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RETIREMENT AND POSTRETIREMENT BENEFITS | 12 Months Ended
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Dec. 31, 2016
RETIREMENT AND POSTRETIREMENT BENEFITS |
RETIREMENT AND POSTRETIREMENT BENEFITS | 26. RETIREMENT AND POSTRETIREMENT BENEFITS PENSION PLANS The Company has three registered pension plans which provide either defined benefit or defined contribution pension benefits, or both, to employees of the Company. The Canadian Plans provide Company funded defined benefit pension and/or defined contribution benefits to Canadian employees of Enbridge. The United States Plan provides Company funded defined benefit pension benefits for United States based employees. The Company has four supplemental pension plans that provide pension benefits in excess of the basic plans for certain employees. A measurement date of December 31, 2016 was used to determine the plan assets and accrued benefit obligation for the Canadian and United States plans. Defined Benefit Plans Benefits payable from the defined benefit plans are based on members’ years of service and final average remuneration. These benefits are partially inflation indexed after a member’s retirement. Contributions by the Company are made in accordance with independent actuarial valuations and are invested primarily in publicly-traded equity and fixed income securities. The effective dates of the most recent actuarial valuations and the next required actuarial valuations for the basic plans are as follows:
|  | Effective Date of Most Recently |  | Effective Date of Next Required
|  | Filed Actuarial Valuation |  | Actuarial Valuation
Canadian Plans |  |  |  |
Liquids Pipelines |  | December 31, 2015 |  | December 31, 2016
Gas Distribution |  | December 31, 2013 |  | December 31, 2016
United States Plan |  | January 1, 2016 |  | January 1, 2017
Defined Contribution Plans Contributions are generally based on the employee’s age, years of service and remuneration. For defined contribution plans, benefit costs equal amounts required to be contributed by the Company. OTHER POSTRETIREMENT BENEFITS OPEB primarily includes supplemental health and dental, health spending accounts and life insurance coverage for qualifying retired employees. BENEFIT OBLIGATIONS AND FUNDED STATUS The following tables detail the changes in the benefit obligation, the fair value of plan assets and the recorded asset or liability for the Company’s defined benefit pension plans and OPEB plans using the accrual method.
|  | Pension |  | OPEB |
December 31, |  | 2016 |  | 2015 |  | 2016 |  | 2015 |
(millions of Canadian dollars) |  |  |  |  |  |  |  |  |
Change in accrued benefit obligation |  |  |  |  |  |  |  |  |
Benefit obligation at beginning of year |  | 2,551 |  | 2,470 |  | 308 |  | 276 |
Service cost |  | 155 |  | 167 |  | 8 |  | 8 |
Interest cost |  | 89 |  | 98 |  | 11 |  | 11 |
Employees’ contributions |  | - |  | - |  | 1 |  | 1 |
Actuarial (gains)/loss |  | 112 |  | (172 | ) | 12 |  | 9 |
Benefits paid |  | (108 | ) | (90 | ) | (12 | ) | (12 | )
Effect of foreign exchange rate changes |  | (14 | ) | 79 |  | (4 | ) | 21 |
Other |  | (7 | ) | (1 | ) | (12 | ) | (6 | )
Benefit obligation at end of year |  | 2,778 |  | 2,551 |  | 312 |  | 308 |
Change in plan assets |  |  |  |  |  |  |  |  |
Fair value of plan assets at beginning of year |  | 2,229 |  | 2,062 |  | 115 |  | 99 |
Actual return on plan assets |  | 168 |  | 88 |  | 5 |  | (2 | )
Employer’s contributions |  | 102 |  | 116 |  | 9 |  | 10 |
Employees’ contributions |  | - |  | - |  | 1 |  | 1 |
Benefits paid |  | (108 | ) | (90 | ) | (12 | ) | (12 | )
Effect of foreign exchange rate changes |  | (10 | ) | 54 |  | (3 | ) | 19 |
Other |  | (1 | ) | (1 | ) | - |  | - |
Fair value of plan assets at end of year 1 |  | 2,380 |  | 2,229 |  | 115 |  | 115 |
Underfunded status at end of year |  | (398 | ) | (322 | ) | (197 | ) | (193 | )
Presented as follows: |  |  |  |  |  |  |  |  |
Deferred amounts and other assets |  | 5 |  | 6 |  | 4 |  | 2 |
Accounts payable and other |  | - |  | - |  | (7 | ) | (6 | )
Other long-term liabilities (Note 18) |  | (403 | ) | (328 | ) | (194 | ) | (189 | )
|  | (398 | ) | (322 | ) | (197 | ) | (193 | )
| 1 |  | Assets of $44 million (2015 - $40 million) are held by the Company in trust accounts that back non-registered supplemental pension plans benefitting United States plan participants. Due to United States tax regulations, these assets are not restricted from creditors, and therefore the Company is unable to include these balances in plan assets for accounting purposes. However, these assets are committed for the future settlement of non-registered supplemental pension plan obligations included in the underfunded status as at the end of the year.
