NOVA SCOTIA TEACHERS' PENSION PLAN

Transcription

1 Financial Statements of NOVA SCOTIA TEACHERS' PENSION PLAN

2 KPMG LLP Telephone (902) Chartered Accountants Fax (902) Purdy's Wharf Tower One Internet Upper Water Street, Suite 1500 Halifax Nova Scotia B3J 3N2 Canada INDEPENDENT AUDITORS' REPORT To the Nova Scotia Teachers' Pension Plan Trustee Inc. We have audited the accompanying financial statements of the Nova Scotia Teachers' Pension Plan, which comprise the statement of financial position as at December 31, 2013 and the statements of changes in net assets available for benefits, changes in pension obligations and changes in deficit for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for pension plans and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Nova Scotia Teachers' Pension Plan as at December 31, 2013 and the changes in its net assets available for benefits and the changes in its pension obligations for the year then ended in accordance with Canadian accounting standards for pension plans. Chartered Accountants April 22, 2014 Halifax, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

3 Financial Statements Financial Statements Statement of Financial Position 1 Statement of Changes in Net Assets Available for Benefits 2 Statement of Changes in Pension Obligations and Changes in Deficit 3 Notes to Financial Statements 4

4 Statement of Financial Position December 31, 2013, with comparative information for 2012 Net Assets Available for Benefits Assets Cash $ 39,697 $ 31,427 Contributions receivable: Employers' 5,173 4,180 Employees' 2,130 2,573 Receivable from pending trades 3,241 2,350 HST receivable Due from administrator (note 12) Accrued investment income 14,091 11,853 Investments (note 5) 4,504,591 4,209,621 Total assets 4,570,517 4,262,004 Liabilities: Pension benefits payable $ - $ 43 Payable for pending trades 5,172 21,061 Accounts payable and accrued liabilities 6,021 5,259 Total liabilities 11,193 26,363 Net assets available for benefits $ 4,559,324 $ 4,235,641 Accrued Pension Obligation and Deficit Accrued pension obligation (note 7) 6,081,931 5,914,369 Deficit (note 7) (1,522,607) (1,678,728) Commitments (note 8) Accrued pension obligation and deficit $ 4,559,324 $ 4,235,641 The accompanying notes are an integral part of these financial statements. On behalf of the Board: Original signed by John B. Carter Chair, Teachers' Pension Plan Trustee Inc. Original signed by Byron Rafuse Director, Teachers' Pension Plan Trustee Inc. Original signed by Jack McLeod Director, Teachers' Pension Plan Trustee Inc. 1

5 Statement of Changes in Net Assets Available for Benefits, with comparative information for 2012 Increase in Assets Contributions (note 4) $ 142,642 $ 145,446 Transfers from other pension plans 1,094 1,873 Investment activities (note 5) 112, ,342 Change in market value of investments (note 5) 477, ,694 Total increase in assets 734, ,355 Decrease in Assets Benefits paid (note 9) 374, ,979 Transfers to other pension plans 2,422 1,036 Administrative expenses (note 10) 34,064 25,446 Total decrease in assets 410, ,461 Increase in net assets available for benefits 323, ,894 Net assets available for benefits, beginning of year 4,235,641 4,024,747 Net assets available for benefits, end of year $ 4,559,324 $ 4,235,641 The accompanying notes are an integral part of these financial statements. 2

6 Statement of Changes in Pension Obligations, with comparative information for Accrued pension obligation, beginning of year $ 5,914,369 $ 5,679,407 Increase in accrued pension benefits: Interest on accrued pension obligation 366, ,482 Contributions and transfers from other pension plans 143, ,319 Changes in actuarial assumptions 101, , , ,313 Decrease in accrued pension benefits: Benefits paid (371,549) (361,649) Net experience gains and losses (46,321) 3,641 Refunds of contributions and interest and transfers to other pension plans (5,276) (3,366) Contributions in excess of current service cost (21,501) (24,977) (444,647) (386,351) Net increase in accrued pension benefits 167, ,962 Accrued pension obligation, end of period $ 6,081,931 $ 5,914,369 Statement of Changes in Deficit, with comparative information for Deficit, beginning of year $ (1,678,728) $ (1,654,660) Net increase in net assets available for benefits 323, ,894 Net increase in accrued pension obligation (167,562) (234,962) Deficit, end of year $ (1,522,607) $ (1,678,728) See accompanying notes to financial statements. 3

