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17. POST-EMPLOYMENT BENEFITS

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.

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, 2016. 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, 2016 were nil (2015: 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 $2.5 million in 2017. 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 Management Pension Committee as appropriate.

Under the defined contribution component of the pension plan, the Company contributes a fixed percentage of an employee’s pensionable earnings to the plan. Contributions under the defined contribution component of the pension plan totalled $10.7 million (2015: $9.7 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.

2016 Pension Plan Movement
2016 (in thousands of dollars)
  Amounts recognized
in net (loss) income
(Gains) losses
recognized in OCI
Present value of
benefit plan obligation
Fair value of
plan assets
          Other
benefit
plans
Pension
plans
Pension
plans
Balance, beginning of year         $ 55,496 $ 193,296 $ 203,391
Total service cost $ 4,008 $   731   3,277  
Interest cost   9,511     2,117   7,394  
Interest income   Loss: (14,609)         14,609
Return on plan assets excluding interest income   6,832   Gain: (5,004)       Loss: (1,828)
Actuarial losses (gains)
Due to changes in financial assumptions   215   2,760   216   2,759  
Due to experience losses   Loss: (132)   Gain: (481)   Loss: (613)    
Contributions by employer           1,208
Administration cost   572         Loss: (572)
Contributions by plan participants         452   452
Benefits paid       Loss: (1,229)   Loss: (7,804)   Loss: (7,804)
Balance, end of year $ 6,397 $ Gain: (2,725) $ 56,718 $ 199,374 $ 209,456
2015 Pension Plan Movement
2015 (in thousands of dollars)
  Amounts recognized
in net income
Losses (gains)
recognized in OCI
Present value of
benefit plan obligation
Fair value of
plan assets
          Other 
benefit
plans
Pension
plans
Pension plans
Balance, beginning of year         $ 65,243 $ 187,666 $ 203,160
Total service cost $ 4,057 $   938   3,119  
Interest cost   9,985     2,625   7,360  
Interest income   Loss: (6,517)         6,517
Return on plan assets excluding interest income   Loss: (1,532)   2,353       Loss: (821)
Curtailment          
Actuarial (gains) losses
Due to changes in demographic assumptions   Loss: (27)   Gain: (4)   Loss: (31)    
Due to changes in financial assumptions   Loss: (90)   Gain: (3,040)   Loss: (5,834)   2,704  
Due to experience losses     Gain: (5,364)   Loss: (6,303)   939  
Contributions by employer           3,678
Administration cost   651         Loss: (651)
Contributions by plan participants         449   449
Benefits paid       Loss: (1,142)   Loss: (8,941)   Loss: (8,941)
Balance, end of year $ 6,527 $ Gain: (6,055) $ 55,496 $ 193,296 $ 203,391

Of the amounts recognized in net (loss) income, $6.4 million (2015: $6.5 million) in expenses were recorded in “Operating expenses”.

The actual return on plan assets was $12.8 million (2015: $5.7 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:

2016 Other Assets
(in thousands of dollars) 2016 2015
Defined benefit obligation $ Loss: (199,374) $ Loss: (193,296)
Fair value of plan assets   209,456   203,391
Net defined benefit asset $ 10,082 $ 10,095
Actuarial (gains) losses on plan assets $ Loss: (5,004) $ 2,353
Actuarial losses on plan liabilities $ 2,759 $ 3,643

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:

2016 Accounts payable and other liabilities
(in thousands of dollars) 2016 2015
Defined benefit obligation $ Loss: (56,718) $ Loss: (55,496)
Actuarial gains on plan liabilities $ Loss: (397) $ Loss: (12,168)

(c) Maturity analysis of defined benefit obligations

The weighted average duration of the pension plan obligation is 14 years (2015: 15 years) and the weighted average duration of the other benefit plans obligation is 16 years (2015: 17 years).

