DALHOUSIE RETIREES' TRUST FUND

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1 Financial Statements of DALHOUSIE RETIREES' TRUST FUND

2 AUDITORS' REPORT To the Trustees of the Dalhousie Retirees' Trust Fund We have audited the Statement of Net Assets Available for Benefits of the Dalhousie Retirees' Trust Fund as at June 30, 2010 and the Statement of Changes in Net Assets Available for Benefits for the year then ended. These financial statements are the responsibility of the Fund s management. 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 plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Fund as at June 30, 2010 and the changes in Net Assets Available for Benefits for the year then ended in accordance with Canadian generally accepted accounting principles. Halifax, Canada September 24, 2010 Chartered Accountants 1

4 Statement of Changes in Net Assets Available for Benefits, with comparative figures for 2009 Additions: Capital transferred from the Dalhousie Pension Trust Fund for retirement benefits (note 2(d)) $ 33,449 $ 41,243 Additions from investments: Current period change in market value of investments 12,938 (35,574) Income from investments (note 6) 9,966 10,465 22,904 (25,109) Interest income (note 2(c)) Total additions 56,493 16,219 Deductions: Administrative expenses (note 7) 1,326 1,064 Pension benefits 24,534 22,444 Total deductions 25,860 23,508 Increase (decrease) in net assets for the year 30,633 (7,289) Net assets available for benefits, beginning of year 249, ,603 Net assets available for benefits, end of year $ 279,947 $ 249,314 See accompanying notes to financial statements. 3

5 Notes to Financial Statements 1. Description of plan: The Dalhousie University Staff Pension Plan is a contributory defined benefit pension plan covering employees of Dalhousie University. Under the Plan, contributions are made by the employees and the University. The Dalhousie Retirees Trust Fund and the Dalhousie Pension Trust Fund together constitute the assets of the Plan. The Plan is registered under the Pension Benefits Act of Nova Scotia and is registered with the Canada Revenue Agency. Dalhousie University is the Administrator of the Plan. (a) Funding policy: The University is required to meet the cost of all benefits not met by required contributions of members. The determination of the value of these benefits is made on the basis of an actuarial valuation (notes 3 and 4). (b) Current service pension: The current service pension provides for pension of 2% of the average best three years of pensionable salary received by the member multiplied by the number of years of participation in the plan up to a maximum of 35 years. (c) Survivor's pension: The normal form of pension payable to members with spouses includes a 66 2/3 % survivor pension in respect of credited service up to June 30, 2004 with a minimum guarantee of 60 monthly payments. For credited service after June 30, 2004, the pension is paid for the member s life with a minimum guarantee of 84 monthly payments, which can be actuarially converted to provide for a survivor s pension. (d) Income taxes: The Retirees Trust Fund is a Registered Pension Trust as defined in the Income Tax Act and is not subject to income taxes. 2. Significant accounting policies: These financial statements are prepared in conformity with accounting principles generally accepted for pension plans in Canada. The significant policies are summarized below: (a) Basis of presentation: The accompanying financial statements have been prepared on an accrual basis and present the net assets available for benefits and changes in net assets available for benefits. 4

6 Notes to Financial Statements, page 2 2. Significant accounting policies (continued): (b) Investments: (i) Valuation of investments: Pooled fund investments 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. Short-term notes and Treasury Bills maturing within a year are stated at cost, which together with accrued interest approximates fair value given the short-term nature of these investments. The market value of other investments is based on closing market quotations as at June 30. Where quoted prices are not available, estimated fair values are calculated using market comparable companies or securities and recent transaction multiples. (ii) Investment transactions: Investment transactions are recorded on the settlement date. (iii) Index linked mortgages: The interest rate is adjusted annually according to the change in Consumer Price Index. In 2010, mortgage payments reduced the principal on a book value basis by $953 ( $820). The cumulative decrease to date totals $9,452. (iv) Income from investments: Income from non-pooled fund investments is recorded on the accrual basis. In the case of pooled funds, the calendar year income distributions when declared are recorded as income. (v) Current period change in market value of investments: Current period change in market value of investments includes all net realized and unrealized capital gains. Gains or losses on sale or maturity of investments, based on the difference between average costs and proceeds, net of any selling expenses, are recorded at the time of disposition of the investment. (vi) Foreign currency exchange contracts: Future foreign currency exchange contracts are entered into to manage foreign currency exposures. These contracts are not designated and documented as hedging relationships in accordance with CICA HB Section 3865: Hedges, and, accordingly, are measured at fair value. 5

