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Pension Plans and Other Postretirement Benefits
 12 Months Ended
Dec. 31, 2011
Notes To Financial Statements [Abstract]  
Pensions and other postretirement benefits

12 – Pensions and other postretirement benefits

 

The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age, generally based on compensation and length of service and/or contributions. Senior and executive management (“executive employees”) subject to certain minimum service and age requirements, are also eligible for an additional retirement benefit under their Special Retirement Stipend Agreements (“SRS”), the Supplemental Executive Retirement Plan (“SERP”) or the Defined Contribution Supplemental Executive Retirement Plan (“DC SERP”). Executive employees who breach the non-compete, non-solicitation and non-disclosure of confidential information conditions of the SRS, SERP or DC SERP plans or other employment agreement will forfeit the retirement benefit under these plans. Should the Company reasonably determine that a current or former executive employee may have violated the conditions of their SRS, SERP, or DC SERP plan or other employment agreement, the Company may at its discretion withhold or suspend payout of the retirement benefit pending resolution of such matter. The Company has suspended payment of the $1.5 million annual retirement benefit due to its former Chief Executive Officer (CEO) pending resolution with the former CEO of issues relating to his compliance with the non-compete, non-solicitation and non-disclosure of confidential information conditions contained in the former CEO's employment agreement and in respect of which the Company has commenced legal proceedings.

       The Company also offers postretirement benefits to certain employees providing life insurance, medical benefits and, for a closed group of employees, free rail travel benefits during retirement. These postretirement benefits are funded as they become due. The information in the tables that follow pertains to all of the Company's defined benefit plans. However, the following descriptions relate solely to the Company's main pension plan, the CN Pension Plan, unless otherwise specified.

 

A.       Description of the CN Pension Plan

The CN Pension Plan is a contributory defined benefit pension plan that covers the majority of CN employees. It provides for pensions based mainly on years of service and final average pensionable earnings and is generally applicable from the first day of employment. Indexation of pensions is provided after retirement through a gain/loss sharing mechanism, subject to guaranteed minimum increases. An independent trust company is the Trustee of the Company's pension trust funds (including the CN Pension Trust Fund). As Trustee, the trust company performs certain duties, which include holding legal title to the assets of the CN Pension Trust Fund and ensuring that the Company, as Administrator, complies with the provisions of the CN Pension Plan and the related legislation. The Company utilizes a measurement date of December 31 for the CN Pension Plan.

 

B.       Funding policy

Employee contributions to the CN Pension Plan are determined by the plan rules. Company contributions are in accordance with the requirements of the Government of Canada legislation, The Pension Benefits Standards Act, 1985, including amendments thereto, and are determined by actuarial valuations. Due to recent legislative changes, actuarial valuations will be required on an annual basis effective for years ending on or after December 31, 2011 for all Canadian plans, or when deemed appropriate by the Office of the Superintendent of Financial Institutions (OSFI). These actuarial valuations are prepared in accordance with legislative requirements and with the recommendations of the Canadian Institute of Actuaries for the valuation of pension plans. The most recently filed actuarial valuation of the CN Pension Plan was conducted as at December 31, 2008 and indicated a funding excess on a going concern and solvency basis. The Company's next actuarial valuation required as at December 31, 2011 will be performed in 2012. While this actuarial valuation is expected to identify a going concern surplus of approximately $1 billion, on a solvency basis a funding deficit of approximately $1.4 billion is expected due to the level of interest rates applicable during that measurement period and the pension plan asset returns. The federal pension legislation requires funding deficits, as calculated under current pension regulations, to be paid over a number of years. Actuarial valuations are also required annually for the Company's U.S. pension plans.

       In 2011, in anticipation of its future funding requirements, the Company made voluntary contributions of $350 million in excess of the required contributions mainly to strengthen the financial position of its main pension plan, the CN Pension Plan. The Company has been advised by the OSFI that this contribution can be treated as a prepayment against its 2012 pension deficit funding requirements. As a result, the Company's cash contributions for 2012 are expected to be in the range of approximately $275 million to $575 million for all its pension plans and include an voluntary contribution of approximately $150 million to $450 million. As at February 3, 2012, the Company contributed $250 million to its defined benefit pension plans including a $150 million additional contribution.

