Air Canada 2009 Annual Report Download - page 60

2009 Air Canada Annual Report
60
Management makes a number of assumptions in the calculation of both the accrued benefi t obligation as well as the
pension costs:
December 31, 2009 December 31, 2008
Weighted average assumptions used to
determine the accrued benefi t liability
Discount rate 6.40 % 7.35 %
Rate of compensation increase (1) 2.50 % 2.50 %
Weighted average assumptions used to
determine the accrued benefi t cost
Discount rate 7.35 % 5.75 %
Expected long-term rate 7.15 % 7.15 %
Rate of compensation increase (2) 2.50 % 2.50 %
(1) As a result of the pay awards, a rate of compensation increase of 0% plus merit was used for years 2009 and 2010 in determining the net benefi t obligation for the pen-
sion plan and 2.50% plus merit for the remaining years.
(2) A rate of compensation increase of 0% plus merit was used in 2009 and in 2010 in determining the net benefi t pension expense and 2.50% plus merit for the
remaining years.
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 fl ows that approximately match the timing and amount of expected
benefi t payments. An increase in the discount rate of 0.25% results in a decrease of $346 million to the pension obligation
and $28 million to the pension expense. A decrease in the discount rate of 0.25% results in an increase of $346 million to
the pension obligation and $25 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 specifi c 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 benefi ts. The determination of the long-term rate considers recent fund performance, including the
signifi cant drop in the value of plan assets during 2008 and the partial recovery in 2009, 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. A sensitivity analysis on pension expense assuming a change in the expected
return on plan assets is provided below.
Composition of pension plan assets
The composition of the domestic registered plan assets and the target allocation are the following:
2009 2008 Target allocation (1)
Non-matched assets (mainly equities) 55.9 % 52.9 % 54.4 %
Matched assets (mainly Canadian bonds) 43.4 % 43.5 % 45.6 %
Cash and temporary investments 0.7 % 3.6 % 0.0 %
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 Fund target allocation. The Bond 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.