7 Notes to Financial Statements, page 3 2. Significant accounting policies (continued): (vii) Alternative investments: Alternative investments include real estate investments and absolute return strategies that encompass exposure to fund of funds with situation specific strategies such as equity long/short, event driven and arbitrage opportunities. (c) Interfund accounts: The interfund balance between the Retirees' Trust Fund and Dalhousie University and/or the Pension Trust Fund attracts or pays interest at prime less 2%. (d) Transfers from Dalhousie Pension Trust Fund: When an employee retires, the actuarial value of retirement benefits is transferred from the Dalhousie Pension Trust Fund and is recorded on the effective date of retirement. (e) Foreign currency translation: The fair values of foreign currency denominated investments included in the statement of net assets available for benefits are translated into Canadian dollars at year-end rates of exchange. Gains and losses arising from translations are included in the current period change in market value of investments. Foreign currency denominated transactions are translated into Canadian dollars at the rates of exchange on the dates of the related transactions. (f) Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. 3. Actuarial valuation: An actuarial valuation as of June 30, 2007 was made by Eckler Ltd., a firm of consulting actuaries. This valuation showed a surplus of $39,990 in the Retirees Trust Fund and a deficit of $39,731 in the Pension Trust Fund. In the Actuary s opinion, these two Trust Funds together form the assets of the Pension Plan, and thus the overall Plan was in a net surplus position of $259 as at June 30, Actuarial extrapolations to June 30, 2009 and June 30, 2010 were made from a February 28, 2009 draft actuarial valuation by the Plan s actuary. The June 30, 2010 extrapolation indicated a surplus of $12,057 in the Retirees Trust Fund and a deficit of $123,131 in the Pension Trust Fund for a net deficit position of $111,074 for the overall Plan.. 6

8 Notes to Financial Statements, page 4 4. Obligations for pension benefits: The actuarial present value of accrued pension benefits was determined using the projected benefits method prorated on service and the Administrator's best estimate assumptions. The actuary extrapolated the results of prior actuarial valuations to yield the June 30, 2009 and June 30, 2010 results. The assumed asset rates of return of 4.95% (for employees who retired prior to June 30, 1994), 4.65% (for employees who retired between June 30, 1994 and June 29, 1996) and 4.55% (for employees who retired June 30, 1996 or later) used in determining the actuarial value of accrued pension benefits were developed by reference to expected long-term market conditions, with further adjustments to reflect the method of indexation of pensions. The actuarial present value of benefits as at June 30 and the principal components of changes in actuarial present values during the year, were as follows: Actuarial present value of accrued pension benefits, beginning of year $ 260,446 $ 225,180 Transfers from Dalhousie Pension Trust Fund and direct contributions 33,449 41,243 Pension benefits paid (24,534) (22,444) Cost of pension indexing Experience (gain) loss (105) 5,429 Interest accrued on benefits 12,316 10,903 Actuarial present value of accrued pension benefits, end of year $ 281,572 $ 260,446 The value of actuarially determined assets available for benefits is different from that determined for accounting purposes. The actuarial value of net assets available for benefits has been determined at amounts that reflect long-term market trends (consistent with assumptions underlying the valuation of the accrued pension benefits). The actuarial value is based on current market value adjusted by the difference between actual investment earnings and expected investment earnings under the assumed rate of return. This difference is amortized on a straight line basis over the current year and the two subsequent years. The actuarial asset values used in the valuation and extrapolation were: Market value of net assets available for benefits $ 279,947 $ 249,314 Market value changes not reflected in actuarial value of net assets 13,682 25,168 Actuarial value of net assets available for benefits $ 293,629 $ 274,482 7

9 Notes to Financial Statements, page 5 5. Investments: Greystone Managed Investments Inc. (Canadian equities) $ 22,087 $ 16,727 Burgundy Asset Management Ltd. (Canadian equities) 13,161 11,098 CIBC Global Asset Management Inc. (Canadian equity pooled fund) 12,492 - Morrison Williams Investment Management Ltd. (Canadian equities) - 10,011 Ashford Capital Management Inc. (U.S. small cap equities) 9,031 9,642 Wedge Capital Management L.L.P. (U.S. large cap equities) 19,548 15,681 Northwater Capital Management Inc. (synthetic U.S. equity pooled funds) - 7,019 State Street Global Advisors, Ltd. (S&P mid cap index pooled fund) 8,746 4,028 Sprucegrove Investment Management Ltd. (Non North American equity pooled fund) 38,184 33,161 First Eagle Investment Management, LLC (Non North American equity pooled fund) 6,395 6,096 Crestline Investors, Inc. (Fund of funds, absolute return) 5,491 5,578 CU Real Property (6) Limited Partnership (Canadian real estate) 3,136 1,652 GPM Real Property (11) Limited Partnership (Canadian real estate) 2, ING Clarion Real Estate Securities (Global real estate) 7,199 - CIBC Global Asset Management Inc. (Canadian bond index pooled fund) 90,843 85,742 Addenda Capital Inc.(Canadian bond pooled fund) 29,509 27,499 First National Financial LP (index linked mortgages) 13,523 14,667 Staff mortgages 8 16 State Street Global Advisors, Ltd. (Currency hedging) (556) 1,470 Miscellaneous & cash at custodian 1,234 - Bank of Nova Scotia (bank account) $ 282,623 $ 251, Income from investments: Canadian equities $ 1,113 $ 1,534 U.S. equities Non-North American equities 1,365 1,952 Bonds 5,644 5,310 Real estate Mortgages Short-term and cash Total income from investments $ 9,966 $ 10,465 8

