A look at the pandemic’s impact on pension plans in Canada’s travel, transportation sectors

The impact on air and rail

Air Canada’s domestic defined benefit pension plans — which have been in a surplus position on an aggregate basis since 2014 — posted a surplus of $2.9 billion as of Jan. 1, 2021, says Nathalie Henderson, the airline’s senior director of pensions.

According to the company’s 2020 annual report, its total employer DB pension funding contributions — including international and supplemental plans — were $103 million in 2020 and were forecasted to be $88 million in 2021.

Read: Two years later: Canada’s DB, DC pension plans weathering the pandemic

Meanwhile, Via Rail Canada Inc. generated a comprehensive loss of $21.9 million in 2020, compared to a loss of $51.3 million in 2019. The rail line’s 2020 annual report said the variation was because of a remeasurement of the DB component of the pension and post-employment benefit plans of $34.4 million in the fourth quarter and a $5.9 million loss for the year. The 2020 expense for the defined contribution component of the plan was $1.4 million, according to the report, which projected an increase to $1.5 million in 2021.

Last April, Via Rail and Unifor — the union representing thousands of Via Rail employees — ratified a new two-year agreement that increased employer contributions for roughly 1,700 members of the company’s hybrid pension plan.

By comparison, Canadian Pacific Railway Ltd. reported a pension surplus of $556 million in 2020, according to its annual report, noting a $33 million increase in costs for DB pension and post-retirement benefits. By comparison, the organization’s DB pension plans’ accumulated benefit obligation as at Dec. 31, 2020 was $13.5 billion, with an estimated DB benefit payment of $632 million for 2021.

CP also estimated its 2021 net periodic benefit credits for its DB pensions would be about $230 million and about $12 million for its DC plans. Since 2012, the company has made $1.32 billion in voluntary pre-payments to reduce its annual pension funding requirements.

Meanwhile, the Canadian National Railway Co. reported a total funded deficit of $447 million across all of its DB plans with a projected benefit obligation in excess of plan assets, according to its 2021 annual report. This number was down from $553 million, reported at the end of 2020. CN’s total pension assets reached $3 billion in 2021.

In an email to Benefits Canada, one of CN’s non-unionized DB pension plan members said the company announced in December 2021 that it will close the plan to future accrual in two years and move all members to a DC plan, which was introduced more than 15 years ago when the DB plan was closed to new hires. CN didn’t respond to Benefits Canada’s requests for comment.

The effects of government measures, market performance

Andrew Gillies, a consulting actuary and partner at Robertson Eadie & Associates, says the strength of pension plans in the industries most impacted by the pandemic will be determined by the current cash flow for their respective plan sponsors.

“The cash flow for companies in those industries has been hurt, so not having a strong plan sponsor makes it difficult to have a pension fund. The best way to have a strong pension fund is by having a plan sponsor that’s going to continue. I would expect in those industries there are cash constraints and you’re trying to balance an obligation to a pension plan, as well as obligations to employees, creditors and debentures.”

Despite the significant economic impact in the early days of the pandemic, Canada’s large DB pension plans rebounded amid an equities rally in the second half of 2020. “The equity markets took a hit and that hurt solvency funding concerns,” says Gillies. “With that, interest rates fell and funding liabilities went up. The plans’ positions really deteriorated over that short period of time and regulators took notice and took actions to shore up the positions of the plans. . . . But equity markets turned around relatively quickly and have been on a pretty good run since, while interest rates are going up. If you look at plans’ positions today, most of them are in a better spot than where they started. The equity markets have been a benefit on the asset side and most plans are either fully funded or getting very close.”

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Pension plan sponsors that took on de-risking strategies — such as increasing allocations to long bonds to mitigate equity issues — prior to the pandemic have shown those strategies mostly worked, he adds. “Those plans have fared as expected, while those that tried to achieve long-term returns through investing in equities have performed quite well. For those long-term pension plans, the ones that continue to be investing for the long term and expect to have equity returns, they’re doing OK.”

Air Canada was among the plan sponsors that used de-risking to weather the pandemic’s economic impact. The airline’s DB plans maintained their strong position through a de-risking strategy launched in 2009, says Henderson.

According to the airline’s 2020 annual report, roughly 75 per cent of its pension assets were invested in fixed income instruments to mitigate interest rate risk. “The strategy, combined with excellent investment returns, has proven its efficiency to protect the plans and reduce the volatility of the financial position, even in a pandemic situation,” says Henderson.

