info on case analysis
Assignment #3
Air Canada Defined Benefit Pension Plan
The Required
1. Assess the financial risks posed by Air Canada’s defined benefit pension plan. (40 marks)
EXTERNAL SOURCES http://www.cbc.ca/news/canada/air-canada-s-great-pension-divide-1.978982 Employer must make up any plan shortfall: Air Canada already has had a large pension deficit
Employer’s responsibility to make sure the plan is properly funded to pay the promised benefits
More costly
http://umanitoba.ca/outreach/evidencenetwork/archives/6007
“First, interest rates are very low. So the value today of retirement income to be paid many years in the future is not as significantly discounted (e.g., at 4% versus 8%).
Second, because of the financial crisis of 2008/09 and the mediocre recovery, pension plan assets are worth less than they were expected to be and pension plans are in the hole — i.e., they owe more money to their employees than they have in the plan, (Air Canada has a $2.1B deficit and $3.2B for Canada Post).
Third, people are living longer and this means they collect pensions longer and company costs go up. Adding to the concerns is the ratio of retirees to active workers that is now about 1 to 1 in both Air Canada and Canada Post. This matters because the cash flow needed to pay benefits must come from worker contributions and investment returns. With the growing ratio of retirees to workers, the plan becomes more dependent on investment returns that are low today.”
http://www.pensions-institute.org/workingpapers/wp0821.pdf
“Employers bear the cost of increases in life expectancy, and they bear the risk of unexpected increases in life expectancy… Defined benefit plan actuaries may be under pressure from plan sponsors to use relative short life expectancy assumptions because those assumptions reduce the measured liability of defined benefit pension plans and improve the current measured and reported financial status of the plans and of the companies that
Air Canada Defined Benefit Pension Plan
The Required
1. Assess the financial risks posed by Air Canada’s defined benefit pension plan. (40 marks)
EXTERNAL SOURCES http://www.cbc.ca/news/canada/air-canada-s-great-pension-divide-1.978982 Employer must make up any plan shortfall: Air Canada already has had a large pension deficit
Employer’s responsibility to make sure the plan is properly funded to pay the promised benefits
More costly
http://umanitoba.ca/outreach/evidencenetwork/archives/6007
“First, interest rates are very low. So the value today of retirement income to be paid many years in the future is not as significantly discounted (e.g., at 4% versus 8%).
Second, because of the financial crisis of 2008/09 and the mediocre recovery, pension plan assets are worth less than they were expected to be and pension plans are in the hole — i.e., they owe more money to their employees than they have in the plan, (Air Canada has a $2.1B deficit and $3.2B for Canada Post).
Third, people are living longer and this means they collect pensions longer and company costs go up. Adding to the concerns is the ratio of retirees to active workers that is now about 1 to 1 in both Air Canada and Canada Post. This matters because the cash flow needed to pay benefits must come from worker contributions and investment returns. With the growing ratio of retirees to workers, the plan becomes more dependent on investment returns that are low today.”
http://www.pensions-institute.org/workingpapers/wp0821.pdf
“Employers bear the cost of increases in life expectancy, and they bear the risk of unexpected increases in life expectancy… Defined benefit plan actuaries may be under pressure from plan sponsors to use relative short life expectancy assumptions because those assumptions reduce the measured liability of defined benefit pension plans and improve the current measured and reported financial status of the plans and of the companies that