Bank of Montreal 2007 Annual Report Download - page 129

BMO Financial Group 190th Annual Report 2007 125
Notes
Note 23: Employee Compensation –Pension and Other Employee Future Benefits
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 that 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 retirement
savings, based on a percentage of that employee’s salary. We recognize
the cost of our defined contribution pension plans in employee com-
pensation 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 of
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, retire-
ment 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 benefit liabilities represents the increase in the
liabilities 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 management’s expectations at the previous year end are con-
sidered 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 represents management’s best esti-
mate of the long-term rate of return on plan assets applied to the fair
value of plan assets. We establish our estimate of the expected rate
of return on plan assets based on the plan’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 returns 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
Our statutory pension plans in Canada and the United States are funded
by us and the assets in these plans are used to pay retirees benefits.
Our supplementary pension plans in Canada are partially funded,
while in the United States the plan is unfunded. Our other employee
future benefit plans in the United States and Canada are partially funded.
Pension and benefit payments related to these plans are either paid
through the respective plan, or paid directly by us.
We measure the fair value of plan assets as at October 31 for
our Canadian plans (September 30 for our U.S. plans). In addition to
actuarial valuations for accounting purposes, we are required to prepare
valuations for determining our pension contributions (our “funding
valuation”). The most recent funding valuation for our main Canadian
plan was performed as at October 31, 2007. We are required to file
funding valuations for that plan with the Office of the Superintendent
of Financial Institutions Canada at least every three years. An annual
funding valuation is required for our U.S. statutory plan. The most recent
valuation was performed as at January 1, 2007.
The benefit liability and the fair value of plan assets in respect of plans that are not fully funded are as follows:
(Canadian $ in millions) Pension benefit plans Other employee future benefit plans
2007 2006 2005 2007 2006 2005
Accrued benefit liability $832 $ 955 $ 959 $908 $ 952 $ 852
Fair value of plan assets 706 729 693 68 68 66
Unfunded benefit liability $126 $ 226 $ 266 $840 $ 884 $ 786