7 Notes to Financial Statements 1. Authority and description of Plan: The Nova Scotia Teachers' Pension Fund (the Plan ) was established by the Nova Scotia Teachers' Pension Act (the Act ). Employee and employer contributions and investment earnings are credited to the Fund which is the funding vehicle for the Teachers' Pension Plan (the Plan ), a pension plan which covers public school and community college teachers. The detailed provisions of the Plan, including pension eligibility criteria and benefit formulas, are contained in the Act and in the Regulations made under the Act. The following description is a summary only. For more complete information, reference should be made to the Plan legislative documents and agreements. General: As part of the June 22, 2005 Agreement between the Province of Nova Scotia (the Province ) and the Nova Scotia Teachers' Union (the Union ), the Province and the Union agreed to joint and equal participation in the governance of the Plan including the sharing of any actuarial surpluses or deficits between the Province and the beneficiaries of the Plan upon the transfer of the Plan to a newly formed trustee entity. Teachers Pension Plan Trustee Inc. (the TPPTI ) was incorporated to act as trustee of the Fund and on April 1, 2006, the TPPTI became the trustee of the Fund. The TPPTI is responsible for the administration of the Plan and the investment management of Fund assets. The investment of the Fund assets is guided by the Fund s Statement of Investment Policies & Goals (the SIP&G ) as written by the TPPTI. The SIP&G sets out the parameters within which the investments are made. These parameters include permissible investments and the policy asset mix. The Investment Beliefs, also found within the SIP&G, state the general principles upon which the investments are made. Funding: The Plan is funded by investment earnings and employee and matching employer contributions of 8.3% of salary up to the Year's Maximum Pensionable Earnings (the YMPE ) per the Canada Pension Plan (the CPP ) and 9.9% of salary above the YMPE. 4

8 1. Authority and description of Plan (continued): Retirement benefits: The basic pension formula is 2% times the number of years of pensionable service times the highest average salary of the best 5 years. Vesting occurs after two years. Pensions are integrated with CPP benefits at age 65. Pensions in pay are increased effective July 1 of each year, as applicable, on one of two indexing bases. For pensions with an effective date before August 1, 2006, the rate is equal to the increase in the 12-month average Consumer Price Index (the CPI ) for Canada, less 1%, to a maximum of 6%. For pensions with an effective date on or after August 1, 2006, as well as pensions of members or beneficiaries who elected to change their indexing basis prior to that date, the rate is dependent on the funding level of the Plan. Plan members are eligible for a pension upon reaching any of the following criteria: 35 years of service; age 50 with 30 years of service (reduced pension); age 55 with an age plus service factor of 85 "Rule of 85"; age 55 with two years of service (reduced pension); age 60 with 10 years of service; age 65 with two years of service. Death benefits: Upon the death of a vested member, the surviving spouse is entitled to receive 60% of the vested member's pension benefit payable for life, or a higher percentage if the member elected an optional form of pension. Eligible children are entitled to receive 10% of the vested member's pension benefit, payable until age 18 (or 25 while still in school). Termination benefits: Upon termination of employment, a vested member may choose to defer their pension until they satisfy one of the above eligibility criteria, or they may remove their funds from the plan in the form of a commuted value (or refund of contributions, for service prior to January 1, 1988). Refunds: The benefit payable upon termination or death of a non-vested member, or upon death prior to retirement of a vested member with no eligible survivors, is a lump sum refund of the member's contributions with interest. 5

9 2. Basis of preparation: (a) Basis of presentation: The Plan adopted Canadian accounting standards for pension plans in Part IV of the Canadian Institute of Chartered Accountants (CICA) Handbook, Section 4600 Pension Plans ("Section 4600"), on January 1, 2011 with a transition date of January 1, Section 4600 provides specific accounting guidance on investments and pension obligations. For accounting policies that do not relate to either investments or pension obligations, the Plan must consistently comply with either International Financial Reporting Standards ("IFRS") in Part I of the CICA Handbook or accounting standards for private enterprises in Part II of the CICA Handbook. The Plan has elected to comply on a consistent basis with IFRS in Part I of the CICA Handbook. To the extent that IFRS in Part I is inconsistent with Section 4600, Section 4600 takes precedence. Consistent with Section 4600, investment assets are presented on a non-consolidated basis even when the investment is in an entity over which the Plan has effective control. Earnings of such entities are recognized as income as earned and as dividends are declared. The Plan's total investment income includes valuation adjustments required to bring the investments to their fair value. These financial statements are prepared on a going concern basis and present the aggregate financial position of the Plan as a separate reporting entity. (b) Early adoption of IFRS 13: The Plan elected to early adopt IFRS 13, Fair Value Measurement, on a prospective basis, commencing January 1, The mandatory application date of IFRS 13 is for fiscal years beginning January 1, The AcSB allowed early adoption for fiscal years beginning on or after January 1, 2011, which is also the effective date for Section The measurement requirements under IFRS 13 were applied consistently to the fair value of all investment assets and investment related liabilities in the periods presented in the financial statements. The definition of fair value has been amended to comply with IFRS 13. There is no impact on the values of either investment assets or investment related liabilities. As per Section 4600, the Plan is not required to comply with the disclosure requirements prescribed in IFRS 13. These financial statements were authorized for issue by the Board of Trustees of the Nova Scotia Teachers' Pension Plan Trustee Inc. on April 22,

