Air Canada 2008 Annual Report Download - page 66

2008 Air Canada Annual Report
66
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 approximately match the timing and amount of expected
benefit payments. An increase of 0.25% results in a decrease of $305 million to the pension obligation and $10 million to
the pension expense. A decrease of 0.25% results in an increase of $313 million to the pension obligation and $9 million
to the pension expense.
Expected Return on Assets Assumption
Air Canada’s expected long-term rate of return on assets assumption is selected based on the facts and circumstances that
existed 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 recent fund performance, including the
significant drop in the value of plan assets during 2008, and historical returns, to the extent that the past is indicative of
the expected long-term, prospective rate. There can be no assurance that the plan will earn the assumed rate of return. A
sensitivity analysis on pension expense assuming a change in the expected return on plan assets is provided below.
Asset Allocation
The composition of the domestic registered plan assets and the target allocation consists of the following:
2008 2007 Target
allocation
Equity 52.9 % 58.9 % 59.0 %
Bonds and Mortgages 43.5 % 36.1 % 41.0 %
Cash and temporary investments 3.6 % 5.0 % 0.0 %
Total 100.0 % 100.0 % 100.0 %
Domestic Registered Plans
For the domestic registered plans, the investments conform to the Statement of Investment Policy and Objectives of the
Air Canada Pension Master Trust Fund (Fund). The investment return objective of the Fund is to achieve a total annualized
rate of return that exceeds inflation by at least 3.75% over the long term.
In addition to the broad asset allocation, as summarized in the asset allocation section above, the following policies apply
to individual asset classes:
• Equity investments can include convertible securities and are required to be diversied among industries and
economic sectors. Foreign equities can comprise 37% to 43% of the total market value of the trust. Limitations are
placed on the overall allocation to any individual security at both cost and market value. Derivatives are permitted
to the extent they are not used for speculative purposes or to create leverage.
• Bondandmortgageinvestmentsareorientedtowardriskaverse,long-term,investmentgradesecuritiesrated“A”
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, fixed income investments are required to be diversified among individual
securities and sectors. The target return is comprised of 40% of the total return of the Scotia Capital Universe Bond
Index and 60% of the total return of the Scotia Capital Long Term Bond Index.
Similar investment policies are established for the other pension plans sponsored by Air Canada.