10 Notes to Financial Statements, page 6 7. Administrative Expenses: Asset administration $ 1,137 $ 893 Benefits administration General administration Total administrative expenses $ 1,326 $ 1, Financial instruments and investment risks: Financial instruments are utilized to replicate certain market exposures or to assist in the management of investment risks. Investments are primarily exposed to foreign currency, interest rate, market and credit risks. The Fund has set formal policies and procedures that establish an asset mix among equity, fixed income and alternative investments, requires diversification of investments within categories, and limits exposure to individual investments, counterparties and foreign currencies. (a) Fair value of financial assets and financial liabilities: The fair values of investments are as described in note 2(b). The fair values of other financial assets and liabilities, being cash and short-term investments, accrued income receivable, due to Dalhousie University, and accrued expenses approximate their carrying values due to the short-term nature of these instruments. (b) All index linked mortgages have a maturity date later than ten years from June 30, No other investments have specific maturity dates. (c) Interest rate risk: The Fund s fixed income risks are managed by diversifying exposures to the Canadian fixed income market, first by investing in a pooled fund that utilizes broad holdings to replicate the overall Canadian fixed income market, and secondly, by investing in another pooled fund that changes the duration of the portfolio to position itself for anticipated interest rate movements. (d) 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 mitigated through the management of the Fund assets within generally accepted parameters of safety and prudence, using a diversified investment program. Investments must adhere to specific limitations as outlined in the Fund s Statement of Investment Policies and Guidelines. 9

11 Notes to Financial Statements, page 7 8. Financial instruments and investment risks (continued): (e) Market risk: Market risk is the risk that the value of an investment will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual investment, or factors affecting all securities traded in the market. The Fund's policy is to invest in a diversified portfolio of investments, based on criteria established in the Statement of Investment Policies and Guidelines, to mitigate the impact of market risk. (f) Derivative financial instruments: Derivatives are financial contracts, the value of which is derived from the value of underlying assets or interest rates or exchange rates. Foreign currency risk arises from the Fund s holding of foreign currency-denominated investments. Foreign currency risk is controlled by the Fund s currency hedging policy. The Fund utilizes derivative contracts directly for managing exposure to foreign currency volatility. Pooled funds or fund-of-funds that the Fund invests in may also use derivative contracts to replicate or to reduce the exposure to certain financial markets or specific securities. Derivative contracts, transacted either on a regulated exchange market or in the over-the-counter market directly between two counterparties, include: (i) Futures and forward contracts Futures and forwards are contractual obligations either to buy or sell a specified amount of money market securities, bonds, equity indices, commodities or foreign currencies at predetermined future dates and prices. Futures are transacted in standardized amounts on regulated exchanges and are subject to daily cash margining. Forwards are customized contracts transacted in the over-the-counter market. (ii) Option contracts: Option contracts are agreements in which the right, but not the obligation, is acquired by the option purchaser from the option writer either to buy or sell, on or before a specified date, a predetermined amount of a financial instrument at a stated price. 10

12 Notes to Financial Statements, page 8 8. Financial instruments (continued): At June 30, the Fund directly had the following derivative contracts outstanding: Notional Amounts Fair Values Foreign exchange contracts: Forwards $ 62,491 $ 38,121 $ (556) $ (1,016) The foreign currency exposure at June 30 is summarized as follows ($ Canadian): Through direct investment: United States $ 31,969 $ 25,350 Europe, Asia, Far East 3,552 Through pooled funds: United States 14,237 9,606 Europe, Asia, Far East 44,579 39,257 Total $ 94,337 $ 74, Commitments: Certain of the alternative investments contain contractual capital commitments. At June 30, 2010, the Fund had outstanding future commitments of $3.8 million CAD in Canadian real estate. 10. Related party transactions: During the year, Dalhousie University provided investment administration, benefit administration, payroll, and accounting services. The costs associated with these services were recovered from the Fund during the year. These recoverable service costs for 2010 were $203 ( $ 157). The transactions were in the normal course of operations and were measured at the exchange amount. 11

DALHOUSIE RETIREES' TRUST FUND

Financial Statements of DALHOUSIE RETIREES' TRUST FUND Statement of Changes in Net Assets Available for Benefits, with comparative figures for 2010 Additions: Capital transferred from the Dalhousie