Pension questions:

[Mitch Cronin]

I'm something of a complete novice when it comes to investment matters... My eyes seem to gloss over as I try to read all the available information about the proposed DC pension scheme... But what I can grasp, doesn't seem all that bad to me.

One thing that strikes me as most odd is that it seems the senior folks are those making the most noises, yet they're protected by that *60* number... (I finaly found where it does indeed say years of "pensionable service", and since I only started paying into it when AC swallowed CAIL, I'm not included)

Is there a way to simplify the explanation of the objections for a man who doesn't have any neurons that fire dollar signs?

Also... I'm a little puzzled about this:

From the Trinity Time site:

"In a defined benefit plan like Air Canada's, the employer bears all the financial risks and enjoys the financial rewards. The employer's contribution varies every year, depending on how well the fund performs. After a period of above average returns, the employer may enjoy a "contribution holiday" and not be required to contribute any funds to the pension plan. However, if there are several years of below average returns, the plan may experience a deficit and the employer may be required to make current service contributions and additional "special payments" to the pension plan to liquidate the deficit. This variability can cause havoc to a company's cash flow, particularly if this happens at a time when the employer experiences a downturn in its business."

That seems to be telling me Trinity has no faith in the ability to invest that money wisely enough to get a decent return... which doesn't make any sense to me at all??? What am I missing? Are pension funds managed by someone other than the employer? (told you I was a novice)

Thanks for any attempts to simplify things for this simple mind.

[Guest neo]

DB pension funds are managed by the employer, or someone the employer gets to do the job. DC funds are typically administered by the employee or the employee's union through trustees.

Trinity's ability to manage the pension funds is not in question, and neither for that matter is Air Canada's. No one can predict the future of a specific investment. Reasonable assumptions can be made about LONG TERM financial returns, but it is impossible to predict in advance what the funds will be worth at any given moment in the future.

If you ask, could Trinity bring in 5-7% return per year averaged over the next 20 years, the answer would be yes. If you ask, can Trinity be sure that in 2009 the pension fund will be worth a specific amount, the answer is no. Yet it is the specific value of the fund at any given time which determines what the plan sponsor (Trinity) will be required to contribute. That uncertainty in a mature plan with thousands of beneficiaries can rapidly lead to a huge liability.

Simply look at the plan as it exists today. It has a solvency problem to the tune of some one and a half billion dollars. Yet, Trinity's total investment in AC is only some $650 million. In other words, there is a pension liability that is at least twice as much as Trinity's entire investment. They could lose all their money, plus be on the hook for twice as much again! You would be unwise to consider doing something like that.

neo

[Mitch Cronin]

Thanks Neo... That last paragraph I can grasp...

Any chance you could attempt to summarize the objections to the proposed changes? I mean, I understand the differences and the risks (I think), but given that most senior folk will have the choice... Why would some of them still be fussing?

[LongTimer V]

The question is why were so many interested in Air Canada,why we signed contracts for consessions,and why is the pension a issue.Victor new all this before.

We have been lied to,and scamed from the beginning and now they want to talk nice.I don't think so.Lost trust long ago with this group.

"They could lose all their money, plus be on the hook for twice as much again! You would be unwise to consider doing something like that. "

[Guest neo]

I have no idea why over-60's would object on a personal basis, as long as their current DB pension benefits are maintained. In fact, they actually come out further ahead because they would have the OPTION of staying with the DB plan with their expected benefits, or moving to a DC plan if they prefered. Why in the world would you object to a no-lose proposition that gives you more options?

The under-60's are in a different position. I can certainly understand their dismay at being forced into a pension situation that they don't want. However, there are at least as many positives as negatives about switching to a DC plan from the beneficiary's point of view. When you factor in the indisputable fact that doing so would make the employer more secure, it tips the scales rather heavily in favor of the change. All, of course, in my humble opinion.

[Guest secondclasscat]

Mitch & Neo,

There are a couple of reasons for "60's" to object. First of all, I am a "60" & I object because 60 was an arbitrary line in the sand. What about the guy with 58 or 59? Why is he not given my choice? It should be all employees with a choice. ( Note to Robert, offer it up in writing at the table, not in a letter to "valued" employees, O White Knight)

Second, for those "60's" who are between 60-70 points, chances are they will not get to retirement with their DB intact because as soon as the overall number of employees in the DC plan is greater than those active employees still in DB plan, it will be sold down the river in a heartbeat in a future negot's for something that benefits all(wage uplift, bonus etc) instead of just those still in DB plan.

[Guest neo]

ssc,

Roger that. On your first point, I recognize that many over 60's would act out of solidarity with people under that line and good on you for doing so. It's why I specified "for personal reasons" in my previous comments. If you were simply choosing for yourself, would you not feel much as I suggested?

I think you raise a very valid caution with your second point. Assuming that there was a split to a DB and DC plan, would the DB plan then be in jeopardy from those who would no longer be in it and therefore might be willing to sacrifice it?

The answer to that reasonable concern is in the nature of DB pensions. They are a trust between the employee-beneficiary and the employer. The employer cannot arbitrarily enter into agreements with someone else which negate the obligation to fund the DB pension.

Could some catastrophic event happen which placed the DB plan in jeopardy? Yes, it could, and that's why all employees (including those who can stay with the DB plan) should consider the DC option.

Would a proposed change to the pension plans occur in anything less than a bankruptcy situation. It's very difficult to see how. And if the situation is so bad, then your DB plan is at risk, anyway.

Never forget... the funds that are in your DB plan are held in trust and can never be taken away from you without your consent, regardless of the deal anyone else may strike.

There are subtleties to it to be sure, but overall, I'd say you're in a strong position. Strictly my opinion, though.

neo