15. Pension and Other Post-Retirement Benefits
Pension Plans
Canada
Substantially all employees of the company are participants in either a defined contribution or a defined benefit pension plan.
The company has established a supplemental defined benefit retirement income plan for senior management that is unfunded, non-contributory and provides a supplementary pension benefit. The plan is provided for by charges to earnings sufficient to meet the projected benefit obligation.
United States
The company has defined benefit pension plans that cover a substantial majority of its employees. Benefits are based on a combination of years of service and compensation levels, depending on the plan. Contributions to the US plans are made to meet or exceed minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and associated Internal Revenue Service regulations and procedures.
Trinidad
The company has contributory defined benefit pension plans that cover a substantial majority of its employees. Benefits are based on a combination of pay and service. The plans' assets consist mainly of local government and other bonds, local mortgage and mortgage-backed securities, fixed income deposits and cash.
Other Post-Retirement Plans
The company provides certain contributory health-care plans and non-contributory life insurance benefits for retired employees. These plans contain certain cost-sharing features such as deductibles and coinsurance, and are unfunded, with benefits subject to change.
Defined Benefit Plans
The components of net expense for the company's pension and other post-retirement benefit plans, computed actuarially, were as follows:
| Pension | Other | ||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||
| Costs arising in the period | |||||||||||||
Service cost for benefits earned during the year |
$ | 15.3 | $ | 14.2 | $ | 13.8 | $ | 6.1 | $ | 4.7 | $ | 5.7 | |
Interest cost on projected benefit obligations |
36.5 | 33.5 | 31.1 | 14.9 | 12.4 | 13.3 | |||||||
Actual return on plan assets |
(44.3) | (42.1) | (34.3) | – | – | – | |||||||
Actuarial (gain) loss |
(33.5) | 8.9 | 27.9 | (12.0) | 18.4 | (12.7) | |||||||
Plan amendments |
0.3 | 1.4 | 3.5 | – | (1.7) | 11.5 | |||||||
Plan curtailments |
– | – | 0.4 | – | – | – | |||||||
Change in valuation allowance |
– | 2.0 | 2.4 | – | – | – | |||||||
Costs arising in the period |
(25.7) | 17.9 | 44.8 | 9.0 | 33.8 | 17.8 | |||||||
| Difference between costs arising in the period and costs recognized in the period in respect of: | |||||||||||||
Return on plan assets |
1.5 | 3.9 | (2.7) | – | – | – | |||||||
Actuarial loss (gain) |
40.8 | (1.7) | (23.6) | 16.4 | (16.4) | 15.4 | |||||||
Plan amendments |
1.5 | 1.0 | (2.3) | (2.9) | (1.1) | (13.0) | |||||||
Transitional obligation |
0.9 | 1.6 | 1.4 | 0.2 | 0.4 | 0.3 | |||||||
| Net expense | $ | 19.0 | $ | 22.7 | $ | 17.6 | $ | 22.7 | $ | 16.7 | $ | 20.5 | |
The assumptions used to determine the benefit obligation and expense for the company's significant plans were as follows (weighted average as of December 31):
| Pension | Other | ||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||
| Discount rate – obligation | 6.50% | 5.85% | 5.70% | 6.50% | 5.85% | 5.70% | |||||||
| Discount rate – expense | 5.85% | 5.70% | 5.75% | 5.85% | 5.70% | 5.75% | |||||||
| Long-term rate of return on assets | 8.00% | 8.00% | 8.50% | n/a | n/a | n/a | |||||||
| Rate of increase in compensation levels | 4.00% | 4.00% | 4.00% | n/a | n/a | n/a | |||||||
The average remaining service period of the active employees covered by the company's pension plans is 12.0 years (2006 – 11.5 years). The average remaining service period of the active employees covered by the company's other benefits plans is 12.1 years (2006 – 11.8 years).
The assumed health-care cost trend rates are as follows:
| 2007 | 2006 | 2005 | |
| Health-care cost trend rates assumed for next year | 6.00% | 6.00% | 6.00% |
| Ultimate health-care cost trend rate assumed | 6.00% | 6.00% | 6.00% |
| Year that the rate reaches the ultimate trend rate | 2007 | 2006 | 2005 |
Effective January 1, 2004, the company's largest retiree medical plan limits the company's share of annual medical cost increases to 75 percent of the first 6 percent of total medical inflation for recent and future non-union retirees. Any cost increases in excess of this amount are funded by increased retiree contributions.
The company's discount rate assumption reflects the weighted average interest rate at which the pension and other post-retirement liabilities could be effectively settled using high-quality bonds at the measurement date. The rate varies by country. The company determines the discount rate using a yield curve approach. Based on the plan's demographics, expected future pension benefit and medical claims, payments are measured and discounted to determine the present value of the expected future cash flows. The cash flows are discounted using yields on high-quality AA-rated non-callable bonds with cash flows of similar timing. The equivalent level discount rate is then used as input by the company to determine the final discount rate. The rate selected for the December 31, 2007 measurement date will be used to determine expense for fiscal 2008.
