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NOTE 9: PENSION AND OTHER POSTRETIREMENT
BENEFIT PLANS We sponsor several retirement programs for our employees. This note provides details about: • types of plans that we sponsor; • funded status of plans that we sponsor; • pension assets; • activity of plans that we sponsor; and • actuarial assumptions. TYPES OF PLANS THAT WE SPONSOR The plans we sponsor in the U.S. and Canada differ according to each country’s requirements. In the U.S., our pension plans are: • qualified – plans that qualify under the Internal Revenue code; and • nonqualified – a plan for select employees that provides additional benefits not qualified under the Internal Revenue Code. In Canada, our pension plans are: • registered – plans that are registered under the Income Tax Act and under the applicable provincial pension acts; and • nonregistered – plans for select employees that provide additional benefits that may not be registered under the Income Tax Act or provincial pension acts. We also offer retiree medical and life insurance plans in the U.S. and Canada. These plans are referred to as Other Postretirement Benefit plans in the following disclosures. Our qualified and registered pension plans and a portion of our nonregistered pension plan are funded plans. We contribute to these plans according to established funding standards. The nonqualified pension plan, a portion of the nonregistered pension plan and the other postretirement benefit plans are unfunded. For the unfunded plans, we pay benefits to retirees from general assets of the company as they come due. Employee Eligibility and Accounting The Pension and Other Postretirement Benefit Plans section of Note 1: Summary of Significant Accounting Policies provides information about employee eligibility for pension plans and postretirement health care and life insurance benefits as well as how we account for the plans and benefits. Measurement Date We measure the fair value of pension plan assets and pension and other postretirement benefit obligations as of the end of our fiscal year. Implementation of Statement 158 We adopted FASB Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132 (R) (Statement 158) in the fourth quarter of 2006. Statement 158 requires that on a prospective basis employers recognize the funded status of their defined benefit pension and other postretirement plans on their balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credit that have not been recognized as components of net periodic benefit cost. FUNDED STATUS OF PLANS THAT WE SPONSOR The funded status of the plans that we sponsor is determined by comparing the benefit obligation to the fair value of plan assets at the end of the year. Changes in Benefit Obligations of Our Pension and Other Postretirement Benefit Plans  Changes in the Fair Value of Plan Assets  The value of our pension assets on our fiscal year-end balance sheet is an estimated value. Due to the timing and nature of the underlying investments, the actual value may be different. At December 31, 2006, the estimated value of our pension plan assets was $6.2 billion. The actual value was $6.6 billion. We reflect the funded status of our pension and other postretirement benefit plans on our Consolidated Balance Sheet. This table shows where these amounts are on our Consolidated Balance Sheet for the last two fiscal years. Funded Status of Our Pension and Other Postretirement Benefit Plans  The asset or liability on our Consolidated Balance Sheet representing the funded status of the plans is different than the cumulative income or expense that we have recognized related to these plans. These differences relate to gains (losses) and prior service costs that are deferred and that will be amortized into our periodic benefit costs in future periods. These unamortized amounts are recorded in cumulative other comprehensive income, which is a component of total shareholders’ interest on our Consolidated Balance Sheet. Changes in Amounts Included in Cumulative Other Comprehensive Income  The amounts for our other postretirement benefits for 2007 include a $66 million unamortized net gain related to the U.S. Medicare Part D subsidy. Because the subsidy is nontaxable, it affects the related effective tax rate. It results in a 52 percent effective tax rate for the deferred taxes related to the changes in unamortized net gain in cumulative other comprehensive income. Accumulated Benefit Obligations Greater Than Plan Assets As of December 30, 2007, pension plans with the accumulated benefit obligation greater than the plan assets had: • $196 million in projected benefit obligations; • $177 million in accumulated benefit obligations; and • assets with a fair value of $24 million. As of December 31, 2006, pension plans with the accumulated benefit obligation greater than the plan assets had: • $218 million in projected benefit obligations; • $203 million in accumulated benefit obligations; and • assets with a fair value of $29 million. The accumulated benefit obligation for all of our defined benefit pension plans was: • $4.4 billion at December 30, 2007; and • $5.0 billion at December 31, 2006. PENSION ASSETS Our Investment Policies and Strategies Our investment policies and strategies guide and direct how we manage funds for the benefit plans we sponsor. These funds include our: • U.S. pension trust – funds our U.S. qualified pension plans; • Canadian pension trust – funds our Canadian