Canada Pension Plan

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Management's Responsibility for Financial Statements

The consolidated financial statements of the Canada Pension Plan are prepared in accordance with Canadian public sector accounting standards by the management of Employment and Social Development Canada. Management is responsible for the integrity and objectivity of the information in the financial statements, including the amounts which must, of necessity, be based on best estimates and judgment. The significant accounting policies are identified in Note 2 to the financial statements. The financial information presented throughout the Annual Report is consistent with the financial statements.

To fulfill its accounting and reporting responsibilities, management has developed and maintains books of account, financial and management controls, information systems and management practices. These systems are designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Financial Administration Act and their accompanying regulations.

The Auditor General of Canada, the external auditor of the Canada Pension Plan, conducts an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and provides a report to the Minister of Employment and Social Development.

Ian Shugart
Deputy Minister Employment and Social Development Canada

Alain P. Séguin, MBA, CPA, CGA
Chief Financial Officer Employment and Social Development Canada

Gatineau, Canada
1 September, 2015

Independent Auditor's Report

To the Minister of Employment and Social Development

I have audited the accompanying consolidated financial statements of the Canada Pension Plan, which comprise the consolidated statement of financial position as at 31 March 2015, and the consolidated statement of operations, consolidated statement of changes in financial assets available for benefit payments and consolidated statement of cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

My responsibility is to express an opinion on these consolidated financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Canada Pension Plan as at 31 March 2015, and the results of its operations, changes in its financial assets available for benefit payments, and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Michael Ferguson, CPA, CA
FCA (New Brunswick)
Auditor General of Canada

1 September 2015
Ottawa, Canada

Table Summary

The table presents, in millions of dollars, a two-year comparative of the consolidated statement of financial position of the Canada Pension Plan. It consists of three columns: a detailed listing of components; current year; previous year. The first series of lines presents the financial assets and related components. Another line presents the total. The second series of lines presents the liabilities and related components. Another line presents the total. The third series of lines presents the financial assets available for benefit payments and another line presents the non-financial assets. The final line presents the total assets available for benefit payments.

(in millions of dollars)

Consolidated Statement of Financial Position
as at March 31

  2015 2014
Financial assets    
Cash (Note 3) 271 167
Receivables (Note 4) 5,325 4,519
Investments (Note 6) 318,481 249,671
Amounts receivable from pending trades (Note 6) 2,908 2,251
Subtotal 326,985 256,608
Liabilities    
Payables and accrued liabilities (Note 8) 1,106 927
Investment liabilities (Note 6) 50,547 30,820
Amounts payable from pending trades (Note 6) 6,087 1,979
Subtotal 57,740 33,726
Financial assets available for benefit payments 269,245 222,882
Non‑financial assets    
Tangible capital assets 370 327
Assets available for benefit payments 269,615 223,209

Approved by:

Ian Shugart
Deputy Minister
Employment and Social Development Canada

Alain P. Séguin, MBA, CPA, CGA
Chief Financial Officer
Employment and Social Development Canada

Table Summary

The table presents, in millions of dollars, a two-year comparative of the consolidated statement of operations of the Canada Pension Plan. It consists of four columns: a detailed listing of components; current year's budget - (Note 9); current year's actual; previous year's actual. The first series of lines presents revenues, related components and totals. Another line presents the total for revenues. The second series of lines presents expenses, the related components and totals. Another line presents the total for expenses. The last few lines present the net increase in assets available for benefit payments, total assets available for benefit payments at beginning of year and the total assets available for benefit payments at end of year.

(in millions of dollars)

Consolidated Statement of Operations
for the year ended March 31

  Budget 2015
(Note 9)
Actual 2015 Actual 2014
Revenues      
Contributions 44,176 45,046 43,181
Net investment income (Note 10)      
Realized gains   8,797 6,099
Unrealized gains   27,208 19,987
Interest income   3,229 2,834
Dividend income   2,324 1,872
Other income   1,413 1,084
Transaction costs   (negative 273) (negative 216)
Investment management fees   (negative 1,254) (negative 947)
Subtotal 9,536 41,444 30,713
Total 53,712 86,490 73,894
Expenses      
Pensions and benefits      
Retirement 30,105 29,582 28,188
Survivor 4,386 4,334 4,248
Disability 4,175 3,939 4,002
Disabled contributor's child 323 296 300
Death 337 312 333
Orphan 233 213 217
Post‑Retirement   142 85
Net overpayments (Note 4)   (negative 71) (negative 49)
Subtotal 39,559 38,747 37,324
Operating expenses (Note 12) 961 1,337 1,085
Total 40,520 40,084 38,409
Net increase in assets available for benefit payments 13,192 46,406 35,485
Assets available for benefit payments, beginning of year 223,209 223,209 187,724
Assets available for benefit payments, end of year 236,401 269,615 223,209

Table Summary

The table presents, in millions of dollars, a two-year comparative of the consolidated statement of changes in financial assets available for benefit payments to the Canada Pension Plan. It consists of four columns: a listing of assets available for benefit payments; current year's budget - (Note 9); current year's actual; previous year's actual. The lines present assets available for benefit payments, changes in non-financial assets, increase in financial assets available for benefit payments and financial assets available for benefit payments at beginning of year. The last line presents the financial assets available for benefit payments at end of year.

