Air Canada: Overview of Pension Arbitration Award

Air Canada: Overview of Pension Arbitration Award

December 19, 2011 at 9:00 AM
On September 17, 2011, Arbitrator Kevin Burkett released his decision in the dispute between CAW-Canada Local 2002 and Air Canada on the pension arrangements for new hires.
 
In a Final Offer Selection, Mr. Burkett selected the CAW proposal to maintain a defined benefit pension plan for new hires, along with a defined contribution plan.  Air Canada’s proposal was for a straight defined contribution pension for new hires.
 
It is a win for CAW Local 2002 members at Air Canada to keep a defined benefit pension for new hires.  The union can build on the plan in future negotiations.  
 
What is the new pension arrangement for new hires?
Effective July 27, 2011, new hires will have two parts to their pension:  a defined benefit and a defined contribution.  The defined benefit plan will be part of the Air Canada Main Line Pension Plan.  The Main Line Pension Plan is for current CAW members (as well as other union members such as IAMAW, CUPE, and CALDA).
 
Defined Benefit Pension Plan (Part 1)

The benefit will be a monthly pension of 0.595% of earnings up to the YMPE and 1% of excess earnings per year of service .  

The employee contributions will be 2% of earnings for the first 5 years; 2.5% of earnings for the next 10 years; and 3% of earnings thereafter.   The employer contributions are as  required to fund the benefit.

Current Air Canada CAW members contribute 5.7% of earnings up to the YMPE and 6% of earnings in excess to the defined benefit pension plan.   Their benefit is a monthly pension of 1.9% of earnings up to the YMPE and 2% of excess earnings per year of service. 


Defined Contribution Pension Plan (Part 2)

The Defined Contribution Plan has set employer and employee contributions.  There is no set benefit promise – the employee has the pool of funds accumulated through contributions and investment returns (which can go up or down depending on the market).  
 
The following table shows the percentage of the employee’s earnings that will be contributed to the defined contribution pension plan by the employee and the employer.  
 
 
                                                                        Employee's Years of Service
Contributions from:  1-2 years  3-5 years  6-15 years  15+ years
Employee    
      -Required    1.5% 1.5% 1.5%  1.5%
      -Optional 0.5%  0.5%  1.0% 1.5%
Total Employee Contributions   2.0% 2.0% 2.5% 3.0%
Employer Contribution    2.0%  2.75% 4.38% 5.25%
Employee + Employer Contribution  4.0%  4.75%  6.88%  8.25%
Employer match as percentage
of employee contribution 
 
100% 
 
137.5% 
175%  175% 
 

Here is an example of the annual contributions to the defined contribution plan.  In this case, the employee earns $20,000 per year and contributes the maximum allowable to the defined contribution plan. 
 
                                                                Employee's Years of Service
Contributions from:  1 – 2 years  3 – 5 years  6 – 15 years  15+ years
Employee  $460  $460  $575  $690
Employer  $460  $633  $1,006  $1,208
Total annual contribution to
employee defined contribution plan
$920  $1,093  $1,581  $1,898
 
 
What will the final pension be for the new hires?
Remember, the union’s proposal to keep a defined benefit pension was based on the premise to improve the pension in future negotiations.  Presumably new hires will have some time to improve the defined benefit plan before they are at retirement age.

Without any improvements in the pension plans, a new hire starting at age 29 and could retire at age 57 and 28 years of service with an unreduced defined benefit pension (ie, the member would have age 55 and 85 points).  If their earnings are $23,430 to start, their combined pension plans could provide a pension that replaces 32% of their earnings.  Under the rules of the defined benefit for current members, the new hire would have a pension replacing 53% of earnings. 

In addition, the retiree would be eligible for Canada/Quebec Pension Plan benefits at age 60 and Old Age Security at age 65.

Why does the CAW-Canada consider the arbitration award "a win”?
The pension in the arbitration award is so much better than Air Canada’s proposal.   

