< Previous606. 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.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 adverse change in the key risk variable – the sector benchmark – for each of the equity mandates in the WCB investment portfolio. Standard deviations are based on historical values for the past five years of market benchmark indices ending on December 31.one standard deviation20202019% decrease in benchmark Estimated loss in fair value - Canadian15.9% $41.5 million 10.5%$25.5 million% decrease in benchmark Estimated loss in fair value - U.S.12.5% $25.3 million 10.0%$18.9 million% decrease in benchmark Estimated loss in fair value - Global13.4% $14.3 million 11.1%$11.6 million% decrease in benchmark Estimated loss in fair value - Emerging markets15.0% $7.2 million 12.7%$5.5 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, 92 per cent (95 per cent in 2019) have at least a BBB credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.2020 WCB ANNUAL REPORT61Securities 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, 2020, these loans amounted to $151.6 million ($202.5 million in 2019). As at December 31, 2020, total collateral pledged to the WCB amounted to $159.3 million ($212.6 million in 2019). Foreign Exchange Risk Management The WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2020, 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 (USD), with USD-denominated holdings of $396.0 million Canadian dollars (CAD) ($320.2 million CAD in 2019) or 21.7 per cent of the portfolio (18.1 per cent in 2019).The table below presents the adverse effects of a 10 per cent appreciation in the Canadian dollar versus the U.S. dollar exchange rate:20202019Estimated loss in fair value$36.0 million$29.1 millionInterest 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, 2020, the duration of the WCB’s bond portfolio was 8.3 years (8.2 years in 2019).The following table shows the effects of a negative 100 basis point (where one basis point equals 1/100 of one per cent) change in interest rates on the bond portfolio: 20202019Estimated loss in fair value of bonds$40.6 million$41.0 millionThe WCB is also subject to interest rate risk through the wholly owned subsidiary WCB Realty Limited. The mortgages payable on investment properties are primarily fixed rate mortgages, which do not create cash flow risk.Liquidity Risk Management Liquidity risk is the risk that the WCB will be unable to meet its financial obligations. To manage this risk, and avoid liquidation of portfolio assets under unfavourable conditions, the WCB maintains two credit facilities as discussed in Note 3.627. DEFERRED ASSESSMENTSAccounting policy Under the authority of the Act, the WCB may defer the collection of the funds, or any portion of the funds, required for the future cost of claims arising in respect of employers in Class A through Class D. Where the WCB defers the collection of the funds the amount deferred is a receivable. Deferred assessments represent the WCB’s estimate of the present value of assessments which will be received in the future to fund the future costs of existing claims that have arisen from the employees of Class A through Class D employers. The fair value for deferred assessments is not readily determinable. Deferred assessments may be secured by irrevocable letters of credit, surety bonds or other suitable forms of guarantee.The changes in deferred assessments were as follows:20202019Balance at beginning of year$ 152,858 $145,544Increase in future cost liability 13,618 7,446 Decrease in pension-related transactions (353)(2,738)Interest allocation (73)(122)Increase in deferred assessments (Note 15) 13,192 4,586 Current pension surplus included in receivables and other 363 2,728 Balance at end of year$ 166,413 $152,8582020 WCB ANNUAL REPORT638. PROPERTY AND EQUIPMENTAccounting policy Property and equipment are valued at cost, less accumulated amortization and any impairment loss. Right-of-use assets (leases) are measured at an amount equal to the lease liabilities (Note 10). Amortization is calculated on a straight-line basis over the estimated useful life of the asset, as follows:Building40 yearsBuilding renovations and leasehold improvements2 to 10 yearsComputer equipment3 to 5 yearsFurniture, fixtures and equipment5 yearsLeasesLease termThe WCB does not recognize a lease liability or corresponding right-of-use asset for leases where the total lease term is less than 12 months or for leases of low value. Payments for these leases are recognized in operating expenses on a straight-line basis over the term of the lease. An item of property and equipment is derecognized upon disposal or when no further economic benefits are expected from its use. Any gain or loss arising on derecognition is included in operating expenses. The carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried at a value in excess of the recoverable amount.The changes in property and equipment were as follows:20202019Building and land1Building renovations and leaseholdsComputer equipmentFurniture, fixtures and equipmentTotalTotalCostAs at January 1$36,597$ 12,385 $ 11,776 $ 5,741 $66,499$55,213Additions- 144 942 24 1,110 5,268Adjustments2-----6,189Disposals----- (171)As at December 3136,597 12,529 12,718 5,76567,60966,499AmortizationAs at January 1(6,597) (6,580) (9,769) (4,172)(27,118)(22,447)Adjustments2----- (879)Amortization charge(1,552) (1,009)(982) (536)(4,079) (3,963)Disposals-----171As at December 31(8,149) (7,589)(10,751) (4,708)(31,197) (27,118)Net book value, as at December 31$28,448$ 4,940 $1,967$1,057$ 36,412 $39,3811. Buildings include right-of-use assets of $5,310, net of accumulated depreciation of $528. 