AC Pensions

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Air Canada nixes valuations

Carrier worries topping up pension funds could reduce assets for other creditors

By KEITH McARTHUR - TRANSPORTATION REPORTER

Saturday, April 19, 2003 - Page B1 Globe & Mail

Air Canada says it won't conduct new valuation reports on its pension funds unless it is instructed to do so by the courts -- because topping up the employee funds could leave fewer assets for other creditors.

A report by Air Canada's court-appointed monitor, Ernst & Young Inc., says Air Canada is "concerned" that filing new valuation reports could put pension claims ahead of other stakeholder claims.

The report also estimates that Air Canada's various pension and retirement benefit plans are underfunded by more than $2.5-billion.

"Air Canada is concerned that filing new valuation reports could alter the priority of pension claims relative to other stakeholder claims if, as is expected, such valuation reports were to reveal deficits," Ernst & Young said in a report filed in court this week.

Pension plans are usually evaluated every three years. Air Canada's various plans were scheduled to be reviewed on July 1 and next Jan. 1.

But the Office of the Superintendent of Financial Institutions, a federal regulator that oversees Air Canada's pension plans, asked the company to conduct valuation reports as of Jan. 1, 2003.

"Air Canada has advised the monitor that it is not in a position to complete or file new valuation reports as requested by OSFI at this time without direction from the court as to what further action, if any, should be taken in that regard," Ernst & Young said.

Sean Dewart, a lawyer representing the Canadian Auto Workers union, said Air Canada has a fiduciary responsibility to do what is in the best interest of its pension plan members.

That means Air Canada should complete the evaluations OSFI has requested even if that would crystallize the airline's liabilities, Mr. Dewart said.

"Air Canada the debtor doesn't want an evaluation because that doesn't suit them, but Air Canada the trustee is in a serious conflict of interest," Mr. Dewart said in an interview.

The Ernst & Young report also estimated that the unfunded liability in Air Canada's pensions grew during the first quarter because of "negative investment returns."

Air Canada had previously estimated that the funds overseen by OSFI were underfunded by $1.3-billion on Jan. 1. But the liability was believed to be even higher by March 31, the monitor said.

The monitor's report also quantified a number of related liabilities, which don't fall under OSFI's watch.

The report said a supplementary pension fund for Air Canada's pilots and executives was estimated to be underfunded by $618-million.

And Air Canada also had unfunded obligations for post-retirement medical, life insurance and disability benefits totalling about $659-million.

Attached to the monitor's report was a copy of a letter sent to Air Canada on March 21 by John Doran, assistant superintendent of supervision for OSFI.

In the letter, Mr. Doran says he believed Air Canada's pension plans were not being administered in accordance with the Pension Benefits Standards Act.

"I am of the opinion that by taking contribution holidays, Air Canada is committing or is about to commit or pursue an act or course of conduct that is contrary to safe or sound financial business practices in respect of the plans," he wrote.

Air Canada has said it was legally entitled to take the pension holidays under the PBSA because the previous valuation reports -- conducted in 2000 and 2002 -- showed that the pensions were in surplus.

Murray Gold, a lawyer for the Canadian Union of Public Employees, which represents Air Canada's flight attendants, said the pension issue will loom large in the restructuring proceedings.

"Pension funds are trust funds and it is very important in any restructuring to protect not only the pensions of active employees, but also the retired employees who depend on the pensions for their livelihood," he said.