The expected maturity of the defined benefit obligations are as follows:

2016 Expected maturity of the defined benefit obligations
2016 (in thousands of dollars)
  Less than 1 year 1-5 years 6-10 years 10 years + Total
Pension plans $ 7,574 $ 38,890 $ 40,950 $ 111,960 $ 199,374
Other benefit plans   1,775   7,437   9,519   37,987   56,718
  $ 9,349 $ 46,327 $ 50,469 $ 149,947 $ 256,092
2015 Expected maturity of the defined benefit obligations
2015 (in thousands of dollars)
  Less than 1 year 1-5 years 6-10 years 10 years + Total
Pension plans $ 7,818 $ 38,535 $ 39,564 $ 107,379 $ 193,296
Other benefit plans   1,616   6,664   8,766   38,450   55,496
  $ 9,434 $ 45,199 $ 48,330 $ 145,829 $ 248,792

(d) Pension plan asset allocation

The table below shows the allocation of defined benefit pension plan assets:

2016 Allocation of defined benefit pension plan
(in thousands of dollars) 2016 2015
Cash $ 6,663 3.2% $ 1,728 0.8%
Canadian fixed income securities (investment grade)
Government of Canada   23,025 11.0%   35,189 17.3%
Provincial and municipal   24,075 11.5%   24,022 11.8%
Corporate   28,353 13.5%   21,375 10.5%
Pooled equity funds
Canadian   55,929 26.7%   43,848 21.6%
Foreign   65,072 31.1%   69,908 34.4%
Other   6,339 3.0%   7,321 3.6%
  $ 209,456 100.0% $ 203,391 100.0%

Of the corporate bonds held in the pension plan, 67.9% (2015: 58.5%) are concentrated in the financial services industry, 9.7% (2015: 25.8%) are concentrated in industrial and 22.4% (2015: 15.7%) are concentrated in utilities.

The Company undertakes an asset-liability study as deemed necessary. The goal of the asset-liability study is to balance the expected long term cost of the plan with the risk tolerance of the Company. To achieve this balance, the assets in the plan are allocated to fixed income securities, foreign equities and Canadian equities.

(e) Assumptions applied

The principal actuarial assumptions used in determining the defined benefit obligation for the Company’s pension plans are follows:

2016 Defined benefit obligation
  Other benefit plans Pension plans
  2016 2015 2016 2015
To determine benefit obligation, end of year:
Discount rate 3.9% 3.9% 3.8% 3.9%
Future salary increases 3.0% 3.0%
Future pension increases 0.0% 0.0%
Inflation assumption 2.0% 2.0%
Prescription drug cost increase 8.0% 8.0%
Medical claims cost increase 4.5% 4.5%
To determine benefit expense for the year:
Discount rate 3.9% 4.1% 3.9% 4.0%
Future salary increases 3.0% 3.0%
Future pension increases 0.0% 0.0%
Inflation assumption 2.0% 2.0%
Prescription drug cost increase 8.0% 8.6%
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, 2016 are based on the Canadian Pensioner Mortality – Private Sector 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:

2016 Discount rate
(in thousands of dollars) 2016 2015
Impact on: +1% -1% +1% -1%
Defined benefit obligation – pension plans $ Loss: (24,810) $ 30,737 $ Loss: (24,634) $ 30,612
Defined benefit obligation – other benefit plans $ Loss: (7,940) $ 9,989 $ Loss: (7,980) $ 10,096

This impact is calculated by performing a calculation of the liabilities as at December 31, 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:

2016 Health care cost assumption
(in thousands of dollars) 2016 2015
Impact on: +1% -1% +1% -1%
Defined benefit obligation – other benefit plans $ 9,469 $ Loss: (7,598) $ 9,010 $ Loss: (7,234)
Aggregate of total service cost and interest cost $ 399 $ Loss: (345) $ 482 $ Loss: (386)

This impact is calculated by performing a calculation of the liabilities as at December 31, 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 – 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.