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Employee retirement benefits | 12 Months Ended
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Dec. 31, 2019
Employee retirement benefits | 5. Employee retirement benefits Retirement benefits, which cover almost all retired employees and their surviving spouses, include pension income and certain health care and life insurance benefits. They are met through funded registered retirement plans and through unfunded supplementary benefits that are paid directly to recipients. Pension income benefits consist mainly of company-paid defined benefit plans that are based on years of service and final average earnings. The company shares in the cost of health care and life insurance benefits. The company’s benefit obligations are based on the projected benefit method of valuation that includes employee service to date and present compensation levels, as well as a projection of salaries to retirement. The expense and obligations for both funded and unfunded benefits are determined in accordance with accepted actuarial practices and U.S. GAAP. The process for determining retirement-income expense and related obligations includes making certain long-term assumptions regarding the discount rate, rate of return on plan assets and rate of compensation increases. The obligation and pension expense can vary significantly with changes in the assumptions used to estimate the obligation and the expected return on plan assets. The benefit obligations and plan assets associated with the company’s defined benefit plans are measured on December 31.
|  | Pension benefits |  |  |  |  |  | Other postretirement benefits |
|  |  | 2019 |  |  |  | 2018 |  |  |  |  |  |  |  | 2019 |  |  |  | 2018 |
Assumptions used to determine benefit obligations at December 31 (percent) |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate |  |  | 3.10 |  |  |  | 3.90 |  |  |  |  |  |  |  | 3.10 |  |  |  | 3.90 |
Long-term rate of compensation increase |  |  | 4.50 |  |  |  | 4.50 |  |  |  |  |  |  |  | 4.50 |  |  |  | 4.50 |
millions of Canadian dollars |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in projected benefit obligation |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Projected benefit obligation at January 1 |  |  | 8,359 |  |  |  | 8,785 |  |  |  |  |  |  |  | 582 |  |  |  | 670 |
Current service cost |  |  | 228 |  |  |  | 239 |  |  |  |  |  |  |  | 16 |  |  |  | 17 |
Interest cost |  |  | 324 |  |  |  | 302 |  |  |  |  |  |  |  | 20 |  |  |  | 22 |
Actuarial loss (gain) |  |  | 1,053 |  |  |  | (498 | ) |  |  |  |  |  |  | 99 |  |  |  | (101 | )
Amendments |  |  | 283 |  |  |  | - |  |  |  |  |  |  |  | - |  |  |  | - |
Benefits paid (a) |  |  | (461 | ) |  |  | (469 | ) |  |  |  |  |  |  | (24 | ) |  |  | (26 | )
Projected benefit obligation at December 31 |  |  | 9,786 |  |  |  | 8,359 |  |  |  |  |  |  |  | 693 |  |  |  | 582 |
Accumulated benefit obligation at December 31 |  |  | 8,814 |  |  |  | 7,661 |  |  |  |  |  |  |  |  |  |  |  |  |
The discount rate for the purpose of calculating year-end postretirement benefits plan liabilities is determined by using the Canadian Institute of Actuaries recommended spot curve for high-quality, long-term Canadian corporate bonds with an average maturity (or duration) approximating that of the liabilities. For the measurement of the accumulated postretirement benefit obligation, the assumed health care cost trend rates start with 5.66 percent in 2020 and gradually decline to 3.57 percent by 20 40 and beyond. A 1.0 percent increase in the health care cost trend rate would increase service and interest cost by $5 million and the accumulated postretirement benefit obligation by $75 million. A 1.0 percent decrease in the health care cost trend rate would decrease service and interest cost by $4 million and the accumulated postretirement benefit obligation by $60 million.
