A little while ago, Ottawa gave Air Canada another pension break. Despite understandable complaints from the airline's rivals, this was probably a necessary move given the overall context. But it is also another sign of Canada's flawed pension plan rules; at least as far as the methods of calculation of the shortfall of defined benefits pension plans are concerned.
Air Canada's seven-year extension of the cap on special payments are intended to erase its sizeable pension fund deficit. The airline will have to pay an average of $200 million a year for seven years, much less than it would have been required to pay without the cap extension. In exchange, executive compensation growth will be restricted, and dividends and share repurchases banned.
Again, given Air Canada's dire situation — its pension fund deficit stands at $4.2 billion — the federal government probably did the right thing. It is better for the country's largest airline to keep flying than for it to file for bankruptcy and lay off thousands of workers.
Still, this kind of break is just a stopgap measure for one company. The deeper problem is how we calculate pension plan liabilities in this country. As I wrote last August, defined-benefit pension plans like Air Canada's are experiencing a lot of stress, mostly because long-term interest rates are exceptionally low at the moment. This reduces investment returns, but not benefits, which are "defined," i.e., fixed.
While American companies that sponsor defined-benefit pension plans can use a discount rate based on average corporate bond rates over 25 years (currently around 6.5%), Canada stipulates a discount rate based on federal government bonds (currently around 3%). If Canadian companies were allowed to use the American rate, their liabilities would be cut in half.
This matters for a number of reasons. For Canadians who fly with Air Canada, it ultimately means higher air fares. For the company itself, it of course hurts their financial health and their capacity to make new investments. For workers, it means lower wages due to a smaller pool of money when it comes time for negotiations. And for retirees, if the company goes bankrupt, they are clearly not better off or better protected.
As other companies inevitably run into troubles similar to Air Canada's, the message is clear: Canada needs to change the way it calculates pension plan liabilities.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.
* This column appears in Sun Media newspapers, published both in several of Canada's key urban markets (Toronto, Ottawa, Calgary, Edmonton, Winnipeg and London) and in its 28 community dailies.