Air Canada 2010 Annual Report Download - page 56

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2010 Air Canada Annual Report
56
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 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.
U.S. Health Care Reform
Air Canada is a sponsor of certain U.S. post-retirement health-care plans that were impacted by U.S. health care reform
legislation enacted in March 2010. Under this legislation, changes include the removal of lifetime benefit maximums. This
legislation has the impact of increasing Air Canada’s post-retirement benefit obligation by $55 million. The full amount is
recognized as an actuarial loss and will be recognized in pension expense over the expected average remaining service life
commencing in 2011.
Composition of Pension Plan Assets
The composition of the domestic registered plan assets and the target allocation are the following:
2010 2009 Target allocation (1)
Non-matched assets (mainly equities) 54.0 % 55.9 % 54.4 %
Matched assets (mainly Canadian bonds) 46.0 % 43.4 % 45.6 %
Cash and temporary investments 0.0 % 0.7 % 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.
Domestic Registered Plans
For the domestic registered plans, the investments conform to the Statement of Investment Policy and Objectives of
the Air Canada Pension Funds as amended during 2010. 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 fixed 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:
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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.
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higher. With the exception of Government of Canada securities or a province thereof, in which the plan may invest
the entire fixed income allocation, these investments are required to be diversified among individual securities and
sectors.