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Pensions and Other Benefits
 12 Months Ended
Dec. 31, 2019
Retirement Benefits [Abstract]  
Pensions and Other Benefits Pensions and other benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2019, the Canadian pension plans represent nearly all of total combined pension plan assets and nearly all 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, 2019, the Canadian other benefits plans represent nearly all of total combined other plan obligations.

The Audit and 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 by investment managers 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 plan 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 long-term return expectation for fixed income, public equity, real estate, infrastructure, private debt 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 years 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, infrastructure and private debt 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 projected 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)
2019

2018

2017

 
2019

2018

2017

Current service cost (benefits earned by employees)
$
107

$
120

$
103

 
$
11

$
12

$
12

Other components of net periodic benefit cost (recovery):
 
 
 
 
 
 
 
Interest cost on benefit obligation
450

438

451

 
20

19

20

Expected return on fund assets
(947
)
(955
)
(893
)
 
—

—

—

Recognized net actuarial loss
84

114

153

 
12

2

(1
)
Amortization of prior service costs
(1
)
(2
)
(5
)
 
1

—

1

Total other components of net periodic benefit (recovery) cost
(414
)
(405
)
(294
)
 
33

21

20

Net periodic benefit (recovery) cost
$
(307
)
$
(285
)
$
(191
)
 
$
44

$
33

$
32



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)
2019

2018

 
2019

2018

Change in projected benefit obligation:
 
 
 
 
 
Benefit obligation at January 1
$
11,372

$
11,679

 
$
501

$
518

Current service cost
107

120

 
11

12

Interest cost
450

438

 
20

19

Employee contributions
41

47

 
—

1

Benefits paid
(646
)
(640
)
 
(34
)
(33
)
Foreign currency changes
(10
)
20

 
—

2

Actuarial loss (gain)
1,296

(292
)
 
43

(18
)
Projected benefit obligation at December 31
$
12,610

$
11,372

 
$
541

$
501


 
Pensions
 
Other benefits
(in millions of Canadian dollars)
2019

2018

 
2019

2018

Change in fund assets:
 
 
 
 
 
Fair value of fund assets at January 1
$
12,349

$
12,808

 
$
4

$
4

Actual return on fund assets
1,528

82

 
1

—

Employer contributions
53

36

 
34

32

Employee contributions
41

47

 
—

1

Benefits paid
(646
)
(640
)
 
(34
)
(33
)
Foreign currency changes
(6
)
16

 
—

—

Fair value of fund assets at December 31
$
13,319

$
12,349

 
$
5

$
4

Funded status – plan surplus (deficit)
$
709

$
977

 
$
(536
)
$
(497
)


The table below shows the aggregate pension projected benefit obligation and aggregate fair value of plan assets for pension plans with fair value of plan assets in excess of projected benefit obligations (i.e. surplus), and for pension plans with projected benefit obligations in excess of fair value of plan assets (i.e. deficit):
 
2019
 
2018
(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
$
(12,076
)
$
(534
)
 
$
(10,884
)
$
(488
)
Fair value of fund assets at December 31
13,079

240

 
12,127

222

Funded Status
$
1,003

$
(294
)
 
$
1,243

$
(266
)


The DB pension plans’ accumulated benefit obligation as at December 31, 2019 was $12,201 million (2018 – $10,981 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. For pension plans with accumulated benefit obligations in excess of fair value of plan assets (i.e. deficit), the aggregate pension accumulated benefit obligation as at December 31, 2019 was $419 million (2018 – $395 million) and the aggregate fair value of plan assets as at December 31, 2019 was $186 million (2018 – $180 million).

All Other benefits plans were in a deficit position at December 31, 2019 and 2018.

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)
2019

2018

 
2019

2018

Pension asset
$
1,003

$
1,243

 
$
—

$
—

Accounts payable and accrued liabilities
(11
)
(11
)
 
(34
)
(34
)
Pension and other benefit liabilities
(283
)
(255
)
 
(502
)
(463
)
Total amount recognized
$
709

$
977

 
$
(536
)
$
(497
)


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, 2019. During 2020, the Company expects to file with the pension regulator a new valuation performed as at January 1, 2020.