|  | Pension benefits |  |  |  |  |  | Other postretirement benefits |
millions of Canadian dollars |  |  | 2019 |  |  |  | 2018 |  |  |  |  |  |  |  | 2019 |  |  |  | 2018 |
Change in plan assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value at January 1 |  |  | 7,691 |  |  |  | 7,870 |  |  |  |  |  |  |  |  |  |  |  |  |
Actual return (loss) on plan assets |  |  | 1,114 |  |  |  | 20 |  |  |  |  |  |  |  |  |  |  |  |  |
Company contributions |  |  | 211 |  |  |  | 203 |  |  |  |  |  |  |  |  |  |  |  |  |
Benefits paid (b) |  |  | (417 | ) |  |  | (402 | ) |  |  |  |  |  |  |  |  |  |  |  |
Fair value at December 31 |  |  | 8,599 |  |  |  | 7,691 |  |  |  |  |  |  |  |  |  |  |  |  |
Plan assets in excess of (less than) projected benefit obligation at December 31 |  |  |  |  |  |  |  |  |  |  |  |  |
Funded plans |  |  | (590 | ) |  |  | (180 | ) |  |  |  |  |  |  |  |  |  |  |  |
Unfunded plans |  |  | (597 | ) |  |  | (488 | ) |  |  |  |  |  |  | (693 | ) |  |  | (582 | )
Total (c) |  |  | (1,187 | ) |  |  | (668 | ) |  |  |  |  |  |  | (693 | ) |  |  | (582 | )
(a) | Benefit payments for funded and unfunded plans.
(b) | Benefit payments for funded plans only.
(c) | Fair value of assets less projected benefit obligation shown above.
Funding of registered retirement plans complies with federal and provincial pension regulations, and the company makes contributions to the plans based on an independent actuarial valuation. In accordance with authoritative guidance relating to the accounting for defined pension and other postretirement benefits plans, the underfunded status of the company’s defined benefit postretirement plans was recorded as a liability in the Consolidated balance sheet, and the changes in that funded status in the year in which the changes occurred was recognized through other comprehensive income.
|  | Pension benefits |  |  |  |  |  | Other postretirement benefits |
millions of Canadian dollars |  |  | 2019 |  |  |  | 2018 |  |  |  |  |  |  |  | 2019 |  |  |  | 2018 |
Amounts recorded in the Consolidated balance sheet consist of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities |  |  | (27 | ) |  |  | (27 | ) |  |  |  |  |  |  | (31 | ) |  |  | (28 | )
Other long-term obligations |  |  | (1,160 | ) |  |  | (641 | ) |  |  |  |  |  |  | (662 | ) |  |  | (554 | )
Total recorded |  |  | (1,187 | ) |  |  | (668 | ) |  |  |  |  |  |  | (693 | ) |  |  | (582 | )
Amounts recorded in accumulated other comprehensive income consist of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial loss (gain) |  |  | 2,256 |  |  |  | 2,117 |  |  |  |  |  |  |  | 133 |  |  |  | 33 |
Prior service cost |  |  | 283 |  |  |  | - |  |  |  |  |  |  |  | - |  |  |  | - |
Total recorded in accumulated other comprehensive income, before tax |  |  | 2,539 |  |  |  | 2,117 |  |  |  |  |  |  |  | 133 |  |  |  | 33 |
The company establishes the long-term expected rate of return on plan assets by developing a forward-looking long-term return assumption for each asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class. The 2019 long-term expected return of 4.5 percent used in the calculations of pension expense compares to an actual rate of return of 8.1 percent and 6.6 percent over the last 10- and 20-year periods respectively, ending December 31, 2019.
