Air Canada 2013 Annual Report Download - page 117

2013 Consolidated Financial Statements and Notes
117
For the Master Trust Fund, approximately 79% of assets as of December 31, 2013 have a quoted market price in an active
market (81% as of December 31, 2012). Assets that do not have a quoted market price in an active market are mainly
investments in privately held entities.
Included in plan assets, for determining the net benefit obligation for accounting purposes, are 17,647,059 Class B Voting
Shares of Air Canada with a fair value of $131 (2012 – $31) which were issued in 2009 in connection with pension funding
agreements reached with all of the Corporation’s Canadian-based unions. All future net proceeds of sale of such shares, when
realised, are to be contributed to the pension 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 2013. The investment return objective 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.
Recognizing the importance of surplus risk management, Air Canada manages the Domestic Registered Plans in an effort to
optimally minimize surplus risk (defined as the difference between asset value and pension liability value), which is considered
to be the key risk to be minimized and monitored. In addition, the objective of the investment strategy is to invest the assets
of the Master Trust in a prudent and diversified manner to minimize the risk of price fluctuation of asset classes and individual
investments within those asset classes and to combine those asset classes and individual investments in an effort to reduce
overall risk.
In addition to the broad asset allocation, as summarized in the asset allocation section above, the following policies apply to
individual asset classes invested within the Master Trust Fund:
• Non-matched assets are mainly equities, and are required to be diversified among industries and economic sectors.
Foreign equities can comprise 25% to 39% of the total market value of the invested assets of the Master Trust Fund.
Limitations are placed on the overall allocation to any individual security. Foreign equities at December 31, 2013 were
19% of assets of the Master Trust Fund. Investments in alternative investments are allowed up to 20% of the total
market value of the invested assets of the Master Trust Fund. Alternative investments are investments in
non-publicly traded securities and in non-traditional asset classes. They may comprise, but are not limited to investments
in real estate, agriculture, timber, private equity, venture capital, infrastructure, emerging markets debt, high yield bonds
and commodity futures.
• 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
fixed income allocation, these investments are required to be diversified among individual securities and sectors.
Derivatives are permitted provided that they are used for managing 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, 2013, a 21% derivatives exposure to matched assets is in place to hedge interest rate risk
related to pension liabilities.
The trusts for the supplemental plans are invested 50% in indexed equity investments, in accordance with their investment
policies, with the remaining 50% held by the Canada Revenue Agency as a refundable tax, in accordance with tax legislation.
Risks
Through its defined benefit pension plans, the Corporation is exposed to a number of risks, the most significant of which are
detailed below:
Asset risk
Non-matched assets are subject to market and equity price risks. Investments in equity and other investments are subject to
changes in price which may not be offset by changes in the value of plan liabilities. The plan liabilities are calculated using a
discount rate set with reference to corporate bond yields. If plan assets underperform this yield, this will create a deficit.
Certain plan assets are invested in foreign equities, which are also subject to foreign exchange risk.