< Previous50 | 2015 WCB ANNUAL REPORTThe fair value of mortgages payable on investment properties is determined annually. Fair value is impacted by changes in market yields which can result in differences between the carrying value and the fair value of the instruments. The fair value of the mortgages payable has been estimated based on the current market rates for mortgages of similar terms and conditions. The fair value of these mortgages was $59.4 million as at December 31, 2015 ($61.1 million in 2014) determined using the following:Interest ratesFrom 2.39% to 3.72%Term to maturity 8 months to 102 monthsThese mortgages are categorized as Level 2 of the fair value hierarchy.For 2016, scheduled principal and interest payments on these mortgages total $18.3 million. The scheduled amounts of principal repayments in each of the next five years are as follows:20162017201820192020ThereafterTotal$16,448$1,600$2,039$9,801$1,440$26,164$57,492Investment Income Investment income, including net rental income and changes in fair value, was derived from the following sources:20152014IncomeNet gains (losses)TotalTotalFixed IncomeBonds$17,125 $(1,537)$15,588 $39,697 Mortgages5,274 (829)4,445 5,889 Cash and short term369 2,2712,6401,51622,768(95)22,67347,102EquitiesCanadian7,587 (10,558)(2,971)25,618 U.S.6,464 37,249 43,713 43,996 Europe, Australasia & Far East3,680 20,70224,3824,424Emerging markets1,020 2,4523,4724,742Private placements- 176 176 (1,613)18,75150,02168,77277,167Real estate Portfolio investments2,783 1,507 4,290 5,721 Investment properties *9,126(2,336)6,790 2,369 11,909(829)11,080 8,090 Infrastructure3,01113,39516,4061,035Investment income$56,439$62,492118,931133,394Less: Portfolio management expenses7,4116,108Net investment income$111,520$127,286*Investment properties income includes gross rental income of $19.5 million net of operating expenses of $7.9 million and mortgage interest of $2.5 million.2015 WCB ANNUAL REPORT | 51Commitments The WCB has contractual agreements to contribute further funding to a maximum of $13.1 million ($42.6 million in 2014) to specific investment projects to be financed from the existing portfolio or from available cash.6. INVESTMENT RISK MANAGEMENTIn accordance with the Statement of Investment Policy and Objectives, the investment objective of the WCB is to generate a consistent, positive, real rate of return on invested assets. Recognizing the need to achieve a balance between risk and return, investment risk is managed through a portfolio that is diversified across a number of distinct asset classes, as well as geographic region and investment style.The following sections describe the nature and extent of financial risk exposure and the related risk mitigation strategies.Market Risk The WCB invests in publicly and privately traded equities and fixed income instruments available on domestic and foreign exchanges. As these securities are affected by market changes and fluctuations, the WCB is exposed to market risk as a result of price changes due to economic fluctuations in capital markets.The following table presents the effect of a material change in the key risk variable – the sector benchmark – for each of the equity mandates in the WCB investment portfolio:201520145 year annualized5 year annualizedEquities+/- 1 standard deviation+/- 2 standard deviations+/- 1 standard deviation+/- 2 standard deviations% change in benchmark Canadian11.1% $25.6 million22.2% $51.2 million11.9% $27.7 million23.8% $55.4 million% change in benchmark U.S.11.2% $28.7 million22.4% $57.4 million11.6% $31.3 million23.2% $62.6 million% change in benchmark Europe, Australasia & Far East12.5% $18.7 million25.0% $37.4 million13.0% $16.2 million26.0% $32.4 million% change in benchmark Emerging markets13.9% $5.7 million27.8% $11.4 million13.4% $5.0 million26.8% $10.0 millionCredit Risk Management Credit exposure on fixed income securities arises from the possibility that the issuer of an