Pensions and other benefits

The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2016, the Canadian pension plans represent approximately 99% of total combined pension plan assets and approximately 98% of total combined pension plan obligations.

The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer contributions to the DB plans, which are actuarially determined, are made on the basis of being not less than the minimum amounts required by federal pension supervisory authorities.

The Company has other benefit plans including post-retirement health and life insurance for pensioners, and post-employment long-term disability and workers’ compensation benefits, which are based on Company-specific claims. At December 31, 2016, the Canadian other benefits plans represent approximately 96% of total combined other plan obligations.

The Finance Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets which take into account the Company’s expected risk tolerances. Pension plan assets are managed by a suite of independent investment managers, with the allocation by manager reflecting these asset mix targets. Most of the assets are actively managed with the objective of outperforming applicable benchmarks. In accordance with the investment policy, derivative instruments may be used to hedge or adjust existing or anticipated exposures.

To develop the 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 the expected composition of the plans’ assets, past experience and future estimates of long-term investment returns. Future estimates of investment returns reflect the expected annual yield on applicable fixed income capital market indices, and the long-term return expectation for public equity, real estate, infrastructure and absolute return investments and the expected added value (relative to applicable benchmark indices) from active management of pension fund assets.

The Company has elected to use a market-related value of assets for the purpose of calculating net periodic benefit cost, developed from a five-year average of market values for the plans’ public equity and absolute return investments (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the plans’ fixed income, real estate and infrastructure securities.

The benefit obligation is discounted using a discount rate that is a blended yield to maturity for a hypothetical portfolio of high-quality corporate debt instruments with cash flows matching project benefit payments. The discount rate is determined by management.

Net periodic benefit cost

The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year include the following components:



	Pensions									Other benefits
(in millions of Canadian dollars)	2016			2015			2014			2016		2015		2014
Current service cost (benefits earned by employees in the year)	$	106		$	126		$	106		$	11	$	12	$	14
Interest cost on benefit obligation	467			463			477			21		21		23
Expected return on fund assets	(846		)	(816		)	(757		)	—		—		—
Recognized net actuarial loss (gain)	190			265			190			7		2		(2		)
Amortization of prior service costs	(7		)	(6		)	(68		)	1		1		—
Net periodic benefit (recovery) cost	$	(90	)	$	32		$	(52	)	$	40	$	36	$	35

Projected benefit obligation, fund assets, and funded status

Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:



	Pensions						Other benefits
(in millions of Canadian dollars)	2016			2015			2016			2015
Change in projected benefit obligation:
Benefit obligation at January 1	$	11,194		$	11,360		$	513		$	517
Current service cost	106			126			11			12
Interest cost	467			463			21			21
Employee contributions	40			43			1			1
Benefits paid	(645		)	(608		)	(31		)	(34		)
Foreign currency changes	(7		)	42			—			4
Plan amendments and other	6			(6		)	—			—
Actuarial loss (gain)	238			(226		)	(5		)	(8		)
Projected benefit obligation at December 31	$	11,399		$	11,194		$	510		$	513



	Pensions						Other benefits
(in millions of Canadian dollars)	2016			2015			2016			2015
Change in fund assets:
Fair value of fund assets at January 1	$	12,300		$	11,376		$	6		$	7
Actual return on fund assets	461			1,374			(1		)	(1		)
Employer contributions	48			81			30			33
Employee contributions	40			43			1			1
Benefits paid	(645		)	(608		)	(31		)	(34		)
Foreign currency changes	(8		)	34			—			—
Fair value of fund assets at December 31	$	12,196		$	12,300		$	5		$	6
Funded status – plan surplus (deficit)	$	797		$	1,106		$	(505	)	$	(507	)



	2016						2015
(in millions of Canadian dollars)	Pension plans in surplus			Pension plans in deficit			Pension plans in surplus			Pension plans in deficit
Projected benefit obligation at December 31	$	(10,902	)	$	(497	)	$	(10,681	)	$	(513	)
Fair value of fund assets at December 31	11,972			224			12,082			218
Funded Status	$	1,070		$	(273	)	$	1,401		$	(295	)

All Other benefits plans were in a deficit position at December 31, 2016 and 2015.