First, the company contributions to the defined contribution plan are higher than Air Canada proposed.  Air Canada wanted a defined contribution plan with Air Canada matching 100% of the employee contributions.  Under the arbitration award, Air Canada will start matching the employee’s contributions at 100% but the company match increases to 137.5% of the employee’s contributions after 2 years and 175% of the employee’s contribution after 5 years.  

Second, as pointed out, the structure for a defined benefit remains in place to build on. 

Third, the defined benefit pension plan for new hires will be within the Air Canada Main Line Pension Plan for current employees – thus ensuring a continuing funding for the pension plan in the upcoming years.

Why did the CAW propose a split DB-DC pension to the arbitrator?  Isn’t it a bit complicated?
Yes, it is a complicated pension.  However, the circumstances made the DB-DC pension the best option for the union’s arbitration proposal.   

CAW Local 2002 members went on strike for three days in June 2011.  The CAW rejected Air Canada’s demand for a cut in the current pension plan and their demand for a defined contribution plan for new hires. 

The CAW and Air Canada reached a settlement on the pension plan for current employees within minutes of the Ministry of Labour’s back-to-work legislation being passed in Parliament.   The outstanding issue was the pension for new hires.  Air Canada wanted a defined contribution plan; the CAW wanted to a defined benefit plan for new hires.  The parties agreed to send the issue of a pension for new hires to Final Offer Selection arbitration.

In preparing our submission to Arbitrator Kevin Burkett, the union was cautious about the Final Offer Settlement.  We knew that the arbitrator was unlikely to select our proposal for the current defined benefit pension plan.  We would have to "come down.”  We focused on keeping a defined benefit pension plan which we could build on in future negotiations.  

The CAW looked at Air Canada’s last offer in negotiations for a defined contribution pension plan for new hires.   We took the contributions that Air Canada was prepared to make to a defined contribution plan and calculated what those contributions would give the new hire in a defined benefit pension plan.

Our actuary reported that the contributions to a defined benefit pension would provide a monthly pension of almost $2,000 for the new hire starting at $23,430 earnings per year and working 28 years to retire at age 57.  Those same contributions to a defined contribution plan would only provide a monthly annuity of $1,338. 

There are several reasons why the same dollars to a defined benefit pension plan provide a superior benefit compared to a defined contribution pension plan:

  • The defined benefit plan has better investment returns with professional management
  • The fees are lower for a large defined benefit plan compared to a defined contribution plan
  • With a defined contribution plan, the member can purchase an annuity (monthly pension) with their funds, but annuities are sold through insurance companies and tend to be expensive.
 
However, Air Canada did not want to take on ANY risk with a defined benefit pension plan.  Defined benefit plans do pose some risk to the employer.  If the market is poor in a particular year, Air Canada must make up any shortfall in a defined benefit pension plan.  Whereas, with a defined contribution pension plan, Air Canada has set contributions and if the market is poor, the member takes the hit on their pension fund.  

The arbitrator gave the union an opportunity to modify our original proposal.  We decided to "split the risk.”  We split our proposed defined benefit pension in half and we added half of Air Canada’s proposed defined contribution pension plan.  While the union’s proposal was reasonable in theory; in practice new hires have a complicated pension plan.  However, we believe that the "win” is to keep a defined benefit pension plan in place for new hires.  The union can negotiate improvements in future bargaining.   

In summary:

If the CAW Local 2002 members had had the opportunity to negotiate a settlement with Air Canada (without back to work legislation effectively dismissing our collective bargaining rights), we might have bargained something different on the pension for new hires.  The CAW will continue to join with other unions to lobby for the right to bargain collective agreements with employers. 

The union is not promoting the Air Canada pension for new hires for other negotiations.  We are pleased that we were able to maintain the defined benefit portion of the pension for new hires and will build on the defined benefit in future negotiations. 

Our position continues to be that defined benefit pensions are the best plans for workers. 

The DB/DC pension may be complicated for new hires to understand.  But this can be an opportunity for the pension committee and union leadership to work with new hires (and current members) to understand the new plan and see the importance of bargaining improvements.
 
 
For more information please contact [email protected]