< Previous50 2016 WCB ANNUAL REPORT6. 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: 201620155 year annualized5 year annualizedEquities+/- 1 standard deviation+/- 2 standard deviations+/- 1 standard deviation+/- 2 standard deviations% change in benchmark Canadian9.0% $23.9 million 18.0% $47.8 million 11.1% $25.6 million 22.2% $51.2 million % change in benchmark U.S.10.2% $27.0 million 20.4% $54.0 million 11.2% $28.7 million 22.4% $57.4 million % change in benchmark Europe, Australasia & Far East11.8% $17.1 million 23.6% $34.2 million 12.5% $18.7 million 25.0% $37.4 million % change in benchmark Emerging markets11.9% $5.1 million 23.8% $10.2 million 13.9% $5.7 million 27.8% $11.4 million Credit 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, 81 per cent (80 per cent in 2015) have at least an A credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.Securities LendingThe 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, 2016, these loans amounted to $228.3 million ($109.2 million in 2015). As at December 31, 2016, total collateral pledged to the WCB amounted to $239.8 million ($114.7 million in 2015). 2016 WCB ANNUAL REPORT 51Foreign Exchange Risk ManagementThe WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2016, the WCB did not undertake hedging strategies for the currency risk of foreign investments. While currency fluctuations influence 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 $363.5 million CAD ($348.0 million CAD in 2015) or 22.1 per cent of the portfolio (23.0 per cent in 2015).The table below presents the effects of a material change in the Canadian/U.S. dollar exchange rates:CAD/USD2016201510% appreciation in the Canadian dollar$(33.1 million)$(31.6 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, 2016, the duration of the WCB’s bond portfolio was 7.7 years (7.2 years in 2015).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: 20162015+/- basis point change50 basis points100 basis points50 basis points100 basis pointsBonds$18.9 million$37.8 million$17.3 million$34.6 millionThe WCB is also subject to interest rate risk through the wholly owned subsidiary WCB Realty Limited. The mortgages payable on investment properties are primarily fixed rate mortgages which do not create cash flow risk.Liquidity Risk Management Liquidity risk is the risk that the WCB will be unable to meet its financial obligations. To manage this risk, and avoid liquidation of portfolio assets under unfavourable conditions, the WCB maintains two credit facilities as discussed in Note 3.52 2016 WCB ANNUAL REPORT7. DEFERRED ASSESSMENTSThe changes in deferred assessments were as follows:20162015Balance at beginning of year$ 137,335$106,273(Decrease) increase in future cost liability (479)31,191 Increase (decrease) in pension-related transactions 1,467(2,148)Interest allocation (14)(12)Net change in deferred assessments (Note 15) 97429,031Current pension (deficit) surplus included in receivables and other (1,358)2,031 Balance at end of year$136,951$137,3358. PROPERTY AND EQUIPMENTThe changes in property and equipment were as follows:20162015Building and landBuilding renovations and leaseholdsComputer equipmentFurniture, fixtures and equipmentTotalTotalCostAs at January 1$23,574 $ 5,987 $ 7,654 $ 3,618 $ 40,833 $ 37,947 Additions 108 557 1,609 157 2,431 3,038 Disposals-- (61)- (61) (152)As at December 31 23,682 6,544 9,202 3,775 43,203 40,833 AmortizationAs at January 1 (2,457) (2,949) (5,816) (2,747) (13,969) (12,034)Amortization charge (667) (478) (1,001) (262) (2,408) (2,087)Disposals- - 60 - 60 152 As at December 31 (3,124) (3,427) (6,757) (3,009) (16,317) (13,969)Net book value, as at December 31$ 20,558 $ 3,117 $2,445 $766$ 26,886 $ 26,864 2016 WCB ANNUAL REPORT 539. INTANGIBLE ASSETSThe changes in intangible assets were as follows:20162015Computer softwareInternally developed systems and softwareTotalTotalCostAs at January 1$ 4,046 $ 15,568 $ 19,614 $ 18,356 Additions 242 3,600 3,842 1,377 Disposals - (4) (4) (119)As at December 31 4,288 19,164 23,452 19,614 AmortizationAs at January 1 (3,673) (11,830) (15,503) (14,852)Amortization charge (246) (691) (937) (770)Disposals - 3 3 119As at December 31 (3,919) (12,518) (16,437) (15,503)Net book value, as at December 31$ 369 $ 6,646 $7,015 $4,111 10. PAYABLES AND ACCRUALSPayables and accruals are comprised of:20162015Accounts payable and accrued liabilities$ 4,828 $4,241 Research and Workplace Innovation Program 2,330 1,779 Deposits from self-insured employers 6,468 5,104 Other payables 1,526 1,336 Balance at end of year$ 15,152 $12,460 54 2016 WCB ANNUAL REPORT11. WORKERS’ RETIREMENT