Air Canada says its domestic pension plans had a small surplus as of Jan. 1, according to preliminary estimates — contrasting with the $3.7-billion solvency deficit a year earlier.

The airline says several factors contributed to the turnaround, including a 13.8 per cent return on investments in 2013, amended benefits that decreased the deficit by $970 million and a $225-million contribution by the company towards the solvency deficit.

The strong performance of North American markets last year boosted returns at most pension plans. 

Air Canada also applied an updated interest rate for calculating future pension obligations.

The new discount rate used in calculating future pension obligations as of Jan. 1 was 3.9 per cent, nearly a full percentage point higher than the 3.0 per cent rate used for the 2013 valuation.

The airline estimated that every 10-basis-point increase in the discount rate decreases the pension plan's liabilities by about $150 million.

The new rate reflected an increase in long-term bond rates, which are a major factor in calculating defined benefit pension plans like those at Air Canada.

Pension a long-time headache

Pension obligations have been a major drag on Canada's largest airline for many years, resulting in friction with Air Canada's labour unions at times as well as a significant operating expense.

"Air Canada's three primary pension objectives are to ensure our employees' and retirees' pensions are secure, the pension solvency deficit is eliminated and that the costs associated with maintaining the pension plans remain affordable, predictable and stable," said Calin Rovinescu, the company's president and chief executive.

"We have, over the past four years, made significant progress on all these objectives."

The company says a final estimate of its domestic pensions' financial health will be completed by the end of June.