Pension Plans and Other Postretirement Benefits

12 Months Ended

Dec. 31, 2013

Notes To Financial Statements [Abstract]

Pensions and other postretirement benefits

11 – 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 employees (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.

On February 4, 2013, the Company's COO resigned to join the Company's major competitor in Canada. As a result, compensation amounts accumulated under the non-registered pension plans subject to non-compete and non-solicitation agreements were forfeited. The Company has recorded an actuarial gain related to the amounts forfeited. In 2012, the Company cancelled the $1.5 million annual retirement benefit otherwise due to its former CEO after determining that the former CEO was likely in breach of the non-compete, non-solicitation and non-disclosure of confidential information conditions contained in the former CEO's employment agreement. The Company recorded a settlement gain of $20 million from the termination of the former CEO's retirement benefit plan for the period beyond June 28, 2012 which was partially offset by the recognition of past accumulated actuarial losses of approximately $4 million. In February 2013, the Company entered into confidential agreements to settle these matters.

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 and regulations thereto, and are determined by actuarial valuations. Actuarial valuations are generally required on an annual basis 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 Company's most recently filed actuarial valuations conducted as at December 31, 2012 indicated a funding excess on a going-concern basis of approximately $1.4 billion and a funding deficit on a solvency basis of approximately $2.1 billion calculated using the three-year average of the Company's hypothetical wind-up ratio in accordance with the Pension Benefit Standards Regulations, 1985. The Company's next actuarial valuations required as at December 31, 2013 will be performed in 2014. These actuarial valuations are expected to identify a going-concern surplus of approximately $1.7 billion, while on a solvency basis a funding deficit of approximately $1.7 billion is expected due to the level of interest rates applicable at their respective measurement dates. 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 2013, in anticipation of its future funding requirements, the Company made voluntary contributions of $100 million in excess of the required contributions mainly to strengthen the financial position of its main pension plan, the CN Pension Plan. These voluntary contributions can be treated as a prepayment against its future required special solvency deficit payments. As at December 31, 2013, the Company had $470 million of accumulated prepayments which remain available to offset future required solvency deficit payments. The Company expects to use approximately $335 million of these prepayments to satisfy its 2014 required solvency deficit payment. As a result, the Company's cash contributions for 2014 are expected to be $130 million, for all the Company's pension plans. As at February 3, 2014, the Company contributed $89 million to its defined benefit pension plans for 2014.

C. Plan assets

The assets of the Company's various Canadian defined benefit pension plans are held in separate trust funds (Trusts) 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 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.

Annually, the CN Investment Division (Investment Manager), 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 and compares the actual performance of the Trusts to the performance of the benchmark indices.

The Company's 2013 target long-term asset mix and actual asset allocation for the Company's pension plans based on fair value, are as follows:

	Target	Percentage
	long-term	of plan assets
Asset allocation	asset mix	2013	2012

Cash and short-term investments	3%	5%	4%
Bonds and mortgages	37%	25%	28%
Equities	45%	41%	41%
Real estate	4%	2%	2%
Oil and gas	7%	8%	8%
Infrastructure	4%	5%	4%
Absolute return	-	10%	9%
Risk-based allocation	-	4%	4%
Total	100%	100%	100%

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, hedge, and adjust existing or anticipated exposures. The SIPP prohibits investments in securities of the Company or its subsidiaries. Investments held in the Trusts consist mainly of the following:

Cash and short-term investments consist primarily of highly liquid investments which ensure adequate cash flows are available to cover near-term benefit payments. Short-term investments are mainly obligations issued by Canadian chartered banks.
Bonds include bond instruments, issued or guaranteed by governments and corporate entities, as well as corporate notes. As at December 31, 2013, 91% 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.
Equity investments are primarily publicly traded securities, well diversified by country, issuer and industry sector. In 2013, the most significant allocation to an individual issuer was approximately 2% and the most significant allocation to an industry sector was approximately 25%.
Real estate is a diversified portfolio of Canadian land and commercial properties held by the Trusts' wholly-owned subsidiaries.
Oil and gas investments include petroleum and natural gas properties operated by the Trusts' wholly-owned subsidiaries and listed and non-listed Canadian securities of oil and gas companies.
Infrastructure investments include participations in private infrastructure funds, public and private debt and publicly traded equity securities of infrastructure and utility companies. Some of these investments are held by the Trusts' wholly-owned subsidiaries.
Absolute return investments are a portfolio of units of externally managed hedge funds, which are invested in various long/short strategies within fixed income, commodities, equities, global macro and multi-strategy funds, as presented in the table of fair value measurement. External managers are monitored on a continuous basis through investment and operational due diligence.
Risk-based allocation is a portfolio of externally managed funds where each asset class contributes equally to the overall risk of the portfolio in order to capture over time different asset classes risk premiums. Some of these investments are held by the Trusts' wholly-owned subsidiaries.

