Air Canada 2012 Annual Report Download - page 57

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2012 Management’s Discussion and Analysis
57
Composition of Pension Plan Assets
Domestic Registered Plans
The composition of the domestic registered plan assets and the target allocation as follows:
2012 2011 Target allocation(1)
Non-matched assets (mainly equities) 54.9% 53.0% 54.4%
Matched assets (mainly Canadian bonds) 45.1% 47.0% 45.6%
Total 100.0% 100.0% 100.0%
(1) Weighted average of the Master Trust Fund target allocation (99% of Domestic Registered Plan assets) and the Bond Trust Fund target allocation. The Bond Trust Fund
serves the purpose of altering the asset mix of some of the participating plans. These plans exhibit characteristics that differ from the majority of the participating plans,
which are solely invested in the Master Trust.
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 of the Fund 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 hedging 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% derivative exposure to matched assets is in place to hedge interest rate risk
related to pension liabilities.
Similar investment policies are established for the international pension plans sponsored by Air Canada.
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.
Air Canada's 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. Management reviewed anticipated future long-
term performance of individual asset categories and considered 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. While the review considers
recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.