The expected long-term rate of return on assets assumption is determined using a building block approach. The expected real rate of return for each individual asset class is determined based on expected future performance. These rates are weighted based on the current asset portfolio. A separate determination is made of the underlying impact of expenses, inflation, rebalancing, diversification and the actively managed portfolio premium. The resulting total expected asset return is compared to the historic returns achieved by the portfolio. Based on these input items, a final rate is selected by the company.
The company uses a December 31 measurement date. The most recent actuarial valuations of the majority of the pension plans for funding purposes were as of January 1, 2007, and the next required valuations are as of January 1, 2008. The change in benefit obligations and change in plan assets for the above pension and other post-retirement plans were as follows:
| Pension | Other | Total | ||||||||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||
| Change in benefit obligations | ||||||||||||||
Balance, beginning of year |
$ | 626.4 | $ | 595.3 | $ | 247.4 | $ | 222.6 | $ | 873.8 | $ | 817.9 | ||
Service cost |
15.3 | 14.2 | 6.1 | 4.7 | 21.4 | 18.9 | ||||||||
Interest cost |
36.5 | 33.5 | 14.9 | 12.4 | 51.4 | 45.9 | ||||||||
Participants' contributions |
0.3 | 0.3 | – | 0.1 | 0.3 | 0.4 | ||||||||
Actuarial (gain) loss |
(33.5) | 8.9 | (12.0) | 18.4 | (45.5) | 27.3 | ||||||||
Foreign exchange rate changes |
6.4 | 2.0 | 3.6 | (0.2) | 10.0 | 1.8 | ||||||||
Plan amendments |
0.3 | 1.4 | – | (1.7) | 0.3 | (0.3) | ||||||||
Benefits paid |
(28.3) | (29.2) | (8.2) | (8.9) | (36.5) | (38.1) | ||||||||
Balance, end of year |
623.4 | 626.4 | 251.8 | 247.4 | 875.2 | 873.8 | ||||||||
| Change in plan assets | ||||||||||||||
Fair value, beginning of year |
519.9 | 480.8 | – | – | 519.9 | 480.8 | ||||||||
Actual return on plan assets |
44.3 | 42.1 | – | – | 44.3 | 42.1 | ||||||||
Employer contributions |
99.6 | 24.7 | 8.2 | 8.8 | 107.8 | 33.5 | ||||||||
Participants' contributions |
0.3 | 0.3 | – | 0.1 | 0.3 | 0.4 | ||||||||
Foreign exchange rate changes |
2.4 | 1.2 | – | – | 2.4 | 1.2 | ||||||||
Benefits paid |
(28.3) | (29.2) | (8.2) | (8.9) | (36.5) | (38.1) | ||||||||
Fair value, end of year |
638.2 | 519.9 | – | – | 638.2 | 519.9 | ||||||||
| Funded status | 14.8 | (106.5) | (251.8) | (247.4) | (237.0) | (353.9) | ||||||||
| Valuation allowance | (16.1) | (16.1) | – | – | (16.1) | (16.1) | ||||||||
| Unamortized net actuarial loss | 76.9 | 117.4 | 42.0 | 58.0 | 118.9 | 175.4 | ||||||||
| Unamortized prior service cost | 3.6 | 5.7 | (15.0) | (18.5) | (11.4) | (12.8) | ||||||||
| Unamortized transitional obligation | 4.2 | 5.1 | 0.4 | 0.6 | 4.6 | 5.7 | ||||||||
| Accrued pension and other post-retirement benefit asset (liability) | $ | 83.4 | $ | 5.6 | $ | (224.4) | $ | (207.3) | $ | (141.0) | $ | (201.7) | ||
| Amounts included in: | ||||||||||||||
Other assets (Note 9) |
$ | 111.4 | $ | 26.4 | $ | 0.3 | $ | 0.4 | $ | 111.7 | $ | 26.8 | ||
Liabilities |
||||||||||||||
Current (Note 12) |
– | (0.3) | (7.9) | (8.6) | (7.9) | (8.9) | ||||||||
Long-term |
(28.0) | (20.5) | (216.8) | (199.1) | (244.8) | (219.6) | ||||||||
| $ | 83.4 | $ | 5.6 | $ | (224.4) | $ | (207.3) | $ | (141.0) | $ | (201.7) | |||
Letters of credit secured certain of the unfunded defined benefit plans as at December 31, 2007 and 2006.