Accumulated other comprehensive loss
Amounts recognized in accumulated other comprehensive loss are as follows:
 
Pensions
 
Other benefits
(in millions of Canadian dollars)
2019

2018

 
2019

2018

Net actuarial loss:
 
 
 
 
 
Other than deferred investment gains
$
3,434

$
2,233

 
$
91

$
61

Deferred investment gains
41

611

 
—

—

Prior service cost
1

—

 
1

2

Deferred income tax
(964
)
(797
)
 
(24
)
(16
)
Total (Note 8)
$
2,512

$
2,047

 
$
68

$
47


 
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 2020 are a cost of $176 million and a recovery of $1 million, respectively, for pensions and costs of $3 million and $nil, respectively, for other post-retirement benefits.

Actuarial assumptions
Weighted-average actuarial assumptions used were approximately:
(percentages)
2019
 
2018
 
2017
 
Benefit obligation at December 31:
 
 
 
 
 
 
Discount rate
3.25
 
4.01
 
3.80
 
Projected future salary increases
2.75
 
2.75
 
2.75
 
Health care cost trend rate
5.50
(1) 
6.00
(1) 
7.00
(2) 
Benefit cost for year ended December 31:
 
 
 
 
 
 
Discount rate
4.01
 
3.80
 
4.02
 
Expected rate of return on fund assets (3)
7.50
 
7.75
 
7.75
 
Projected future salary increases
2.75
 
2.75
 
2.75
 
Health care cost trend rate
6.00
(1) 
7.00
(2) 
7.00
(2) 
(1) The health care cost trend rate was assumed to be 6.00% in 2019, is assumed to be 5.50% in 2020 and 5.00% per year in 2021 and thereafter.
(2) The health care cost trend rate was previously 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.
(3) The expected rate of return on fund assets that will be used to compute the 2020 net periodic benefit credit is 7.25%.

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 $5 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.

Plan assets
Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure, absolute return investments and private debt. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate and infrastructure values are based on the value of each fund’s assets as calculated by the fund manager, generally using third party appraisals or discounted cash flow analysis and taking into account current market conditions and recent sales transactions where practical and appropriate. Private debt values are based on the value of each fund’s assets as calculated by the fund manager taking into account current market conditions and reviewed annually by external parties. 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 weighted average asset allocation targets and the weighted average policy range for each major asset class at year end, were as follows:
 
 
 
Percentage of plan assets
at December 31
Asset allocation (percentage)
Asset allocation target
Policy range
2019
2018
Cash and cash equivalents
1.2
0 – 10
0.9
1.1
Fixed income
24.1
20 – 40
24.6
25.6
Public equity
45.1
35 – 55
54.5
50.2
Real estate and infrastructure
9.8
4 – 13
6.8
7.7
Private debt
9.8
4 – 13
2.4
1.3
Absolute return
10.0
4 – 13
10.8
14.1
Total
100.0
 
100.0
100.0


Summary of the assets of the Company’s DB pension plans
The following is a summary of the assets of the Company’s DB pension plans at December 31, 2019 and 2018. As of December 31, 2019 and 2018, there were no plan assets classified as Level 3 valued investments.
 
Assets Measured at Fair Value
Investments
measured at NAV(1)

Total Plan
Assets

(in millions of Canadian dollars)
Quoted prices in
active markets
for identical assets (Level 1)

Significant other
observable inputs (Level 2)

December 31, 2019
 
 
 
 
Cash and cash equivalents
$
112

$
—

$
—

$
112

Fixed income
 
 
 
 
Government bonds(2)
233

1,857

—

2,090

Corporate bonds(2)
273

819

—

1,092

Mortgages(3)
159

5

—

164

Public equities
 
 
 
 
Canada
1,351

—

—

1,351

U.S. and international
5,883

22

—

5,905

Real estate(4)
—

—

724

724

Infrastructure(5)
—

—

187

187

Private debt(6)
—

—

313

313

Derivative instruments(7)
—

(59
)
—

(59
)
Absolute return(8)
 
 
 
 
Funds of hedge funds
—

—

1,418

1,418

Multi-strategy funds
—

—

22

22

 
$
8,011

$
2,644

$
2,664

$
13,319

December 31, 2018
 
 
 
 
Cash and cash equivalents
$
127

$
12

$
—

$
139

Fixed income
 
 
 
 
Government bonds(2)
101

1,281

—

1,382

Corporate bonds(2)
128

1,606

—

1,734

Mortgages(3)
41

—

—

41

Public equities
 
 
 
 
Canada
1,287

—

—

1,287

U.S. and international
4,892

24

—

4,916

Real estate(4)
—

—

697

697

Infrastructure(5)
—

—

259

259

Private debt(6)
—

—

162

162

Derivative instruments(7)
—

(7
)
—

(7
)
Absolute return(8)
 