(in millions of dollars)

Consolidated Statement of Changes in Financial Assets available for Benefit Payments
for the year ended March 31

  Budget 2015
(Note 9)
Actual 2015 Actual 2014
Net increase in assets available for benefit payments 13,192 46,406 35,485
Changes in non‑financial assets   (negative 43) (negative 255)
Increase in financial assets available for benefit payments 13,192 46,363 35,230
Financial assets available for benefit payments, beginning of year 222,882 222,882 187,652
Financial assets available for benefit payments, end of year 236,074 269,245 222,882

Table Summary

The table presents, in millions of dollars, a two-year comparative of the consolidated statement of cash flow for the Canada Pension Plan. It consists of three columns: a listing of activities; current year; previous year. The first series of lines presents operating activities by cash receipts and payment types. Another line presents the cash flow from operating activities. The second series of lines presents capital activities including the cash flow from capital activities. The third series of lines presents the financing activities by type of debt actions. Another line presents the cash flow from financing activities. The fourth series of lines presents investing, purchasing and disposal activities. Another line presents the cash flow used in investing activities. The remaining lines present the increase (decrease) in cash and cash at beginning of year. The last line presents the cash at end of year.

(in millions of dollars)

Consolidated Statement of Cash Flow
for the year ended March 31

  2015 2014
Operating activities    
Cash receipts    
Contributions 44,301 43,659
Dividends on investments 1,960 1,644
Interest on investments 3,235 2,899
Other investment income 1,223 926
Cash payments    
Pensions and benefits (negative 38,845) (negative 37,284)
Operating expenses (negative 1,121) (negative 1,075)
Investment management fees (negative 555) (negative 338)
Transaction costs (negative 241) (negative 198)
Payment of interest on debt (negative 130) (negative 76)
Cash flows from operating activities 9,827 10,157
Capital Activities    
Acquisition of tangible capital assets (negative 43) (negative 286)
Cash flows used in capital activities (negative 43) (negative 286)
Financing activities    
Issuance of debt 34,678 36,405
Repayment of debt (negative 34,614) (negative 36,401)
Cash flows from financing activities 64 4
Investing activities    
Purchases    
Equities (negative 158,409) (negative 95,553)
Real Assets (negative 6,255) (negative 6,079)
Bonds and inflation‑linked bonds (negative 273,306) (negative 329,463)
Money market securities and absolute return strategies (negative 3,335,451) (negative 2,543,342)
Other debts (negative 10,852) (negative 7,229)
Disposals    
Equities 149,755 94,746
Real Assets 3,539 2,884
Bonds and inflation‑linked bonds 275,051 326,986
Money market securities and absolute return strategies 3,341,523 2,542,212
Other debts 4,661 5,038
Cash flows used in investing activities (negative 9,744) (negative 9,800)
Net increase in cash 104 75
Cash, beginning of year 167 92
Cash, end of year 271 167

Notes to Consolidated Financial Statements for the year ended March 31, 2015

1. Authority, objective and responsibilities

a. Description of the Canada Pension Plan

The Canada Pension Plan (CPP) is a federal-provincial plan established by an Act of Parliament in 1965. The CPP is administered by the Government of Canada and the participating provinces.

The CPP began operations in 1966. It is a compulsory and contributory social insurance program operating in all parts of Canada, except Quebec, which operates the Régime de rentes du Québec (RRQ), a comparable program. The CPP's objective is to provide a measure of protection to workers and their families against the loss of earnings due to retirement, disability or death. The CPP is financed by contributions and investment returns. Employers and employees pay contributions equally to the CPP. Self‑employed workers pay the full amount.

The Minister of Employment and Social Development is responsible for the administration of the CPP, under the legislation Canada Pension Plan; the Minister of National Revenue is responsible for collecting contributions. The Minister of Finance and his provincial counterparts are responsible for setting CPP contribution rates, pension and benefit levels and funding policy. The CPP Investment Board (CPPIB) is responsible for managing the amounts that are being transferred under section 108.1 of the Canada Pension Plan. It acts in the best interests of the beneficiaries and contributors under the Act.