2. Adjustments related to the initial application of IFRS 16.649. INTANGIBLE ASSETSAccounting policy Acquired intangible assets, primarily computer software, are valued at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful life, and included in operating expenses.Internally generated intangible assets, primarily computer software and systems development, including professional fees incurred to implement these assets, are valued at cost and amortized over their useful lives. Amortization is calculated on a straight-line basis over the estimated useful life, as follows:Computer software 3 yearsInternally generated systems development 10 yearsThe carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried at a value in excess of the recoverable amount. The changes in intangible assets were as follows:20202019Computer softwareInternally developed systems and softwareTotalTotalCostAs at January 1$ 5,205 $ 26,565 $ 31,770 $29,398Additions 237 458 695 2,372Disposals- - - -As at December 31 5,442 27,023 32,465 31,770AmortizationAs at January 1 (4,618) (16,583) (21,201)(18,960)Amortization charge (304) (1,935) (2,239)(2,248)Disposals- - - 7As at December 31 (4,922) (18,518) (23,440)(21,201)Net book value, as at December 31$ 520 $8,505 $9,025 $10,5692020 WCB ANNUAL REPORT6510. PAYABLES AND ACCRUALSAccounting policy Payables and accruals are obligations to pay for goods and services acquired in the normal course of operations. The WCB records a liability and an expense for goods upon receipt or transfer of control, and for services when they are performed. For lease liabilities, the WCB records a liability and a right-of-use asset upon commencement of a lease. Lease liabilities are measured at the present value of remaining lease payments, discounted by the WCB’s incremental borrowing rate of 3.95 per cent. The amount in employer refunds payable represents all outstanding employer accounts with credit balances, arising primarily from surplus distributions, prevention rebates and changes to estimated premiums due.Other payables include various payroll-related liabilities and deposits from Class A through Class D employers. The timing and amount of payables and accruals are readily determinable. The liability for each lease is settled at the end of its lease term; otherwise, these amounts are expected to be settled before the end of the next reporting period.Payables and accruals are comprised of:20202019Accounts payable and accrued liabilities$5,080 $6,645Employer refunds payable21,5589,260Research and Workplace Innovation Program1,773 2,542Deposits from Class A through Class D employers 2,055 2,054Lease liabilities5,068 5,487Other payables1,450 1,642Balance at end of year$36,984$27,6306611. WORKERS’ RETIREMENT ANNUITY FUNDAccounting policy In accordance with Section 42(2) of the Act, where wage loss benefits are paid to a worker after a qualifying period, the WCB is required to invest on a worker’s behalf an amount equal to a percentage between five per cent and seven per cent, to provide an annuity for the worker at retirement. In addition, the worker may contribute an amount of not more than the amount contributed by the WCB. This annuity fund is part of the WCB investment portfolio and is intended to establish or replace lost pension entitlement resulting from a work-related injury or illness.The changes in the workers’ retirement annuity fund were as follows:20202019Balance as at January 1$ 38,353 $34,187Investment income 3,151 4,154WCB contributions 1,816 1,750Workers’ contributions553512Benefits paid (2,894)(2,250)Balance as at December 31$ 40,979 $38,35312. EMPLOYEE BENEFITSAccounting policy The WCB has several employee benefit plans:Short-Term Benefits Short-term employee benefits are measured on an undiscounted basis and are expensed when the services are rendered. These benefits include wages, salary, vacation entitlements and group health plans. Retirement plans The retirement plans, comprised of the WCB Retirement Plan and the Supplementary Employee Retirement Plan, are funded by employee and employer contributions. The WCB Retirement Plan is a defined benefit pension plan that provides indexed pensions (two-thirds of the Consumer Price Index for Canada) based on years of service and the best five consecutive years average earnings in the last 12 years of employment. The Supplementary Employee Retirement Plan provides that the employees of the WCB, whose pension benefits exceed the maximum pension benefit permitted under the federal Income Tax Act, will receive pension benefits based on their total pensionable earnings.Sick leave plan The WCB sick leave plan is a multi-faceted benefit plan. Sick leave credits are earned and payable in the form of sick leave in the current year. Unused sick leave credits are accumulated and carried forward 2020 WCB ANNUAL REPORT67to future periods, and are available to be taken as sick leave when the current year entitlement is exhausted. For employees that meet established criteria upon termination or retirement, the sick leave plan represents a post-employment benefit plan that provides for payment of sick leave credits. For accounting purposes, it is treated as a defined benefit plan and the liability is valued on the basis of discount rates and other estimates that are consistent with the estimates used for defined benefit obligations. For this unfunded plan, where the WCB funds the obligation