CAPÍTULO N 5 PLAN ESTRATÉGICO
5.3 DEFINICIÓN DE OBJETIVOS COMUNICACIONALES 5.3.1 Objetivo General
The Company provides certain pension and other post-employment benefits through defined benefit, defined contribution and other post-employment benefit plans to eligible participants upon retirement.
Prior to fiscal 2013, ad hoc, discretionary indexation increases were granted to retirees in the defined benefit pension plans. Effective December 31, 2013, no further ad hoc increases are expected to be granted in the foreseeable future. The effect of this change resulted in a negative past service cost being recognized, resulting in a reduction to the benefit obligation and the net period cost of $20.5 million for 2013. The reduction in the net period cost was recognized in “Other (expense) income”.
During the year, the Company continued its Business Transformation Program which resulted in further employee separations, triggering a further plan curtailment. The effect of the curtailment was a reduction in the defined benefit pension obligation of $1.3 million (2013: $4.7 million) and a reduction in the other post-employment benefit obligation of $0.2 million (2013: $1.4 million). This also resulted in a reduction in the net period cost of $1.5 million for 2014 (2013: $6.1 million), which was recognized within “Other (expense) income”.
The contributory defined benefit pension plans provide pension benefits based on length of service and final average pensionable earnings. The most recent actuarial valuation was prepared as of January 1, 2012. The contribution to be paid by the Company is determined each year by the Company’s pension actuaries. The Company’s funding policy is to make contributions in amounts that are required to discharge the benefit obligations over the life of the plan. Discretionary pension contributions for the year ended December 31, 2014 were nil (2013: nil). Based on the latest actuarial valuations of all its plans, the total contributions by the Company to the pension plans are expected to be approximately $10.1 million in 2015. The contributions are expected to be made in the form of cash. The plans are regulated by the Financial Services Commission of Ontario.
Plan assets associated with the pension plans are funded pursuant to a trust agreement through a trust company as selected by the Company. Ultimate responsibility for governance of the plan lies with the Company’s Board of Directors and specifically with the Investment Committee, and the Human Resources and Compensation Committee. Regular administration duties are delegated to the Pension Management Committee as appropriate.
Under the defined contribution component of the plan, the Company contributes a fixed percentage of an employee’s pensionable earnings to the plan. Contributions under the defined contribution component of the plan totaled $8.8 million (2013: $9.1 million). (a) Plan movements
The following table presents the movement of the Company’s pension plan and other benefit plan obligations and plan assets during the year.
(in thousands of dollars)
2014
Amounts recognized
in net income recognized in OCI (Gains) losses Present value of benefit plan obligation Fair value of plan assets Other benefit
plans Pension plans Pension plans
Balance, beginning of year $ 54,530 $ 165,345 $ 189,842
Total service cost $ 5,322 $ - 2,068 3,254
Interest cost 10,102 - 2,602 7,500
Interest income (2,794) - - - 2,794
Return on plan assets excluding interest
income (6,039) (8,060) - - 14,099
Curtailment (1,508) - (201) (1,307)
Actuarial losses (gains)
Due to changes in demographic
assumptions (602) 1,330 249 479
Due to changes in financial assumptions (115) 28,453 7,659 20,679
Due to experience losses - (517) (517) -
Contributions by employer - - - - 5,486
Administration cost 777 - - - (777)
Contributions by plan participants - - - 577 577
Benefit paid - - (1,147) (8,861) (8,861)
(in thousands of dollars)
2013
Amounts recognized
in net income recognized in OCI (Gains) losses Present value of benefit plan obligation Fair value of plan assets Other benefit
plans Pension plans Pension plans
Balance, beginning of year $ 52,211 $ 189,359 $ 173,058
Total service cost $ 5,983 $ - 1,985 3,998 -
Interest cost 10,585 - 2,316 8,269 -
Interest income (2,767) - - - 2,767
Return on plan assets excluding interest
income (5,188) (11,583) - - 16,771
Past service cost (20,529) - - (20,529) -
Curtailment (6,073) - (1,387) (4,686) -
Actuarial losses (gains)
Due to changes in demographic
assumptions (880) 12,253 1,126 10,247 -
Due to changes in financial assumptions (187) (10,081) (254) (10,014) -
Due to experience losses - (352) (352) - -
Settlements 370 - - 370 -
Contributions by employer - - - - 9,746
Administration cost 831 - - - (831)
Contributions by plan participants - - - 541 541
Benefit paid - - (1,115) (12,210) (12,210)
Balance, end of year $ (17,855) $ (9,763) $ 54,530 $ 165,345 $ 189,842 Of the amounts recognized in net income, $6.7 million (2013: $8.7 million) in expenses were recorded in “Operating expenses” and a curtailment gain of $1.5 million (2013: $6.1 million) and a negative past service cost of nil (2013: $20.5 million) were recorded in “Other (expense) income”.
