March 12, 2013 / 11:10 PM / in 5 years

Air Canada wins extension on cap on special pension payments

OTTAWA (Reuters) - Air Canada ACb.TO won a seven-year extension on Tuesday of the cap on special payments to erase its sizeable pension fund deficit, but will have to make higher payments than it originally requested and abide by certain conditions.

An Air Canada aircraft takes off after snowfall at Heathrow airport in London January 21, 2013. REUTERS/Neil Hall

Finance Minister Jim Flaherty said the airline, which had sought to limit its special payments to C$150 million ($145.6 million) a year for 10 years, will have to pay a total of C$1.4 billion over seven years, or an average of C$200 million a year, with a minimum of C$150 million a year.

Executive compensation at the troubled airline, Canada’s largest, will only be allowed to grow at the rate of inflation, special bonuses will be prohibited and limits will be imposed on executive incentive plans, the Finance Department said.

The airline said in a release: “During the time the regulations are in force, Air Canada will be subject to a series of covenants and undertakings, including no dividends and share repurchases, certain limitations on executive compensation arrangements and no pension plan benefit improvements without regulatory approval.”

In 2009, Air Canada won agreement from the government for a moratorium on making any special payments to reduce its pension deficit through 2010, and then a cap on special payments that would rise from C$150 million in 2011 to C$225 million in 2013.

That deal, which sought to address a major gap in its defined benefit plans as interest rates and yields declined, expires at the end of January 2014, and the new arrangement goes through to the end of January 2021.

Reporting by Randall Palmer; Editing by Eric Walsh and Cynthia Osterman

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