10 2. Basis of preparation (continued): (c) Basis of measurement: The financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair value through the statement of changes in net assets available for benefits and derivative financial instruments which are measured at fair value. Units of holding companies held are measured at the fair value of the underlying assets. (d) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the Plan's functional currency. (e) Use of estimates and judgments: The preparation of the financial statements in conformity with Section 4600 and IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the statement of financial position, the reported amounts of changes in net assets available for benefits and accrued pension benefits during the year. Actual results may differ from those estimates. Significant estimates included in the financial statements relate to the valuation of real estate holding companies, infrastructure, private equity investments and the determination of the accrued pension obligation. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected. 3. Significant accounting policies: (a) Investment transactions, income recognition and transactions costs: i) Investment transactions: Investment transactions are accounted for on a trade date basis. 7

11 3. Significant accounting policies (continued): ii) Income recognition: Income from investments is recorded on an accrual basis and includes interest, dividends and gains and losses that have been realized on disposal of investments and the unrealized appreciation and depreciation in the fair value of investments. iii) Transaction costs: Brokers' commissions and other transaction costs are recorded in the statement of changes in net assets available for benefits when incurred. (b) Foreign currency translation: Transactions denominated in foreign currencies are translated into Canadian dollars at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into Canadian dollars at the exchange rate at that date. Foreign currency differences arising on retranslation are recognized in the statement of changes in net assets available for benefits as a change in net unrealized gains (loss) on market value of investments. (c) Financial assets and liabilities: (i) Non-derivative financial assets: Financial assets are recognized initially on the trade date, which is the date that the Plan becomes a party to the contractual provisions of the instrument. The Plan classifies all of its financial assets at fair value through the statement of changes in net assets available for benefits if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through the statement of changes in net assets available for benefits if the Plan manages such investment and makes purchase and sale decisions based on their fair value in accordance with the Plan's documented risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognized in the statement of changes in net assets available for benefits as incurred. Financial assets at fair value through the statement of changes in net assets available for benefits are measured at fair value and changes therein are recognized in the statement of changes in net assets available for benefits. 8

12 3. Significant accounting policies (continued): (ii) Non-derivative financial liabilities: All financial liabilities are recognized initially on the trade date at which the Plan becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are offset and the net amount presented in the statement of financial position, when and only when, the Plan has a legal right to offset the amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Plan considers its amounts payable to be a non-derivative financial liability. (iii) Derivative financial instruments: Derivative financial instruments are recognized initially at fair value and attributable transactions costs are recognized in the statement of changes in net assets available for benefits as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and all changes are recognized immediately in the statement of changes in net assets available for benefits. (d) Fair value measurement: Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. As allowed under IFRS 13, if an asset or a liability measured at fair value has a bid and an ask price, the price within the bid-ask spread that is the most representative of fair value in the circumstances shall be used to measure fair value. The Plan uses closing market price as a practical expedient for fair value measurement. When available, the Plan measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis. 9

13 3. Significant accounting policies (continued): If a market for a financial instrument is not active, then the Plan establishes fair value using a valuation technique. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. When a transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. All changes in fair value, other than interest and dividend income and expense, are recognized in the statement of changes in net assets available for benefits as part of the change in market value of investments. Fair values of investments are determined as follows: i) Fixed income securities, real return bonds and equities are valued at year-end quoted closing prices, where available. Where quoted prices are not available, estimated fair values are calculated using comparable securities. ii) iii) Short-term notes, treasury bills, repurchase agreements and term deposits maturing within a year are stated at cost, which together with accrued interest income approximates fair value given the short-term nature of these investments. Pooled funds are valued at the unit values supplied by the pooled fund administrator, which represent the Fund's proportionate share of underlying net assets at fair values determined using closing market prices. 10