instrument fails to meet its obligation to make interest payments and repay principal. To mitigate the risk of credit default, the minimum quality standard for individual bonds and debentures at time of purchase is BBB, as rated by an established bond rating service. To further mitigate this risk, bonds with a BBB rating are limited to a maximum of 15 per cent of the bond portfolio. The balance of the portfolio should be invested in bonds with a minimum rating of A or higher.In addition to directly owned fixed income securities, the WCB is invested in a pooled bond fund. The pooled fund guidelines require that the average credit quality of the pooled fund’s assets must be BBB- or higher, and that non-investment grade securities shall not exceed 25 per cent of the pooled fund’s assets on a market value basis.Of the fixed income assets in the investment portfolio, 80 per cent (89 per cent in 2014) have at least an A credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.52 | 2015 WCB ANNUAL REPORTSecurities Lending The WCB may lend, for fee income, any of its securities to third parties, provided the loans are secured by cash or readily marketable securities having a market value of at least 105 per cent of the market amount of the asset borrowed. As at December 31, 2015, these loans amounted to $109.2 million ($100.2 million in 2014). As at December 31, 2015, total collateral pledged to the WCB amounted to $114.7 million ($105.2 million in 2014).Foreign Exchange Risk Management The WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2015, the WCB did not undertake hedging strategies for the currency risk of foreign investments. While currency fluctuations influenced short term returns, these fluctuations are not expected to affect the long term position of the investment portfolio.The WCB has exposure to the U.S. dollar, with USD-denominated holdings of $348.0 million CAD ($348.9 million CAD in 2014) or 23.0 per cent of the portfolio (23.1 per cent in 2014).The table below presents the effects of a material change in the Canadian/U.S. dollar exchange rates:CAD/USD2015201410% appreciation in the Canadian dollar$(31.6 million)$(31.7 million)Interest Rate Risk Management The WCB is exposed to interest rate risk to the extent that the fair value or future cash flows of a financial instrument fluctuate due to changes in market interest rates. These fluctuations are managed by actively controlling the duration of the fixed income portfolio. As at December 31, 2015, the duration of the WCB’s bond portfolio was 7.2 years (8.7 years in 2014).The following table shows the effects of a negative 50 and 100 basis point (where one basis point equals 1/100 of one per cent and 50 basis points equals 0.5 per cent) change in interest rates on the bond portfolio:20152014+/- basis point change50 basis points100 basis points50 basis points100 basis pointsBonds$17.3 million$34.6 million$18.1 million$36.2 millionThe WCB is also subject to interest rate risk through the wholly owned subsidiary WCB Realty Limited. The mortgages payable on investment properties are primarily fixed rate mortgages which do not create cash flow risk.Liquidity Risk Management Liquidity risk is the risk that the WCB will be unable to meet its financial obligations. To manage this risk, and avoid liquidation of portfolio assets under unfavourable conditions, the WCB maintains two credit facilities as discussed in Note 3.2015 WCB ANNUAL REPORT | 537. DEFERRED ASSESSMENTSThe changes in deferred assessments were as follows:20152014Balance at beginning of year$106,273$70,136 Increase in future cost liability31,191 6,596 (Decrease) increase in pension-related transactions(2,148)1,941 Interest allocation(12)(1,083)Net change in deferred assessments (note 15)29,0317,454 Refund of accumulated excess pension income- 29,632 Current pension surplus (deficit) included in receivables and other2,031 (949)Balance at end of year$137,335$106,2738. PROPERTY, PLANT