Bank of Montreal 2008 Annual Report Download - page 143

Notes
BMO Financial Group 191st Annual Report 2008 | 139
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 ben-
efits 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 pension plans in employee compen-
sation 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: defined benefit pension liabilities
and 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, rate of compensation increase,
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 work-
force and the amount of benefits to which employees 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 previous 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 unrec-
ognized 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 estimate
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 con sider-
ation 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, the United States and the United
Kingdom are funded by us and the assets in these plans are used to
pay benefits to retirees.
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 valua-
tions for determining our pension contributions (our “funding valuation”).
The most recent funding valuation for our main Canadian plan was
performed as at October 31, 2008. We are required to file a funding
valuation for that plan with OSFI 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, 2008.
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
2008 2007 2006 2008 2007 2006
Accrued benefit liability $ 3,407 $ 832 $ 955 $705 $ 908 $ 952
Fair value of plan assets 3,234 706 729 71 68 68
Unfunded benefit liability $173 $ 126 $ 226 $634 $ 840 $ 884
Note 24: Employee Compensation –Pension and Other Employee Future Benefits