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The Globe and Mail

When it comes to saving pensions, Flaherty’s meddling is not all bad

You have to wonder if there is some truth to the rumours that Finance Minister Jim Flaherty just wrote his last budget.

Mr. Flaherty has been known to put his nose in other people's business on occasion. Recently, however, there is a sense of urgency in his interventions, as if it were his last chance to put his imprint on Canada.

Despite recent evidence that the real estate market is cooling and that Canadians have curbed their appetite for new debt, Mr. Flaherty interfered in the mortgage market by restraining lenders from competing on rates. In the budget, he also reclaimed a big chunk of the money Ottawa sends to the provinces for labour training, opening up a jurisdictional dispute where there was none on the yet-to-be-substantiated grounds that provinces are doing a dreadful job.

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The meddling of Mr. Flaherty is uncharacteristic of the Conservatives, who are traditionally allergic to political interference and who have favoured a more supple federalism. And yet, of all of his recent moves that have raised eyebrows, one is bang-on right: granting pension relief to Air Canada with strong strings attached.

Air Canada's pension plans are facing a crushing solvency deficit, pegged at $4.2-billion in January, 2012. There is no reason to believe that things have improved, even if stock markets have since shot up. Interest rates, which determine how much cash is needed to meet future obligations (the lower the discount rate is, the more you need), are still at rock bottom.

Air Canada got some breathing room with a deal that grants it seven years to meet its pension obligations. The carrier will only have to contribute $200-million per year, on average, on top of its regular payments. But there are conditions. Air Canada can't repurchase its shares or pay out dividends, and its executives may have to make do with less extras. Pay raises will be limited to inflation, special bonuses are out and incentive plans are curbed.

WestJet Airlines' president, Gregg Saretsky, condemned the agreement, saying it gives Air Canada a "special treatment," at the "expense of other industry players." This is rich coming from an airline that offers a far less generous retirement plan.

The fact is this deal does not cost taxpayers a cent. Besides, Air Canada is not the first to negotiate a special agreement because of a challenging business environment. Most governments have given pension managers more time. In Quebec, 60 per cent of the roughly 750 defined-benefit retirement plans have availed themselves of a 2009 law which granted them 10 years instead of five to tackle their pension deficit. Two pulp and paper producers, Resolute Forest Products and Krueger, got even more time through special deals, and the newspaper La Presse is now asking for the same.

Moreover, all those special agreements came with conditions. For instance, Resolute has to make 60 per cent of its investments in Quebec, keep its headquarters in the province, limit executive compensation and pay no dividend as long as its solvency deficit remains under 80 per cent.

This is not a misguided intervention in a populist bid to gain votes with some CEO-bashing. No bank would give you more time to repay your mortgage without asking for something in return. And should a bank be so extraordinarily kind, it would make sure you didn't sail off on a cruise in the Caribbean come winter.

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Strong conditions are even more important in Air Canada's case. Does the name Robert Milton ring a bell? The airline's former president made $39-million in special bonuses in 2006 and 2007 when he stripped the company of its best cash-flow businesses. Erring on the side of caution with Air Canada is not paranoia. Of course, an executive pay freeze won't fill the pension hole alone. But nothing makes an executive run faster than when his bonus is at stake.

Some have argued that Air Canada's pension plans are too generous. While that might have been true, this is no longer the case. The airline's main unions stripped their defined pension's plans when they renewed their contracts in 2011. Once the concessions come into effect, Air Canada's solvency deficit will drop by $1.1-billion based on the 2012 figures.

Besides the 26,000 workers it employs, Air Canada supports 30,600 retirees. They would face great hardship if their pensions were cut. When companies go belly up, like Nortel did, the pensioners are the last to be seated at the table, as the Supreme Court of Canada confirmed. They are lucky to get crumbs.

Helping out struggling companies while protecting the pension plans of thousands of workers overrides all the criticism the Air Canada deal has attracted. And so it is that on company pensions, Mr. Flaherty can meddle all he wants.

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