 

C.       Plan assets

The assets of the Company's various plans are held in separate trust funds which are diversified by asset type, country and investment strategies. Each year, the CN Board of Directors reviews and confirms or amends the Statement of Investment Policies and Procedures (SIPP) which includes the plans' long-term asset class mix and related benchmark indices (Policy). This Policy is based on a long-term forward-looking view of the world economy, the dynamics of the plans' benefit liabilities, the market return expectations of each asset class and the current state of financial markets. The Policy mix in 2011 was: 2% cash and short-term investments, 38% bonds, 47% equities, 4% real estate, 5% oil and gas and 4% infrastructure assets.

       Annually, the CN Investment Division, a division of the Company created to invest and administer the assets of the plans, proposes a short-term asset mix target (Strategy) for the coming year, which is expected to differ from the Policy, because of current economic and market conditions and expectations. The Investment Committee of the Board (Committee) regularly compares the actual asset mix to the Policy and Strategy asset mixes and evaluates the actual performance of the trust funds in relation to the performance of the Policy, calculated using Policy asset mix and the performance of the benchmark indices.

       The Committee's approval is required for all major investments in illiquid securities. The SIPP allows for the use of derivative financial instruments to implement strategies or to hedge or adjust existing or anticipated exposures. The SIPP prohibits investments in securities of the Company or its subsidiaries. Investments held in the trust funds consist mainly of the following:

  • Cash, short-term investments and bonds consist primarily of highly liquid securities which ensure adequate cash flows are available to cover near-term benefit payments. Short-term securities are almost exclusively obligations issued by Canadian chartered banks. As at December 31 2011, 93% of bonds were issued or guaranteed by Canadian, U.S. or other governments.
  • Mortgages consist of mortgage products which are primarily conventional or participating loans secured by commercial properties and publicly traded REITs (Real Estate Investment Trust).
  • Equity investments are well diversified by country, issuer and industry sector. The most significant allocation either to an individual issuer or industry sector was approximately 4% and 21%, respectively, in 2011.
  • Real estate is a diversified portfolio of Canadian land and commercial properties.
  • Oil and gas investments include petroleum and natural gas properties operated by the trusts' wholly-owned subsidiaries and Canadian marketable securities.
  • Infrastructure investments are publically traded trust units, participations in private infrastructure funds and public debt and equity securities of infrastructure and utility companies.
  • Absolute return investments are a portfolio of units of externally managed hedge funds.

 

The plans' investment manager monitors market events and exposures to markets, currencies and interest rates daily. When investing in foreign securities, the plans are exposed to foreign currency risk that may be adjusted or hedged; the effect of which is included in the valuation of the foreign securities. Net of the effects mentioned above, the plans were 71% exposed to the Canadian dollar, 7% to European currencies, 11% to the US dollar and 11% to various other currencies as at December 31, 2011. Interest rate risk represents the risk that the fair value of the investments will fluctuate due to changes in market interest rates. Sensitivity to interest rates is a function of the timing and amount of cash flows of the assets and liabilities of the plans. To manage credit risk, established policies require dealing with counterparties considered to be of high credit quality. Derivatives are used from time to time to adjust asset mix or exposures to foreign currencies, interest rate or market risks of the portfolio or anticipated transactions. Derivatives are contractual agreements whose value is derived from interest rates, foreign exchange rates, equity or commodity prices. When derivatives are used for hedging purposes, the gains or losses on the derivatives are offset by a corresponding change in the value of the hedged assets. Derivatives may include forwards, futures, swaps and options.

 

       The tables on the following page present the fair value of plan assets excluding the economic exposure of derivatives as at December 31, 2011 and 2010 by asset class, their level within the fair value hierarchy and the valuation techniques and inputs used to measure such fair value.

 

In millions, unless otherwise indicated    Fair value measurements at December 31, 2011
Asset class TotalPercentage of total assets Level 1 Level 2 Level 3
Cash and short-term investments (1)$ 1,0267.0%$ 21$ 1,005$ -
Bonds (2)         
Canada and supranational  1,65011.2%  -  1,650  -
Provinces of Canada  1,93713.1%  -  1,937  -
Emerging market debt  2882.0%  -  288  -
Mortgages (3)  1781.2%  8  170  -
Equities (4)         
Canadian  2,39516.3%  2,373  -  22
U.S.  1,1257.6%  1,087  38  -
International  2,71218.4%  2,680  32  -
Real estate (5)  2141.5%  -  -  214
Oil and gas (6)  1,2328.4%  343  -  889
Infrastructure (7)  7074.8%  9  79  619
Absolute return (8)       -  -
Multi-strategy funds  3582.4%  -  358  -
Fixed income funds  2141.5%  -  214  -
Equity funds  2601.8%  -  260  -
Global macro funds  3682.5%  -  368  -
 $ 14,66499.7%$ 6,521$ 6,399$ 1,744
Other (9)  550.3%      
Total plan assets$ 14,719100%      
 