14 3. Significant accounting policies (continued): iv) The Fund holds bank sponsored asset backed commercial paper, bonds and debentures in its cash and fixed income portfolios; however, exposure is limited to multi-seller, multi-asset conduits with global style credit facilities, thus mitigating both credit and liquidity risk. There has been no impact on the value of these assets at December 31, v) Real estate holding companies, private equities, and infrastructure are valued based on estimated fair values determined by using appropriate techniques and best estimates by either management, appraisers, or both. Where external appraisers are engaged to perform the valuation, management ensures the appraisers are independent and compares the assumptions used by the appraisers with management s expectations based on current market conditions and industry practice to ensure the valuation captures the business and economic conditions specific to the investment. vi) vii) viii) Investments in derivative contracts, including futures, forwards and option contracts, are valued at year-end quoted market prices, interest, spot and forward rates, where available. Where quoted prices are not available, appropriate alternative valuation techniques are used to determine fair value. The gains or losses from derivative contracts are included in the realized and unrealized gains or losses on investments. Absolute return strategy investments, comprised of hedge funds, are recorded at fair value based on net asset values obtained from each of the funds administrators. These net asset values are reviewed by management. Commodities, comprised of pooled funds, are recorded at fair value based on the net asset values obtained from each of the funds' administrators. These net asset values are reviewed by management. (e) Non-investment assets and liabilities: The fair value of non-investment assets and liabilities are equal to their amortized cost value and are adjusted for foreign exchange where applicable. (f) Receivable/payable from pending trades: For securities transactions, the fair value of receivable from pending trades and payable for pending trades approximate their carrying amounts due to their short-term nature. 11

15 3. Significant accounting policies (continued): (g) Accrued pension obligation: The value of the accrued pension obligation of the Plan is based on a going concern method actuarial valuation prepared by an independent firm of actuaries using the projected unit credit method. The accrued pension obligation is measured in accordance with accepted actuarial methods using actuarial assumptions and methods adopted by the TPPTI for the purpose of establishing the long-term funding requirements of the Plan. The actuarial valuation included in the financial statements is consistent with the valuation for funding purposes. (h) Contributions: Basic contributions from employers and members are recorded on an accrual basis. Service purchases that include but are not limited to leaves of absence and transfers from other pension plans are recorded and service is credited when the purchase amount is received. In certain years, an additional contribution to the Plan may be required from the Minister of Finance. In any indexing period in which there is an actuarial deficit and clause 27B(3)(a) of the Teachers' Pension Plan Regulations applies, the Minister must contribute to the Fund, no later than the beginning of the following indexing period, an amount equal to the actuarial value, as calculated by the Plan's actuary at the beginning of the indexing period, of the difference between: (a) (b) the indexing of all pensions to which subsection 27B(3) applies for that indexing period at a rate of one-half of the percentage increase in the 12-month average CPI for that indexing period over the 12-month average CPI for the preceding indexing period to a maximum of 6% and, for all future indexing periods, at a rate of one-half of the assumed percentage increase in the 12-month average CPI determined in accordance with the actuarial assumptions and methods; and no indexing of all pensions to which subsection 27B(3) applies for that indexing period and, for all future indexing periods, indexing at a rate of one-half of the assumed percentage increase in the 12-month average CPI determined in accordance with the actuarial assumptions and methods. 12

16 3. Significant accounting policies (continued): (i) Benefits: Benefit payments to retired members, commuted value payments and refunds to former members, and transfers to other pension plans are recorded in the period in which they are paid. Accrued benefits are recorded as part of the accrued pension benefit obligation. (j) Administrative expenses: Administrative expenses, incurred for plan administration and direct investment management services, are recorded on an accrual basis. Plan administration expenses represent expenses incurred to provide direct services to the plan members and employers. Investment management expenses represent expenses incurred to manage the Fund. Base external manager fees for portfolio management are expensed in investment management expenses as incurred. (k) Income taxes: The Fund is the funding vehicle for a registered pension plan, as defined by the Income Tax Act (Canada) and, accordingly is not subject to income taxes. (l) Future changes in IFRS and new standards and interpretations not yet adopted: A number of new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2013, and have not been applied in preparing these financial statements. Standards which may potentially have an effect on the financial statements of the Plan are as follows: 13