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 66% exposed to the Canadian dollar, 14% to the US dollar, 8% to European currencies, and 12% to various other currencies as at December 31, 2013. 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, and equity or commodity prices. They include forwards, futures, options and swaps and are included in investment categories based on their underlying exposure. 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.

The following tables present the fair value of plan assets as at December 31, 2013 and 2012 by asset class, their level within the fair value hierarchy and the valuation techniques and inputs used to measure such fair value:

In millions				Fair value measurements at December 31, 2013
Asset class		Total		Level 1		Level 2		Level 3
Cash and short-term investments ⁽¹⁾	$	897	$	16	$	881	$	-
Bonds ⁽²⁾
Canada, U.S. and supranational		1,416		-		1,416		-
Provinces of Canada and municipalities		2,297		-		2,297		-
Corporate		111		-		111		-
Emerging market debt		261		-		261		-
Mortgages ⁽³⁾		166		-		166		-
Equities ⁽⁴⁾
Canadian		2,160		2,138		-		22
U.S.		1,307		1,307		-		-
International		3,421		3,421		-		-
Real estate ⁽⁵⁾		299		-		-		299
Oil and gas ⁽⁶⁾		1,380		379		40		961
Infrastructure ⁽⁷⁾		788		10		115		663
Absolute return funds⁽⁸⁾						-		-
Multi-strategy		460		-		460		-
Fixed income		519		-		486		33
Equity		391		2		389		-
Global macro		328		-		328		-
Risk-based allocation ⁽⁹⁾		607		-		607		-
	$	16,808	$	7,273	$	7,557	$	1,978
Other ⁽¹⁰⁾		61
Total plan assets	$	16,869

In millions				Fair value measurements at December 31, 2012
Asset class		Total		Level 1		Level 2		Level 3
Cash and short-term investments ⁽¹⁾	$	615	$	13	$	602	$	-
Bonds ⁽²⁾
Canada, U.S. and supranational		1,735		-		1,735		-
Provinces of Canada		2,152		-		2,152		-
Corporate		35		-		35		-
Emerging market debt		353		-		353		-
Mortgages ⁽³⁾		133		-		133		-
Equities ⁽⁴⁾
Canadian		2,220		2,198		-		22
U.S.		1,121		1,121		-		-
International		3,082		3,082		-		-
Real estate ⁽⁵⁾		279		-		-		279
Oil and gas ⁽⁶⁾		1,339		370		29		940
Infrastructure ⁽⁷⁾		679		8		94		577
Absolute return funds⁽⁸⁾
Multi-strategy		410		-		410		-
Fixed income		425		-		415		10
Commodity		91		-		91		-
Equity		259		-		259		-
Global macro		296		-		296		-
Risk-based allocation ⁽⁹⁾		586		-		586		-
	$	15,810	$	6,792	$	7,190	$	1,828
Other ⁽¹⁰⁾		1
Total plan assets	$	15,811
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 table 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 based on significant unobservable inputs (Level 3)

In millions			Equities ⁽⁴⁾		Real estate ⁽⁵⁾		Oil and gas ⁽⁶⁾		Infrastructure ⁽⁷⁾		Absolute return ⁽⁸⁾		Total
Beginning balance at
December 31, 2011		$	22	$	214	$	889	$	619	$	-	$	1,744
	Actual return relating to assets still held at the reporting date		2		68		90		(13)		-		147
	Purchases, sales and settlements		(2)		(3)		(39)		(29)		10		(63)
Balance at
December 31, 2012		$	22	$	279	$	940	$	577	$	10	$	1,828
	Actual return relating to assets still held at the reporting date		2		26		72		43		3		146
	Purchases, sales and settlements		(2)		(6)		(51)		43		20		4
Ending balance at
December 31, 2013		$	22	$	299	$	961	$	663	$	33	$	1,978