The weighted average assumptions made in the measurement of the projected benefit obligations of the pension plans and OPEB are as follows:
|  | Pension |  | OPEB |
Year ended December 31, |  | 2016 |  | 2015 |  | 2014 |  | 2016 |  | 2015 |  | 2014 |
Discount rate |  | 4.0% |  | 4.2% |  | 4.0% |  | 4.0% |  | 4.2% |  | 3.9% |
Average rate of salary increases |  | 3.6% |  | 3.6% |  | 4.0% |  |  |  |  |  |  |
NET BENEFIT COSTS RECOGNIZED
|  | Pension |  | OPEB |
Year ended December 31, |  | 2016 |  | 2015 |  | 2014 |  | 2016 |  | 2015 |  | 2014 |
(millions of Canadian dollars) |  |  |  |  |  |  |  |  |  |  |  |  |
Benefits earned during the year |  | 155 |  | 167 |  | 108 |  | 8 |  | 8 |  | 8 |
Interest cost on projected benefit obligations |  | 89 |  | 98 |  | 93 |  | 11 |  | 11 |  | 12 |
Expected return on plan assets |  | (148 | ) | (142 | ) | (123 | ) | (6 | ) | (6 | ) | (5 | )
Amortization of prior service credits |  | - |  | - |  | - |  | (1 | ) | - |  | - |
Amortization of actuarial loss |  | 35 |  | 49 |  | 28 |  | 1 |  | 1 |  | - |
Net defined benefit costs on an accrual basis |  | 131 |  | 172 |  | 106 |  | 13 |  | 14 |  | 15 |
Defined contribution benefit costs |  | 3 |  | 4 |  | 4 |  | - |  | - |  | - |
Net benefit cost recognized in Earnings |  | 134 |  | 176 |  | 110 |  | 13 |  | 14 |  | 15 |
Amount recognized in OCI: |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial (gains)/loss 1 |  | 24 |  | (107 | ) | 232 |  | 12 |  | 16 |  | 15 |
Net prior service credit 2 |  | - |  | - |  | - |  | (12 | ) | (6 | ) | - |
Total amount recognized in OCI |  | 24 |  | (107 | ) | 232 |  | - |  | 10 |  | 15 |
Total amount recognized in Comprehensive income |  | 158 |  | 69 |  | 342 |  | 13 |  | 24 |  | 30 |
| 1 |  | Unamortized actuarial losses included in AOCI, before tax, were $425 million (2015 - $404 million) relating to the pension plans and $54 million (2015 - $44 million) relating to OPEB at December 31, 2016.
| 2 |  | Unamortized prior service credits included in AOCI, before tax, were $13 million (2015 - $1 million) relating to OPEB at December 31, 2016.