AND EQUIPMENTThe changes in property, plant and equipment were as follows:20152014Building and landBuilding renovations and leaseholdsComputer equipmentFurniture, fixtures and equipmentTotalTotalCostAs at January 1$23,574 $4,713 $6,557 $3,103 $37,947 $35,528 Additions-1,274 1,249 515 3,038 2,732 Disposals-- (152)-(152)(313)As at December 3123,574 5,987 7,654 3,618 40,833 37,947 AmortizationAs at January 1(1,791)(2,462)(5,240)(2,541)(12,034)(10,614)Amortization charge(666)(487)(728)(206)(2,087)(1,733)Disposals- -152 -152 313 As at December 31(2,457)(2,949)(5,816)(2,747)(13,969)(12,034)Net book value, as at December 31$21,117$3,038$1,838$871$26,864$25,91354 | 2015 WCB ANNUAL REPORT9. INTANGIBLE ASSETSThe changes in intangible assets were as follows:20152014Computer softwareInternally developed systems and softwareTotalTotalCostAs at January 1$3,945 $14,411 $18,356 $19,246 Additions220 1,157 1,377 913 Disposals(119)-(119)(1,803)As at December 314,046 15,568 19,614 18,356 AmortizationAs at January 1(3,579)(11,273)(14,852)(15,841)Amortization charge(213)(557)(770)(814)Disposals119 - 119 1,803 As at December 31(3,673)(11,830)(15,503)(14,852)Net book value, as at December 31$373$3,738$4,111$3,50410. PAYABLES AND ACCRUALSPayables and accruals are comprised of:20152014Accounts payable and accrued liabilities$4,241 $3,538 Research and Workplace Innovation Program1,779 1,972 Deposits from self insured employers5,104 4,932 Other payables1,336 1,334 Balance at end of year$12,460$11,7762015 WCB ANNUAL REPORT | 5511. WORKERS’ RETIREMENT ANNUITY FUNDThe changes in the workers’ retirement annuity fund were as follows:20152014Balance as at January 1$27,514 $24,666 Investment income2,036 2,344 WCB contributions1,512 1,450 Workers' contributions433 426 Benefits paid(1,681)(1,372)Balance as at December 31$29,814$27,51412. EMPLOYEE BENEFITSComponents of the employee benefits liability are as follows:20152014Employee pension plan$66,566 $71,642 Sick leave plan11,588 11,331 Employee vacation entitlements4,467 3,983 Retiree healthcare spending account1,930 1,853 Other238 462 As at December 31$84,789$89,271The WCB measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. The most recent actuarial valuation of the Retirement Plan for funding purposes, to be filed with the pension regulators, was as at December 31, 2015. This funding valuation showed a funding deficit of $6.2 million (2014 valuation, surplus of $1.0 million). The solvency deficit as at December 31, 2015 was $71.6 million (2014 valuation, deficit of $50.0 million). The WCB is not required to fund this deficiency as the WCB is exempt from the solvency and transfer deficiency provisions of the Pension Benefits Act.Total cash payments for employee future benefits for 2015, consisting of cash contributed by the WCB to the funded pension plan and cash payments directly to beneficiaries for unfunded plans, were $4.9 million ($4.5 million in 2014). Based on historical experience and expected salary expense, the WCB expects to fund $6.1 million in 2016.56 | 2015 WCB ANNUAL REPORTThe key actuarial assumptions used to value the employee benefit liabilities for accounting purposes are as follows:Pension PlanSick Leave Plan2015201420152014Discount rate4.25%4.00%4.25%4.00%Rate of compensation increase3.50%3.75%3.50%3.75%The rates shown in the 2015 column were effective as of December 31, 2015. The rates were applied in determining the benefit plan balances at December 31, 2015. The rates shown in the 2014 column were effective at December 31, 2014 and were applied in determining the 2015 benefit plan expense.The actuarial present value of the defined benefit obligation is sensitive to changes in actuarial assumptions, the most significant assumption being the discount rate. The following table illustrates the sensitivity of the defined benefit obligations to a one per cent change in the discount rate:20152014+1.0%-1.0%+1.0%-1.0%Pension plan$(37,765)$49,090 $(39,196)$52,186 