Pension asset and liabilities in the Company’s Consolidated Balance Sheets

Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:



	Pensions						Other benefits
(in millions of Canadian dollars)	2016			2015			2016			2015
Pension asset	$	1,070		$	1,401		$	—		$	—
Accounts payable and accrued liabilities	(10		)	(10		)	(34		)	(34		)
Pension and other benefit liabilities	(263		)	(285		)	(471		)	(473		)
Total amount recognized	$	797		$	1,106		$	(505	)	$	(507	)

The defined benefit pension plans’ accumulated benefit obligation as at December 31, 2016 was $11,143 million (2015 – $10,893 million). The accumulated benefit obligation is calculated on a basis similar to the projected benefit obligation, except no future salary increases are assumed in the projection of future benefits.

The measurement date used to determine the plan assets and the accrued benefit obligation is December 31. The most recent actuarial valuation for pension funding purposes for the Company’s main Canadian pension plan was performed as at January 1, 2016. During 2017, the Company expects to file a new valuation with the pension regulator.

Accumulated other comprehensive losses

Amounts recognized in accumulated other comprehensive losses are as follows:



	Pensions						Other benefits
(in millions of Canadian dollars)	2016			2015			2016			2015
Net actuarial loss:
Other than deferred investment gains	$	2,842		$	3,144		$	66		$	77
Deferred investment gains	(366		)	(1,101		)	—			—
Prior service cost	(7		)	(20		)	3			4
Deferred income tax	(699		)	(580		)	(17		)	(20		)
Total (Note 7)	$	1,770		$	1,443		$	52		$	61

The unamortized actuarial loss and the unamortized prior service cost included in “Accumulated other comprehensive loss” that are expected to be recognized in net periodic benefit cost during 2017 are $153 million and a recovery of $5 million, respectively, for pensions and $2 million and $1 million, respectively, for other post-retirement benefits.

Actuarial assumptions

Weighted-average actuarial assumptions used were approximately:



(percentages)	2016		2015		2014
Benefit obligation at December 31:
Discount rate	4.02		4.22		4.09
Projected future salary increases	2.75		3.00		3.00
Health care cost trend rate	7.00	⁽¹⁾	7.00	⁽²⁾	7.00	⁽²⁾
Benefit cost for year ended December 31:
Discount rate	4.22		4.09		4.90
Expected rate of return on fund assets	7.75		7.75		7.75
Projected future salary increases	3.00		3.00		3.00
Health care cost trend rate	7.00	⁽²⁾	7.00	⁽²⁾	7.50	⁽³⁾

⁽¹⁾The health care cost trend rate is assumed to be 7.00% in 2017 and 2018, and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2022 and thereafter.

⁽²⁾The health care cost trend rate was previously assumed to be 6.50% in 2017 (7.00% in 2016 and 2015), and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2020 and thereafter.

⁽³⁾ For the 2014 benefit cost, the health care cost trend rate was assumed to be 6.00% in 2017 (6.50% in 2016, 7.00% in 2015, 7.50% in 2014), and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2019 and thereafter.

Assumed health care cost trend rates affect the amounts reported for the health care plans. A one-percentage-point increase in the assumed health care cost trend rate would increase the post-retirement benefit obligation by $6 million, and a one-percentage-point decrease in the assumed health care cost trend rate would decrease the post-retirement benefit obligation by $5 million. A one-percentage-point increase or decrease in the assumed health care cost trend rate would have no material effect on the total of service and interest costs.

In 2014, the Canadian Institute of Actuaries and the Society of Actuaries each published updated mortality tables based on broad pension plan experience in Canada and the U.S., respectively. At December 31, 2014, the Company changed the basis for its obligations for defined benefit pension and post-retirement benefit plans to these new mortality tables, with adjustments to reflect actual plan mortality experience to the extent that credible experience data were available. The changes to the new mortality tables increased the obligations for pensions and post-retirement benefits at that date by approximately $225 million. The Company's obligations for defined benefit pension and post-retirement benefit plans continue to be based on the new mortality tables at December 31, 2016.