In accordance with the Canada Pension Plan, the financial activities of the CPP are recorded in the CPP Account (Notes to consolidated Financial Statements - Note 3). The financial transactions affecting the Account are governed by the Canada Pension Plan and its regulations. The CPP's investments are held by the CPPIB. The CPPIB was established pursuant to the Canada Pension Plan Investment Board Act (CPPIB Act). The CPPIB is a federal Crown corporation and all of its shares are owned by Her Majesty the Queen in right of Canada.

The CPPIB's transactions are governed by the CPPIB Act and its accompanying regulations. The CPPIB's assets are to be invested with a view to achieving a maximum rate of return without undue risk of loss, with regard to the factors that may affect the funding of the CPP and its ability to meet its financial obligations on any given business day.

The CPPIB and its wholly‑owned subsidiaries are exempt from Part I income tax under paragraphs 149(1)(d) and 149(1)(d.2) of the Income Tax Act (Canada) on the basis that all of the shares of the CPPIB and its subsidiaries are owned by Her Majesty the Queen in right of Canada or by a corporation whose shares are owned by Her Majesty the Queen in right of Canada, respectively.

The CPPIB is designed to operate at arm's length from the government. It is required to be accountable to the public, Parliament (through the federal Minister of Finance) and the provinces. It provides regular reports of its activities and the results achieved. The financial statements of the CPPIB are audited annually by an external firm and are included in its annual report.

As stated in the Canada Pension Plan and CPPIB Act, changes to these Acts require the approval of at least two‑thirds of the provinces that have, in the aggregate, not less than two‑thirds of the population of all included provinces.

b. Pensions and Benefits

Retirement pensions — A retirement pension is payable to CPP contributors at age 60 or older, according to the provisions of the Act. The monthly amount is equal to 25 percent of the contributor's average monthly pensionable earnings during the pensionable period. The amount is reduced or increased depending upon whether the contributor applies for a retirement pension before or after age 65. The maximum new monthly pension payable at age 65 in 2015 is $1,065.00 (2014 — $1,038.33).

Post‑retirement benefits — A post‑retirement benefit (PRB) pension is payable to each retirement pension recipient who has continued to work and has made contributions to the PRB while between the ages of 60 and 70, according to provisions of Bill C‑51 of 2009. The PRB payments to eligible contributors came into effect on January 1, 2013. The maximum new monthly PRB at age 65 in 2015 is $26.63 (2014 — $25.96).

Disability benefits — A disability benefit is payable to a contributor who is disabled, according to the provisions of the Act. The amount of the disability benefit to be paid includes a flat‑rate portion and an amount equal to 75 percent of the earned retirement pension. The maximum new monthly disability benefit in 2015 is $1,264.59 (2014 — $1,236.35).

Survivor's benefits — A survivor's benefit is payable to the spouse or common‑law partner (the beneficiary) of a deceased contributor, according to the provisions of the Act. For a beneficiary under the age of 65, the benefit consists of a flat‑rate portion and an amount equal to 37.5 percent of the deceased contributor's earned retirement pension. A beneficiary between the ages of 35 and 45 who is not disabled or who has no dependent children receives reduced benefits. For beneficiaries aged 65 and over, the benefit is equal to 60 percent of the retirement pension granted to the deceased contributor. The maximum new monthly benefit payable to a beneficiary in 2015 is $639.00 (2014 — $623).

Disabled contributor's child and orphan benefits — According to the provisions of the Act, each child of a contributor who is receiving disability benefits or a child of a deceased contributor is entitled to a benefit as long as the child is under the age of 18, or is between the ages of 18 and 25 and attending school full‑time. The flat‑rate monthly benefit in 2015 is $234.87 (2014 — $230.72).

Death benefits — According to the provisions of the Act, a death benefit is a one‑time payment to, or on behalf of, the estate of a contributor. The death benefit is a lump‑sum payment that amounts to six times the amount of the deceased contributor's monthly retirement pension, up to a maximum, in 2015, of $2,500.00 (2014 — $2,500.00).

Pensions and benefits indexation — As required by the Act, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2015 is 1.8 percent (2014 — 0.9 percent).

2. Significant accounting policies

a. Basis of presentation

These financial statements are presented on a consolidated basis. They include the consolidated statement of financial position, the consolidated statement of operations, the consolidated statement of changes in financial assets available for benefit payments and the consolidated statement of cash flow of the CPP and the CPPIB. These financial statements are prepared in accordance with Canadian public sector accounting standards (PSAS).