While some of Gillies’ DC plan sponsor clients put temporary holds on contributions in the first year of the pandemic, that stance has largely reversed as markets rebounded. “The hardest hit companies were looking for cost savings measures [for their pensions]. Some stopped contributions for their members and basically took a contribution holiday, while regulators permitted a reduction in contributions as long as a minimum level of contribution was maintained.

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“Those seemed to be pretty short-term measures, unless an organization was really struggling with cash flow. The entities I know of had a temporary hold on contributions but then, since then, have made their employees whole. They stopped for six months and then doubled up on contributions for the following six months to bring everyone back to where they should be.”

In Ontario, he adds, while the provincial government established measures to mitigate the pandemic’s impact — such as deferring contributions — many plans chose not to use these options. “The way to access those measures involved quite a few hoops. There were specific communication requirements and I don’t think a lot of companies used those mitigating factors.

“Most of them were trying to figure out the best way to mitigate contribution requirements through strategic filing valuation, but they really didn’t avail themselves of the available options and, when the market rebounded, everything went away. There wasn’t a concern anymore and the regulators started to ease up on the moratoriums on value transfers and things of that nature. Things corrected through the marketplace and not through interventions by regulators.”

Delayed retirement for some plan members

When travel restrictions effectively grounded Canadian airlines in the second quarter of 2020, Air Canada enacted a temporary workforce reduction of roughly 50 per cent — representing 20,000 employees — which it achieved through a combination of layoffs, terminations, early retirements and special leaves, according to the airline’s annual report.

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These layoffs have delayed retirement for some members, says Alex Habib, secretary-treasurer for the Canadian Union of Public Employee’s Air Canada division, which represents roughly 9,000 flight attendants at Air Canada and Air Canada Rouge. While layoffs in the early days of the pandemic were reversed by fall 2020 in anticipation of a strong winter travel season, he says the pandemic’s second and third waves in early 2021 caused the airline to lay off up to 80 per cent of its workforce.

“Many members look at their retirement date based on their annual plan statement, based on when they’ll have that magic number. People who are at 20-plus years of service were laid off and, during that period of time, they weren’t accruing allowable service in their plan, so when they get their plan statement this June, they’re going to see how [the pandemic] impacted their projected retirement date.”

Flight attendants hired after June 2011 are in Air Canada’s hybrid pension plan, says Habib, and while they’re further from retirement than members of the airline’s closed DB plan, they also felt the impact of ongoing monthly fixed account fees coupled with an inability to contribute to the hybrid plan’s DC portion. He adds that hybrid plan members aren’t able to buy back contributions for this period.

“When you’re not contributing, especially for someone new, it can really eat away at any potential gains that your investments were making during that time. We looked at having a percentage-based account management fee, but in the long run it costs more. It’s better overall to have a fixed monthly fee, but the junior members did see an impact.”

While Air Canada stopped matching contributions for laid-off workers, Henderson notes the airline resumed its portion of the contributions as soon as these employees returned to work.

Looking to the future

The pandemic will be a stress test for hybrid pension plan design, says Corey Vermey, director of pensions and benefits at Unifor, the union that represents more than 9,000 employees in the rail sector — including those at CN, CP and Via — and roughly 5,800 airline workers, including Air Canada.

“You’ll have a natural experiment with senior plan members in the legacy DB plan and junior members in the hybrid plan. It’s the junior members that would be most exposed in a pandemic. But if all the trains stopped running, you can assume a lot of senior people would be on layoff, too.”

Read: Pension solvency measures helping plan sponsors through pandemic and beyond

Looking forward, Vermey says it will be relevant to see how the pandemic influenced member choices on the DC side of hybrid plans. “In view of the last two years and the reduction of hours, how did members respond? And how did members respond with their investments when they saw the market sink in 2020? Did they engage in more asset allocation trades? Did they try to time the decline and miss the rebound? And comparing that to the professional management of the DB assets — how did the managers respond compared to the individuals?”

As employers face an increasingly competitive labour market amid the so-called ‘Great Resignation,’ many plan sponsors are revisiting pension plan designs to attract and retain employees, says Jean-Daniel Côté, vice-president and practice leader for retirement consulting at BFL Canada.

“What we’re seeing now is a lot of [plan sponsor] clients taking a second look at their [pension] offering, both in terms of what they’re paying, flexibility, competitiveness and financial wellness. . . . There’s a lot more focus now on the retirement side than there’s been in a long time. That’s good news for pension plan design. Employers are looking at whether they want a pension plan or something more flexible.”

Blake Wolfe is the managing editor of Benefits Canada.