Plan assets

Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure and absolute return investments. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate values are based on annual valuations performed by external parties, taking into account current market conditions and recent sales transactions where practical and appropriate. Infrastructure values are based on the fair value of each fund’s assets as calculated by the fund manager, generally using a discounted cash flow analysis that takes into account current market conditions and recent sales transactions where practical and appropriate. Absolute return investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.

The Company’s pension plan asset allocation, the current weighted average asset allocation targets and the current weighted average policy range for each major asset class, were as follows:



	Current asset allocation target	Current policy range	Percentage of plan assets at December 31
Asset allocation (percentage)	Current asset allocation target	Current policy range	2016	2015
Cash and cash equivalents	0.5	0 – 5	1.1	1.1
Fixed income	29.5	20 – 40	21.4	21.0
Public equity	46.0	35 – 55	53.8	54.5
Real estate and infrastructure	12.0	4 – 20	7.5	5.8
Absolute return	12.0	0 – 18	16.2	17.6
Total	100.0		100.0	100.0

Summary of the assets of the Company’s DB pension plans at fair values

The following is a summary of the assets of the Company’s DB pension plans at fair values at December 31, 2016 and 2015:



(in millions of Canadian dollars)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV⁽¹⁾		Total
December 31, 2016
Cash and cash equivalents	$	121	$	11	$	—	$	—	$	132
Fixed income
• Government bonds⁽²⁾	—		1,357		—		—		1,357
• Corporate bonds⁽²⁾	—		1,186		—		—		1,186
• Mortgages⁽³⁾	—		71		—		—		71
Public equities
• Canada	1,480		57		—		—		1,537
• U.S. and international	4,985		36		—		—		5,021
Real estate⁽⁴⁾	—		—		437		188		625
Derivative assets⁽⁵⁾	—		7		—		—		7
Absolute return⁽⁶⁾
• Funds of hedge funds	—		—		—		668		668
• Multi-strategy funds	—		—		—		502		502
• Credit funds	—		—		—		505		505
• Equity funds	—		—		—		300		300
Infrastructure⁽⁷⁾	—		—		—		285		285
	$	6,586	$	2,725	$	437	$	2,448	$	12,196
December 31, 2015
Cash and cash equivalents	$	129	$	11	$	—	$	—	$	140
Fixed income
• Government bonds⁽²⁾	—		1,276		—		—		1,276
• Corporate bonds⁽²⁾	—		1,228		—		—		1,228
• Mortgages⁽³⁾	—		81		—		—		81
Public equities
• Canada	1,449		46		—		—		1,495
• U.S. and international	5,169		34		—		—		5,203
Real estate⁽⁴⁾	—		—		451		—		451
Derivative assets⁽⁵⁾	—		—		—		—		—
Absolute return⁽⁶⁾
• Funds of hedge funds	—		—		—		781		781
• Multi-strategy funds	—		—		—		517		517
• Credit funds	—		—		—		555		555
• Equity funds	—		—		—		311		311
Infrastructure⁽⁷⁾	—		—		—		262		262
	$	6,747	$	2,676	$	451	$	2,426	$	12,300

⁽¹⁾Investments measured at net asset value ("NAV"):

Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.

⁽²⁾Government & Corporate Bonds:

Fair values for bonds are based on market prices supplied by independent sources as of the last trading day.

⁽³⁾Mortgages:

The fair value of mortgages of $71 million (2015 – $81 million) is based on current market yields of financial instruments of similar maturity, coupon and risk factors.

⁽⁴⁾Real estate:

The fair value of real estate investments of $437 million (2015 – $451 million) is based on property appraisals which use a number of approaches that typically include a discounted cash flow analysis, a direct capitalization income method and/or a direct comparison approach. Appraisals of real estate investments are generally performed semi-annually by qualified external accredited appraisers. There are $81 million of unfunded commitments for real estate investments as at December 31, 2016 (2015 – $278 million).

⁽⁵⁾ Derivatives:

The Company’s pension funds may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and options to manage interest rate risk and volatility (Level 2). There are currency forwards with a notional value of $937 million and a fair value of $7 million as at December 31, 2016 with maturities varying from three to fifteen months. These currency forwards reduce the funds' exposure to the U.S. dollar.

