Air Canada 2014 Annual Report Download - page 111

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111
2014 Consolidated Financial Statements and Notes
COMPOSITION OF PENSION PLAN ASSETS
Domestic Registered Plans
The composition of the Domestic Registered Plan assets and the target allocation are the following:
2014 2013
2014 TARGET
ALLOCATION
Bonds 54% 46% 53%
Canadian equities 10% 15% 11%
Foreign equities 21% 31% 21%
Alternative investments 15% 8% 15%
100% 100% 100%
For the Domestic Registered Plan assets,
approximately 85% of assets as of December 31,
2014 have a quoted market price in an active market.
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 $209 (2013 – $131) 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. 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 indices (FTSE TMX Canada), 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 plan assets 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 pension funds:
• Equities are required to be diversified among
regions, industries and economic sectors.
Limitations are places on the overall allocation to
any individual security.
• 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. Alternative
investments are required to be diversified by asset
class, strategy, sector and geography.
• Canadian bonds are 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, 2014, a 20% 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.