(1)	Cash and short-term investments are valued at cost, which approximates fair value, and are categorized as Level 1 for cash and Level 2 for short-term investments.
(2)	Bonds are valued using mid-price bids obtained from independent pricing data suppliers, predominantly TMX Group Inc. When prices are not available from independent sources, the fair value is based on the present value of future cash flows using current market yields for comparable instruments. All bonds are categorized as Level 2.
(3)	Mortgages are secured by real estate. The fair value of $166 million ($133 million in 2012) of mortgages categorized as Level 2 is based on the present value of future cash flows using current market yields for comparable instruments.

(4)	The fair value of equity investments categorized as Level 1 is based on quoted prices in active markets. The fair value of equity investments of $22 million ($22 million in 2012) categorized as Level 3 represent units in private equity funds which are valued by their independent administrators.
(5)	The fair value of real estate investments of $299 million ($279 million in 2012) includes land and buildings classified as Level 3 and is presented net of related mortgage debt of $41 million ($48 million in 2012). 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 on a rotational basis.
(6)	Oil and gas investments categorized as Level 1 are valued based on quoted prices in active markets. Investments in oil and gas equities traded on a secondary market are valued based on the most recent transaction price and are categorized as Level 2. Investments of $961 million ($940 million in 2012) classified as Level 3 consist of operating oil and gas properties and the fair value is 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 investments consist of $10 million ($8 million in 2012) of publicly traded equity securities of infrastructure companies classified as Level 1, $115 million ($94 million in 2012) of public and private debt issued by infrastructure companies classified as Level 2 and $663 million ($577 million in 2012) of infrastructure funds that are classified as Level 3 and are valued based on discounted cash flows or earnings multiples. Infrastructure funds cannot be redeemed; distributions will be received from the funds as the underlying investments are liquidated.
(8)	Absolute return investments are valued using the net asset value as reported by the independent fund administrators. All absolute return investments have contractual redemption frequencies, ranging from monthly to annually, and redemption notice periods varying from 5 to 90 days. Absolute return 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.

(9)	Risk-based allocation investments are valued using the net asset value as reported by the independent fund administrators and are classified as Level 2. All funds have contractual redemption frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.

(10)	Other consists of operating assets of $85 million ($94 million in 2012) and liabilities of $24 million ($93 million in 2012) required to administer the Trusts' 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.

D. Additional disclosures


(i) Obligations and funded status


			Pensions				Other postretirement benefits
In millions		Year ended December 31,		2013		2012		2013		2012


Change in benefit obligation
Projected benefit obligation at beginning of year			$	16,335	$	15,548	$	277	$	284
Amendments				-		-		-		6
Interest cost				658		740		11		13
Actuarial loss (gain)				(747)		812		(22)		(3)
Service cost				155		134		3		4
Curtailment gain				-		-		-		(6)
Plan participants’ contributions				56		55		-		-
Foreign currency changes				16		(5)		5		(3)
Benefit payments, settlements and transfers (1)				(963)		(949)		(18)		(18)
Projected benefit obligation at end of year			$	15,510	$	16,335	$	256	$	277
Component representing future salary increases				(344)		(443)		-		-
Accumulated benefit obligation at end of year			$	15,166	$	15,892	$	256	$	277

Change in plan assets
Fair value of plan assets at beginning of year			$	15,811	$	14,719	$	-	$	-
Employer contributions				226		833		-		-
Plan participants’ contributions				56		55		-		-
Foreign currency changes				10		(2)		-		-
Actual return on plan assets				1,728		1,135		-		-
Benefit payments, settlements and transfers				(962)		(929)		-		-
Fair value of plan assets at end of year			$	16,869	$	15,811	$	-	$	-

Funded status (Excess (deficiency) of fair value of plan assets over projected
benefit obligation at end of year)			$	1,359	$	(524)	$	(256)	$	(277)



(1)	Includes the settlement gain related to the termination of the former CEO's retirement benefit plan in 2012.
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, 2013 were $14,458 million and $16,059 million respectively ($15,247 million and $15,042 million, respectively, at December 31, 2012).