The actual return on plan assets was $16.9 million (2013: $19.5 million). (b) Funding status of defined benefit plans
The amounts recognized for pension plans in the consolidated balance sheet in “Other assets” at the reporting date are as follows:
(in thousands of dollars)
2014
2013
2012
2011
2010
Defined benefit obligation $ (187,666) $ (165,345) $ (189,359) $ (176,049) $ (158,017) Fair value of plan assets 203,160 189,842 173,058 158,152 155,510 Net defined benefit asset (obligation) $ 15,494 $ 24,497 $ (16,301) $ (17,897) $ (2,507) Actuarial (gains) losses on plan assets $ (8,060) $ (11,583) $ (1,802) $ 7,003 $ (1,553) Actuarial losses on plan liabilities $ 21,158 $ 233 $ 6,188 $ 9,766 $ 24,043
The amounts recognized for other benefit plans in the consolidated balance sheet in “Accounts payable and other liabilities” at the reporting date are as follows:
(in thousands of dollars)
2014
2013
2012
2011
2010
Defined benefit obligation $ (65,243) $ (54,530) $ (52,211) $ (58,693) $ (51,442) Actuarial losses on plan liabilities $ 7,391 $ 520 $ 4,162 $ 2,322 $ 10,149 (c) Maturity analysis of defined benefit obligations
The weighted average duration of the pension plan obligation is 16 years (2013: 15 years) and the weighted average duration of the other benefit plans obligation is 18 years (2013: 17 years).
The expected maturity of the defined benefit obligations are as follows:
(in thousands of dollars)
2014
Less than 1 year 1 5 years 6-10 years 10 years + Total
Pension plans $ 7,496 $ 37,763 $ 37,208 $ 105,199 $ 187,666
Other benefit plans 1,710 9,006 10,138 44,389 65,243
$ 9,206 $ 46,769 $ 47,346 $ 149,588 $ 252,909
(in thousands of dollars)
2013
Less than 1 year 1 5 years 6-10 years 10 years + Total
Pension plans $ 6,693 $ 33,280 $ 32,718 $ 92,654 $ 165,345
Other benefit plans 1,566 8,021 8,946 35,997 54,530
$ 8,259 $ 41,301 $ 41,664 $ 128,651 $ 219,875 (d) Pension plan asset allocation
The table below shows the allocation of defined benefit pension plan assets:
(in thousands of dollars)
2014
2013
Cash $ 1,128 0.6% $ 8,160 4.3%
Canadian fixed income securities (investment grade)
Government of Canada 33,696 16.6 24,021 12.7
Provincial and municipal 22,803 11.2 13,688 7.2
Corporate 21,526 10.6 26,055 13.7
Pooled equity funds
Canadian 53,427 26.3 49,563 26.1
Foreign 63,196 31.1 61,048 32.2
Other 7,384 3.6 7,307 3.8
$ 203,160 100.0% $ 189,842 100.0%
(e) Assumptions applied
The principal actuarial assumptions used in determining the defined benefit obligation for the Company’s pension plans are follows:
Other benefit plans
Pension plans
2014 2013 2014 2013
To determine benefit obligation, end of year
Discount rate 4.1% 4.9% 4.0% 4.8%
Future salary increases - - 3.0% 3.0%
Future pension increases - - 0.0% 0.0%
Inflation assumption - - 2.0% 2.0%
Prescription drug cost increase 8.6% 8.8% - -
Medical claims cost increase 4.5% 4.5% - -
To determine benefit expense for the year
Discount rate 4.9% 4.6% 4.8% 4.5%
Future salary increases - - 3.0% 3.0%
Future pension increases - - 0.0% 1.0%
Inflation assumption - - 2.0% 2.0%
Prescription drug cost increase 8.8% 9.0% - -
Medical claims cost increase 4.5% 4.5% - -
The mortality assumptions used to assess the Company’s defined benefit obligations for the pension and other post-employment benefit plans as of December 31, 2014 are based on the Canadian Pensioner Mortality – Private Sector mortality tables (2013: 85% of the 1994 UP mortality tables) as established by the Canadian Institute of Actuaries.
