Making the Best of a Bad Situation at Air Canada

By Amanda Moravec

AC_pension_workers Pension plan solvency deficiencies – the hole that opens up when there aren’t enough assets to cover liabilities if the plan winds up – are vexing public and private-sector pensions. That fraction of workers fortunate enough to have a defined-benefit (DB) pension plan is facing a toxic mix of volatile returns, extremely low interest rates (which raise the cost of pension benefits), and all too frequently, a legacy of employer contribution ‘holidays’ or underfunding when pension fund returns were high. Typically, when liabilities outweigh the assets in the plan, employers are expected to make up the difference.

Increasingly, though, employers are using the difficult environment to force radical changes to pension plans. And governments aren’t helping. Solvency funding relief in Ontario and elsewhere has ratcheted up pressure on plan members to pay more into the plan, or accept benefit cuts in exchange for easing the rules on solvency payments. Originally designed to protect benefits in the event of plan wind-up, the requirement for funding pensions on a solvency basis is throttling defined benefit (DB) plans to the point of extinction. Recall that a DB plan provides a predictable retirement benefit typically at lower cost and with higher returns than its alternatives – and the employer must shoulder a portion of the funding risk. As the cost of these plans rise, employers are looking to close DB plans and dump pension risk and cost onto workers.

In a familiar pattern, in 2011 negotiations with the CAW, Air Canada had tried to close its DB plan and shift new hires into an inferior defined-contribution (DC) plan. (Employer costs are fixed in a defined-contribution plan, with no requirement for solvency funding or other special payments.) When the dispute went to final-offer arbitration, an arbitration board decided in favour of the union’s proposal for a DB/DC hybrid for new employees, with the DB benefit level cut in half.

For years, Air Canada’s unions have urged changes to solvency funding rules. At the same time, the CAW, the International Association of Machinists (IAMAW) and others have complained about Air Canada’s excessive payouts to executives, while workers agreed to concessions and the pension plan struggled with a huge solvency deficiency. In 2010, during a 10-year solvency funding relief period granted by the federal government that included a 21 month spell of no payments whatsoever, Air Canada rewarded CEO Calvin Rovinescu with $4.6 million in compensation and a $5 million retention bonus. Prior to this, over the decade leading up to his departure in 2009, Robert Milton drained $86 million in compensation out of the company.

Now Air Canada has won the right to make lower solvency payments. In exchange, the federal government will require that Air Canada hold executive pay increases to the rate of inflation, with limits on incentive plans and special bonuses prohibited. Company directors will also be prevented from rewarding themselves through share buy-backs and divided payments.

While the federal Department of Finance exaggerates just how strenuous these measures really are, the significance of Jim Flaherty’s conditions shouldn’t be lost on politicians and other unions. Short of ending the subsidy of taxing stock options not as income, but at the much lower capital gains rate, government restrictions on private-sector executive compensation are far preferable to pious wishes for more vigilant corporate compensation committees and “say-on-pay” shareholder resolutions.

The CAW made the best of a bad situation in June 2011, when the federal Labour Minister’s back-to- work legislation forced the union into arbitration over Air Canada’s pension proposals. Unions need to insist that, at a minimum, controls on executive pay be included in the list of conditions for public and private-sector solvency funding relief. Taking the Air Canada precedent further, regulators should have the power to extract concessions on executive compensation in exchange for consenting to plan changes. Currently, provincial pension regulators must agree to major changes in pension plans, including plan amendments that reduce benefits, the payment of fund surpluses to the employer, and the transfer of assets. Just as workers’ retirement incomes are at risk when employers seek changes to the pension plan, directors’ and senior management’s pay should be on the table as well. Pensions are deferred wages for workers, so let’s bring management’s bonuses and pay packets into the discussion. Are you listening, Kathleen Wynne and Tom Mulcair?

AMANDA MORAVEC LIVES IN LONDON, ONTARIO, WHERE SHE STUDIES IN THE BUSINESS PROGRAM AT THE UNIVERSITY OF WESTERN ONTARIO. HER MAIN AREA OF INTEREST IS PENSIONS. SHE COMES FROM A UNION FAMILY, AND WAS INVOLVED IN SOLIDARITY WORK DURING THE CATERPILLAR LOCK-OUT OF ELECTRO-MOTIVE WORKERS IN 2012.

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One thought on “Making the Best of a Bad Situation at Air Canada

  1. Hello Rank and File,

    Thanks to you and your author for this important article.

    The alternative to this whole mess of private pension plans being underfunded with a government (and too often union) seal of approval is a universal Canada Pension Plan with substantially improved benefits, paying a respectable percentage of the average Canadian salary. One additional option would be a provision that would allow workers to negotiate through their unions or by any other means supplemental benefits whose premiums would be paid in whole or in part by employers. Unions need to get mobilized to fight for this.

    I don’t think it is entirely accurate for the author to state, “At the same time, the CAW, the International Association of Machinists (IAMAW) and others have complained about Air Canada’s excessive payouts to executives, while workers agreed to concessions and the pension plan struggled with a huge solvency deficiency.” Formally speaking, yes, workers at Air Canada “agreed” to concessions. But often, this followed efforts by them to say no that were frustrated by their unions. On more than one occasion, IAM and CAW leaders presented concessions as inevitable and necessary and closed off rank and file industrial action. This happened over the closure last year of AVEOS, for example.

    I recall the voter participation in concession agreements as often very low. Votes in favour were often a bitter acknowledgement by workers that their unions were not willing to lead a militant fight in opposition. So today we arrive at pension plans that are deeply insolvent, thousands of job losses, and thousands more jobs degraded to part time and on call status. And still there is no fight at the federal level for an improved CPP. I wish I could be confident that the pension insolvency at Air Canada and other large employers will diminish over time, but I am not.

    The real answer here is a more generous CPP, paid by the
    likes of those investors who have looted Air Canada over the years. But to get that, we need to mobilize and fight.

    Roger Annis, retired aerospace worker and IAM member

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