Complete Transport Inc. Review of the Defined Benefit Pension Plan January 23 Alison Catherine Cristiana

Mandate Assist Complete Transport Inc. to decide whether they should modify their defined benefit pension plan given the current imbalances in pension funds. Introduction Analysis Implementation Conclusion

New proposed investment policy: Recommendation CTI. should maintain their defined benefit pension plan and reduce progressively the contributions. New proposed investment policy: 60% in fixed income (short-term bonds) 40% in equity (focus on emerging market equities) This will allow CTI to be able to achieve the expected return of 7.5% involving the lest possible risk and avoid underfunding. Introduction Analysis Implementation Conclusion

Pension Plans Overview Defined Benefit Pension Plan Currently underfunded (30% actuarial deficit) Overly generous (30% employee contribution) High Risk Increased life expectancy        ~20 years Poor investment returns The industry trends are discouraging the defined benefit pension plan Introduction Analysis Implementation Conclusion

CTI Overview 1. 2. 3. Competitive advantage Good market position Ability to retain skilled and qualified workers Family oriented corporate culture Defined benefit pension plan 1. 2. 3. Overfunded plan Stable Revenues (mature industry, differentiated product)s Financial flexibility D/E: 0.55 Sales to payroll:3.77 The defined benefit plan is critical for CTI’s business. Introduction Analysis Implementation Conclusion

Maintain the Defined Benefit Pension plan that will allow CTI to maintain long-term competitive advantage. CTI Overview Good market position Competitive advantage Ability to retain skilled and qualified workers Family oriented corporate culture Defined benefit pension plan 1. 2. 3. Overfunded plan Stable Revenues (mature industry, differentiated product)s Financial flexibility D/E: 0.55 Sales to payroll: The defined benefit plan is critical for CTI’s business who has the ability to support this plan. Introduction Analysis Implementation Conclusion

Reduce the contributions progressively in the future Financial Analysis $38m actuarial surplus Younger workforce than the industry Capex not used efficiently Reduce the contributions progressively in the future Use the cash from reduced contributions to: Invest in value adding projects Give money back to shareholders by increasing dividends Introduction Analysis Implementation Conclusion

Reduce the contributions Maintain the Defined Benefit Pension Plan, but reduce the actuarial surplus in order to create shareholder value. Financial Analysis $38m actuarial surplus Younger workforce than the industry No intensive Capex needs Reduce the contributions Use the cash from reduced contributions to: Invest in value adding projects Give money back to shareholders by increasing dividends Introduction Analysis Implementation Conclusion

Investment Policy Return objective CTI has a 7.5% return objective (minimum of 6.65% to avoid shortfalls) Risk Tolerance Low risk tolerance : capital preservation (pension fund & 41-year old employees) Time horizon 40-years investment horizon Liquidity needs Payments to retirees expected within the next 25 years Constraints Employee Retirement Income Security Act (above state and local pension law) Prohibited investment in traditional asset (alcohol, defensive) Introduction Analysis Implementation Conclusion

Current Asset Allocation Equity Fixed Income Allocation Return 6.50% (10y Cad) 7.23% Current portfolio comprised of equal portions of fixed income and equities Introduction Analysis Implementation Conclusion

Current Asset Allocation Overall, the fund manager has generated excess return, but we see areas of improvement. Introduction Analysis Implementation Conclusion

Emerging Markets Analysis The optimal portfolio combination between the EM ETF is 45.7% in EMM and 54.3% in EMB. Introduction Analysis Implementation Conclusion

Proposed Asset Allocation Bond Equity Allocation After-tax return 5.0% 9.3% More diversified portfolio (increased bond allocation-expected increasing rates) would meet CTI’s low risk tolerance and capital preservation. Introduction Analysis Implementation Conclusion

Hedging risks 1 2 Buy short-duration bonds (increasing interest rates) Fixed Income Buy short-duration bonds (increasing interest rates) Mix of governmental bonds (Ontario and Quebec) 2 Equity Diversification: 7.2% 9.3% The proposed security selection allows reducing both the industry specific risk and the market risk. Introduction Analysis Implementation Conclusion

Hedging Risks 3 Use Protective put in order to limit volatility Derivatives Use Protective put in order to limit volatility Purchase the underlying security Purchase a put on the same asset Unlimited Upside The protective put offers long term price appreciation but also protects against potential stock price depreciation Introduction Analysis Implementation Conclusion

New proposed investment policy: Recommendation CTI. should maintain their defined benefit pension plan and reduce progressively the contributions. New proposed investment policy: 60% in fixed income (short-term bonds) 40% in equity (focus on emerging market equities) This will allow CTI to be able to achieve the expected return of 7.5% involving the lest possible risk and avoid underfunding. Introduction Analysis Implementation Conclusion

Thank you. Q&A January 22 Alison Catherine Cristiana