Air Canada 2012 Annual Report Download - page 115

2012 Consolidated Financial Statements and Notes
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For the Domestic Registered Plans, the investments conform to the Statement of Investment Policy and Objectives of the Air
Canada Pension Funds, as amended during 2012. The investment return objective is to achieve a total annualized rate of
return that exceeds by a minimum of 1.0% before investment fees on average over the long term (i.e. 10 years) the total
annualized return that could have been earned by passively managing the Liability Benchmark. The Liability Benchmark, which
is referenced to widely used Canadian fixed income performance benchmarks (DEX), is composed of a mix of the DEX
Universe Provincial Bond Index, DEX Long Term Provincial Bond Index and DEX Real Return Bond Index that closely matches
the characteristics of the pension liabilities.
In addition to the broad asset allocation, as summarized in the asset allocation section above, the following policies apply to
individual asset classes:
 Non-matched assets are mainly equities, and are required to be diversified among industries and economic sectors.
Foreign equities can comprise 25% to 39% of the total market value of the Master Trust Fund. Limitations are placed on
the overall allocation to any individual security. Investments in alternative investments are allowed up to 15% of the
total market value of the Master Trust Fund.
 Matched assets are mainly Canadian bonds, oriented toward long term investment grade securities rated "BBB" or higher.
With the exception of Government of Canada securities or a province thereof, in which the plan may invest the entire
fixed income allocation, these investments are required to be diversified among individual securities and sectors.
Derivatives are permitted provided that they are used for managing a particular risk (including interest rate risk related to
pension liabilities) or to create exposures to given markets and currencies and that counterparties have a minimum credit
rating of A. As of December 31, 2012, a 15% derivatives exposure to matched assets is in place to mitigate interest rate risk
related to pension liabilities.
Similar investment policies are established for the International pension plans sponsored by the Corporation.
The trusts for the supplemental plans are invested 50% in indexed equity investments, in accordance with their investment
policies, with the remaining 50% held by the Canada Revenue Agency as a refundable tax, in accordance with tax legislation.
Assumptions
Management is required to make significant estimates about actuarial and financial assumptions to determine the cost and
related liabilities of the Corporation’s employee future benefits.
Financial assumptions
Discount Rate
The discount rate used to determine the pension obligation was determined by reference to market interest rates on
corporate bonds rated "AA" or better with cash flows that approximate the timing and amount of expected benefit payments.
Expected Return on Assets Assumption
The expected long-term rate of return on assets assumption is selected based on the facts and circumstances that exist as of
the measurement date and the specific portfolio mix of plan assets. Air Canada’s management, in conjunction with its
actuaries, reviews anticipated future long-term performance of individual asset categories and considers the asset allocation
strategy adopted by Air Canada, including the longer duration in its bond portfolio in comparison to other pension plans.
These factors are used to determine the average rate of expected return on the funds invested to provide for the pension plan
benefits. The determination of the long-term rate considers a number of factors including recent fund performance, and
historical returns, to the extent that the past is indicative of the expected long-term, prospective rate. There can be no
assurance that any of the plans will earn the expected rate of return.
Future increases in compensation are based upon the current compensation policies and economic forecasts.