17 3. Significant accounting policies (continued): a) Offsetting financial assets and financial liabilities: In December 2011, the IASB issued amendments to IAS 21 Offsetting Financial Assets and Financial Liabilities ("IAS 32") and to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities ("IFRS 7"). The amendments clarify that an entity has a legally enforceable right to offset if that right is not contingent on a future event; and that right is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. These amendments also contain new disclosure requirements for financial assets and financial liabilities that are offset in the statement of financial position or subject to master netting agreements or similar agreements. The disclosure amendments are effective for the fiscal year beginning January 1, The amendments may result in additional disclosures. The Plan does not expect this new standard to have a significant impact on their financial statements. b) Financial instruments: In December 2011, the IASB issued IFRS 9 ("IFRS 9"), which sets out requirements for the classification and measurement of financial assets and financial liabilities. This is the first phase of a three-phase project to replace the current standard for accounting for financial instruments. The new standard specifies that financial assets are to be measured at either amortized cost or fair value on the basis of the reporting entity;s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The classification and measurement of financial liabilities designated at fair value through profit or loss remain generally unchanged; however, fair value changes attributable to changes in the credit risk for financial liabilities designated at fair value through profit or loss are to be recorded in other comprehensive income unless they offset amounts recorded in income. In November 2013, the IASB issued an amendment to IFRS 9 which set out in an new general hedge accounting model. The other phase of this project, which is currently under development, addresses impairment. In July 2013, the IASB tentatively decided to defer the effective date of IFRS 9 to an unspecified date pending the finalization of the impairment and hedge accounting phases of the project. The Plan has not yet determined the impact that the current IFRS 9 or the further changes will have on the Plan's financial statements. 14

18 3. Significant accounting policies (continued): c) Consolidated financial statements: In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements ("IFRS 10"), which provides a single consolidation model that defines control and establishes control as the basis for consolidation for all types of interests. IFRS 10 is effective for the fiscal year beginning January 1, The Plan expects no significant impacts on their financial statements from the adoption of the new standard. d) Disclosure of interests in other entities: In May 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities ( IFRS 12 ), which sets out the disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. This new standard requires disclosure of the nature of, and risks associated with, an entity s interests in other entities and the effects of these interests on its financial position, financial performance and cash flows. The new standard is effective for the fiscal year beginning November 1, 2013, and will result in additional disclosures. e) Fair value measurement: In May 2011, the IASB issued IFRS 13 Fair Value Measurement ( IFRS 13 ), which replaces the existing standard for fair value measurement. The new standard provides a common definition of fair value and establishes a framework for measuring fair value. The new standard also requires additional disclosures about fair value measurements. IFRS 13 is effective for our fiscal year beginning January 1, The adoption of the new standard will result in additional disclosures. The Plan does not expect this new standard to have a significant impact on how the Plan determines fair value. 15

19 4. Contributions: Employer: Matched current service $ 67,685 $ 65,199 Matched past service ,862 65,310 Special contributions from Province of Nova Scotia 5,991 13,775 Employee: Matched current service 67,685 65,199 Matched past service Unmatched past service 927 1,051 68,789 66,361 $ 142,642 $ 145,446 16

20 5. Investments and derivatives: (a) Fair value of the Fund's investments and related income are summarized in the following table: As at As at December 31, 2013 December 31, 2012 Assets % Assets % Fixed income Money market $ 202, $ 91, Canadian bonds and debentures 467, , Non-Canadian bonds and debentures 487, , Canadian real return bonds 233, , Equities Canadian 744, , US 697, , Global 763, , Real assets Real estate 444, , Infrastructure 96, , Commodities 115, , Absolute return strategy Hedge funds 251, , Derivatives Swaps, futures, options (396) - (232) - Currency forwards (774) - (9,186) (0.2) $ 4,504, $ 4,209,

21 5. Investments and derivatives (continued): Changes in market value of investments and derivatives As at December 31, 2013 Investment income Realized Unrealized Total Fixed income $ 51,493 $ 8,167 $ (63,091) $ (54,924) Equities 46, , , ,603 Real assets 13,393 7,300 33,047 40,347 Absolute return strategies - 2,018 50,317 52,335 Derivatives 872 (65,460) 5,075 (60,385) Other Total $ 112,860 $ 151,710 $ 326,266 $ 477,976 Changes in market value of investments and derivatives As at December 31, 2012 Investment income Realized Unrealized Total Fixed income $ 51,080 $ 17,003 $ 4,648 $ 21,651 Equities 49,665 (4,351) 231, ,989 Real assets 12,851 49,620 (6,466) 43,154 Absolute return strategies ,143 14,143 Derivatives ,654 (13,118) 30,536 Other 2,050 (3) 1,224 1,221 Total $ 116,342 $ 105,923 $ 231,771 $ 337,694 18

