Employee retirement benefits

12 Months Ended

Dec. 31, 2020

Employee retirement benefits

5. Employee retirement benefits

Retirement benefits, which cover almost all retired employees and their surviving spouses, include pension income and certain health care and life insurance benefits. They are met through funded registered retirement plans and through unfunded supplementary benefits that are paid directly to recipients.

Pension income benefits consist mainly of company-paid defined benefit plans that are based on years of service and final average earnings. The company shares in the cost of health care and life insurance benefits. The company’s benefit obligations are based on the projected benefit method of valuation that includes employee service to date and present compensation levels, as well as a projection of salaries to retirement.

The expense and obligations for both funded and unfunded benefits are determined in accordance with accepted actuarial practices and U.S. GAAP. The process for determining retirement-income expense and related obligations includes making certain long-term assumptions regarding the discount rate, rate of return on plan assets and rate of compensation increases. The obligation and pension expense can vary significantly with changes in the assumptions used to estimate the obligation and the expected return on plan assets.

The benefit obligations and plan assets associated with the company’s defined benefit plans are measured on December 31.

	Pension benefits			Other postretirement benefits
		2020	2019		2020	2019
Assumptions used to determine benefit obligations at December 31 (percent)
Discount rate		2.50	3.10		2.50	3.10
Long-term rate of compensation increase		4.00	4.50		4.00	4.50

millions of Canadian dollars
Change in projected benefit obligation
Projected benefit obligation at January 1	9,786		8,359		693		582
Current service cost	305		228		24		16
Interest cost	308		324		24		20
Actuarial loss (gain) (a)	811		1,053		152		99
Amendments	-		283		-		-
Benefits paid (b)	(494	)	(461	)	(20	)	(24	)
Projected benefit obligation at December 31	10,716		9,786		873		693
Accumulated benefit obligation at December 31	9,619		8,814

(a) Actuarial loss primarily driven by a decrease in the year-end discount rate from 3.10 percent to 2.50 percent, partially offset by the impact of a reduction in the long-term rate of compensation increase assumption from 4.50 percent to 4.00 percent.

(b) Benefit payments for funded and unfunded plans.

The discount rate for the purpose of calculating year-end postretirement benefits plan liabilities is determined by using the Canadian Institute of Actuaries recommended spot curve for high-quality, long-term Canadian corporate bonds with an average maturity (or duration) approximating that of the liabilities. For the measurement of the accumulated postretirement benefit obligation, the assumed health care cost trend rates start with 5.66 percent in 2021 and gradually decline to 3.57 percent by 2040 and beyond.

	Pension benefits					Other postretirement benefits
millions of Canadian dollars		2020		2019			2020		2019
Change in plan assets
Fair value at January 1		8,599		7,691
Actual return (loss) on plan assets		1,073		1,114
Company contributions		195		211
Benefits paid (a)		(441	)	(417	)
Fair value at December 31		9,426		8,599
Plan assets in excess of (less than) projected benefit obligation at December 31
Funded plans		(641	)	(590	)
Unfunded plans		(649	)	(597	)		(873	)	(693	)
Total (b)		(1,290	)	(1,187	)		(873	)	(693	)

(a) Benefit payments for funded plans only.

(b) Fair value of assets less projected benefit obligation shown above.

Funding of registered retirement plans complies with federal and provincial pension regulations, and the company makes contributions to the plans based on an independent actuarial valuation. In accordance with authoritative guidance relating to the accounting for defined pension and other postretirement benefits plans, the underfunded status of the company’s defined benefit postretirement plans was recorded as a liability in the Consolidated balance sheet, and the changes in that funded status in the year in which the changes occurred was recognized through other comprehensive income.

	Pension benefits					Other postretirement              benefits
millions of Canadian dollars		2020		2019			2020		2019
Amounts recorded in the Consolidated balance sheet consist of:
Current liabilities		(27	)	(27	)		(31	)	(31	)
Other long-term obligations		(1,263	)	(1,160	)		(842	)	(662	)
Total recorded		(1,290	)	(1,187	)		(873	)	(693	)
Amounts recorded in accumulated other comprehensive income consist of:
Net actuarial loss (gain)		2,232		2,256			272		133
Prior service cost		269		283			-		-
Total recorded in accumulated other comprehensive income, before-tax		2,501		2,539			272		133

The company establishes the long-term expected rate of return on plan assets by developing a forward-looking long-term return assumption for each asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class. The 2020 long-term expected return of 4.5 percent used in the calculations of pension expense compares to an actual rate of return of 8.4 percent and 6.9 percent over the last 10- and 20-year periods respectively, ending December 31, 2020.