The CPP, which is managed by both the Government of Canada and participating provinces, is not considered to be part of the reporting entity of the Government of Canada. Accordingly, its financial activities are not consolidated with those of the Government.

b. International financial reporting standards

The CPPIB, which is a significant component of the CPP consolidated financial statements, adopted International Financial Reporting Standards (IFRS) as of April 1, 2014. While there is no impact on financial assets available for benefit payments and net increase in assets available for benefit payments as a result of CPPIB's IFRS adoption, CPPIB's incremental financial statement disclosures related to investments, investment receivables and investment liabilities is supplementary information to the requirements of the PSAS.

c. Financial instruments

The CPP, through CPPIB, measures its investments, investment receivables and investment liabilities at fair value.

The investments and investment receivables are measured at fair value on the basis that they are part of a portfolio managed and evaluated on a fair value basis in accordance with investment strategies and risk management of CPPIB.

Investment liabilities are measured at fair value upon meeting the following criteria:

  • It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;
  • On initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or
  • It is a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument.

The CPP, through the CPPIB, recognizes investments, investment receivables and investment liabilities when, and only when, it becomes a party to the contractual provisions of the instrument. In addition, these are recorded on a trade date basis.

Investments and investment receivables are derecognized when the contractual rights to receive the cash flows expire or where the CPP, through CPPIB, has transferred its rights to receive cash flows from the asset and where it has transferred substantially all the risks and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Investment liabilities are derecognized by CPP, through CPPIB, when the obligation under the liabilities is discharged, cancelled or expires.

Upon initial recognition, investments, investment receivables and investment liabilities are measured at fair value. Subsequent changes in the fair value are recorded as unrealized gain (loss) on investments and included in net investment income (loss), along with the interest and dividend income elements of such financial instruments.

d. Valuation of investments, investment receivables and investment liabilities

Investments, investment receivables and investment liabilities are recorded on a trade date basis and are stated at fair value. Fair value is an estimate of the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act.

In an active market, fair value is best evidenced by an independent quoted market price. In the absence of an active market, fair value is determined by valuation techniques that make maximum use of inputs observed from markets. These valuation techniques include using recent arm's length market transactions, if available, or current fair value of another investment that is substantially the same, discounted cash flow analysis, pricing models and other accepted industry valuation methods, that may include the use of estimates made by management, appraisers or both where significant judgment is required. By using valuation methods based on reasonable alternative assumptions, different fair values could result. CPPIB's management has determined that the potential impact on fair values using these reasonable alternative assumptions would not be significant.

e. Contributions

Contributions include CPP contributions earned for the year. The Canada Revenue Agency (CRA) collects contributions and measures them using the assessment of tax returns. In determining the amount of contributions earned for the year, the CRA considers cash received and contributions assessed, and makes an estimate for contributions related to tax returns not yet assessed. This estimate is subject to review. Adjustments, if any, are recorded as contributions in the year they are known.

Following the legislative change brought by Bill C‑51 of 2009, CPP contributions toward the new PRB are being collected. As of January 1, 2012, Canadians working outside Quebec who receive CPP or RRQ retirement benefits began making contributions to the PRB. Contributions are mandatory for CPP or RRQ retirement pension recipients aged 60–65. Those between the ages of 65 and 70 can choose not to contribute. The PRB becomes payable the year after contributions are made.

f. Investment income

Income from investments includes realized gains and losses from investments, changes in unrealized gains and losses on investments, dividend income, interest income and net operating income from private real estate investments. Dividend income is recognized on the ex‑dividend date, which is when the right to receive the dividend has been established. Interest income is recognized using the effective interest rate method.

g. Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition or disposal of an investment. Transaction costs are expensed as incurred and included in net investment income (loss).

h. Investment management fees

Investment management fees are paid to investment managers for externally managed investments. Investment management fees are expensed as incurred and included in net investment income (loss).

i. Securities purchased under reverse repurchase agreements and sold under repurchase agreements

Securities purchased under reverse repurchase agreements represent the purchase of securities effected with a simultaneous agreement to sell them back at a specified price at a specified future date and are accounted for as an investment receivable. These securities are not recognized as an investment of the CPP, through the CPPIB. The fair value of securities to be resold under these reverse repurchase agreements is monitored and additional collateral is obtained, when appropriate, to protect against credit exposure. In the event of counterparty default, the CPP, through the CPPIB, has the right to liquidate the collateral held.