|  | Pension benefits |  |  | Other postretirement benefits |
|  |  | 2019 |  |  |  | 2018 |  |  |  | 2017 |  |  |  | 2019 |  |  |  | 2018 |  |  |  | 2017 |
Assumptions used to determine net periodic benefit cost for years ended December 31 (percent) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate |  |  | 3.90 |  |  |  | 3.40 |  |  |  | 3.75 |  |  |  | 3.90 |  |  |  | 3.40 |  |  |  | 3.75 |
Long-term rate of return on funded assets |  |  | 4.50 |  |  |  | 5.00 |  |  |  | 5.50 |  |  |  | - |  |  |  | - |  |  |  | - |
Long-term rate of compensation increase |  |  | 4.50 |  |  |  | 4.50 |  |  |  | 4.50 |  |  |  | 4.50 |  |  |  | 4.50 |  |  |  | 4.50 |
millions of Canadian dollars |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Components of net periodic benefit cost |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current service cost |  |  | 228 |  |  |  | 239 |  |  |  | 217 |  |  |  | 16 |  |  |  | 17 |  |  |  | 16 |
Interest cost |  |  | 324 |  |  |  | 302 |  |  |  | 313 |  |  |  | 20 |  |  |  | 22 |  |  |  | 23 |
Expected return on plan assets |  |  | (349 | ) |  |  | (402 | ) |  |  | (408 | ) |  |  | - |  |  |  | - |  |  |  | - |
Amortization of prior service cost |  |  | - |  |  |  | 4 |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |
Amortization of actuarial loss (gain) |  |  | 149 |  |  |  | 175 |  |  |  | 176 |  |  |  | (1 | ) |  |  | 6 |  |  |  | 8 |
Net periodic benefit cost |  |  | 352 |  |  |  | 318 |  |  |  | 308 |  |  |  | 35 |  |  |  | 45 |  |  |  | 47 |
Changes in amounts recorded in accumulated other comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial loss (gain) |  |  | 288 |  |  |  | (116 | ) |  |  | 123 |  |  |  | 99 |  |  |  | (101 | ) |  |  | (49 | )
Amortization of net actuarial (loss) gain included in net periodic benefit cost |  |  | (149 | ) |  |  | (175 | ) |  |  | (176 | ) |  |  | 1 |  |  |  | (6 | ) |  |  | (8 | )
Prior service cost |  |  | 283 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Amortization of prior service cost included in net periodic benefit cost |  |  | - |  |  |  | (4 | ) |  |  | (10 | ) |  |  | - |  |  |  | - |  |  |  | - |
Total recorded in other comprehensive income |  |  | 422 |  |  |  | (295 | ) |  |  | (63 | ) |  |  | 100 |  |  |  | (107 | ) |  |  | (57 | )
Total recorded in net periodic benefit cost and other comprehensive income, before tax |  |  | 774 |  |  |  | 23 |  |  |  | 245 |  |  |  | 135 |  |  |  | (62 | ) |  |  | (10 | )
Costs for defined contribution plans, primarily the employee savings plan, were $43 million in 2019 (2018 - $41 million, 2017 - $40 million). A summary of the change in accumulated other comprehensive income is shown in the table below:
|  | Total pension and other postretirement benefits |
millions of Canadian dollars |  | 2019 |  |  | 2018 |  |  | 2017 |
(Charge) credit to other comprehensive income, before tax |  |  | (522 | ) |  |  | 402 |  |  |  | 120 |
Deferred income tax (charge) credit (note 18) |  |  | 128 |  |  |  | (104) |  |  |  | (38) |
(Charge) credit to other comprehensive income, after tax |  |  | (394 | ) |  |  | 298 |  |  |  | 82 |
The company’s investment strategy for pension plan assets reflects a long-term view, a careful assessment of the risks inherent in various asset classes and broad diversification to reduce the risk of the portfolio. Consistent with the long-term nature of the liability, the plan assets are primarily invested in global, market-cap-weighted indexed equity and domestic indexed bond funds to diversify risk while minimizing costs. The equity funds hold Imperial Oil Limited stock only to the extent necessary to replicate the relevant equity index. The balance of the plan assets is largely invested in high-quality corporate and government debt securities. Studies are periodically conducted to establish the preferred target asset allocation. The target asset allocation for equity securities is 30 percent. The target allocation for debt securities is 67 percent. Plan assets for the remaining 3 percent are invested in venture capital partnerships that pursue a strategy of investment in U.S. and international early stage ventures . The 2019 fair value of the pension plan assets, including the level within the fair value hierarchy, is shown in the table below:
|  |  |  |  | Fair value measurements at December 31, 2019, using: |
millions of Canadian dollars |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Net Asset Value |
