Air Canada 2009 Annual Report Download - page 61

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2009 Management’s Discussion and Analysis
61
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”) as amended during 2008. 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 fi xed 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 diversifi ed among industries and economic sectors.
Foreign equities can comprise 31% to 37% of the total market value of the Master Trust Fund. Limitations are
placed on the overall allocation to any individual security at both cost and market value. Investments in non-publicly
traded securities and in non-traditional asset classes are allowed up to 10% 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 fi xed income allocation, these investments are required to be diversifi ed 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, 2009, an additional 5% derivatives exposure to matched assets is in place to hedge interest
rate risk related to pension liabilities.
Similar investment policies are established for the other pension plans sponsored by Air Canada.
The Corporation’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 specifi c portfolio mix of plan assets. Management reviewed anticipated
future long-term performance of individual asset categories and considered the asset allocation strategy adopted by the
Corporation, 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. While the
review considers recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.
Sensitivity analysis
Sensitivity analysis on the 2009 pension expense based on different actuarial assumptions with respect to discount rate and
expected return on plan assets is as follows:
Impact on 2009 pension expense (Canadian dollars in millions)
0.25 percentage point
Decrease Increase
Discount rate on obligation assumption $ 25 $ (28)
Long-term rate of return on plan assets assumption $ 30 $ (29)
Assumed health care cost trend rates have a signifi cant effect on the amounts reported for the health care plans. An 8.25%
annual rate of increase in the per capita cost of covered health care benefi ts was assumed for 2009 (8.25% was assumed
for 2008). The rate is assumed to decrease gradually to 5% by 2015. A one percentage point increase in assumed health
care trend rates would have increased the service and interest costs by $1 million and the obligation by $18 million.
A one percentage point decrease in assumed health care trend rates would have decreased the service and interest costs by
$2 million and the obligation by $23 million.