TD Bank 2006 Annual Report Download - page 95

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results 91
Asset Allocation
Security 2006 2005 2004
Equity 62% 60% 56%
Debt 36 3943
Cash equivalents 21 1
Total 100% 100% 100%
The effect of a one percentage point increase or decrease in
the expected return on assets assumption on the 2006 pension
expense would be a $19 million decrease or increase, respectively.
The Bank’s principal pension plan weighted average asset
allocations at July 31, by asset category are as follows:
For 2006 the Bank’s principal pension plan’s net assets included
funded investments in the Bank and its affiliates which had a
market value of $6 million (2005 – $6 million; 2004 – $3 million).
The investments of the Bank’s principal pension plan are man-
aged utilizing a balanced approach with the primary objective of
achieving a real rate of return of 3%. Accordingly, the allowable
asset mix range are detailed in the following table:
Asset Mix
Security Acceptable range
Equity 50%-65%
Debt 30%-48%
Cash equivalents 0%-4%
The investment policy for the Bank’s principal pension plan is
detailed below. The plan was in compliance with its investment
policy throughout the year.
Futures contracts and options can be utilized provided they do
not create additional financial leverage. However, The Society
invests in hedge funds, which normally will employ leverage when
executing their investment strategy. Substantially all assets must
have readily ascertainable market values.
The equity portfolio will be generally fully invested and broadly
diversified primarily in medium to large capitalization quality
companies and income trusts with no individual holding exceed-
ing 10% of the equity portfolio at any time. Foreign equities and
American Depository Receipts of similar high quality may also be
included to further diversify the portfolio.
Debt instruments of a non-government entity must not exceed
10% of the total debt portfolio. Corporate debt issues generally
must meet or exceed a credit rating of BBB at the time of pur-
chase and during the holding period. There are no limitations on
the maximum amount allocated to each credit rating within the
debt portfolio.
For the defined benefit plans and the non-pension employee
benefit plans, actuarial valuations are prepared at least every
three years (and extrapolated in the interim) to determine the
present value of the accrued benefit liability. Pension and non-
pension benefit expenses are determined based upon separate
actuarial valuations using the projected benefit method pro-rated
on service and management’s best estimates of investment
returns on the plan’s assets, compensation increases, retirement
ages of employees and estimated health care costs. The discount
rate used to value liabilities is based on long-term corporate AA
bond yields as of the valuation date. The expense includes the
cost of benefits for the current year’s service, interest expense on
liabilities, expected income on plan assets based on fair market
values and the amortization of plan amendments on a straight-
line basis over the expected average remaining service life of
the employee group (expected average remaining period to full
eligibility for non-pension post-retirement benefits). The excess,
if any, of the net actuarial gain or loss over 10% of the greater
of the projected benefit obligation and the fair market value of
plan assets is also amortized over the expected average remaining
service life of the employee group. The expected average remain-
ing service life of active employees of the Bank’s principal pension
plan and the principal non-pension post-retirement benefit plans
is 10 years and 16 years respectively. The expected average
remaining period to full eligibility for the principal non-pension
post-retirement plans is 11 years. The cumulative difference
between expense and funding contributions is reported on the
Consolidated Balance Sheet in other assets or other liabilities.
For the defined contribution plans, annual pension expense
is equal to the Bank’s contributions to the plan.
PENSION BENEFIT PLAN
The Bank’s principal pension plan is funded by contributions from
the Bank and from members. In accordance with legislation, the
Bank contributes amounts determined on an actuarial basis to
the plan and has the ultimate responsibility for ensuring that the
liabilities of the plan are adequately funded over time.
The table on the following page presents the financial position
of the Bank’sprincipal pension plan.The pension plan assets and
obligations are measured as at July 31.
The Bank’s contributions to the principal pension plan during
2006 were $60 million. These contributions were made in accor-
dance with the actuarial valuation report for funding purposes
as at October 31, 2004. The next valuation for funding purposes
must be as of a date no later than October 31, 2007.
Todevelop the expected long term rate of return on assets
assumption for the Bank’s principal pension plan, the Bank
considered the historical returns and the future expectations for
returns for each asset class, as well as the target asset allocation
of the fund. This resulted in the selection of a long term rate of
return on assets assumption of 6.75%.