22 5. Investments and derivatives (continued): b) Derivatives: Derivatives are financial contracts, the value of which is "derived" from the value of underlying assets or interest or exchange rates. Derivatives provide flexibility in implementing investment strategies. The Fund utilizes such contracts to enhance investment returns and for managing exposure to interest rate and foreign currency volatility. Notional amounts of derivative contracts are the contract amounts used to calculate the cash flows to be exchanged. They represent the contractual amount to which a rate or price is applied for computing the cash to be paid or received. Notional amounts are the basis upon which the returns from, and the fair value of, the contracts are determined. They do not necessarily indicate the amounts of future cash flows involved or the current fair value of the derivative contracts. They are a common measure of volume of outstanding transactions but do not represent credit or market risk exposure. The derivative contracts become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in either market rates or prices relative to their terms. The aggregate notional amounts and fair values of derivative contracts can fluctuate significantly. Derivative contracts, transacted either on a regulated exchange market or in the overthe-counter ("OTC") market, directly between two counterparties include the following: Interest rate swaps Interest rate swaps involve contractual agreements between two counterparties to exchange fixed and floating interest payments based on notional amounts. They are used to adjust interest rate yield curve exposures and substitute for physical securities. Long swap positions increase exposure to long-term interest rates and short positions decrease exposure. Long swap positions are backed with high grade, liquid debt securities. 19

23 5. Investments and derivatives (continued): Credit default swaps Credit default swaps ("CDS") provide protection against the decline in value of the referenced asset as a result of specified events such as payment default or insolvency. The purchaser pays a premium to the seller of the CDS in return for payment related to the deterioration in the value of the referenced asset. The referenced asset for CDS is a debt instrument. They are used to manage credit exposure without buying or selling securities outright. Written CDS increase credit exposure (selling protection), obligating the Fund to buy bonds from counterparties in the event of a default. Purchased CDS decrease exposure (buying protection), providing the right to put bonds to the counterparty in the event of a default. Net long exposures are backed with high grade, liquid debt securities. Underlying credit exposures are continuously monitored. Futures Government futures are contractual obligations to either buy or sell at a fixed value (the contracted price) government fixed income financial instruments at a predetermined future date. They are used to adjust interest rate exposure and replicate government bond positions. Long future positions are backed with high grade, liquid debt securities. Money market futures are contractual obligations to either buy or sell money market financial instruments at a predetermined future date at a specified price. They are used to manage exposures at the front end of the yield curve. Futures are based on shortterm interest rates and do not require delivery of an asset at expiration. Therefore they do not require cash backing. Options Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or sell (put option), a security, exchange rate, interest rate, or other financial instrument or commodity at a predetermined price, at or by a specified future date. The seller (writer) of an option can also settle the contract by paying the cash settlement value of the purchaser's right. The seller (writer) receives a premium from the purchaser for this right. Purchased options are used to manage interest rate volatility exposures. Written options generate income in expected interest rate scenarios and may generate capital losses if unexpected interest rate environments are realized. Both written and purchased options will become worthless at expiration if the underlying instrument does not reach the strike price of the option. In-the-money portion of written options are covered by high grade, liquid debt securities. 20

24 5. Investments and derivatives (continued): Currency forwards Currency forwards are contractual obligations to exchange one currency for another at a specified price or settlement at a predetermined future date. Forward contracts are used to manage the currency exposure of investments held in foreign currencies. The notional amount of a currency forward represents the contracted amount purchased or sold for settlement at a future date. The fair value is determined by the difference between the market value and the notional value upon settlement. The fair value of derivatives, based upon their contractual maturity, as at December 31, 2013 and 2012, are as follows: Total at Total at Under 1 1 to 5 Over 5 December 31, December 31, year years years Interest rate swaps $ - $ - $ - $ - $ 425 Credit default swaps (62) 29 (257) Futures 21 (369) - (348) (35) Options (63) (14) - (77) (365) (29) (305) (62) (396) (232) Currency forwards (774) - - (774) (9,186) $ (803) $ (305) $ (62) $ (1,170) $ (9,418) Cash is deposited or pledged with various financial institutions as collateral or margin in the event that the Fund was to default on payment obligations on its derivative contracts. On the statement of financial position collateral is represented as part of the net cash balance of the Plan. The fair value of cash held at other financial institutions as collateral or margin as at December 31, 2013 and December 31, 2012 is as follows. December 31, December 31, Collateral and margin $ 1,394 $ 57 21