The company is a sponsor of certain US post-retirement health-care plans that were impacted by the US Medicare Prescription Drug, Improvement and Modernization Act of 2003. This legislation expanded Medicare to include (for the first time) coverage for prescription drugs and introduced a prescription drug benefit and federal subsidy to sponsors of retiree health-care benefit plans that provide benefits at least "actuarially equivalent" to Medicare Part D. The company accounted for the impact of the legislation prospectively as of July 1, 2004. The federal subsidy had the effect of reducing the company's accumulated post-retirement benefit obligation by $23.2 and reducing the net periodic post-retirement benefit cost for the year by $4.2 (2006 – $2.4).
The accumulated benefit obligation for all defined benefit pension plans was $562.7 and $557.8 at December 31, 2007 and 2006, respectively. The aggregate projected benefit obligation, accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows:
| 2007 | 2006 | |||
| Projected benefit obligation | $ | 91.3 | $ | 597.5 |
| Accumulated benefit obligation | 85.0 | 543.4 | ||
| Fair value of plan assets | 59.7 | 457.7 | ||
Sensitivity of Assumptions
The effect of a change in the health-care cost trend rate on the other post-retirement benefit obligation and the aggregate of service and interest cost would have been as follows:
| 2007 | 2006 | 2005 | ||||
| As reported: | ||||||
Benefit obligation |
$ | 251.8 | $ | 247.4 | $ | 222.6 |
Aggregate of service and interest cost |
21.0 | 17.1 | 19.0 | |||
| Impact of increase of 1.0 percentage point: | ||||||
Benefit obligation |
36.9 | 36.7 | 31.4 | |||
Aggregate of service and interest cost |
3.9 | 2.8 | 3.2 | |||
| Impact of decrease of 1.0 percentage point: | ||||||
Benefit obligation |
(29.7) | (29.2) | (27.8) | |||
Aggregate of service and interest cost |
(3.0) | (2.2) | (2.9) | |||
The above sensitivities are hypothetical and should be used with caution. Changes in amounts based on a 1.0 percentage point variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear. The sensitivities have been calculated independently of changes in other key variables. Changes in one factor may result in changes in another, which could amplify or reduce certain sensitivities.
Plan Assets
Approximate asset allocations, by asset category, of the company's significant pension plans were as follows at December 31:
| Asset Category | Target | 2007 | 2006 |
| Equity securities | 65% | 64% | 66% |
| Debt securities | 35% | 36% | 34% |
| Real estate | – | – | – |
| Other | – | – | – |
| Total | 100% | 100% | 100% |
The company employs a total return on investment approach whereby a mix of equities and fixed income investments is used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income investments.
Furthermore, equity investments are diversified across US and non-US stocks, as well as growth, value and small and large capitalizations. US equities are also diversified across actively managed and passively invested portfolios. Other assets such as private equity, real estate and hedge funds are not used at this time. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The investment strategy in Trinidad is largely dictated by local investment restrictions (maximum of 50 percent in equities and 20 percent foreign) and asset availability since the local equity market is small and there is little secondary market activity in debt securities.
Defined Contribution Plans
All of the company's US employees may participate in defined contribution savings plans. These plans are subject to US federal tax limitations and provide for voluntary employee salary deduction contributions. The company contribution provides a minimum of 3 percent (to a maximum of 6 percent) of salary depending on employee contributions and company performance. The company's 2007 contributions were $6.4 (2006 – $6.2; 2005 – $6.1).
All of the company's Canadian salaried employees and certain hourly employees participate in the PCS Inc. Savings Plan and may make voluntary contributions. The company contribution provides a minimum of 3 percent (to a maximum of 6 percent) of salary based on company performance. The company's contributions in 2007 were $4.8 (2006 – $3.9; 2005 – $4.4).
Certain of the company's Canadian employees participate in the contributory PCS Inc. Pension Plan. The member contributes to the plan at the rate of 5.5 percent of the member's earnings, or such other percentage amount as may be established by a collective agreement, and the company contributes for each member at the same rate. The member may also elect to make voluntary additional contributions. The company's contributions in 2007 were $5.7 (2006 – $5.0; 2005 – $4.5).
Cash Payments
Total cash payments for pensions and other post-retirement benefits for 2007, consisting of cash contributed by the company to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its defined contribution plans, were $124.8. Approximately $53.0 is expected to be contributed by the company to all plans during 2008.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from either corporate assets or the qualified pension trusts:
| Other | ||||||||
| Pension | Gross | Reduction due to Medicare Part D Subsidy |
Net | |||||
| 2008 | $ | 29.6 | $ | 10.5 | $ | 1.0 | $ | 9.5 |
| 2009 | 32.6 | 11.5 | 1.2 | 10.3 | ||||
| 2010 | 33.1 | 12.5 | 1.3 | 11.2 | ||||
| 2011 | 35.2 | 13.6 | 1.5 | 12.1 | ||||
| 2012 | 39.0 | 14.5 | 1.7 | 12.8 | ||||
| 2013-2017 | 232.3 | 89.6 | 11.7 | 77.9 | ||||