Bank of Montreal 2004 Annual Report Download - page 115

BMO Financial Group Annual Report 2004 111
Notes
Pension and Other Employee Future Benefit Plans
We have a number of arrangements in Canada, the United States
and the United Kingdom that provide pension and other employee
future benefits to our retired and current employees.
Pension arrangements include defined benefit statutory pension
plans as well as supplemental arrangements, which provide
pension benefits in excess of statutory limits. Generally, under
these plans we provide retirement benefits based on an employee’s
years of service and average annual earnings over a period of
time prior to retirement. We are responsible for ensuring that the
statutory pension plans have sufficient assets to pay the pension
benefits upon retirement of employees. Voluntary contributions
can be made by employees but are not required.
We also provide defined contribution pension plans to employees
in some of our subsidiaries. Under these plans, we are responsible
for contributing a predetermined amount to a participant’s retire-
ment savings, based on a percentage of that employee’s salary.
We recognize the cost of our defined contribution pension plans
in expense as the employees work for us.
We also provide other employee future benefits, including
health and dental care benefits and life insurance for current
and retired employees.
Pension and Other Employee Future Benefit Liabilities
We have two types of benefit liabilities: our defined benefit
pension liabilities and our other employee future benefit liabilities.
These benefit liabilities represent the amount of pension and
other employee future benefits that our employees and retirees
have earned as at year end.
Our actuaries perform valuations of our benefit liabilities for
pension and other employee future benefits as at October 31 each
year for our Canadian plans (September 30 for our U.S. plans),
using the projected benefit method prorated on service, based on
management’s assumptions about discount rates, salary growth,
retirement age, mortality and health care cost trend rates.
The discount rate is determined by management with reference to
market conditions at year end. Other assumptions are determined
with reference to long-term expectations.
Components of the change in our benefit liabilities year over year
and our pension and other employee future benefit expense are
as follows:
Benefits earned by employees represent benefits earned in the
current year. They are determined with reference to the current
workforce and the amount of benefits to which they will be entitled
upon retirement, based on the provisions of our benefit plans.
Interest cost on the benefit liabilities represents the increase in
the liability that results from the passage of time.
Actuarial gains or losses may arise in two ways. First, each year
our actuaries recalculate the benefit liabilities and compare them
to those estimated as at the prior year end. Any differences that
result from changes in assumptions or from plan experience being
different from what was expected by management at the previous
year end are considered actuarial gains or losses. Secondly, actuarial
gains and losses arise when there are differences between expected
and actual returns on plan assets.
At the beginning of each year, we determine whether the
unrecognized actuarial gain or loss is more than 10% of the greater
of our plan asset or benefit liability balances. Any unrecognized
actuarial gain or loss in excess of this 10% threshold is recognized
in expense over the remaining service period of active employees.
Amounts below the 10% threshold are not recognized in income.
Plan amendments are changes in our benefit liabilities as a result
of changes to provisions of the plans. These amounts are recognized
in expense over the remaining service period of active employees.
Expected return on assets r epresents management’s best estimate
of the long-term rate of return on plan assets applied to the fair
value of plan assets. We establish our estimate of expected rate of
return on plan assets based on the fund’s target asset allocation and
estimated rates of return for each asset class. Estimated rates of
return are based on expected returns from fixed income securities,
which take into consideration bond yields. An equity risk premium
is then applied to estimate equity returns. Returns from other
asset classes are set to reflect the relative risks of these classes
as compared to fixed income and equity assets. Differences between
expected and actual return on assets are included in our actuarial
gain or loss balance, as described above.
Settlements occur when benefit liabilities for plan participants
are settled, usually through lump sum cash payments, and as
a result we no longer have a liability to provide them with benefit
payments in the future.
Funding of Pension and Other Employee Future Benefit Plans
We make cash contributions to our statutory pension plans.
The actual and target asset allocations are set out on the following
page. The investment policy for the main Canadian pension plan
assets is to have a diversified mix of quality investments that is
expected to provide a superior real rate of return over the long term,
while limiting performance volatility. We also have a retirement
compensation arrangement that partially funds supplemental
pension benefits in Canada. However, pension payments related to
this plan are paid directly by the Bank. Retirement benefits for our
supplemental plans in the United States are also paid directly by
the Bank. Our other employee future benefit liability in the United
States is partially funded; and our other employee future benefit
liability in Canada is unfunded. Benefits in connection with our
other employee future benefit plans are paid directly by the Bank.
We measure the fair value of plan assets as at October 31 for
our Canadian plans (September 30 for our U.S. plans).
Note 20 Employee Compensation – Employee Future Benefits
Depending on the plan, deferred incentive payments can be
paid either upon retirement/resignation, over the three-year
period of the plan or at the end of the three-year period of the plan.
The deferred incentive payments can be paid in cash, shares or a
combination of both.
Employee compensation expense for these plans is recorded
in the year the incentive payment and/or commissions is earned.
Changes in the amount of the incentive payment payable as a
result of dividends and share price movements are recorded as
employee compensation expense in the period of the change.
We have entered into derivative instruments in order to hedge
our exposure to these plans. Changes in the fair value of these
derivatives are recorded as employee compensation expense in
the period in which they arise.
Liabilities related to these plans were recorded in other liabilities
in our Consolidated Balance Sheet and totalled $218 million and
$283 million as at October 31, 2004 and 2003, respectively.
Employee compensation expense related to these plans that
was recorded in our Consolidated Statement of Income for the
years ended October 31, 2004, 2003 and 2002 was $4 million,
$26 million and $18 million, respectively, net of the impact
of hedging.