Canadian Lawyer InHouse

fixed-income investments — the lion's share of most plan assets — are generating such low returns. The DBRS report notes the discount rate, which pension plans use to calculate the present value of future pension obligations, has been plummeting since 2008 and are unlikely to rise anytime soon — though they are bottoming out. DBRS estimates if the discount rate rises by 2 per cent, the funding gap of almost US$400 billion would be eliminated. It's certainly achievable given the average discount rate in 2011 was 4.84 per cent compared with 6.27 per cent in 2008. Since companies cannot control interest rates, it means they must fund shortfalls using voluntary payments, such as BCE did in late 2012, dropping $750-million into its plan. Corporate Canada has an estimated $600-billion sitting on its balance sheet, but the reality is A Tradition of Business Whether conducting business in Canada or across the globe, Aird & Berlis LLP understands the realities of your work. Our clients benefit from the firm's solid relationships with major institutions, government authorities and renowned national and international law firm affiliates. AIRD & BERLIS 1/2 island We combine the depth and strength of Canada's largest firms with the creativity and effectiveness of smaller firms. Count on us for legal counsel from a business perspective.® Eldon Bennett Managing Partner ebennett@airdberlis.com 416.865.7704 Brookfield Place, 181 Bay Street Suite 1800, Box 754 Toronto, ON M5J 2T9 T 416.863.1500 F 416.863.1515 www.airdberlis.com 24 ntitled-2 1 • a pr il 2013 few companies have the luxury of writing a billion-dollar cheque like BCE did. In fact, experts say companies are reluctant to kick extra money into pension plans because the expectation is interest rates will soon start to rise and much of the funding problem will vanish. Many simply rely on letters of credit to satisfy regulators' concerns about shortfalls. Monteiro says, "The problem with pension plans is that once you put it in, you can't get it back easily." There are also companies required by pension regulators to make catch up payments and some of those are seeking relief. Take Air Canada. It made $433 million in pension plan funding payments in 2012, which included a special past service catch-up payment of $173 million. For the last three years, Air Canada, whose pensions are federally regulated, has been making catch-up payments under special three-year pension relief regulations passed by the federal government following the credit crisis. Air Canada projects another past service payment of $221-million in 2013. However, its Q4 financial statement notes the three-year regulation is set to expire in 2014 so Air Canada, with the agreement of five labour groups, is now asking the federal government to cap the past service payment at "acceptable levels" over the next decade or until the plans are no longer in deficit. Under the recent negotiations with its labour groups, Air Canada secured amendments to existing plans that will reduce liabilities and will put in place a hybrid pension regime for new employees consisting of both a defined-benefit and definedcontribution component, putting the airline at the forefront of pension reform that is bubbling through corporate Canada. "We had an awful lot of learning to do," says Headon. "Issues coming out of pension reform touch a large number of stakeholders." That meant making sure the large team, which included non-lawyers such as actuaries, tax experts, and managers, were kept up to speed on negotiations. "Lawyers are in a very good position to play a role to make sure the team has the information they need and are pulling in the same direction." INHOUSE 8/25/11 12:01:27 PM

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