PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION PLANS

We maintain registered and non-registered, contributory and non-contributory pension plans which provide defined benefit and/or defined contribution pension benefits covering substantially all employees. The Canadian Plans provide Company funded defined benefit and/or defined contribution pension benefits to our Canadian employees. The United States Plans provide Company funded defined benefit pension benefits to our United States employees. We also maintain supplemental pension plans that provide pension benefits in excess of the basic plans for certain employees.

Defined Benefit Plans

Benefits payable from the defined benefit plans are based on each plan participant’s years of service and final average remuneration. These benefits are partially inflation-indexed after a plan participant’s retirement. Our contributions are made in accordance with independent actuarial valuations and are invested primarily in publicly-traded equity and fixed income securities.

Defined Contribution Plans

Contributions are generally based on each plan participant’s age, years of service and current eligible remuneration. For defined contribution plans, benefit costs equal amounts required to be contributed by us.

Benefit Obligation, Plan Assets and Funded Status

The following table details the changes in the projected benefit obligation, the fair value of plan assets and the recorded asset or liability for our defined benefit pension plans:



	Canada				United States
December 31,	2017		2016		2017		2016
(millions of Canadian dollars)
Change in projected benefit obligation
Projected benefit obligation at beginning of year	2,270		2,064		508		487
Service cost	156		129		48		26
Interest cost	116		73		35		16
Actuarial loss	145		97		57		15
Benefits paid	(165	)	(87	)	(42	)	(21	)
Foreign currency exchange rate changes	—		—		(63	)	(14	)
Acquired in Merger Transaction	1,505		—		811		—
Plan settlements	—		—		(59	)	—
Other	6		(6	)	(16	)	(1	)
Projected benefit obligation at end of year¹	4,033		2,270		1,279		508
Change in plan assets
Fair value of plan assets at beginning of year	2,019		1,886		361		343
Actual return on plan assets	308		146		113		22
Employer contributions	161		74		57		28
Benefits paid	(165	)	(87	)	(42	)	(21	)
Foreign currency exchange rate changes	—		—		(51	)	(10	)
Acquired in Merger Transaction	1,290		—		731		—
Plan settlements	—		—		(59	)	—
Other	6		—		(13	)	(1	)
Fair value of plan assets at end of year²	3,619		2,019		1,097		361
Underfunded status at end of year	(414	)	(251	)	(182	)	(147	)
Presented as follows:
Deferred amounts and other assets	38		5		—		—
Accounts payable and other	(60	)	—		(3	)	—
Other long-term liabilities	(392	)	(256	)	(179	)	(147	)
	(414	)	(251	)	(182	)	(147	)


1	The accumulated benefit obligation for our Canadian pension plans was $3.7 billion and $978 million as at December 31, 2017 and 2016, respectively. The accumulated benefit obligation for our United States pension plans was $$1.2 billion and $462 million as at December 31, 2017 and 2016, respectively.

Assets in the amount of $9 million (2016 - $8 million) and $40 million (2016 - $44 million), related to our Canadian and United States non-registered supplemental pension plan obligations, are held in grantor trusts that, in accordance with federal tax regulations, are not restricted from creditors. These assets are committed for the future settlement of benefit obligations included in the underfunded status as at the end of the year, however they are excluded from plan assets for accounting purposes.

Certain of our pension plans have accumulated benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets were as follows:



	Canada		United States
December 31,	2017	2016	2017	2016
(millions of Canadian dollars)
Projected benefit obligations	1,444	2,188	1,280	508
Accumulated benefit obligations	1,306	978	1,217	462
Fair value of plan assets	1,131	1,927	1,098	361

Amount Recognized in Accumulated Other Comprehensive Income

The amounts of pre-tax AOCI relating to our pension plans are as follows:



	Canada		United States
December 31,	2017	2016	2017	2016
(millions of Canadian dollars)
Net actuarial gain	334	310	112	121
Total amount recognized in AOCI	334	310	112	121

Net Benefit Costs Recognized

The components of net benefit cost and other amounts recognized in pre-tax OCI related to our pension plans are as follows:



		Canada						United States
Year ended December 31,		2017		2016		2015		2017		2016		2015
(millions of Canadian dollars)
Service cost		156		129		137		48		26		30
Interest cost		116		73		81		35		16		17
Expected return on plan assets		(201	)	(127	)	(120	)	(57	)	(21	)	(22	)
Amortization of actuarial loss		29		32		39		10		3		10
Net defined benefit costs		100		107		137		36		24		35
Defined contribution benefit costs		11		3		3		15		—		—
Net benefit cost recognized in Earnings		111		110		140		51		24		35
Amount recognized in OCI:
	Net actuarial (gain)/loss arising during the year	38		28		(58	)	—		16		(19	)
	Amortization of net actuarial gain	(14	)	(14	)	(20	)	(9	)	(6	)	(10	)
Total amount recognized in OCI		24		14		(78	)	(9	)	10		(29	)
Total amount recognized in Comprehensive income		135		124		62		42		34		6

We estimate that approximately $25 million related to the Canadian pension plans and $4 million related to the United States pension plans as at December 31, 2017 will be reclassified from AOCI into earnings in the next 12 months.

Actuarial Assumptions

The weighted average assumptions made in the measurement of the projected benefit obligations and net benefit cost of our pension plans are as follows:



	Canada						United States
	2017		2016		2015		2017		2016		2015
Projected benefit obligations
Discount rate	3.6	%	4.0	%	4.2	%	3.5	%	4.0	%	4.1	%
Rate of salary increase	3.2	%	3.7	%	3.6	%	3.1	%	3.3	%	3.3	%
Net benefit cost
Discount rate	4.0	%	4.2	%	4.0	%	4.0	%	4.1	%	3.7	%
Rate of return on plan assets	6.5	%	6.5	%	4.4	%	7.2	%	7.2	%	7.1	%
Rate of salary increase	3.7	%	3.6	%	2.5	%	3.3	%	3.2	%	4.0	%

The overall expected rate of return is based on the asset allocation targets with estimates for returns on equity and debt securities based on long-term expectations.

OTHER POSTRETIREMENT BENEFITS

OPEB primarily includes supplemental health and dental, health spending accounts and life insurance coverage for qualifying retired employees on a non-contributory basis.

The following table details the changes in the accumulated postretirement benefit obligation, the fair value of plan assets and the recorded asset or liability for our OPEB plans:



	Canada				United States
December 31,	2017		2016		2017		2016
(millions of Canadian dollars)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation at beginning of year	179		173		133		135
Service cost	7		4		5		4
Interest cost	10		6		10		5
Participant contributions	—		—		4		1
Actuarial (gain)/loss	(8	)	2		(34	)	10
Benefits paid	(10	)	(6	)	(19	)	(6	)
Foreign currency exchange rate changes	—		—		(17	)	(4	)
Acquired in Merger Transaction	146		—		254		—
Other	(3	)	—		1		(12	)
Accumulated postretirement benefit obligation at end of year	321		179		337		133
Change in plan assets
Fair value of plan assets at beginning of year	—		—		115		115
Actual return on plan assets	—		—		21		5
Employer contributions	10		6		1		3
Participant contributions	—		—		4		1
Benefits paid	(10	)	(6	)	(19	)	(6	)
Foreign currency exchange rate changes	—		—		(11	)	(3	)
Acquired in Merger Transaction	—		—		102		—
Fair value of plan assets at end of year	—		—		213		115
Underfunded status at end of year	(321	)	(179	)	(124	)	(18	)
Presented as follows:
Deferred amounts and other assets	—		—		7		4
Accounts payable and other	(12	)	(7	)	(7	)	—
Other long-term liabilities	(309	)	(172	)	(124	)	(22	)
	(321	)	(179	)	(124	)	(18	)

Amount Recognized in Accumulated Other Comprehensive Income

The amounts of pre-tax AOCI relating to our OPEB plans are as follows:



	Canada			United States
December 31,	2017		2016	2017		2016
(millions of Canadian dollars)
Net actuarial gain/(loss)	17		25	(15	)	29
Prior service cost	(2	)	2	(11	)	(15	)
Total amount recognized in AOCI	15		27	(26	)	14

Net Benefit Costs Recognized

The components of net benefit cost and other amounts recognized in pre-tax OCI related to our OPEB plans are as follows:



	Canada						United States
Year ended December 31,	2017		2016		2015		2017		2016		2015
(millions of Canadian dollars)
Service cost	7		4		3		5		4		5
Interest cost	10		6		7		10		5		4
Expected return on plan assets	—		—		—		(10	)	(6	)	(6	)
Amortization of actuarial loss and prior service cost	1		—		1		—		—		—
Net OPEB cost recognized in Earnings	18		10		11		5		3		3
Amount recognized in OCI:
Net actuarial (gain)/loss arising during the year	(8	)	2		2		(42	)	12		16
Amortization of net actuarial (gain)/loss	(1	)	(1	)	(1	)	1		(1	)	—
Prior service cost	(3	)	—		—		1		(12	)	(7	)
Total amount recognized in OCI	(12	)	1		1		(40	)	(1	)	9
Total amount recognized in Comprehensive income	6		11		12		(35	)	2		12

We estimate that approximately nil related to the Canadian OPEB plans and $2 million related to the United States OPEB plans as at December 31, 2017 will be reclassified from AOCI into earnings in the next 12 months.

Actuarial Assumptions

The weighted average assumptions made in the measurement of the accumulated postretirement benefit obligations and net benefit cost of our OPEB plans are as follows:



	Canada						United States
	2017		2016		2015		2017		2016		2015
Accumulated postretirement benefit obligations
Discount rate	3.6	%	4.0	%	4.2	%	3.5	%	3.6	%	4.2	%
Net OPEB cost
Discount rate	4.0	%	4.2	%	4.0	%	4.0	%	3.8	%	3.9	%
Rate of return on plan assets							6.0	%	6.0	%	6.0	%

The overall expected rate of return is based on the asset allocation targets with estimates for returns on equity and debt securities based on long-term expectations.

Assumed Health Care Cost Trend Rates

The assumed rates for the next year used to measure the expected cost of benefits are as follows:



	Canada				United States
	2017		2016		2017		2016
Health care cost trend rate assumed for next year	5.5	%	5.4	%	7.4	%	6.9	%
Rate to which the cost trend is assumed to decline (the ultimate trend rate)	4.4	%	4.5	%	4.5	%	4.5	%
Year that the rate reaches the ultimate trend rate	2034		2034		2037		2037

A 1% change in the assumed health care cost trend rate would have the following effects for the year ended and as at December 31, 2017:



	Canada			United States
	1% Increase	1% Decrease		1% Increase	1% Decrease
(millions of Canadian dollars)
Effect on total service and interest costs	2	(1	)	1	(1	)
Effect on accumulated postretirement benefit obligation	28	(23	)	20	(17	)

PLAN ASSETS

We manage the investment risk of our pension funds by setting a long-term asset mix policy for each plan after consideration of: (i) the nature of pension plan liabilities; (ii) the investment horizon of the plan; (iii) the going concern and solvency funded status and cash flow requirements of the plan; (iv) our operating environment and financial situation and our ability to withstand fluctuations in pension contributions; and (v) the future economic and capital markets outlook with respect to investment returns, volatility of returns and correlation between assets.

The asset allocation targets and major categories of plan assets are as follows:



	Canada					United States
	Target	December 31,				Target	December 31,
Asset Category	Allocation	2017		2016		Allocation	2017		2016
Equity securities	40.0 - 70.0%	52.0	%	47.0	%	52.5 - 70.0%	47.1	%	55.4	%
Fixed income securities	27.5 - 60.0%	34.2	%	39.0	%	27.5 - 30.0%	47.7	%	33.0	%
Other	0.0 - 20.0%	13.8	%	14.0	%	0.0 - 20.0%	5.2	%	11.6	%

The following tables summarize the fair value of plan assets for our pension and OPEB plans recorded at each fair value hierarchy level.