The discount rate is the assumption that has the largest impact on the value of these obligations. The impact of a 1% change in this rate is as follows:
(in thousands of dollars)
2014
2013
Impact on + 1% - 1% + 1% - 1%
Defined benefit obligation – pension plans $ (25,677) $ 32,064 $ (21,843) $ 26,480 Defined benefit obligation – other benefit plans (9,815) 12,510 (7,918) 10,052 This impact is calculated by performing a calculation of the liabilities as at December 31, 2014 using a discount rate 1% higher or lower than the discount rate used, holding all other assumptions constant.
The impact of a 1% change in the health care cost assumption is as follows:
(in thousands of dollars)
2014
2013
Impact on + 1% - 1% + 1% - 1%
Defined benefit obligation – other benefit plans $ 12,312 $ (9,712) $ 9,448 $ (7,511) Aggregate of total service cost and interest cost 956 (748) 821 (648) This impact is calculated by performing a calculation of the liabilities as at December 31, 2014 using a health care cost 1% higher or lower than the health care cost increase used, holding all other assumptions constant.
(f) Risks arising from post-employment benefits
The key risks to which the Company is exposed to as a result of sponsoring the defined benefit pension plans and other post- employment benefit plans are as follows:
(i) Inflation risk – Inflation can increase the cost of benefits provided under post-employment benefits and result in higher benefit obligations. As the return on plan assets is indirectly influenced by inflation, an increase in inflation would not result in a corresponding increase in the value of plan assets.
(ii) Interest rate risk – Changes in interest rates will influence discount rates resulting in an inverse change in benefit obligations. For the defined benefit plan, interest rate changes would also have an inverse change on the fair value fixed income security assets thereby somewhat offsetting the impact of the change in discounting of the benefit obligations.
(iii) Equity market price risk – As discussed in note 7, economic trends, the political environment and other factors can positively or adversely impact the equity markets and consequently the value of equity investments held by the defined benefit plan. If equity market returns exceed or lag behind the discount rates, the net defined benefit obligation will be impacted.
(iv) Foreign exchange risk – Changes in foreign exchange rates will impact the fair value of foreign pooled equity funds held by the defined benefit plan. A decrease in the value of foreign currencies relative to the Canadian dollar will decrease the fair value of foreign pooled equity funds, increasing the net defined benefit obligation. An increase in the value of foreign currencies relative to the Canadian dollar will have an inverse effect.
(v) Life expectancy risk – Changes in life expectancy will impact the amount of benefits provided under post-employment benefits resulting in a change in the benefit obligation. An increase in life expectancy will increase the amount of benefits provided under post- employment benefits resulting in an increase in the benefit obligation. A decrease in the life expectancy will have an inverse effect.
19. CAPITAL MANAGEMENT
Management develops the capital strategy for the Company and supervises the capital management processes. The Board of Directors is responsible for overseeing management’s compliance with the capital management policies. As a federally regulated property and casualty insurance company, the Company’s capital position is monitored by OSFI. OSFI evaluates the Company’s capital adequacy through the minimum capital test (“MCT”), which measures available capital against required risk-weighted capital. Available capital comprises total equity plus or minus adjustments prescribed by OSFI. Capital required is calculated by applying risk factors to the assets and liabilities of the Company. As at the reporting date, the Company’s MCT ratio of 295.4% significantly exceeds the minimum capital ratio of 150% required by OSFI.
Management actively monitors the MCT and the effect that external and internal actions have on the capital base of the Company. In particular, management determines the effect on capital before entering into any significant transactions to ensure that policyholders are not put at risk through the depletion of capital to unacceptable levels. The Board of Directors reviews the MCT on a quarterly basis. In accordance with regulatory requirements and the Company’s capital management policies, the Board of Directors has set internal targets at levels higher and more stringent than OSFI’s minimum requirements. Management also conducts its own risk solvency assessment on at least an annual basis and provides regular updates to its management risk committee, the risk review committee as well as the Board of Directors.
Reinsurance is also used to protect the Company’s capital level from large losses, including those of a catastrophic nature, which could have a detrimental impact on capital. The Company has adopted policies that specify tolerance for financial risk retention. Once the retention limits are reached, as disclosed in note 10, reinsurance is utilized to cover the excess risk.
On at least an annual basis, the Company performs stress testing, including Dynamic Capital Adequacy Testing, on the Company’s capital position to ensure that the Company has sufficient capital to withstand a number of significant adverse scenarios.