In millions, unless otherwise indicated    Fair value measurements at December 31, 2010
Asset class TotalPercentage of total assets Level 1 Level 2 Level 3
Cash and short-term investments (1)$ 4292.8%$ 429$ -$ -
Bonds (2)         
Canada and supranational  2,01313.3%  -  2,013  -
Provinces of Canada  1,2928.6%  -  1,292  -
Corporate   920.6%  -  92  -
Emerging market debt  3182.1%  -  318  -
Mortgages (3)  2051.4%  30  175  -
Equities (4)         
Canadian  3,22821.4%  3,204  -  24
U.S.  1,3168.7%  1,316  -  -
International  3,07620.4%  3,076  -  -
Real estate (5)  3182.1%  -  -  318
Oil and gas (6)  1,1417.6%  289  -  852
Infrastructure (7)  6074.0%  29  85  493
Absolute return (8)         
Multi-strategy funds  3112.1%  -  106  205
Fixed income funds  1971.3%  -  197  -
Commodity funds  750.5%  -  75  -
Equity funds  1481.0%  -  147  1
Global macro funds  2921.9%  -  292  -
 $ 15,05899.8%$ 8,373$ 4,792$ 1,893
Other (9)  340.2%      
Total plan assets$ 15,092100%      
Level 1: Fair value based on quoted prices in active markets for identical assets
Level 2: Fair value based on significant observable inputs
Level 3: Fair value based on significant unobservable inputs  Footnotes to the tables follow on the next page

                    
The following table reconciles the beginning and ending balances of the fair value of investments classified as Level 3.
                    
  Fair value measurements using significant unobservable inputs (Level 3) Additional information (10)
                Infra- stracture hedged  Absolute return hedged
In millions Equities (4) Real estate (5) Oil and gas (6) Infrastructure (7) Absolute return (8) Total    
Beginning balance at                  
December 31, 2009$ 18$ 266$ 752$ 449$ 182$1,667 $ 449$  182
 Actual return relating to assets still held at the reporting date  3  32  90  19  (11) 133   46   -
 Purchases, sales and settlements  3  (14)  (48)  25  109 75   1   99
 Transfers in and/or out of Level 3  -  34  58  -  (74)  18   -   (74)
Balance at                  
December 31, 2010$ 24$ 318$ 852$ 493$ 206$1,893 $ 496$  207
 Actual return relating to assets still held at the reporting date  2  58  90  74  (7) 217   63   (8)
 Purchases, sales and settlements  (4)  (162)  (53)  52  (1) (168)   62   (1)
 Transfers in and/or out of Level 3  -  -  -  -  (198)  (198)   -   (198)
Ending balance at                  
December 31, 2011$ 22$ 214$ 889$ 619$ -$1,744 $621$  -
                    
                    
(1)Short-term investments consist primarily of securities issued by Canadian chartered banks. Such investments are valued at cost, which approximates fair value.
(2)Bonds are valued using prices obtained from independent pricing data suppliers, predominantly TSX Inc. When prices are not available from independent sources, the bond is valued by comparison to prices obtained for a bond of similar interest rate, maturity and risk.
(3)Mortgages are secured by real estate. The fair value measurement of $170 million ($175 million in 2010) of mortgages categorized as Level 2 is based on current market yields of financial instruments of similar maturity, coupon and risk factors. Mortgages denominated in foreign currencies are fully hedged back to the Canadian dollar, the effects of which are reflected in the values presented in the tables above.
                    
                    
(4)The fair value of equity investments of $22 million ($24 million in 2010) categorized as Level 3 represent units in private equity funds which are valued by their administrators.
(5)The fair value of real estate investments of $214 million ($318 million in 2010) includes land and buildings classified as Level 3. Land is valued based on the fair value of comparable assets, and buildings are valued based on the present value of estimated future net cash flows or the fair value of comparable assets. Independent valuations of land and buildings are performed triennially.
(6)The fair value of oil and gas investments of $889 million ($852 million in 2010) classified as Level 3 is valued based on estimated future net cash flows that are discounted using prevailing market rates for transactions in similar assets. The future net cash flows are based on forecasted oil and gas prices and projected future annual production and costs.
(7)Infrastructure funds consist of $9 million ($29 million in 2010) of trust units that are publicly traded and classified as Level 1, $79 million ($85 million in 2010) of bank loans and bonds issued by infrastructure companies classified as Level 2 and $619 million ($493 million in 2010) of infrastructure funds that are classified as Level 3 and are valued based on earnings multiples. Infrastructure funds cannot be redeemed; distributions will be received from the funds as the underlying investments are liquidated. Infrastructure funds denominated in foreign currencies are fully hedged back to the Canadian dollar, the effects of which are reflected in the values presented in the additional information table presented above.
(8)Absolute return investments are valued using the net asset value as reported by the fund administrators. All hedge fund investments have contractual redemption frequencies, ranging from monthly to annually, and redemption notice periods varying from 5 to 90 days. Hedge fund investments that have redemption dates less frequent than every four months or that have restrictions on contractual redemption features at the reporting date are classified as Level 3. During the year, absolute return investments having a fair value of $198 million (nil in 2010) were transferred from Level 3 to Level 2 as the restrictions on redemption were lifted.
                    