25 6. Financial instruments: (a) Fair values: The fair values of investments and derivatives are as described in note 3(d). The fair values of other financial assets and liabilities, being cash, contributions receivable, receivable from pending trades, rebates receivable, due from administrator, accrued investment income, pension benefits payable, payable for pending trades and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these financial instruments. Fair value measurements recognized in the statement of financial position are categorized using a fair value hierarchy that reflects the significance of inputs used in determining the fair values. Level 1: Fair value is based on inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Investment Manager has the ability to access at the measurement date. Level 1 primarily includes publicly listed investments. Level 2: Fair value is based on valuation methods that make use of inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, including inputs in markets that are not considered to be active. Level 2 primarily includes debt securities and derivative contracts not traded on a public exchange and public equities not traded in an active market. Level 3: Fair value is based on valuation methods where inputs that are based on nonobservable market data have a significant impact on the valuation. Level 3 primarily includes real estate, infrastructure, and private equity investments valued based on discounted future cash flow models which reflect assumptions that a market participant would use when valuing such an asset or liability. 22

26 6. Financial instruments (continued): The following table illustrates the classification of the Fund's financial instruments using the fair value hierarchy as at December 31: As at December 31, 2013 Level 1 Level 2 Level 3 Total Fixed income Money market $ 9,584 $ 164,745 $ 28,399 $ 202,729 Canadian bonds and debentures 243, , ,504 Non-Canadian bonds and debentures 17, ,221 11, ,870 Canadian real return bonds - 154,725 79, ,757 Equities Canadian 457, , ,693 US 420, ,258 49, ,274 Global 580, , ,922 Real assets Real estate - 142, , ,649 Infrastructure ,866 96,866 Commodities - 115, ,115 Absolute return strategies Hedge funds - 251, ,382 Derivatives Swaps, futures, options - (396) - (396) Currency forwards - (774) - (774) $ 1,729,203 $ 2,208,151 $ 567,226 $ 4,504,591 23

27 6. Financial instruments (continued): As at December 31, 2012 Level 1 Level 2 Level 3 Total Fixed income Money market $ 9,717 $ 69,789 $ 11,978 $ 91,484 Canadian bonds and debentures 274, , ,848 Non-Canadian bonds and debentures 24, , ,174 Canadian real return bonds - 177,877 92, ,360 Equities Canadian 428, , ,717 US 320, ,183 39, ,470 Global 538, , ,118 Real assets Real estate - 134, , ,642 Infrastructure ,054 83,054 Commodities - 119, ,212 Absolute return strategies Hedge funds - 209, ,960 Derivatives Swaps, futures, options - (232) - (232) Currency forwards - (9,186) - (9,186) $ 1,596,533 $ 2,133,646 $ 479,442 $ 4,209,621 There were no significant transfers between level 1 and level 2 financial instruments during the years ended December 31, 2013 and

28 6. Financial instruments (continued): The following table shows the changes in the fair value measurement in Level 3 of the fair value hierarchy: Fixed income Equity Real assets Total Level 3 investments, January 1, 2013 $ 104,461 $ 39,633 $ 335,348 $ 479,442 Transfers in: Transfers out: Purchases 39,915-39,238 79,153 Sales (12,776) - (5,932) (18,708) Realized gains Unrealized gains (losses) (12,835) 9,574 34,303 31,042 Unrealized investment expenses - - (3,915) (3,915) Level 3 investments, end of year $ 118,944 $ 49,207 $ 399,075 $ 567,226 Year ended December 31, 2012 Fixed income Equity Real assets Total Level 3 investments, January 1, 2012 $ 113,525 $ 43,513 $ 255,111 $ 412,149 Transfers in: Transfers out: Purchases 11,977-56,841 68,818 Sales (21,831) (2,008) (4,163) (28,002) Realized gains (losses) 170 (2,904) - (2,734) Unrealized gains 620 1,032 31,565 33,217 Unrealized investment expenses - - (4,006) (4,006) Level 3 investments, end of year $ 104,461 $ 39,633 $ 335,348 $ 479,442 Unrealized investment expenses represent investment management and performance fees of level 3 investment vehicles which have been re-classified from unrealized gains (losses) (note 10). The total income from level 3 financial instruments held as at December 31, 2013 and 2012, respectively, was $27,339 and $26,