Sick leave plan(875)1,012 (953)2,060 The WCB’s defined benefit plan expenses are as follows:Pension PlanSick Leave Plan2015201420152014Current service cost$9,643 $6,027 $526 $462 Net interest expense2,709 1,550 450 487 Remeasurements(12,667)33,814 (552)829 Total benefit plan expenses$(315)$41,391$424$1,778As at December 31, the funding status of the defined benefit plans is as follows:Pension PlanSick Leave Plan2015201420152014Fair value of plan assets$172,692 $163,454 $-$-Defined benefit obligation(239,258)(235,096)(11,588)(11,331)Net defined benefit liability$(66,566)$(71,642)$(11,588)$(11,331)2015 WCB ANNUAL REPORT | 57Details of the WCB’s net defined benefit liability are as follows:Pension PlanSick Leave Plan2015201420152014Balance at January 1$(71,642)$(34,355)$(11,331)$(9,910)Benefit cost recognized in income(12,352)(7,577)(976)(949)Remeasurements recognized in othercomprehensive income (loss)12,667 (33,814)552 (829)Employer contributions4,761 4,104 167 357 Net change in net defined benefit liability5,076(37,287)(257)(1,421)Net defined benefit liability at December 31$(66,566)$(71,642)$(11,588)$(11,331)Details of the WCB’s defined benefit obligations are as follows:Pension PlanSick Leave Plan2015201420152014Balance at January 1$(235,096)$(181,557)$(11,331)$(9,910)Current service cost(12,683)(8,627)(526)(462)Interest expense(9,394)(8,994)(450)(487)Transfers to the plan(3,267)(122)--Remeasurements consisting of:Actuarial gains (losses)17,442 (39,253)552 (829)Benefits paid3,740 3,457 167 357 Net change in defined benefit obligation(4,162)(53,539)(257)(1,421)Defined benefit obligation at December 31$(239,258)$(235,096)$(11,588)$(11,331)58 | 2015 WCB ANNUAL REPORTDetails of the WCB’s defined benefit plan assets are as follows:Pension Plan20152014Balance at January 1$163,454$147,202Interest income6,685 7,444 Employer contributions4,761 4,104 Employee contributions3,040 2,600 Transfers to the plan3,267 122 Remeasurements consisting of:Actuarial (loss) gain(4,775)5,439 Benefits paid(3,740)(3,457)Net change in plan assets9,238 16,252 Plan assets at December 31$172,692$163,454The fair value of the pension plan assets as at December 31 is:Pension Plan20152014EquityCanadian$54,208 $51,167 Foreign (including U.S.)54,381 44,648 108,589 95,815 Fixed income61,693 59,261 Cash and short term2,410 8,378 $172,692$163,454The Plan assets are wholly invested in pooled funds. Therefore, at December 31, 2015 and 2014 the Plan held financial instruments valued using inputs that are observable for the asset either directly or indirectly (Level 2).2015 WCB ANNUAL REPORT | 59WCB Retiree Healthcare Spending Account (RHCSA) Details of the WCB RHCSA are as follows:20152014Balance at January 1$(1,853)$(736)Benefit cost recognized in income(168)(953)Remeasurements recognized in other comprehensive income (loss)88(164)Employer contributions3-Net change in net defined benefit liability(77)(1,117)Defined benefit liability at December 31$(1,930)$(1,853)Related Party Transactions - Pension Plan By definition, the WCB pension plan is a related party to the WCB. Transactions between the related parties are detailed below:20152014Transactions:Contributions from employees$3,040$2,600Contributions from employer4,7614,104There were no amounts outstanding as at December 31, 2015 or December 31, 2014. 13. BENEFIT LIABILITIES FOR ALL EMPLOYERSBenefit liabilities are determined in accordance with standards established by the Actuarial Standards Board (Canada). The actuarial present value of future benefit payments reflects management’s long term estimates of economic and actuarial assumptions and methods, which are based upon past experience and modified for current trends. As these assumptions may change over time to reflect underlying conditions, it is possible that such changes could cause a material change in the actuarial present value of the future payments. The fair value for benefit liabilities is not readily determinable.Next >