Securities sold under repurchase agreements are accounted for as collateralized borrowing because they represent the sale of securities with a simultaneous agreement to buy them back at a specified price at a specified future date. The securities sold continue to be recognized as an investment of the CPP, through the CPPIB, with any changes in fair value recorded as net gain (loss) on investments and included in net investment income (loss). Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is included in net investment income (loss) (refer to Notes to consolidated Financial Statements - Note 10).

j. Securities sold short

Securities sold short represent securities that are sold, but not owned, by the CPP, through the CPPIB. The CPP, through the CPPIB, has an obligation to cover these short positions, which are accounted for as an investment liability based on the fair value of the securities sold. Collateral is pledged to the counterparty, when appropriate (refer to Notes to consolidated Financial Statements - Note 7). Interest and dividend expense on securities sold short are included in net investment income (loss) (refer to Notes to consolidated Financial Statements - Note 10).

k. Translation of foreign currencies

Transactions, including purchases and sales of investments, income and expenses, are translated at the rate of exchange prevailing on the date of the transaction. Investments and monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates prevailing on the year-end date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.

Foreign currency transaction gains and losses on financial instruments are included in net investment income (loss) (refer to Notes to consolidated Financial Statements - Note 10).

l. Pensions and benefits

Pensions and benefits expenses are recorded when incurred or reasonably estimated.

m. Tax deductions due to the Canada Revenue Agency

Tax deductions due to the CRA consist primarily of voluntary and non‑resident taxes withheld from pensions and benefit payments to CPP beneficiaries (refer to Notes to consolidated Financial Statements - Note 8).

n. Net overpayments

Net overpayments comprise overpayments of pensions and benefits that were established during the year less remissions of debts granted.

o. Operating expenses

Operating expenses are recorded as incurred.

p. Other claims and legal actions

The CPP records an allowance for claims and legal proceedings when it is likely that there will be a future payment and a reasonable estimate can be made.

q. Measurement uncertainty

The preparation of consolidated financial statements in accordance with PSAS requires management to make certain estimates, judgments and assumptions that affect the reported values of assets and liabilities as at the date of the financial statements and revenues and expenses during the reporting period. Estimates are based on the best information available at the time of preparation of the consolidated financial statements and are reviewed annually to reflect new information as it becomes available. Significant estimates and judgments are required principally in determining the reported estimated contributions, allowance for doubtful accounts, contingent liabilities, actuarial obligation in respect of benefits and valuation of financial instruments which are not actively traded. Measurement uncertainty exists in these consolidated financial statements. Actual results could significantly differ from those estimates.

r. Future changes in accounting standards

Financial instruments

The Public Sector Accounting Board (PSAB) issued new sections in 2011 and has recently deferred their concurrent adoption date to April 1, 2019. The CPP is currently analyzing the impact of these new standards on its consolidated financial statements:

i. Financial instruments

The new section 3450 (financial instruments) establishes standards for recognizing and measuring financial assets, financial liabilities and non‑financial derivatives. Items within the scope of the section are assigned to one of two measurement categories: fair value and cost or amortized cost. Fair value measurement will apply to portfolio investments in equity instruments that are quoted in an active market. Other financial assets and financial liabilities will generally be measured at cost or amortized cost, unless the entity defines and implements a risk management or investment strategy to manage and evaluate the performance of a group of financial assets, financial liabilities or both on a fair value basis, then the entity may include those items in the fair value category. Until an item is derecognized, gains and losses arising as a result of fair value remeasurement will be reported in the Consolidated Statement of Remeasurement Gains and Losses.

ii. Foreign currency translation

The revised section 2601 (foreign currency translation) requires that remeasurement gains and losses on foreign currency translation be reported in a new Consolidated Statement of Remeasurement Gains and Losses until such time as the financial instrument is derecognized, at which point, the accumulated remeasurement gain and loss is recognized in the Consolidated Statement of Operations.

iii. Financial statement presentation

The revised section 1201 (financial statements presentation) establishes the general principles and information standards applicable to consolidated financial statements. It requires that remeasurement gains and losses be reported in a new statement. Also, the assets available for benefit payments will be presented as the total of the net increase in assets available for benefit payments for the year and the accumulated remeasurement gains and losses.

3. Cash

Cash consists of the total cash held by the CPP Account and the CPPIB. The CPP Account was established in the accounts of Canada by the Canada Pension Plan to record the contributions, interest, pensions, benefits and operating expenses of the CPP. It also records the amounts transferred to or received from the CPPIB. As at March 31, 2015, the deposit with the Receiver General for Canada in the CPP Account is $212 million (2014 — $140 million) and the CPPIB's cash is $59 million (2014 — $27 million) for a total of $271 million (2014 — $167 million).

4. Receivables

Receivables comprised the following:

Table Summary

The table presents, in millions of dollars, a two-year comparative of receivables related to the Canada Pension Plan. It consists of three columns: a detailed listing of components; current year; previous year.