                    
(9)Other consists of net operating assets required to administer the trust funds' investment assets and the plans' benefit and funding activities. Such assets are valued at cost and have not been assigned to a fair value category.
                    
                    
(10)This additional information demonstrates the fair value of the infrastructure and absolute return funds after considering the effects of foreign currency hedges.
                    

D. Additional disclosures

              
(i) Obligations and funded status            
              
              
   Pensions Other postretirement benefits
In millionsYear ended December 31, 2011  2010  2011  2010
              
              
Change in benefit obligation            
Projected benefit obligation at beginning of year$14,895 $13,708 $283 $268
Amendments 27  5  1  -
Interest cost  788  837  14  16
Actuarial loss (gain) 577  1,118  (2)  22
Service cost  124  99  4  3
Curtailment gain -  -  (1)  (1)
Plan participants’ contributions  54  50  -  -
Foreign currency changes  5  (12)  3  (6)
Benefit payments, settlements and transfers  (922)  (910)  (18)  (19)
Projected benefit obligation at end of year $15,548 $14,895 $284 $283
              
Component representing future salary increases (437)  (439)  -  -
Accumulated benefit obligation at end of year$15,111 $14,456 $284 $283
              
              
Change in plan assets            
Fair value of plan assets at beginning of year$15,092 $14,332 $- $-
Employer contributions  458  411  -  -
Plan participants’ contributions  54  50  -  -
Foreign currency changes  1  (8)  -  -
Actual return on plan assets  36  1,217  -  -
Benefit payments, settlements and transfers  (922)  (910)  -  -
Fair value of plan assets at end of year $14,719 $15,092 $- $-
              
              
Funded status (Excess (deficiency) of fair value of plan assets over           
projected benefit obligation at end of year)$(829) $197 $(284) $(283)
              
              
              
Measurement date for all plans is December 31.           
The projected benefit obligation and fair value of plan assets for the CN Pension Plan at December 31, 2011 were $14,514 million and $13,992 million respectively ($13,941 million and $14,343 million, respectively, at December 31, 2010).
              
              
(ii) Amounts recognized in the Consolidated Balance Sheet           
   Pensions Other postretirement benefits
In millionsDecember 31, 2011  2010  2011  2010
              
Noncurrent assets (Note 6) $- $442 $- $-
Current liabilities (Note 7)  -  -  (18)  (18)
Noncurrent liabilities   (829)  (245)  (266)  (265)
Total amount recognized $(829) $197 $(284) $(283)
              
              
(iii) Amounts recognized in Accumulated other comprehensive loss (Note 19)      
   Pensions Other postretirement benefits
In millionsDecember 31, 2011  2010  2011  2010
Net actuarial gain (loss) $(2,720) $(1,185) $3 $1
Prior service cost $(30) $(5) $(3) $(4)
              
              
(iv) Information for the pension plans with an accumulated benefit obligation in excess of plan assets 
   Pensions Other postretirement benefits
In millionsDecember 31, 2011  2010  2011  2010
Projected benefit obligation $15,015 $436  N/A  N/A
Accumulated benefit obligation $14,606 $386  N/A  N/A
Fair value of plan assets $14,191 $191  N/A  N/A
              

                    
(v) Components of net periodic benefit cost (income)                 
   Pensions Other postretirement benefits
In millionsYear ended December 31, 2011  2010  2009  2011  2010  2009
Service cost$124 $99 $83 $4 $3 $3
Interest cost  788  837  885  14  16  17
Curtailment gain -  -  -  (1)  (1)  (3)
Settlement loss 3  -  -  -  -  -
Expected return on plan assets  (1,005)  (1,009)  (1,007)  -  -  -
Amortization of prior service cost  2  -  -  2  2  5
Recognized net actuarial loss (gain) 8  3  5  -  (2)  (3)
Net periodic benefit cost (income)$(80) $(70) $(34) $19 $18 $19
                    
The estimated prior service cost and net actuarial loss for defined benefit pension plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost (income) over the next fiscal year are $4 million and $123 million, respectively.
The estimated prior service cost and net actuarial gain for other postretirement benefits that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost (income) over the next fiscal year are $2 million and nil, respectively.
                    
