Bank of Montreal 2015 Annual Report Download - page 172

Notes
We also provide other employee future benefits, including health and dental care benefits and life insurance, for current and retired employees.
Short-term employee benefits, such as salaries, paid absences, bonuses and other benefits, are accounted for on an accrual basis over the period
in which the employees provide the related services.
Investment Policy
The assets of the defined benefit pension plans are managed in accordance with all applicable laws and regulations. The plans are administered with
a well-defined governance structure, with the oversight and decision-making resting with the Board of Directors.
The plans are managed under a framework that considers both assets and liabilities in the development of an investment policy and in
managing risk.
The plans invest in asset classes that include equities, fixed income and alternative strategies, under established investment guidelines. Plan
assets are diversified across asset classes and by geographic exposure. They are managed by asset management firms that are responsible for the
selection of investment securities. Derivative instruments are permitted under policy guidelines and are generally used to hedge foreign currency
exposures, manage interest rate exposures or replicate the return of an asset.
Asset Allocations
The asset allocation ranges and weighted-average actual asset allocations of our primary pension plans, based on the fair market values at
October 31, are as follows:
Pension benefit plans
Range
2015
Actual
2015
Actual
2014
Equities 25% – 50% 42% 42%
Fixed income investments 35% – 55% 45% 45%
Other 10% – 25% 13% 13%
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis.
Risk Management
The plans are exposed to various risks, including market risk (interest rate, equity and foreign currency risks), credit risk, operational risk, surplus risk
and longevity risk. We follow a number of approaches to monitor and actively manage these risks, including monitoring surplus-at-risk, which
measures a plan’s risk in an asset-liability framework; stress testing and scenario analyses to evaluate the volatility of the plans’ financial positions
and any potential impact on the bank; hedging of currency exposures and interest rate risk within policy limits; controls related to asset mix
allocations, geographic allocations, portfolio duration, credit quality, sector guidelines, issuer/counterparty limits and others; and ongoing monitoring
of exposures, performance and risk levels.
Pension and Other Employee Future Benefit Liabilities
Our actuaries perform valuations of our defined benefit obligations for pension and other employee future benefits as at October 31 of each year
using the projected unit credit method based on management’s assumptions about discount rates, rates of compensation increase, retirement age,
mortality and health care cost trend rates.
The discount rates for the primary Canadian and U.S. pension and other employee future benefit plans were selected using high-quality AA rated
corporate bonds with terms matching the plans’ cash flows.
The fair value of plan assets is deducted from the defined benefit obligation to determine the net defined benefit asset or liability. For defined
benefit pension plans that are in a net defined benefit asset position, the recognized asset is limited to the present value of economic benefits
available in the form of future refunds from the plan or reductions in future contributions to the plan (the “asset ceiling”). Changes in the asset ceiling
are recognized in other comprehensive income. Components of the change in our net defined benefit assets or liabilities 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 employees will be entitled upon retirement, based on the provisions of our benefit plans.
Interest on net defined benefit asset or liability represents the increase in the net defined benefit asset or liability that results from the passage of
time and is determined by applying the discount rate to the net defined benefit asset or liability.
Actuarial gains and losses may arise in two ways. First, each year our actuaries recalculate the defined benefit obligations and compare them to
those estimated as at the previous year end. Any differences that result from changes in demographic and economic assumptions or from plan
member experience being different from management’s expectations at the previous year end are considered actuarial gains or losses. Second,
actuarial gains and losses arise when there are differences between the discount rate and actual returns on plan assets. Actuarial gains and losses are
recognized immediately in other comprehensive income as they occur and are not subsequently reclassified to income in future periods.
Plan amendments are changes in our defined benefit obligations that result from changes to provisions of the plans. The effects of plan
amendments are recognized immediately in income when a plan is amended.
Settlements occur when defined benefit obligations for plan participants are settled, usually through lump sum cash payments, and as a result we no
longer have any obligation to provide such participants with benefit payments in the future.
Funding of Pension and Other Employee Future Benefit Plans
We fund our defined benefit pension plans in Canada and the United States in accordance with statutory requirements, and the assets in these plans
are used to pay benefits to retirees and other employees. Some groups of employees are also eligible to make voluntary contributions in order to
receive enhanced benefits. Our supplementary pension plan in Canada is funded, while in the United States the supplementary pension plan is
unfunded.
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