to be a crown corp and had no choice but to accept the terms of the existing pension plan which was negotiated by a government that gave public sector unions whatever they demanded. IOW, Air Canada, the private corporation, did not freely enter into the pension agreement.

[Wilber]

If a company sets up a defined benefit plan for its employees then there a long list of regulations that apply. I believe one of those regulations the employer is liable for any deficit. This is wrong. Group pension plans are fine but the company should only be required to make regular payments based on total payrool just like the employees but the beneficies are liable for any deficit.

Even if I am wrong and a company could choose to offer a pension plan without the liability, Air Canada used to be a crown corp and had no choice but to accept the terms of the existing pension plan which was negotiated by a government that gave public sector unions whatever they demanded. IOW, Air Canada, the private corporation, did not freely enter into the pension agreement.

The employer is responsible for any deficit but it is not required to contribute at times when the plan is fully funded by employee contributions. If the company was required to make regular payments based on the total payroll, it is far more unlikely that these plans would ever get into deficit as the fund would constantly be building over the years through contributions by both employees and the employer, allowing them a much better chance of surviving cyclical down turns. Current regulations prevent this by letting companies off the hook for pension obligations when times are good and limiting the amount plans can be over funded through company contributions to 10%.

Air Canada has been a publicly owned company since 1988. When it absorbed Canadian Airlines in 2001 it took over responsibility for the Canadian plans which had in turn taken over responsibility for the PWA, Nordair, EPA, Transair, Quebec Air and Wardair plans, all of which were public companies when their plans were introduced and all of which were fully funded at the time Air Canada took them over. Air Canada has also guaranteed those plans during a previous round of CCAA, so yes they have freely entered into them through negotiation with their unions since being privatized.

Edited April 2, 2009 by Wilber

[Riverwind]

Current regulations prevent this by letting companies off the hook for pension obligations when times are good and limiting the amount plans can be over funded through company contributions to 10%.

I rest my case. The regulations are the problem not the company. If the regulations were different then employees would have had to settle for much less in terms of pay increases in the past because the company could not count on the 'savings' from reduced pension payments during could times. Pension funds should be a straight deduction from payroll that is always paid with no further liability on the part of the company.

Air Canada has also guaranteed those plans during a previous round of CCAA, so yes they have freely entered into them through negotiation with their unions since being privatized.

Not relevant since you confirmed the regulatory framework is what caused the problem - not the company.

[Wilber]

I rest my case. The regulations are the problem not the company. If the regulations were different then employees would have had to settle for much less in terms of pay increases in the past because the company could not count on the 'savings' from reduced pension payments during could times. Pension funds should be a straight deduction from payroll that is always paid with no further liability on the part of the company.

Not relevant since you confirmed the regulatory framework is what caused the problem - not the company.

The company never topped up the plans to the amount allowed while it was turning a profit and ACE was pillaging its assets. They put in the minimum required by law, not the maximum. They used the regulations to take a vacation from contributions. If they had topped up the plans to the extent possible under the regulations when they were profitable, this situation wouldn't be nearly as bad. Instead the ten year let they were given during the last round of CCAA allowed their obligations to be put off longer. Unfortunately the way ACE set the company up, Air Canada wound up with liability for the pensions while ACE had control of its assets. Shysters pure and simple, concerned with mining as much money as possible from the company, not building its future. Your philosophical opinions on defined benefit pensions notwithstanding, this is a deal the company made with its employees. You are correct connecting pension benefits to salaries as they are one of the chips on the table when contracts are signed. Increased pension benefits in future will cost you in wages today, that is why they should be looked at as deferred wages.

[Riverwind]

The company never topped up the plans to the amount allowed while it was turning a profit and ACE was pillaging its assets.

I will agree that the funny business with ACE holdings makes this example quite murky. Scams where a shell company sucks all the assets out of a failing company but leaves the liabilities are not uncommon and are supposed to be prevented by securities regulators. Sounds like they were asleep at the switch (what else is new). That said, this example simply re-enforces my point about disconnecting pension plans from the company. Treat company contributions a wages which must be paid regularily once negotiated. At that point the employees have complete control and don't have to depend on the company acting in good faith.

[Wilber]

I will agree that the funny business with ACE holdings makes this example quite murky. Scams where a shell company sucks all the assets out of a failing company but leaves the liabilities are not uncommon and are supposed to be prevented by securities regulators. Sounds like they were asleep at the switch (what else is new). That said, this example simply re-enforces my point about disconnecting pension plans from the company. Treat company contributions a wages which must be paid regularily once negotiated. At that point the employees have complete control and don't have to depend on the company acting in good faith.