directly from its own resources, employee contributions are not required.WCB Retiree Healthcare Spending Account (RHCSA) The RHCSA is a defined benefit plan. Eligible retirees receive a predetermined annual credit amount which may be used to cover healthcare expenses not covered by other plans. The WCB funds this plan directly via the plan administrator.Recognition and measurement The WCB measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year, using actuarial assumptions that are unbiased and mutually compatible. The assumptions represent management’s best estimates of the variables that will determine the ultimate cost of post-employment benefits. Actuarial assumptions are comprised of demographic assumptions on matters such as mortality and employee turnover, and financial assumptions on matters such as salary and benefit levels, interest rates and return on investments. Given the long term nature of the plan and the use of these assumptions, the resulting estimates are subject to significant uncertainty.The Projected Unit Credit Method is used to calculate the defined benefit obligations and current service costs. This method reflects service rendered by employees to the date of valuation and incorporates actuarial assumptions regarding discount rates used to determine the present value of benefits, projected rates of salary growth and long term expected rate of return on plan assets.Discount rates are based on the market yields of high-quality corporate bonds.In accordance with IAS 19 Employee Benefits, the net interest approach is used to disaggregate the costs of the retirement plans. The change in the net defined benefit liability is disaggregated into the following components:• Service cost, or the additional liability that arises from employees providing service during the period.• Net interest or the interest expense on the net defined benefit liability calculated using the discount rate.• Remeasurements, which are other changes in the value of the defined benefit obligation such as changes in estimates and other changes in the value of plan assets. Service cost and net interest are recognized in operating surplus whereas remeasurements are recognized in other comprehensive income. Employee contributions, which are independent of the number of years of service, are treated as a reduction of service cost.When past service costs arise they are recognized immediately.68Components of the employee benefits liability are as follows:20202019Retirement plans$ 189,144 $131,760Sick leave plan 15,299 14,011Employee vacation entitlements 5,036 4,653Retiree healthcare spending account 3,732 3,216Other 271 886As at December 31$ 213,482 $154,526The key actuarial assumptions used to value the employee benefit liabilities for accounting purposes are as follows:20202019Discount rate2.60%3.15%Rate of compensation increase1.00% to 3.00%0.75% to 3.00%Retirement plans A reconciliation of the retirement plans’ net defined benefit liability and its components is as follows:Defined Benefit ObligationFair Value of Plan AssetsNet Defined Benefit LiabilityNet Defined Benefit Liability20202019Balance at January 1$ 380,335 $ (248,575)$ 131,760 $93,475Benefit cost recognized in income:Current service cost 17,356 - 17,356 12,839Interest expense (income) 11,842 (7,835) 4,007 3,556Employee contributions- (3,528) (3,528)(3,546) 29,198 (11,363) 17,835 12,849Remeasurements recognized in OCI:Experience loss (gain) 7,916 - 7,916 (3,145)Loss from changes in actuarial assumptions 43,368 - 43,368 56,151Return on plan assets excluding interest income- (6,173) (6,173)(22,010) 51,284 (6,173) 45,111 30,996Other changes:Employer contributions- (5,562) (5,562)(5,560)Transfers to the plan 990 (990)--Benefits paid (9,766) 9,766 -- (8,776) 3,214 (5,562)(5,560)Balance at December 31$ 452,041 $ (262,897)$189,144 $131,7602020 WCB ANNUAL REPORT69The most recent actuarial valuation of the WCB Retirement Plan for funding purposes, to be filed with the pension regulators, was as at December 31, 2020. This funding valuation showed a funding surplus of $5.3 million (2019 valuation, surplus of $7.4 million). The solvency deficiency as at December 31, 2020, was $166.1 million (2019 valuation, deficiency of $129.0 million). The WCB is not required to fund this deficiency as the WCB is exempt from the solvency and transfer deficiency provisions of the Pension Benefits Act.The fair value of the retirement plan assets as at December 31 is:20202019EquityCanadian$ 65,551 $62,177Foreign (including US) 79,731 74,410 145,282 136,587Fixed income 65,619 61,769Real estate 51,996 50,219As at December 31$ 262,897 $248,575The retirement plans’ assets are wholly invested in segregated funds. The fair value represents the retirement plans’ share of the net asset value provided by the custodian and is based on the last market price for the underlying assets. At December 31, 2020, plan assets are categorized as Level 1 with the exception of certain fixed income investments which are categorized as Level 2 of the fair value hierarchy. Sick leave plan A reconciliation of the sick leave plan net defined benefit liability (equal to the defined benefit obligation) is as follows:20202019Balance at January 1$ 14,011 $12,352Benefit cost recognized in income:Current service cost 776 629Interest expense 432 473 1,208 1,102Remeasurements recognized in OCI:Experience gain (8)(11)Loss on change in actuarial assumptions 662 1,606 654 1,595Benefits paid directly by the employer (574)(1,038)Net defined benefit liability at December 31$ 15,299 $14,011Next >