(in millions of dollars)

  2015 2014
Contributions 5,114 4,368
Régime de rentes du Québec 162 116
Beneficiaries    
Balance of pensions and benefits overpayments 169 147
Allowance for doubtful accounts (negative 120) (negative 112)
Total 5,325 4,519

Contributions receivable represent the estimated amount to be collected from the CRA relating to contributions earned at year end and adjusted for tax returns not yet assessed. The amount includes an estimate that takes into consideration the number of contributors and the average contribution to be received, which is based on the average earning and the CPP contribution rate. On an annual basis, the model used to make the estimate is reviewed. The difference between the estimate and the actual amount has not been significant in the past.

The CPP has procedures to detect overpayments. During the year, overpayments totalling $75 million (2014 — $53 million) were established and debts totalling $4 million (2014 — $4 million) were forgiven as per the remission provisions of the Canada Pension Plan. A further $49 million (2014 — $36 million) was recovered through collection of payments and withholdings from beneficiaries.

5. Investment activities risk management

The CPP, through the investment activities carried out by the CPPIB, is exposed to a variety of financial risks. These risks include market risk, credit risk and liquidity risk. The CPPIB manages and mitigates financial risks through the Risk/Return Accountability Framework that is contained within the investment policies and approved by the Board of Directors at least once every fiscal year. This framework contains risk limits and risk management provisions that govern investment decisions. It has been designed to achieve the mandate of the CPPIB, which is to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP and the ability of the CPP to meet its financial obligations on any given business day.

An active risk limit is included within the Risk/Return Accountability Framework, which represents a limit on the amount of investment risk that the CPPIB can take relative to the CPP Reference Portfolio. The CPP Reference Portfolio is approved by the Board of Directors and serves as a performance benchmark against which the CPPIB's value‑added activities are measured. The objective of the CPPIB is to create value‑added investment returns greater than the returns that would be generated by the CPP Reference Portfolio. The CPPIB monitors the active risk in the CPP Investment Portfolio daily and reports active risk exposures to the Board of Directors on at least a quarterly basis.

  1. Market risk: Market risk (including currency risk, interest rate risk and other price risk) is the risk that the fair value or future cash flows of an investment or investment liability will fluctuate because of changes in market prices and rates.

    Currency risk: The CPP, through the CPPIB, is exposed to currency risk through holdings of investments or investment liabilities in various currencies.

    In Canadian dollars, the net underlying currency exposures, after allocating foreign currency derivatives, as at March 31, are as follows:

    Table Summary

    The table presents, in millions of dollars, a two-year comparative of the net underlying currency exposures. It consists of three columns: Currency; current year; previous year each year is sub-divided into the same two columns - Net exposure and percentage of total. The final line presents the total for this table.

    (in millions of dollars)

    Currency 2015 2014
    Net exposure % of total Net exposure % of total
    United States Dollar 116,292 59 83,612 58
    Euro 30,955 16 22,241 15
    British Pound Sterling 12,595 6 9,380 7
    Japanese Yen 11,879 6 6,966 5
    Australian Dollar 6,499 3 7,222 5
    Chinese Yuan 2,614 1 917 1
    Hong Kong Dollar 2,425 1 2,285 1
    Swiss Franc 2,045 1 843 1
    Chilean Peso 1,855 1 1,459 1
    South Korean Won 1,792 1 1,468 1
    Brazilian Real 1,404 1 1,017 1
    Indian Rupee 1,344 1 613 1
    Swedish Krona 1,313 1 849 1
    Other 4,344 2 4,010 2
    Total 197,356 100 142,882 100

    As at March 31, 2015, with all other variables and underlying values held constant, a change in the value of the Canadian dollar against major foreign currencies by 5 percent would result in an approximate increase (decrease) in the value of investments and investments liabilities as follows:

    Table Summary

    The table presents, in millions of dollars, a two-year comparative of the increase (decrease) in the value of investments and investments liabilities. It consists of three columns: Currency; current year; previous year. Each year is subdivided into the same two columns — Change in Investment Value. Each columns is subdivided into the same two columns — plus five percent and minus five percent. The final row presents the total for this table.