Asset class |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canadian |  |  | 210 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 210 |
Non-Canadian |  |  | 2,449 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,449 |
Debt securities - Canadian |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  |  | 1,379 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,379 |
Government |  |  | 4,299 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4,299 |
Asset backed |  |  | 1 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1 |
Equities – Venture capital |  |  | 204 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 204 |
Cash |  |  | 57 |  |  |  | 40 |  |  |  |  |  |  |  |  |  |  |  | 17 |
Total plan assets at fair value |  |  | 8,599 |  |  |  | 40 |  |  |  |  |  |  |  |  |  |  |  | 8,559 |
The 2018 fair value of the pension plan assets, including the level within the fair value hierarchy, is shown in the table below:
|  |  |  |  | Fair value measurements at December 31, 2018, using: |
millions of Canadian dollars |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Net Asset Value |
Asset class |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canadian |  |  | 170 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 170 |
Non-Canadian |  |  | 2,035 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,035 |
Debt securities - Canadian |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  |  | 1,231 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,231 |
Government |  |  | 3,987 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3,987 |
Asset backed |  |  | 3 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3 |
Equities – Venture capital |  |  | 226 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 226 |
Cash |  |  | 39 |  |  |  | 33 |  |  |  |  |  |  |  |  |  |  |  | 6 |
Total plan assets at fair value |  |  | 7,691 |  |  |  | 33 |  |  |  | - |  |  |  | - |  |  |  | 7,658 |
A summary of pension plans with accumulated benefit obligations in excess of plan assets is shown in the table below:
|  | Pension benefits |
millions of Canadian dollars |  | 2019 |  |  |  |  |  | 2018 |
For funded pension plans with accumulated benefit obligations in excess of plan assets: (a) |  |  |  |  |  |  |  |  |  |  |  |
Projected benefit obligation |  |  | 1,042 |  |  |  |  |  |  |  | 943 |
Accumulated benefit obligation |  |  | 942 |  |  |  |  |  |  |  | 852 |
Fair value of plan assets |  |  | 870 |  |  |  |  |  |  |  | 739 |
Accumulated benefit obligation less fair value of plan assets |  |  | 72 |  |  |  |  |  |  |  | 113 |
For unfunded plans covered by book reserves: |  |  |  |  |  |  |  |  |  |  |  |
Projected benefit obligation |  |  | 597 |  |  |  |  |  |  |  | 488 |
Accumulated benefit obligation |  |  | 536 |  |  |  |  |  |  |  | 451 |
(a) | The amounts shown for funded pension plans with accumulated benefit obligations in excess of plan assets represent the company’s proportionate share of a joint venture sponsored pension plan. For the company sponsored funded plan, plan assets exceeded the accumulated benefit obligation in both 2019 and 2018.
Estimated 2020 amortization from accumulated other comprehensive income
millions of Canadian dollars |  | Pension benefits |  |  | Other postretirement benefits |
Net actuarial loss (gain) (a) |  |  | 157 |  |  |  | 9 |
Prior service cost (b) |  |  | 13 |  |  |  | - |
(a) | The company amortizes the net balance of actuarial loss (gain) as a component of net periodic benefit cost over the average remaining service period of active plan participants.
(b) | The company amortizes prior service cost on a straight-line basis.
Cash flows Benefit payments expected in:
millions of Canadian dollars |  | Pension benefits |  |  | Other postretirement benefits |
2020 |  |  | 460 |  |  |  | 31 |
2021 |  |  | 460 |  |  |  | 31 |
2022 |  |  | 460 |  |  |  | 32 |
2023 |  |  | 460 |  |  |  | 32 |
2024 |  |  | 460 |  |  |  | 32 |
2025 - 2029 |  |  | 2,245 |  |  |  | 160 |
In 2020, the company expects to make cash contributions of about $216 million to its pension plans.

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- Definition The entire disclosure for pension and other postretirement benefits. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 715 -URI http://asc.fasb.org/topic&trid=2235017 + Details
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