	Pension benefits									Other postretirement          benefits
	2020			2019			2018			2020			2019			2018
Assumptions used to determine net periodic benefit cost for years ended December 31 (percent)
Discount rate		3.10			3.90			3.40			3.10			3.90			3.40
Long-term rate of return on funded assets		4.50			4.50			5.00			-			-			-
Long-term rate of compensation increase		4.50			4.50			4.50			4.50			4.50			4.50
millions of Canadian dollars
Components of net periodic benefit cost
Current service cost		305			228			239			24			16			17
Interest cost		308			324			302			24			20			22
Expected return on plan assets		(391	)		(349	)		(402	)		-			-			-
Amortization of prior service cost		14			-			4			-			-			-
Amortization of actuarial loss (gain)		153			149			175			13			(1	)		6
Net periodic benefit cost		389			352			318			61			35			45
Changes in amounts recorded in accumulated other comprehensive income
Net actuarial loss (gain)		129			288			(116	)		152			99			(101	)
Amortization of net actuarial (loss) gain included in net periodic benefit cost		(153	)		(149	)		(175	)		(13	)		1			(6	)
Prior service cost		-			283			-			-			-			-
Amortization of prior service cost included in net periodic benefit cost		(14	)		-			(4	)		-			-			-
Total recorded in other comprehensive income		(38	)		422			(295	)		139			100			(107	)
Total recorded in net periodic benefit cost and other comprehensive income, before-tax		351			774			23			200			135			(62	)

Costs for defined contribution plans, primarily the employee savings plan, were $47 million in 2020 (2019 - $43 million, 2018 - $41 million).

A summary of the change in accumulated other comprehensive income is shown in the table below:

	Total pension and other postretirement benefits
millions of Canadian dollars	2020			2019			2018
(Charge) credit to other comprehensive income, before-tax		(101	)		(522	)		402
Deferred income tax (charge) credit (note 18)		23			128			(104	)
(Charge) credit to other comprehensive income, after-tax		(78	)		(394	)		298

The company’s investment strategy for pension plan assets reflects a long-term view, a careful assessment of the risks inherent in various asset classes and broad diversification to reduce the risk of the portfolio. Consistent with the long-term nature of the liability, the plan assets are primarily invested in global, market-cap-weighted indexed equity and domestic indexed bond funds to diversify risk while minimizing costs. The balance of the plan assets is largely invested in high-quality corporate and government debt securities. Studies are periodically conducted to establish the preferred target asset allocation. The target asset allocation for equity securities is 30 percent. The target allocation for debt securities is 67 percent. Plan assets for the remaining 3 percent are invested in venture capital partnerships that pursue a strategy of investment in U.S. and international early stage ventures.

The 2020 fair value of the pension plan assets, including the level within the fair value hierarchy, is shown in the table below:

			Fair value measurements at December 31, 2020, using:
millions of Canadian dollars	Total		Level 1		Level 2	Level 3	Net Asset Value
Asset class
Equity securities
Canadian		222						222
Non-Canadian		2,690						2,690
Debt securities - Canadian
Corporate		1,426						1,426
Government		4,825						4,825
Asset backed		-						-
Equities – Venture capital		214						214
Cash		49		41				8
Total plan assets at fair value		9,426		41				9,385

The 2019 fair value of the pension plan assets, including the level within the fair value hierarchy, is shown in the table below:

			Fair value measurements at December 31, 2019, using:
millions of Canadian dollars	Total		Level 1		Level 2	Level 3	Net Asset Value
Asset class
Equity securities
Canadian		210						210
Non-Canadian		2,449						2,449
Debt securities - Canadian
Corporate		1,379						1,379
Government		4,299						4,299
Asset backed		1						1
Equities – Venture capital		204						204
Cash		57		40				17
Total plan assets at fair value		8,599		40				8,559

A summary of pension plans with accumulated benefit obligation and projected benefit obligation in excess of plan assets is shown in the table below:

	Pension benefits
millions of Canadian dollars	2020		2019
For funded pension plans with accumulated benefit obligation in excess of plan assets: (a)
Accumulated benefit obligation		1,034		942
Fair value of plan assets		954		870
Accumulated benefit obligation less fair value of plan assets		80		72
For funded pension plans with projected benefit obligation in excess of plan assets:
Projected benefit obligation		10,067		9,189
Fair value of plan assets		9,426		8,599
Projected benefit obligation less fair value of plan assets		641		590
For unfunded plans covered by book reserves:
Projected benefit obligation		649		597
Accumulated benefit obligation		565		536

(a) The amounts shown for funded pension plans with accumulated benefit obligation in excess of plan assets represent the company’s proportionate share of a joint venture sponsored pension plan. For the company sponsored funded plan, the fair value of plan assets exceeded the accumulated benefit obligation in both 2020 and 2019.

Cash flows

Benefit payments expected in:

millions of Canadian dollars	Pension benefits		Other postretirement benefits
2021		460		31
2022		460		32
2023		465		32
2024		465		33
2025		465		34
2026 - 2030		2,325		175

In 2021, the company expects to make cash contributions of about $164 million to its pension plans.