Someone did, the unions went to court trying to prevent proceeds from the sale of Air Canada assets from being distributed to ACE shareholders. The judge told them to take a hike and let it go through so I guess that kind of stuff is quite legal. The actual plans are disconnected from the company in that the company has no say in how they are administered. Agree with you that a company should be required to make regular contributions then let the chips fall where they may. Our present system prevents many people with defined benefit pensions from contributing to RRSP's because the government factors in the company's commitment to make up any deficits. If the company goes away, the money isn't there and the pensioners can conceivably wind up in worse shape than if they had their own RRSP's.

[fellowtraveller]

The inconvenience of only having 75 planes available instead of over 400? Do you realize that Air Canada has the 8th largest aircraft fleet in the world? Do you realize that the majority of people (I've heard in the range of 80%) still fly Air Canada? It would be more than a simply inconvenience, it would be a disaster.

Excellent. WestJet can easily lease some planes from the carcass of Air Canada to meet the demand.

[Smallc]

Excellent. WestJet can easily lease some planes from the carcass of Air Canada to meet the demand.

If they can do that, fine....but what will our market be like without competition?

[Alta4ever]

Pension plans are an agreement between employers and employees. An agreement that both have freely entered into.

Or forced into (under duress by a union).

[waldo]

Excellent. WestJet can easily lease some planes from the carcass of Air Canada to meet the demand.

If they can do that, fine....but what will our market be like without competition?

competition? no worries... as a good corporate citizen, WestJet will keep fares artificially low - you betcha!

[Wilber]

Or forced into (under duress by a union).

How are they forced into it any more than anything else that is negotiated. Under Canada's pension regulations these plans are very seductive for companies as well. You have a young company with young employees and they tell you they want a pension plan. Sounds great you say because now you can get something else back in negotiations for that plan and guess what, your employees are going to be contributing to that plan for 20 or more years before anyone retires and the earnings of the accumulated funds will probably be enough to fund the plan for a decades more before you as the employer have to contribute a nickel. Such a deal, unfortunately all good things eventually come to an end but that may be at least thirty or forty years from now so who cares. Get my drift?

[Alta4ever]

your employees are going to be contributing to that plan for 20 or more years before anyone retires and the earnings of the accumulated funds will probably be enough to fund the plan for a decades more before you as the employer have to contribute a nickel. Such a deal, unfortunately all good things eventually come to an end but that may be at least thirty or forty years from now so who cares.

It depends on the type of plan they are looking for is it defined benefit or defined contribution? One is very detrimental to the company and can leave huge unfunded liabilities, which are dramatically augment in time likes these.

[Wilber]

It depends on the type of plan they are looking for is it defined benefit or defined contribution? One is very detrimental to the company and can leave huge unfunded liabilities, which are dramatically augment in time likes these.

A defined benefit plan doesn't cost the company a dime until enough employees retire that the employee contributions and their earnings can no longer fully fund the pension. This could be a matter of decades for a new company with a majority of young employees. A defined contribution plan can cost a company upfront depending on what its negotiated contributions might be. It's pretty much a matter of pay me now or pay me later. Today's financial situation is putting a lot of stress on many defined benefit plans but if you asked those companies thirty or forty years ago if they would rather put millions a year in contributions up front or pay nothing for thirty or forty years and then see if they if they might need to make up a shortfall, which one do you think they would have chosen?

[Alta4ever]

"Defined Contribution Pension Plan

A savings plan in which both employer and employees make pre-defined contributions that are generally based on a percentage of employee salary.

Contributions are tax deductible and accumulate on a tax-deferred basis. Amount accumulated is used to determine annuity amount payable upon retirement.

Features

In most cases, members provide their own investment instructions for the amounts contributed on their behalf.

Funds accumulated cannot be withdrawn before retirement and must be used to purchase an annuity.

These plans are generally better suited to employers who want to help their employees build an income for retirement. "

http://www.desjardins.com/en/entreprises/s...-determinee.jsp

The up front cost of these is minimal as they are tax deductable for the employer.

[Wilber]

"Defined Contribution Pension Plan

A savings plan in which both employer and employees make pre-defined contributions that are generally based on a percentage of employee salary.

Contributions are tax deductible and accumulate on a tax-deferred basis. Amount accumulated is used to determine annuity amount payable upon retirement.

Features

In most cases, members provide their own investment instructions for the amounts contributed on their behalf.

Funds accumulated cannot be withdrawn before retirement and must be used to purchase an annuity.

These plans are generally better suited to employers who want to help their employees build an income for retirement. "

http://www.desjardins.com/en/entreprises/s...-determinee.jsp

The up front cost of these is minimal as they are tax deductable for the employer.

Then why did all these companies negotiate defined benefit plans? Hindsight is always 20/20. Contributions are always tax deductible regardless of the type of plan.