Air Canada 2014 Annual Report Download - page 112

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112 2014 Annual Report
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
Investments in equity and alternative 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 also subject to foreign
exchange risk.
Interest rate risk
A decrease in corporate and/or government bond
yields will increase plan liabilities, which will be
partially offset by an increase in the value of the
plans’ bond holdings.
Funding risk
Adverse changes in the value of plan assets or in
interest rates could have a significant impact on
pension plan solvency valuations and cash funding
requirements. Refer to discussion above with respect
to past service funding obligations while the 2014
Regulations are in effect.
Life expectancy
The majority of the plans’ obligations are to provide
benefits for the life of the member, so increases in
life expectancy will result in an increase in the plans’
liabilities.
ASSUMPTIONS
Management is required to make significant
estimates about actuarial and financial assumptions
to determine the cost and related liabilities of the
Corporation’s employee future benefits.
Financial assumptions
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 flows that approximate the timing and
amount of expected benefit payments.
Future increases in compensation are based upon the
current compensation policies, labour agreements and
economic forecasts.
The significant weighted average assumptions used to determine the Corporation’s accrued benefit obligations
and cost are as follows:
PENSION BENEFITS OTHER EMPLOYEE FUTURE
BENEFITS
2014 2013 2014 2013
DISCOUNT RATE USED TO DETERMINE:
Accrued benefit cost for the year ended December 31 4.90% 4.30% 4.80% 4.17%
Accrued benefit liability as at December 31 4.00% 4.90% 3.90% 4.80%
RATE OF FUTURE INCREASES IN COMPENSATION USED TO DETERMINE:
Accrued benefit cost for the year ended December 31 2.50% 2.50% not applicable not applicable
Accrued benefit obligation as at December 31 2.50% 2.50% not applicable not applicable