                    
(vi) Weighted-average assumptions used in accounting for pensions and other postretirement benefits
    Pensions  Other postretirement benefits
  December 31, 2011  2010  2009  2011  2010  2009
                    
To determine projected benefit obligation                 
Discount rate (1) 4.84%  5.32%  6.19%  4.70%  5.29%  6.01%
Rate of compensation increase (2) 3.25%  3.50%  3.50%  3.25%  3.50%  3.50%
                    
To determine net periodic benefit cost                 
Discount rate (1) 5.32%  6.19%  7.42%  5.29%  6.01%  6.84%
Rate of compensation increase (2) 3.50%  3.50%  3.50%  3.50%  3.50%  3.50%
Expected return on plan assets (3) 7.50%  7.75%  7.75%  N/A  N/A  N/A
                    
(1)The Company’s discount rate assumption, which is set annually at the end of each year, is used to determine the projected benefit obligation at the end of the year and the net periodic benefit cost for the following year. The discount rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments with a rating of AA or better, would provide the necessary cash flows to pay for pension benefits as they become due. The discount rate is determined by management with the aid of third-party actuaries. The Company’s methodology for determining the discount rate is based on a zero-coupon bond yield curve, which is derived from semi-annual bond yields provided by a third party. The portfolio of hypothetical zero-coupon bonds is expected to generate cash flows that match the estimated future benefit payments of the plans as the bond rate for each maturity year is applied to the plans’ corresponding expected benefit payments of that year.
(2)The rate of compensation increase is determined by the Company based upon its long-term plans for such increases.
(3)To develop its expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related value of assets, the Company considers multiple factors. The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the current asset portfolio mix. Consideration is taken of the historical performance, the premium return generated from an actively managed portfolio, as well as current and future anticipated asset allocations, economic developments, inflation rates and administrative expenses. Based on these factors, the rate is determined by the Company. For 2011, the Company used a long-term rate of return assumption of 7.50% on the market-related value of plan assets to compute net periodic benefit cost. The Company has elected to use a market-related value of assets, whereby realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are recognized over a period of five years, while investment income is recognized immediately. Effective January 1, 2012 the Company will reduce the expected long-term rate of return on plan assets from 7.50% to 7.25% to reflect management's current view of long term investment returns. The effect of this change in management's assumption will be to increase net periodic benefit cost by approximately $20 million.
                    
                    
(vii) Health care cost trend rate for other postretirement benefits       
For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 10% and 9% for 2011 and 2012, respectively. It is assumed that the rate will decrease gradually to 4.5% in 2028 and remain at that level thereafter.
Assumed health care costs have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed health care cost trend rate would have the following effect:
                    
In millions        One-percentage-point
               Increase Decrease
Effect on total service and interest costs            $1 $(1)
Effect on benefit obligation            $16 $(14)
                    
                    
(viii) Estimated future benefit payments
                    
In millions       Pensions   Other postretirement benefits
2012      $973       $18
2013      $996       $18
2014      $1,018       $19
2015      $1,040       $19
2016      $1,060       $19
Years 2017 to 2021      $5,444       $98
                    

E. Defined contribution and other plans

The Company maintains defined contribution pension plans for certain salaried employees as well as certain employees covered by collective bargaining agreements. The Company also maintains other plans including Section 401(k) savings plans for certain U.S. based employees. The Company's contributions under these plans are expensed as incurred and amounted to $10 million, $16 million and $8 million for 2011, 2010 and 2009, respectively.

 

F. Contributions to multi-employer plan

Under collective bargaining agreements, the Company participates in a multiemployer benefit plan named the Railroad Employees National Early Retirement Major Medical Benefit Plan which is administered by the National Carriers' Conference Committee (NCCC), and provides certain postretirement health care benefits to certain retirees. The Company's contributions under this plan are expensed as incurred and amounted to $11 million, $10 million and $8 million in 2011, 2010 and 2009, respectively. The annual contribution rate for the plan is determined by the NCCC and for 2011 was $164.41 per month per active employee ($155.96 in 2010). The plan covered 846 retirees in 2011 (716 in 2010).