registered pension plans; and • Retirement Compensation Arrangements – funds a portion of our Canadian nonregistered pension plans. Our policies and strategies also include using sound practices to manage the risk exposure of investing these funds. U.S. and Canadian Pension Trusts Our U.S. pension trust holds the funds for our U.S. qualified pension plans while our Canadian pension trust holds the funds for our registered pension plans. Our strategy within the trusts is to invest: • directly and via total return partnership swaps in a diversified mix of nontraditional investments; and • indirectly in derivatives to promote effective use of capital, increase returns and manage associated risk. Our direct investments include: • hedge funds; • private equity; • opportunistic real estate; and • other externally managed alternative investment funds. Our indirect investments include: • equity index derivatives; and • fixed income derivatives. The overall return for our pension trusts includes: • returns earned on our direct investments; and • returns earned on the derivatives we use. Retirement Compensation Arrangements Retirement Compensation Arrangements fund a portion of our Canadian nonregistered plans. Under Retirement Compensation Arrangements, our contributions get split: • 50 percent to our investments in a portfolio of equities; and • 50 percent to a noninterest-bearing refundable tax account held by Canada Revenue Agency – as required by Canadian tax rules. The Canadian tax rules requirement means that – on average over time – approximately 50 percent of our Canadian nonregistered plans’ assets do not earn returns. Managing Risk All investments are subject to risk, and we manage it using sound practices and diversification. Funds are exposed to risk through the indirect or derivative investments made by our U.S. pension trust and our Canadian pension trust. The risk is primarily nonperformance by counterparties to the investments. However, we do not expect any counterparties to fail to meet their obligations. Also, no principal is at risk with these types of investments. Only the amount of unsettled net receivables is at risk. We manage this risk through: • selection of counterparties with a defined minimum credit quality; • diversification; • settlement provisions; and • documented agreements. Hedge funds and private partnerships. We manage these risks through: • selection and diversification of managers and strategies; and • use of limited-liability vehicles. Portfolio risk. We manage this risk through: • diversification; and • constraining the risk profile within defined boundaries. Allocation of Our Plan Assets We report the allocation of assets for our: • qualified and registered pension plans; and • nonregistered plans. We do not have target allocations for our direct investment portfolio or derivatives. Qualified and Registered Pension Plans. The funds for our qualified and registered pension plans are in our U.S. pension trust and in our Canadian pension trust. This table shows how we have invested these funds. Allocation of Assets for Our Qualified and Registered Pension Plans  Nonregistered Plans. We invest 50 percent of the funds we contribute to our nonregistered pension plans. Under Canadian tax rules for Retirement Compensation Arrangements, the other 50 percent goes to a noninterest-bearing refundable tax account held by Canada Revenue Agency. The following table shows how we have invested the funds that we’re allowed to manage. Allocation of Assets for Our Nonregistered Plans  Fair Value of Derivatives Held by Pension Trusts This table shows the fair value of the derivatives held by our pension trusts – which fund our qualified and registered plans – at the end of our last two fiscal years.  Notional Amount of Derivatives Held by Pension Trusts This table shows the notional amount of the derivatives held by our pension trusts – which fund our qualified and registered plans – at the end of our last two fiscal years.  ACTIVITY OF PLANS THAT WE SPONSOR Net Periodic Benefit Costs (Credits)  Estimated Amortization From Cumulative Other Comprehensive Income in 2008 Amortization of the net loss and prior service (credit) cost of our pension and postretirement benefit plans will affect our other comprehensive income in 2008. The net effect of the estimated amortization will be a decrease to net periodic benefit costs in 2008.  Expected Funding in 2008 Established funding standards govern the funding requirements for our qualified and registered pension plans. We fund the benefit payments of our nonqualified and nonregistered plans as benefit payments come due. For 2008, we expect to: • have no obligation to contribute funds to our U.S. qualified pension plans; • contribute $17 million to our U.S. nonqualified pension plans; • contribute $3 million to our Canadian registered and nonregistered pension plans, including approximately $1 million of required funding. This is net of an anticipated reversion of surplus plan assets; and • contribute $63 million to our U.S. and Canadian other postretirement plans. Canadian provincial regulators have approved a surplus sharing proposal for three of our Canadian registered plans. The share of surplus due to plan members was paid during 2007, along with most of the surplus to our company. There is a small amount of surplus that will be paid to our company and a few plan members in 2008. This amount is approximately $200,000. Our retiree medical and life