TD Bank 2010 Annual Report Download - page 124

TD BANK GROUP ANNUAL REPORT 2010 FINANCIAL RESULTS122
PLAN ASSUMPTIONS
To develop the assumption for the expected long-term return on plan
assets for the Bank’s principal pension plans, the Bank considered the
historical returns and the future expectations for returns for each asset
class, as well as the investment policies of the principal pension plans.
This resulted in the selection of the assumption for the expected long-
term return on plan assets of 6.75% (2009 – 6.75%) for the Society
and 4.25% (2009 – 4.25%) for the Plan.
The rate of increase for health care costs for the next year used to
measure the expected cost of benefits covered for the principal non-
pension post-retirement benefit plan is 6.50%. The rate is assumed
to decrease gradually to 3.70% by the year 2028 and remain at that
level thereafter. For 2010, the effect of a one percentage point
increase or decrease in the health care cost trend rate on the benefit
expense is a $6 million increase and a $5 million decrease, respectively,
and on the benefit obligation, a $75 million increase and a $60 million
decrease, respectively.
INVESTMENT STRATEGY AND ASSET ALLOCATION
The primary objective of the Society and the TDPP is to achieve an
annualized real rate of return of 3.00% and 2.50%, respectively,
over rolling 10-year periods. The investment policies for the principal
pension plans are detailed below and exclude Pension Enhancement
Account (PEA) assets which are invested at the member’s discretion
in certain mutual funds. The investment policies and asset allocations
as at July 31 by asset category for the principal pension plans
(excluding PEA) are as follows:
(or equivalent) must not exceed 35% of the total fund. Asset backed
securities must have a minimum credit rating of AAA and must not
exceed 25% of the total fund. Substantially all assets must have
readily determinable fair values. The TDPP was in compliance with
its investment policy throughout the year.
RISK MANAGEMENT PRACTICES
The principal pension plans’ investments include financial instruments
which are exposed to various risks. These risks include market risk
(including foreign currency risk, interest rate risk, and price risk), credit
risk, and liquidity risk. The principal pension plans manage these finan-
cial risks in accordance with the Pension Benefits Standards Act, 1985,
applicable regulations, and the principal pension plans’ Statement of
Investment Policies and Procedures. The following are some specific
risk management practices employed by the principal pension plans:
• Monitoring credit exposure of counterparties
• Monitoring adherence to asset allocation guidelines
• Monitoring asset class performance against benchmarks
OTHER PENSION AND RETIREMENT PLANS
CT Pension Plan
As a result of the acquisition of CT Financial Services Inc. (CT), the Bank
sponsors a pension plan consisting of a defined benefit portion and a
defined contribution portion. The defined benefit portion was closed to
new members after May 31, 1987, and newly eligible employees joined
the defined contribution portion of the plan. Effective August 2002,
the defined contribution portion of the plan was closed to new contri-
butions from active employees and employees eligible for that plan
became eligible to join the Society. Funding for the defined benefit
portion is provided by contributions from the Bank and members of the
plan. For the defined contribution portion, annual pension expense is
equal to the Bank’s contributions to that portion of the plan.
For the principal pension plans and the principal non-pension
post-retirement benefit plan, actuarial valuations are prepared at least
every three years to determine the present value of the accrued benefit
liability. Pension and non-pension post-retirement benefit expenses
are determined based upon separate actuarial valuations using the
projected benefit method pro-rated on service and management’s best
estimates of expected long-term return on plan assets, compensation
increases, health care cost trend rate and discount rate, which are
reviewed annually by the Bank’s actuaries. The discount rate used to
value liabilities is based on long-term corporate AA bond yields as of
the measurement date. The expense includes the cost of benefits for
the current year’s service, interest expense on liabilities, expected
income on plan assets based on fair values and the amortization of
benefit plan amendments and actuarial gains or losses. Plan amend-
ments are amortized on a straight-line basis over the expected average
remaining service life of the active members for the principal pension
plans (10 years for the Society and 11 years for the Plan) and the
expected average remaining period to full eligibility for the principal
non-pension post-retirement benefit plan (7 years). The excess, if
any, of the net actuarial gain or loss over 10% of the greater of the
projected benefit obligation and the fair value of plan assets is also
amortized over the expected average remaining service life of the
active members (10 years for the Society, 11 years for the Plan, and
15 years for the principal non-pension post-retirement benefit plan).
The cumulative difference between expense and contributions is
reported in other assets or other liabilities.
The investment policy of the Society is a balanced portfolio. Debt
instruments of a single non-government entity must not exceed 10%
of the total debt portfolio. Non-government debt instruments gener-
ally must meet or exceed a credit rating of BBB at the time of purchase
and during the holding period except that up to 20% of the fair value
of the bond mandate managed to the DEX Universe Bond Index may
be invested in bonds with a credit rating below BBB. There are no limi-
tations on the maximum amount allocated to each credit rating within
the debt portfolio. Futures contracts and options can be utilized
provided they do not create financial leverage for the Society. The
Society invests in hedge funds, which normally will employ leverage
when executing their investment strategy. The equity portfolio is
broadly diversified primarily across medium to large capitalization qual-
ity companies and income trusts with no individual holding exceeding
10% of the equity portfolio at any time. Foreign equities and American
Depository Receipts of similar high quality may also be included to
further diversify the portfolio. Alternative investments include hedge
funds and private equities. Substantially all assets must have readily
determinable fair values. The Society was in compliance with its invest-
ment policy throughout the year. For 2010, the Society’s net assets
included private equity investments in the Bank and its affiliates which
had a fair value of $4 million (2009 – $4 million; 2008 – $9 million).
The investment policy of the TDPP, which commenced on March 1,
2009, is a high-quality, long-term fixed income portfolio. Debt instru-
ments of non-government entities must not exceed 80% of the total
fund and non-Canadian government entities must not exceed 20%
of the total fund. Debt instruments of a single non-government or
non-Canadian government entity must not exceed 10% of the total
fund. All debt instruments must meet or exceed a credit rating of BBB-
(or equivalent) at the time of purchase and during the holding period.
In addition, any debt instruments that are rated from BBB+ to BBB-
Investment Policy and Asset Allocation
Acceptable Range Asset Allocation
Society TDPP
Society TDPP 2010 2009 2008 2010 2009
Security
Debt 30% – 48% 95% – 100% 34% 33% 33% 100% 0%
Equity 35% – 65% 0% 55% 55% 57% 0% 0%
Alternative investments 0% – 15% 0% 7% 8% 8% 0% 0%
Cash equivalents 0% – 4% 0% – 5% 4% 4% 2% 0% 0%
Total 100% 100% 100% 100% 0%