The Company estimates that approximately $36 million related to pension plans and $1 million related to OPEB at December 31, 2016 will be reclassified from AOCI into earnings in the next 12 months. Regulatory adjustments are recorded in the Consolidated Statements of Earnings, the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Financial Position to reflect the difference between pension expense for accounting purposes and pension expense for ratemaking purposes. Offsetting regulatory assets or liabilities are recorded to the extent pension or OPEB costs or gains are expected to be collected from or refunded to customers in future rates (Note 5). For the year ended December 31, 2016, an offsetting regulatory liability increased by $10 million (2015 - nil) and has been recorded to the extent pension and OPEB costs are expected to be refunded to customers in future rates. The weighted average assumptions made in the measurement of the cost of the pension plans and OPEB are as follows:
|  | Pension |  | OPEB |
Year ended December 31, |  | 2016 | 2015 | 2014 |  | 2016 | 2015 | 2014
Discount rate - service cost |  | 4.1 | % | 4.0 | % | 5.0% |  | 4.2 | % | 3.9 | % | 4.9 | %
Discount rate - interest cost |  | 4.1 | % | 4.0 | % | 5.0% |  | 4.2 | % | 3.9 | % | 4.9 | %
Average rate of return on plan assets |  | 6.6 | % | 6.7 | % | 6.7% |  | 6.0 | % | 6.0 | % | 6.0 | %
Average rate of salary increases |  | 3.6 | % | 4.0 | % | 3.7% |  |  |  |  |  |  |
MEDICAL COST TRENDS The assumed rates for the next year used to measure the expected cost of benefits are as follows:
|  | Medical Cost Trend Rate Assumption for Next Fiscal Year |  | Ultimate Medical Cost Trend Rate Assumption |  | Year in which Ultimate Medical Cost Trend Rate Assumption is Achieved
Canadian Plans |  |  |  |  |  |
Drugs |  | 6.6% |  | 4.5% |  | 2034
Other medical |  | 4.5% |  | - |  | -
United States Plan |  | 6.9% |  | 4.5% |  | 2037
A 1% increase in the assumed medical care trend rate would result in an increase of $23 million in the benefit obligation and an increase of $1 million in service and interest costs. A 1% decrease in the assumed medical care trend rate would result in a decrease of $45 million in the benefit obligation and a decrease of $2 million in service and interest costs. PLAN ASSETS The Company manages the investment risk of its pension funds by setting a long-term asset mix policy for each plan after consideration of: (i) the nature of pension plan liabilities; (ii) the investment horizon of the plan; (iii) the going concern and solvency funded status and cash flow requirements of the plan; (iv) the operating environment and financial situation of the Company and its ability to withstand fluctuations in pension contributions; and (v) the future economic and capital markets outlook with respect to investment returns, volatility of returns and correlation between assets. The overall expected rate of return is based on the asset allocation targets with estimates for returns on equity and debt securities based on long-term expectations. Expected Rate of Return on Plan Assets
|  | Pension |  | OPEB |
Year ended December 31, |  | 2016 | 2015 |  | 2016 | 2015
Canadian Plans |  | 6.6 | % | 6.7% |  |  |  |  |
United States Plan |  | 7.2 | % | 7.2% |  | 6.0 | % | 6.0 | %
Target Mix for Plan Assets
|  | Canadian Plans |  |  |
|  | Liquids Pipelines |  | Gas Distribution |  | United States |
|  | Plan |  | Plan |  | Plan |
Equity securities |  | 62.5% |  | 53.5% |  | 62.5% |
Fixed income securities |  | 30.0% |  | 40.0% |  | 30.0% |
Other |  | 7.5% |  | 6.5% |  | 7.5% |
Major Categories of Plan Assets Plan assets are invested primarily in readily marketable investments with constraints on the credit quality of fixed income securities. As at December 31, 2016, the pension assets were invested 48.3% (2015 - 56.4%) in equity securities, 31.4% (2015 - 31.4%) in fixed income securities and 20.3% (2015 - 12.2%) in other. The OPEB assets were invested 60.0% (2015 - 59.1%) in equity securities, 39.1% (2015 - 40.0%) in fixed income securities and 0.9% (2015 - 0.9%) in other. The following table summarizes the Company’s pension financial instruments at fair value. Non-financial instruments with a carrying value of $7 million asset (2015 - $21 million asset) and refundable tax assets of $105 million (2015 - $106 million) have been excluded from the table below.