ANNUITY FUNDThe changes in the workers’ retirement annuity fund were as follows:20162015Balance as at January 1$ 29,814 $ 27,514 Investment income 8942,036 WCB contributions 1,6011,512 Workers' contributions 451433 Benefits paid (1,515)(1,681)Balance as at December 31$31,245$29,81412. EMPLOYEE BENEFITSComponents of the employee benefits liability are as follows:20162015Retirement plans$ 77,911 $ 66,566 Sick leave plan 12,031 11,588 Employee vacation entitlements 4,713 4,467 Retiree healthcare spending account 2,188 1,930 Other 312 238 As at December 31$ 97,155 $ 84,789 The WCB measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year. 2016 WCB ANNUAL REPORT 55A reconciliation of the retirement plans’ net defined benefit liability and its components is as follows:Defined Benefit ObligationFair Value of Plan AssetsNet Defined Benefit Liability201620152016201520162015Balance at January 1$ 239,258$ 235,096$ (172,692)$ (163,454)$ 66,566$71,642Benefit cost recognized in income:Current service cost 11,946 12,683 -S - 11,946 12,683Interest expense (income) 10,088 9,394 (7,446) (6,685) 2,642 2,709Employee contributions - - (3,506) (3,040) (3,506) (3,040) 22,034 22,077 (10,952) (9,725) 11,082 12,352Remeasurements recognized in OCI:Experience loss 1,641 1,840 - - 1,641 1,840Gain from changes in demographic assumptions - (37) - - - (37)Loss (gain) from changes in economic assumptions 12,037 (19,245) - - 12,037 (19,245)Return on plan assets excluding interest income - - (8,155) 4,775 (8,155) 4,775 13,678 (17,442) (8,155) 4,775 5,523 (12,667)Other changes:Employer contributions - - (5,260) (4,761) (5,260) (4,761)Transfers to the plan 853 3,267 (853) (3,267) - - Benefits paid (4,616) (3,740) 4,616 3,740 - - (3,763) (473) (1,497) (4,288) (5,260) (4,761)Balance at December 31$ 271,207$239,258$ (193,296)$ (172,692)$77,911$66,566The most recent actuarial valuation of the WCB Retirement Plan for funding purposes, to be filed with the pension regulators, was as at December 31, 2016. This funding valuation showed a funding deficit of $1.4 million (2015 valuation, deficit of $6.2 million). The solvency deficit as at December 31, 2016 was $89.7 million (2015 valuation, deficit of $71.6 million). The WCB is not required to fund this deficiency as the WCB is exempt from the solvency and transfer deficiency provisions of the Pension Benefits Act.56 2016 WCB ANNUAL REPORTA reconciliation of the sick leave plan net defined benefit liability (equal to the defined benefit obligation) is as follows:Net Defined Benefit Liability20162015Balance at January 1$ $11,588 $11,331Benefit cost recognized in income:Current service cost 518 526Interest expense 480 40 998976Remeasurements recognized in OCI:Experience loss (gain) 2 (7)Gain on change in demographic assumptions (237) - Loss (gain) on change in economic assumptions 249 (545)Return on plan assets excluding interest income - - 14 (552)Other changes:Benefits paid directly by the employer (569) (167)Net defined benefit liability at December 31$ 12,031$11,588Total cash payments for employee future benefits for 2016, consisting of cash contributed by the WCB to the funded pension plan and cash payments directly to beneficiaries for unfunded plans, were $5.8 million ($4.9 million in 2015). Based on historical experience and expected salary expense, the WCB expects to fund $5.5 million in 2017.The key actuarial assumptions used to value the employee benefit liabilities for accounting purposes are as follows:20162015Discount rate4.00%4.25%Rate of compensation increase3.50%3.50%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 obligation to a one per cent change in the discount rate:20162015+1.0%-1.0%+1.0%-1.0%Retirement plans $ (43,568)$ 57,352$ (37,765) $ 49,090 Sick leave plan (945) 1,094 (875) 1,0122016 WCB ANNUAL REPORT 57The fair value of the retirement plans’ assets as at December 31 is:Retirement Plan20162015Equity Canadian$ 48,256 $ 54,208Foreign (including U.S.) 57,850 54,381 106,106 108,589 Fixed income 48,337 61,693Real estate 38,853 - Cash and short term - 2,410 $ 193,296$ 172,692The retirement plans’ assets are wholly invested in segregated funds (pooled funds in 2015). The fair value represents the retirement plans’ share of the net asset value provided by the custodian and is based on the last market price for the underlying assets. At December 31, 2016, plan assets are categorized as Level 1 with the exception of certain fixed income investments which are categorized as Level 2. At December 31, 2015 all assets are categorized as Level 2.WCB Retiree Healthcare Spending Account (RHCSA)Details of the WCB RHCSA are as follows:20162015Balance as at January 1$ 1,930 $1,853 Benefit cost recognized in income 174 168Remeasurements recognized in OCILoss (gain) on change in economic assumptions 93 (88)Employer contributions (9) (3)Net change in net defined benefit liability 258 77Defined benefit liability at December 31$2,188 $1,930 Related Party Transactions By definition, the WCB retirement plan is a related party to the WCB. Transactions between the related parties are detailed below: 20162015Contributions from the employees$ 3,506 $ 3,040 Contributions from the employer 5,260 4,761 There were no amounts outstanding as at December 31, 2016 or December 31, 2015.58 2016 WCB ANNUAL REPORT13. 