    (in millions of dollars)

    Currency 2015
    Change in Investment Value
    2014
    Change in Investment Value
    +5% -5% +5% -5%
    United States Dollar (negative 5,815) 5,815 (negative 4,181) 4,181
    Euro (negative 1,548) 1,548 (negative 1,112) 1,112
    British Pound Sterling (negative 630) 630 (negative 469) 469
    Japanese Yen (negative 594) 594 (negative 348) 348
    Australian Dollar (negative 325) 325 (negative 361) 361
    Chinese Yuan (negative 131) 131 (negative 46) 46
    Hong Kong Dollar (negative 121) 121 (negative 114) 114
    Swiss Franc (negative 102) 102 (negative 42) 42
    Chilean Peso (negative 93) 93 (negative 73) 73
    South Korean Won (negative 89) 89 (negative 73) 73
    Brazilian Real (negative 70) 70 (negative 51) 51
    Indian Rupee (negative 67) 67 (negative 31) 31
    Swedish Krona (negative 66) 66 (negative 42) 42
    Other (negative 217) 217 (negative 201) 201
    Total (negative 9,868) 9,868 (negative 7,144) 7,144

    Interest rate risk: Interest rate risk is the risk that the fair value or future cash flows of an investment or investment-related liability will fluctuate because of changes in market interest rates.

    Other price risk: Other price risk is the risk that the fair value or future cash flows of an investment will fluctuate because of changes in market prices arising primarily from equity price risk, commodity price risk and credit spread risk, whether those changes are caused by factors specific to the individual investment or factors affecting all securities traded in the market.

  2. Credit risk: Credit risk is the risk of financial loss due to a counterparty failing to meet its contractual obligations, or a reduction in the value of the assets due to a decline in the credit quality of the borrower, counterparty, guarantor or the assets (collateral) supporting the credit exposure. The CPP's, through the CPPIB, most significant exposure to credit risk is through its investment in debt securities, over the counter derivatives (as discussed in Notes to consolidated Financial Statements - Note 6(f)) and guarantees. The carrying amounts of these investments and guarantees are presented in Notes to consolidated Financial Statements - Note 6 and Notes to consolidated Financial Statements - Note 16(c) respectively.
  3. Liquidity Risk: Liquidity risk is the risk of being unable to generate sufficient cash or its equivalent in a timely and cost‑effective manner to meet investment commitments and investment liabilities as they come due. The CPP, through the CPPIB, manages liquidity risk through its ability to raise funds through the issuance of commercial paper and transacting in securities sold under repurchase agreements (refer to Notes to consolidated Financial Statements - Note 6 and Notes to consolidated Financial Statements - Note 7).

    The CPPIB maintains $1.5 billion (2014 — $1.5 billion) of unsecured credit facilities to meet potential liquidity requirements. As at March 31, 2015, the total amount drawn on the credit facilities is $nil (2014 — $nil). The CPPIB also has the ability to readily dispose of certain investments that are traded in an active market. These include a liquid portfolio of publicly traded equities, money market securities and marketable bonds.

    The CPPIB is also exposed to liquidity risk through its responsibility for providing cash management services to the CPP (refer to Notes to consolidated Financial Statements - Note 18). In order to manage liquidity risk associated with this short‑term cash management program, certain assets are segregated and managed separately. Liquidity risk is also managed by investing these assets in liquid money market instruments with the primary objective of ensuring that the CPP has the necessary liquidity to meet benefit payment obligations on any business day.

6. Investments and investment liabilities

As stated in Notes to consolidated Financial Statements - Note 1, the role of the CPPIB is to invest the assets with a view to achieving a maximum rate of return without undue risk of loss, with regard to the factors that may affect the funding of the CPP and the ability of the CPP to meet its financial obligations on any given business day. To achieve its mandate, the CPPIB has established investment policies in accordance with its regulations. These set out the manner in which their assets shall be invested and their financial risks managed and mitigated through the Risk/Return Accountability Framework.

The CPPIB's investments are grouped by asset class based on the risk/return characteristics of the investment strategies of the underlying portfolios. The investments, before allocating derivative contracts, associated money market securities and other investment receivables and liabilities to the asset classes to which they relate, are as follows:

Table Summary

The table presents, in millions of dollars, a two-year comparative of the investments and investment liabilities. It consists of three columns: a detailled listing of components; current year; previous year. The first series of lines presents the asset class and related investments, the total for the asset class and another line presents the total investments. The second series of lines presents investment liabilities and related transactions. Another line presents the total for the investment liabilities. The last series of lines present the amounts receivable and amounts payable from pending trades. The final line presents the net investments.