|  | 2016 |  |  | 2015 |
December 31, |  | Level 1 | 1 | Level 2 | 2 | Level 3 | 3 | Total |  |  | Level 1 | 1 | Level 2 | 2 | Level 3 | 3 | Total |
(millions of Canadian dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pension |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | 47 |  | - |  | - |  | 47 |  |  | 37 |  | - |  | - |  | 37 |
Fixed income securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canadian government bonds |  | 137 |  | - |  | - |  | 137 |  |  | 131 |  | - |  | - |  | 131 |
Corporate bonds and debentures |  | 5 |  | 3 |  | - |  | 8 |  |  | 5 |  | 3 |  | - |  | 8 |
Canadian corporate bond index fund |  | 277 |  | - |  | - |  | 277 |  |  | 259 |  | - |  | - |  | 259 |
Canadian government bond index fund |  | 214 |  | - |  | - |  | 214 |  |  | 201 |  | - |  | - |  | 201 |
United States debt index fund |  | 111 |  | - |  | - |  | 111 |  |  | 102 |  | - |  | - |  | 102 |
Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canadian equity securities |  | 138 |  | - |  | - |  | 138 |  |  | 133 |  | - |  | - |  | 133 |
United States equity securities |  | 2 |  | - |  | - |  | 2 |  |  | 2 |  | - |  | - |  | 2 |
Global equity securities |  | 114 |  | 30 |  | - |  | 144 |  |  | 106 |  | 25 |  | - |  | 131 |
Canadian equity funds |  | 287 |  | - |  | - |  | 287 |  |  | 253 |  | - |  | - |  | 253 |
United States equity funds |  | 271 |  | - |  | - |  | 271 |  |  | 243 |  | 5 |  | - |  | 248 |
Global equity funds |  | 167 |  | 140 |  | - |  | 307 |  |  | 161 |  | 148 |  | - |  | 309 |
Infrastructure 4 |  | - |  | - |  | 184 |  | 184 |  |  | - |  | - |  | 182 |  | 182 |
Real estate 4 |  | - |  | - |  | 137 |  | 137 |  |  | - |  | - |  | 115 |  | 115 |
Forward currency contracts |  | - |  | 4 |  | - |  | 4 |  |  | - |  | (10 | ) | - |  | (10 | )
OPEB |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | 1 |  | - |  | - |  | 1 |  |  | 2 |  | - |  | - |  | 2 |
Fixed income securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States government and government agency bonds |  | 45 |  | - |  | - |  | 45 |  |  | 46 |  | - |  | - |  | 46 |
Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States equity funds |  | 35 |  | - |  | - |  | 35 |  |  | 34 |  | - |  | - |  | 34 |
Global equity funds |  | 34 |  | - |  | - |  | 34 |  |  | 34 |  | - |  | - |  | 34 |
| 1 |  | Level 1 assets include assets with quoted prices in active markets for identical assets.
| 2 |  | Level 2 assets include assets with significant observable inputs.
| 3 |  | Level 3 assets include assets with significant unobservable inputs.
| 4 |  | The fair values of the infrastructure and real estate investments are established through the use of valuation models.
Changes in the net fair value of plan assets classified as Level 3 in the fair value hierarchy were as follows:
December 31, |  | 2016 |  | 2015 |
(millions of Canadian dollars) |  |  |  |  |
Balance at beginning of year |  | 297 |  | 132 |
Unrealized and realized gains |  | 22 |  | 44 |
Purchases and settlements, net |  | 2 |  | 121 |
Balance at end of year |  | 321 |  | 297 |
PLAN CONTRIBUTIONS BY THE COMPANY
|  | Pension |  | OPEB |
Year ended December 31, |  | 2016 |  | 2015 |  | 2016 |  | 2015 |
(millions of Canadian dollars) |  |  |  |  |  |  |  |  |
Total contributions |  | 102 |  | 116 |  | 9 |  | 10 |
Contributions expected to be paid in 2017 |  | 148 |  |  |  | 2 |  |  |
BENEFITS EXPECTED TO BE PAID BY THE COMPANY
Year ended December 31, |  | 2017 |  | 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022-2026 |
(millions of Canadian dollars) |  |  |  |  |  |  |  |  |  |  |  |  |
Expected future benefit payments |  | 115 |  | 121 |  | 127 |  | 134 |  | 142 |  | 829 |

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