insurance plans are unfunded. Benefits for these plans are paid from general assets of our company as they come due. Except for benefits provided to certain unionized employees, we retain the right to terminate other postretirement benefits. However, we do expect to continue to sponsor and pay benefits under these plans in 2008. The estimated 2008 funding of $63 million includes approximately $17 million of funding expected to be required to cover benefit payments under the contractual obligations. Projected Benefit Payments Estimated Projected Benefit Payments for the Next 10 Years  ACTUARIAL ASSUMPTIONS We use actuarial assumptions in estimating our benefit obligations and our net periodic benefit costs. Rates We Use in Estimating Our Benefit Obligations In estimating our benefit obligations, we use assumptions that include: • discount rates in the U.S. and Canada; and • rates of compensation increases for our salaried and hourly employees in the U.S. and Canada. Discount Rates and Rates of Compensation Used in Estimating Our Pension Plan and Other Postretirement Benefit Obligations  Estimating Our Net Periodic Benefit Costs In estimating our net periodic benefit costs, we use assumptions that drive the various components of those costs. The assumptions we use include: • discount rates in the U.S. and Canada; • expected returns on our plan assets; and • rates of compensation increases for our salaried and hourly employees in the U.S. and Canada. This table shows the discount rates, expected returns on our plan assets and rates of compensation increases we used over the last three years in estimating our net periodic benefit costs. Rates Used in Estimating Our Net Periodic Benefit Costs  Expected Return on Our Plan Assets We report the expected return on assets for our: • qualified and registered pension plans; and • nonregistered plans. Qualified and Registered Pension Plans. Our expected return on assets in our U.S. pension trust and our Canadian pension trust was 9.5 percent as of December 30, 2007. The expected return includes: • 8.0 percent from direct investments; and • 1.5 percent from derivatives. These trusts fund our qualified and registered pension plans. The expected return is our best estimate of the long-term return we expect from our U.S. pension trust. Since 1998, our Canadian pension trust investment strategy has mirrored the investment strategy of our U.S. pension trust. Determining our expected return: • requires a high degree of judgment; • uses our historical fund returns as a base; and • places added weight on more recent pension plan asset performance. Over the 23 years it has been in place, our U.S. pension trust investment strategy has achieved a 17.7 percent net compound annual return rate. Our total actual return on assets held by our pension trusts was $777 million in 2007. Actual Returns on Assets Held by Our Pension Trusts  Nonregistered Plans. Our expected overall annual return on assets that fund our nonregistered plans is 4.75 percent. Our expected long-term annual rate of return on the equity portion of this portfolio – the portion we’re allowed to invest and manage – is 9.5 percent. We base that expected rate of return on: • historical experience; and • future return expectations. We reach the 4.75 percent expected overall annual return by dividing the 9.5 percent by two. That’s because Canadian tax rules require 50 percent of the assets for nonregistered plans to go to a noninterest-bearing refundable tax account. As a result, the return we earn investing the other 50 percent gets spread over 100 percent of the assets. Health Care Costs Rising costs of health care significantly affect the costs of our health care plans. Health Care Cost Trend Rates We use assumptions about health care cost trend rates to estimate the cost of the benefits we provide. In 2007, the assumed weighted health care cost trend rate for the next year was: • 9 percent in the U.S.; and • 6.3 percent in Canada. This table shows the assumptions we use in estimating the annual cost increase for the health care benefits we provide. Assumptions We Use in Estimating Health Care Benefit Costs 
A 1 percent change in our assumed health care cost trend rates can significantly affect our accumulated benefit obligations. Effect of a 1 Percent Change in Health Care Costs  OTHER PLANS In addition to the pension and postretirement benefit plans we provide, we also: • make contributions to union-administered multi-employer pension plans; and • sponsor other postretirement and defined contribution plans. Union-Administered Multi-Employer Pension Plans We make negotiated contributions to union-administered multiemployer pension plans. Over the last three years, our contributions were approximately: • $6 million in 2007; • $10 million in 2006; and • $13 million in 2005. Our contribution generally is based on fixed amounts per hour per employee. These plans cover approximately 1,800 of our employees. Other Postretirement Plans We sponsor other postretirement plans for our U.S. and Canadian employees. These plans are not included above since the full cost of the plans is paid for by retirees. Defined Contribution Plans We sponsor various defined contribution plans for our U.S. and Canadian salaried and hourly employees. Over the last three years, our contributions to these plans were: • $53 million in 2007; • $62 million in 2006; and • $61 million in 2005. The basis for determining our contributions varies by plan. |