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.The key actuarial assumptions used to value the benefit liabilities as at December 31 are as follows:20162015Discount rate5.75%5.75%Inflation for CPI-indexed benefits2.25%2.25%Inflation for wage-related benefits3.25%3.25%Inflation for healthcare benefits5.25%5.25%An analysis of the components of and changes in benefit liabilities is as follows:20162015Short Term DisabilityLong Term DisabilitySurvivor BenefitsHealthcare BenefitsRehabilitation ServicesTotalTotalBalance at beginning of year$ 146,297$ 536,892$ 133,198$ 298,165$ 5,973$ 1,120,525$1,080,682Add: Claim costs incurredCurrent year 44,519 48,815 2,739 53,163 998 150,234160,722 Prior years 24,709 (23,293) 3,828 15,675 (3,096) 17,82350,828 69,228 25,522 6,567 68,838 (2,098) 168,057211,550Less: Claim payments madeCurrent year 26,921 732 128 21,194 4 48,97948,544 Prior years 29,031 57,197 12,018 34,500 215 132,961123,163 55,952 57,929 12,146 55,694 219 181,940171,707Balance at end of year$ 159,573$ 504,485$ 127,619$311,309$ 3,656$1,106,642$1,120,525The liability for short term disability claims is an estimate of future wage loss payments for claims that have yet to medically plateau or stabilize. The long term disability liability includes estimated future wage loss payments for those claims that have medically plateaued and stabilized, estimated future pension payments, and estimated future cost of claims relating to certain long latent occupational diseases. The liability for survivor benefits is composed of estimated future pension payments and other services provided to survivors of those who have lost their lives as a result of workplace injuries or illnesses. Healthcare liabilities are the estimated future medical costs for existing claims. The liability for rehabilitation services is composed of the estimated cost of future rehabilitation services which are externally supplied to the WCB.2016 WCB ANNUAL REPORT 59Included in the benefit liabilities balance is $100.4 million ($103.7 million in 2015) for the estimated long latent occupational disease liability. The Workers Compensation Act of Manitoba lists specific illnesses and injuries presumed to be caused by firefighting, unless the contrary is proven. Effective January 1, 2016, the Act was amended to include a presumption for Post-Traumatic Stress Disorder, regardless of occupation.Also included in the benefit liability is $92.1 million ($93.7 million in 2015) for the future cost of administering existing claims.Sensitivity of Actuarial AssumptionsThe most significant assumption in the determination of the benefit liabilities is the discount rate. The following table shows the sensitivity of the benefit liabilities to an immediate one per cent increase or decrease in the key assumptions used to determine the liabilities:Change in liability in millions:20162015+/- % change on assumed rates+1.0%-1.0%+1.0%-1.0%Discount rate $ (87)$ 103 $ (87)$103 Wage inflation rate 53 (46) 54 (47)General inflation rate 11 (9) 10 (9)Healthcare inflation rate 36 (30) 35 (28)An increase in the discount rate results in a decrease to the benefit liabilities and vice versa.An increase to any of the inflation rates results in an increase to the benefit liabilities. Each inflation rate affects only those benefits that are directly impacted by that type of inflation. For example, healthcare inflation only affects healthcare liabilities.Liability Adequacy TestIFRS 4 Insurance Contracts requires an insurer to apply a liability adequacy test that meets specified minimum requirements, as follows:a. the test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees; andb. if the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.If these minimum requirements are met, there are no further requirements.The current claim benefit liability valuation meets the liability adequacy testing requirements of IFRS 4. Accordingly, a separate annual liability adequacy test is not required.Next >