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As at December 31, 2011 - Impact on pension expense under international accounting

Every year, companies must establish an expense for their defined benefit pension plans.

The graph shows the expense impact for a typical pension plan that starts the year at an arbitrary value of 100 (expense index). The expense is influenced by changes in the discount rate based on high-quality corporate bonds and the median return of pension fund assets.

The table below shows the discount rates for varying durations and the change since the beginning of the year. A plan’s duration generally varies between 10 (mature plan) and 20 (young plan). In order to promote comparability of results, please note that the discount rates shown below

do not reflect the new CIA educational note concerning the discount rate for accounting purposes (September 2011). This new methodology will be applied when determining the expense index starting in 2012. For your information, the new method would have resulted in a discount rate of 4.39% at December 31 (for a duration of 14), which is about 0.61% lower than that shown.

The pension expense has increased since the beginning of the year largely due to asset returns below expectations, as well as a drop in the discount rate since December 2010.

Please contact your Morneau Shepell consultant for a customized analysis of your pension plan.

Discount Rate

Comments:

1. The expense is established as at December 31, 2010, based on the average financial position of the pension plans used in our 2009 Survey of Economic Assumptions in Accounting for Pensions and Other Post-Retirement Benefits report (i.e. a ratio of assets to obligation value of 91% as at December 31, 2008). Also, we are assuming that, under the international accounting, the employer elected the exemption at transition with regards to past gains and losses, and that future gains and losses are recognized in other comprehensive income (excluded from expenses shown).

2. The return on assets corresponds to the return on the Morneau Shepell benchmark portfolio (55% equities and 45% fixed income).

3. The actuarial obligation is that of a final average earnings plan, without indexing (two scenarios: with and without employee contributions).