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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Thank you. Q&A
January 22
Alison
Catherine
Cristiana