Bank of Montreal 2013 Annual Report Download - page 157

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the change in our benefit liabilities year over
year and our pension and other employee future benefit expense are
as follows:
Benefits earned by employees represent benefits earned in the
current year. They are determined with reference to the current
workforce and the amount of benefits to which employees will be
entitled upon retirement, based on the provisions of our benefit plans.
Interest cost on benefit liabilities represents the increase in the
liabilities that results from the passage of time.
Actuarial gains or losses may arise in two ways. First, each year
our actuaries recalculate the benefit liabilities and compare them to
those estimated as at the previous year end. Any differences that result
from changes in assumptions or from plan experience being different
from management’s expectations at the previous year end are
considered actuarial gains or losses. Secondly, actuarial gains and losses
arise when there are differences between expected and actual returns
on plan assets.
At the beginning of each year, we determine whether the
unrecognized actuarial gain or loss is more than 10% of the greater of
our plan asset or benefit liability balances. Any unrecognized actuarial
gain or loss in excess of this 10% threshold is recognized in employee
compensation expense over the expected remaining service period of
active employees. Amounts below the 10% threshold are not
recognized in income.
Plan amendments are changes in our benefit liabilities that result
from changes to provisions of the plans. The effects of plan
amendments are recognized immediately to the extent that benefits are
vested and are otherwise recognized over the average period until
benefits are vested on a straight-line basis.
Expected return on assets represents management’s best
estimate of the long-term rate of return on plan assets applied to the
fair value of plan assets. We establish our estimate of the expected rate
of return on plan assets based on the plan’s target asset allocation and
estimated rates of return for each asset class. Estimated rates of return
are based on expected returns from fixed income securities, which take
into consideration bond yields. Long-term returns are then estimated for
Summarized information for the past three years is as follows:
(Canadian $ in millions)
global equity markets. Returns from other asset classes are set to reflect
the relative risks of these classes as compared to fixed income and
equity assets. Differences between expected and actual returns on
plan assets are included in our actuarial gain or loss balance, as
described above.
Settlements occur when benefit liabilities for plan participants are
settled, usually through lump sum cash payments, and as a result we no
longer have any obligation to provide such participants with benefit
payments in the future.
For pension benefit plans that are in a net benefit asset position,
the recognized asset is limited to the total of any unrecognized actuarial
losses and past service costs plus the present value of economic
benefits available in the form of future refunds from the plan or
reductions in future contributions to the plan (the “asset ceiling”).
Funding of Pension and Other Employee Future Benefit
Plans
Our defined benefit pension plans in Canada and the United States are
funded by us in accordance with statutory requirements and the assets
in these plans are used to pay benefits to retirees.
Our supplementary pension plans in Canada are funded, while in
the United States the supplementary plan is unfunded.
Our other employee future benefit plans in the United States and
Canada are either partially funded or unfunded. Pension and benefit
payments related to these plans are either paid through the respective
plan or paid directly by us.
We measure the fair value of plan assets for our plans in Canada
and the United States as at October 31. In addition to actuarial
valuations for accounting purposes, we are required to prepare
valuations for determining our pension contributions (our “funding
valuation”). The most recent funding valuation for our main Canadian
plan was performed as at October 31, 2013. The next funding valuation
for this plan will be performed as at October 31, 2014. An annual
funding valuation is also required for our plan in the United States. The
most recent valuation was performed as at January 1, 2013.
Pension benefit plans Other employee future benefit plans
2013 2012 2011 2013 2012 2011
Defined benefit liability 6,181 6,012 5,124 1,174 1,175 977
Fair value of plan assets 6,267 5,802 5,338 95 81 72
Surplus (deficit) 86 (210) 214 (1,079) (1,094) (905)
(Gain) loss in the benefit liability arising from changes in
assumptions (93) 693 73 (53) 152 (66)
Excess (shortfall) of actual returns over expected returns on plan
assets 188 177 (87) 5 4 1
Notes
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Asset Allocations
The investment policy for plan assets is to have a diversified mix of
quality investments that are expected to provide a superior rate of
return over the long term, while limiting performance volatility. Plan
assets are rebalanced within ranges around target allocations.
Risk Management
The plans are exposed to various risks, including market risk (interest
rate, equity and foreign currency risks), credit risk, operational risk,
surplus risk and longevity risk. We follow a number of approaches to
monitor and actively manage these risks, including:
‰ Monitoring surplus-at-risk, which measures a plan’s risk in an asset-
liability framework.
‰ Stress testing and scenario analyses to evaluate the volatility of the
plans’ financial positions and their impact on the bank.
‰ Hedging of currency exposures and interest rate risk within
policy limits.
‰ Controls related to asset mix allocations, geographic allocations,
portfolio duration, credit quality, liquidity, sector guidelines, issuer/
counterparty limits, and others.
‰ Ongoing monitoring of exposures, performance and risk levels.
168 BMO Financial Group 196th Annual Report 2013