Pension



	Canada						United States
	Level 1¹	Level 2²		Level 3³	Total		Level 1¹	Level 2²		Level 3³	Total
(millions of Canadian dollars)
December 31, 2017
Cash and cash equivalents	169	—		—	169		2	—		—	2
Equity securities
Canada	842	425		—	1,267		—	—		—	—
United States	427	—		—	427		343	—		—	343
Global	189	—		—	189		122	52		—	174
Fixed income securities
Government	933	—		—	933		—	—		—	—
Corporate	301	3		—	304		522	1		—	523
Infrastructure and real estate⁴	—	—		340	340		—	—		56	56
Forward currency contracts	—	(10	)	—	(10	)	—	(1	)	—	(1	)
Total pension plan assets at fair value	2,861	418		340	3,619		989	52		56	1,097
December 31, 2016
Cash and cash equivalents	156	—		—	156		3	—		—	3
Equity securities
United States	219	—		—	219		54	—		—	54
Canada	425	—		—	425		—	—		—	—
Global	165	140		—	305		116	30		—	146
Fixed income securities
Government	351	—		—	351		—	—		—	—
Corporate	277	3		—	280		116	—		—	116
Infrastructure and real estate⁴	—	—		281	281		—	—		40	40
Forward currency contracts	—	2		—	2		—	2		—	2
Total pension plan assets at fair value	1,593	145		281	2,019		289	32		40	361

OPEB



	Canada				United States
	Level 1¹	Level 2²	Level 3³	Total	Level 1¹	Level 2²	Level 3³	Total
(millions of Canadian dollars)
December 31, 2017
Cash and cash equivalents	—	—	—	—	1	—	—	1
Equity securities
United States	—	—	—	—	80	—	—	80
Global	—	—	—	—	36	—	—	36
Fixed income securities
Government	—	—	—	—	96	—	—	96
Total OPEB plan assets at fair value	—	—	—	—	213	—	—	213
December 31, 2016
Cash and cash equivalents	—	—	—	—	1	—	—	1
Equity securities
United States	—	—	—	—	35	—	—	35
Global	—	—	—	—	34	—	—	34
Fixed income securities
Government	—	—	—	—	45	—	—	45
Total OPEB plan assets at fair value	—	—	—	—	115	—	—	115


1	Level 1 assets include assets with quoted prices in active markets for identical assets.


2	Level 2 assets include assets with significant observable inputs.


3	Level 3 assets include assets with significant unobservable inputs.


4	The fair values of the infrastructure and real estate investments are established through the use of valuation models.

Changes in the net fair value of plan assets classified as Level 3 in the fair value hierarchy were as follows:



	Canada		United States
December 31,	2017	2016	2017	2016
(millions of Canadian dollars)
Balance at beginning of year	281	248	40	49
Unrealized and realized gains	26	20	5	2
Purchases and settlements, net	33	13	11	(11	)
Balance at end of year	340	281	56	40

EXPECTED BENEFIT PAYMENTS AND EMPLOYER CONTRIBUTIONS



Year ended December 31,	2018	2019	2020	2021	2022	2023-2027
(millions of Canadian dollars)
Pension
Canada	158	165	172	180	187	1,036
United States	82	81	85	83	92	453
OPEB
Canada	12	12	13	13	14	43
United States	25	25	25	25	24	110

In 2018, we expect to contribute approximately $126 million and $36 million to the Canadian and United States pension plans, respectively, and $12 million and $7 million to the Canadian and United States OPEB plans, respectively.

RETIREMENT SAVINGS PLANS

In addition to the retirement plans discussed above, we also have defined contribution employee savings plans available to both Canadian and United States employees. Employees may participate in a matching contribution where we match a certain percentage of before-tax employee contributions of up to 5.0% of eligible pay per pay period for Canadian employees and up to 6.0% of eligible pay per pay period for United States employees. For the years ended December 31, 2017, 2016 and 2015, we expensed pre-tax employer matching contributions of $14 million, nil and nil for Canadian employees and $31 million, $13 million and $15 million for United States employees, respectively.