29 6. Financial instruments (continued): (b) Investment risk management: Risk management relates to the understanding and active management of risks associated with all areas of the business and the associated operating environment. Investments are primarily exposed to interest rate volatility, market price fluctuations, credit risk, foreign currency risk and liquidity risk. The Fund has set formal goals, policies, and operating procedures that establish an asset mix among equity, fixed income, real assets, absolute return strategy investments and derivatives that requires diversification of investments within categories, and set limits on the size of exposure to individual investments and counterparties. Risk and credit committees have been created to regularly monitor the risks and exposures of the Fund. Trustee oversight, procedures and compliance functions are incorporated into Fund processes to achieve consistent controls and to mitigate operational risk. (i) Interest rate risk Interest rate risk refers to the fact that the Fund s financial position will change with market interest rate changes, as fixed income securities are sensitive to changes in nominal interest rates. Interest rate risk is inherent in the management of a pension plan due to prolonged timing differences between cash flows related to the Fund's assets and cash flows related to the Plan's liabilities. To properly manage the Plan's interest rate risk, appropriate guidelines on the weighting and duration for the bonds and other fixed income investments are set and monitored. The following table summarizes the contractual maturities of all financial assets at December 31, by the earlier of contractual repricing or maturity dates: Average Under 1 to 5 5 to 10 Over 10 yield December 31, year years years years Total (%) (1) Money market $ 202,729 $ - $ - $ - $ 202,729 - Bonds and debentures 21, , , , , Real return bonds (2) ,032 79, Total $ 224,654 $ 367,109 $ 296,161 $ 349,211 $1,237,

30 6. Financial instruments (continued): Average Under 1 to 5 5 to 10 Over 10 yield December 31, year years years years Total (%) (1) Money market $ 91,484 $ - $ - $ - $ 91,484 - Bonds and debentures 51, , , , , Real return bonds (2) ,483 92, Total $ 143,480 $ 349,815 $ 325,858 $ 361,836 $1,180, The fixed income maturity schedule is exclusive of Canadian pooled real return bond funds (December 31, $154,725; December 31, $177,877). (1) The average effective yield reflects the estimated annual income of a security as a percentage of its year-end fair value. (2) Real return bond yields are based on real interest rates. The ultimate yield will be impacted by inflation as it occurs. The fair value of the Fund is affected by short-term changes in nominal interest rates. Pension liabilities are exposed to the long-term expectation of rate of return of the Fund as well as expectations of inflation and salary escalation. 27

31 6. Financial instruments (continued): Interest rate sensitivity The Fund's investments in fixed income are sensitive to interest rate movements. The following table represents the Fund's assets subject to interest rate changes, average duration due to a one percent increase (decrease) in interest rate and the change in fair value of those assets: December 31, December 31, Interest rate sensitive assets $ 1,236,737 $ 1,180,795 Average duration for 1% increase in interest rates (5.6) (6.2) Sensitivity to 1% increase in interest rates $ (69,584) $ (73,374) Fair value after 1% increase in rates $ 1,167,153 $ 1,107,421 Average duration for 1% decrease in interest rates Sensitivity to 1% decrease in interest rates $ 69,584 $ 80,858 Fair value after 1% decrease in rates $ 1,306,321 $ 1,261,653 (ii) Market price risk Market price risk is the risk of fluctuation in market values of investments from influences specific to a particular investment or from influences on the market as a whole. Market price risk does not include interest rate risk and foreign currency risk which are also discussed in this note. As all of the Fund's financial instruments are carried at fair value with fair value changes recognized in the statement of changes in financial position, all changes in market conditions will directly result in an increase (decrease) in net assets. Market price risk is managed by the Fund through the construction of a diversified portfolio of instruments traded on various markets and across various industries. 28

32 6. Financial instruments (continued): Market sensitivity: The Fund's investments in equities are sensitive to market fluctuations. The following table represents the change in fair value of the Fund s investment in public and private equities due to a ten percent increase (decrease) in fair market values as at December 31, 2013: December 31, December 31, Total equities $ 2,205,889 $ 2,061,305 10% increase in market values $ 220,589 $ 206,131 Fair value after 10% increase $ 2,426,478 $ 2,267,436 10% decrease in market values $ (220,589) $ (206,131) Fair value after 10% decrease $ 1,985,300 $ 1,855,174 (iii) Credit risk Credit risk is the risk of loss in the event the counterparty to a transaction fails to discharge an obligation and causes the other party to incur a loss. Credit risk is generally higher when a non-exchange traded financial instrument is involved because the counterparty for traded financial instrument is not backed by an exchange clearing house. Credit risk associated with the Fund is regularly monitored and analyzed through risk and credit committees. 29