⁽⁶⁾ Absolute return:

The fair value of absolute return fund investments of $1,975 million (2015 – $2,164 million) is based on the NAV reported by the fund administrators. The funds have different redemption policies and periods. There are no unfunded commitments for absolute return investments as at December 31, 2016 (2015 – $nil).



-	Funds of hedge funds invest in a portfolio of hedge funds that allocate capital across a broad array of funds and/or investment managers, with monthly redemptions upon 95 days' notice.
-	Multi-strategy funds include funds that invest in broadly diversified portfolios of equity, fixed income and derivative instruments with quarterly redemptions upon 60 days' notice.
-	Credit funds invest in an array of fixed income securities with quarterly redemptions upon 60 days' notice.
-	Equity funds invest primarily in U.S. and global equity securities. Redemptions range from quarterly upon 60 days' notice to triennially upon 45 days' notice.

⁽⁷⁾ Infrastructure:

Infrastructure fund values of $285 million (2015 – $262 million) are based on the NAV of the funds that invest directly in infrastructure investments. The fair values of the investments have been estimated using the capital accounts representing the plans ownership interest in the funds. The investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments. It was estimated that the investments in these funds will be liquidated over the weighted-average period of approximately two years. As at December 31, 2016, unfunded commitments for infrastructure investments were $nil (2015 - $nil).

Portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3)

During 2015 and 2016 the portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3) changed as follows:



(in millions of Canadian dollars)	Real Estate
As at January 1, 2015	$	654
Disbursements	(223		)
Net realized gains	64
Decrease in net unrealized gains	(44		)
As at December 31, 2015	$	451
Disbursements	(36		)
Net realized gains	24
Decrease in net unrealized gains	(2		)
As at December 31, 2016	$	437

Additional plan assets information

The Company’s expected long-term target return is 7.75%, net of all fees and expenses. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and interest rates. When advantageous and with due consideration, derivative instruments may be utilized, provided the total value of the underlying assets represented by financial derivatives, excluding currency forwards, is limited to 30% of the market value of the fund.

When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign securities. CP has entered into currency forward contracts to partially offset pension plan exposure to the U.S. dollar. At December 31, 2016 the plans were 34% exposed to the U.S. dollar net of the currency forwards (42% excluding the currency forwards), 14% exposed to European currencies, and 5% exposed to various other currencies.

At December 31, 2016, fund assets consisted primarily of listed stocks and bonds, including 109,630 of the Company’s Common Shares (2015 –188,276) at a market value of $21 million (2015 – $33 million) and Unsecured Notes issued by the Company at a par value of $3 million (2015 – $3 million) and a market value of $3 million (2015 – $3 million).

Cash flows

In 2016, the Company contributed $57 million to its pension plans (2015 – $90 million; 2014 – $88 million), including $9 million to the DC plans (2015 – $9 million; 2014 – $8 million), $36 million to the Canadian registered and U.S. qualified DB pension plans (2015 – $69 million; 2014 – $67 million), and $12 million to the Canadian non-registered supplemental pension plan (2015 – $12 million; 2014 – $13 million). In addition, the Company made payments directly to employees, their beneficiaries or estates or to third-party benefit administrators of $30 million in 2016 (2015 – $33 million; 2014 – $26 million) with respect to other benefits.

Estimated future benefit payments

The estimated future defined benefit pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:



(in millions of Canadian dollars)	Pensions		Other benefits
2017	$	616	$	33
2018	626		32
2019	634		32
2020	641		31
2021	649		31
2022 – 2026	3,315		147

The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly from the Company.

Defined contribution plan

Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year.

Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary.

The DC plans provide a pension based on total employee and employer contributions plus investment income earned on those contributions.

In 2016, the net cost of the DC plans, which generally equals the employer’s required contribution, was $9 million (2015 – $9 million; 2014 – $8 million).

Contributions to multi-employer plans

Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in 2016 in respect of post-retirement medical benefits were $4 million (2015 – $4 million; 2014 – $4 million).