(ii) Amounts recognized in the Consolidated Balance Sheet
			Pensions				Other postretirement benefits
In millions		December 31,		2013		2012		2013		2012

Noncurrent assets (Note 5)			$	1,662	$	-	$	-	$	-
Current liabilities (Note 6)				-		-		(18)		(17)
Noncurrent liabilities				(303)		(524)		(238)		(260)
Total amount recognized			$	1,359	$	(524)	$	(256)	$	(277)


(iii) Amounts recognized in Accumulated other comprehensive loss (Note 18)
			Pensions				Other postretirement benefits
In millions		December 31,		2013		2012		2013		2012
Net actuarial gain (loss)			$	(1,515)	$	(3,264)	$	27	$	6
Prior service cost			$	(22)	$	(26)	$	(5)	$	(6)


(iv) Information for the pension plans with an accumulated benefit obligation in excess of plan assets
			Pensions				Other postretirement benefits
In millions		December 31,		2013		2012		2013		2012
Projected benefit obligation			$	527	$	526		N/A		N/A
Accumulated benefit obligation			$	475	$	461		N/A		N/A
Fair value of plan assets			$	224	$	201		N/A		N/A


(v) Components of net periodic benefit cost (income)
			Pensions						Other postretirement benefits
In millions		Year ended December 31,		2013		2012		2011		2013			2012		2011
Service cost			$	155	$	134	$	124	$	3		$	4	$	4
Interest cost				658		740		788		11			13		14
Curtailment gain				-		-		-		-			(6)		(1)
Settlement loss (gain) ⁽¹⁾				4		(12)		3		-			-		-
Expected return on plan assets				(958)		(994)		(1,005)		-			-		-
Amortization of prior service cost				4		4		2		1			3		2
Amortization of net actuarial loss (gain)				227		119		8		(1)			-		-
Net periodic benefit cost (income)			$	90	$	(9)	$	(80)	$	14		$	14	$	19

(1)	Includes the settlement gain related to the termination of the former CEO's retirement benefit plan in 2012.
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 $129 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 $4 million, respectively.


(vi) Weighted-average assumptions used in accounting for pensions and other postretirement benefits
				Pensions						Other postretirement benefits
		December 31,		2013		2012		2011		2013			2012		2011

To determine projected benefit obligation
Discount rate ⁽¹⁾				4.73%		4.15%		4.84%		4.69%			4.01%		4.70%
Rate of compensation increase ⁽²⁾				3.00%		3.00%		3.25%		3.00%			3.00%		3.25%

To determine net periodic benefit cost
Discount rate ⁽¹⁾				4.15%		4.84%		5.32%		4.01%			4.70%		5.29%
Rate of compensation increase ⁽²⁾				3.00%		3.25%		3.50%		3.00%			3.25%		3.50%
Expected return on plan assets ⁽³⁾				7.00%		7.25%		7.50%		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. For the Canadian pension and other postretirement benefit plans, future expected benefit payments at each measurement date are discounted using spot rates from a derived AA corporate bond yield curve. The derived curve is based on observed rates for AA corporate bonds with short-term maturities and a projected AA corporate curve for longer term maturities based on spreads between observed AA corporate bonds and AA provincial bonds. The derived curve 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 2013, the Company used a long-term rate of return assumption of 7.00% 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. In 2014, the Company will maintain the expected long-term rate of return on plan assets at 7.00% to reflect management's current view of long-term investment returns.


(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 8% for 2013 and 2014. 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	$	-
Effect on benefit obligation												$	10	$	(9)


(viii) Estimated future benefit payments
In millions							Pensions				Other postretirement benefits
2014							$	991						$	18
2015							$	1,011						$	19
2016							$	1,033						$	19
2017							$	1,048						$	19
2018							$	1,058						$	19
Years 2019 to 2023							$	5,367						$	95

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 $13 million, $11 million and $10 million for 2013, 2012 and 2011, respectively.

F. Contributions to multi-employer plan

Under collective bargaining agreements, the Company participates in a multi-employer 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 $10 million, $11 million and $11 million in 2013, 2012 and 2011, respectively. The annual contribution rate for the plan is determined by the NCCC and for 2013 was $143.21 per month per active employee ($154.49 in 2012). The plan covered 867 retirees in 2013 (874 in 2012).