 
 
 
Funds of hedge funds
—

—

1,189

1,189

Multi-strategy funds
—

—

286

286

Credit funds
—

—

32

32

Equity funds
—

—

232

232

 
$
6,576

$
2,916

$
2,857

$
12,349

(1) Investments measured at net asset value ("NAV"):
Amounts are comprised of certain investments measured 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 values of mortgages are based on current market yields of financial instruments of similar maturity, coupon and risk factors.
(4) Real estate:
Real estate fund values are based on the NAV of the funds that invest directly in real estate investments. The values of the investments have been estimated using the capital accounts representing the plan’s ownership interest in the funds. Of the total, $606 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $583 million). The remaining $118 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying real estate investments (2018 – $114 million). As at December 31, 2019, there are $35 million of unfunded commitments for real estate investments (December 31, 2018 – $38 million).
(5) Infrastructure:
Infrastructure fund values are based on the NAV of the funds that invest directly in infrastructure investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $119 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $130 million). The remaining $68 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments (2018 – $129 million).
(6) Private debt:
Private debt fund values are based on the NAV of the funds that invest directly in private debt investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $154 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $162 million). The remaining $159 million is not subject to redemption and is normally returned through distributions as a result of the repayment of the underlying loans (2018 – $nil). As at December 31, 2019, there are $392 million of unfunded commitments for private debt investments (December 31, 2018 – $608 million).
(7) Derivatives:
The investment managers 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). The Company may utilize derivatives directly, but only for the purpose of hedging foreign currency exposures. As at December 31, 2019, there are currency forwards with a notional value of $334 million (December 31, 2018 – $1,226 million) and a fair value of $13 million (December 31, 2018 – $(7) million). The fixed income investment manager utilizes a portfolio of bond forwards for the purpose of reducing asset/liability interest rate exposure. As at December 31, 2019, there are bond forwards with a notional value of $3,269 million and a negative fair value of $72 million (December 31, 2018 – $nil).
(8) Absolute return:
The value of absolute return fund investments is based on the NAV reported by the fund administrators. The funds have different redemption policies with redemption notice periods varying from 60 to 95 days and frequencies ranging from monthly to triennially.

Additional plan assets information
The Company's primary investment objective for pension plan assets is to achieve a long–term return, net of all fees and expenses, that is sufficient for the plan's assets to satisfy the current and future obligations to plan beneficiaries, while minimizing the financial impact on the Company. 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 by investment managers, provided the total value of the underlying assets represented by financial derivatives (excluding currency forwards, liability hedging derivatives in fixed income portfolios and derivatives held by absolute return funds) is limited to 30% of the market value of the fund.

The funded status of the plans is exposed to fluctuations in interest rates, which affects the relative values of the plans' liabilities and assets. In order to mitigate interest rate risk, the Company's main Canadian defined benefit pension plan utilizes a liability driven investment strategy in its fixed income portfolio, which uses a combination of long duration bonds and derivatives to hedge interest rate risk, managed by the investment manager. At December 31, 2019, the plan's solvency funded position was 45% hedged against interest rate risk (2018 – 11%).

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. At December 31, 2019, the plans were 39% exposed to the U.S. dollar net of currency forwards (41% excluding the currency forwards), 6% exposed to the Euro, and 14% exposed to various other currencies. At December 31, 2018, the plans were 33% exposed to the U.S. dollar net of currency forwards (43% excluding the currency forwards), 4% exposed to the Euro, and 13% exposed to various other currencies.

At December 31, 2019, fund assets consisted primarily of listed stocks and bonds, including 119,758 of the Common Shares (2018 – 86,084) at a market value of $40 million (2018 – $21 million) and Unsecured Notes issued by the Company at a par value of $nil (2018 – $1 million) and a market value of $nil (2018 – $1 million).
Estimated future benefit payments
The estimated future DB 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

2020
$
620

$
34

2021
623

32

2022
627

31

2023
630

30

2024
633

30

2025 – 2029
3,203

144



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, where appropriate, and employer contributions plus investment income earned on those contributions.

In 2019, the net cost of the DC plans, which generally equals the employer’s required contribution, was $11 million (2018 – $10 million; 2017 – $9 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 2019 in respect of post-retirement medical benefits were $3 million (2018 – $3 million; 2017 – $5 million).