Air Canada has provided an update regarding its Canadian pension plans solvency status. Based on preliminary estimates and the factors outlined below, Air Canada projects its Canadian registered pension plans at January 1, 2014 to be in a small surplus position. The Canadian registered pension plans solvency deficit at January 1, 2013 was $3.7 billion. Final valuations as of January 1, 2014 will be completed in the first half of 2014.
The elimination of the previous $3.7 billion deficit is the result of several factors: (1) a 13.8% return on investments during 2013, (2) the implementation of previously disclosed pension benefit amendments which are estimated to have decreased the solvency deficit by approximately $970 million, (3) contributions made by the corporation for the year of $225 million in respect of the solvency deficit and (4) the application of an estimated prescribed discount rate of 3.9% to calculate its future pension obligations.
The discount rate used to value the pension obligations is determined pursuant to guidance of the Canadian Institute of Actuaries. The discount rate used at January 1, 2013 was 3.0%. Air Canada used an estimated discount rate of 3.9% at January 1, 2014. Every 10 basis points change in the discount rate would result in approximately a $150 million change to the solvency liabilities. The final valuation will be based on the guidance for January 1, 2014 expected to be confirmed in February.
Four years ago, Air Canada began a program with the objective of materially de-risking its pension plans, and a new investment strategy with liability driven initiatives was introduced. The strategy contributed to achieving a return over the four-year period of 11.8%, a first quartile performance (versus Canadian large pension plans), while lowering the overall risk profile. At present, 70.0% of the pension liabilities are matched with fixed income products to mitigate a significant portion of the interest rate (discount rate) risk. It is Air Canada's objective over the mid-term, assuming appropriate market conditions, to match 100% of the pension liabilities with fixed income products.
"Air Canada's three primary pension objectives are to ensure our employees' and retirees' pensions are secure, the pension solvency deficit is eliminated and that the costs associated with maintaining the pension plans remain affordable, predictable and stable," said Calin Rovinescu, President and Chief Executive Officer. "We have, over the past four years, made significant progress on all these objectives".