(in millions of dollars)

  2015 2014
Equities    
Canada 8,798 8,464
Foreign developed markets 114,274 85,238
Emerging markets 14,217 11,068
Total equities 137,289 104,770
Fixed income    
Bonds 65,642 55,258
Other debts 22,428 13,883
Money market securities 17,740 19,663
Total fixed income 105,810 88,804
Absolute return strategies 16,185 12,243
Real assets    
Real estate 30,375 25,461
Infrastructure 15,013 13,123
Total real assets 45,388 38,584
Investment receivables    
Securities purchased under reverse repurchase agreements 10,817 3,221
Accrued interest 928 907
Derivative receivables 1,882 1,010
Dividends receivable 182 132
Total investment receivables 13,809 5,270
Total investments 318,481 249,671
Investment liabilities    
Securities sold under repurchase agreements (negative 15,779) (negative 5,230)
Securities sold short (negative 22,385) (negative 14,874)
Debt financing liabilities (negative 9,955) (negative 9,654)
Derivative liabilities (negative 2,428) (negative 1,062)
Total investment liabilities (negative 50,547) (negative 30,820)
Amounts receivable from pending trades 2,908 2,251
Amounts payable from pending trades (negative 6,087) (negative 1,979)
Net investmentsLink to footnote 1 264,755 219,123

a. Equities

Equities consist of public and private investments in each of these three markets: Canadian, foreign developed and emerging.

  1. Public equity investments are made directly or through funds. As at March 31, 2015, public equities include fund investments with a fair value of $8,541 million (2014 — $6,000 million).
  2. Private equity investments are generally made directly or through ownership in limited partnership funds. The private equity investments represent equity ownerships or investments with the risk and return characteristics of equity. As at March 31, 2015, the fair value of private equities is $18,473 million (2014 — $ 15,037 million).

b. Fixed income

  1. Bonds consist of non‑marketable and marketable bonds.

    The non‑marketable bonds issued by the provinces prior to 1998 have rollover provisions attached to them by the Act. These provisions permit each issuer, at its option, to roll over the bonds on maturity for a further 20–year term at a rate based on capital markets borrowing rates for that province existing at the time of rollover. The non‑marketable bonds are also redeemable before maturity at the option of the issuers.

    In lieu of exercising its statutory rollover right described in the preceding paragraph, agreements between the CPPIB and the provinces permit each province to repay the bond and concurrently cause the CPPIB to purchase a replacement bond or bonds in a total principal amount not exceeding the principal amount of the maturing security for a term of not less than five years and not more than 30 years. Such replacement bonds contain rollover provisions that permit the issuer, at its option, to roll over the bond for successive terms of not less than five years and subject in all cases to the maximum 30 years outside maturity date. The replacement bonds are also redeemable before maturity at the option of the issuers.

  2. Other debt consists of investments in direct private debt, asset‑backed securities, intellectual property, royalties, distressed mortgage funds and private debt funds.
  3. Money market securities consist of cash, term deposits, treasury bills and commercial paper.

c. Absolute return strategies

Absolute return strategies consist of investments in funds and internally managed portfolios whose objective is to generate positive returns regardless of market conditions, that is, returns with a low correlation to broad market indices. The underlying securities of the funds and the internally managed portfolios could include, but are not limited to, equities, fixed income securities and derivatives.

d. Real assets

  1. The CPPIB obtains exposure to real estate through direct investments in privately held real estate, real estate funds and publicly traded securities.

    Private real estate investments are managed on behalf of the CPPIB by investment managers primarily through co‑ownership arrangements. As at March 31, 2015, real estate investments include assets of $30,375 million (2014 — $25,461 million)

  2. Infrastructure investments are generally made directly. As at March, 2015, infrastructure includes direct investments with a fair value of $14,956 million (2014 — $12,795 million) and $57 million in fund investments (2014 — $328 million).

e. Securities purchased under reverse repurchase agreements and sold under repurchase agreements

Reverse repurchase and repurchase agreements are carried at the amounts at which the securities were initially acquired or sold, which, together with accrued interest income or expense, approximates fair value due to the short‑term nature of these securities.

The terms to maturity of the securities purchased under reverse repurchase agreements, as at March 31, 2015, are as follows: within 1 year, $10,817 million (2014 — $3,221 million); 1 year to over 10 years, $nil (2014 — $nil).

The terms to maturity of the undiscounted value of the securities sold under repurchase agreements, as at March 31, 2015, are as follows: within 1 year, $15,780 million (2014 — $5,231 million); 1 year to over 10 years, $nil (2014 — $nil).

f. Derivative contracts

A derivative contract is a financial contract, the value of which is derived from the value of underlying assets, indices, interest rates, currency exchange rates or other market‑based factors. Derivatives are transacted through regulated exchanges or negotiated in over‑the‑counter markets. The CPPIB uses different types of derivative instruments, which include futures and forwards, swaps, options and warrants.

Notional amounts of derivative contracts represent the contractual amounts to which a rate or price is applied for computing the cash flows to be exchanged. The notional amounts are used to determine the gains/losses and fair value of the contracts. They are not recorded as assets or liabilities on the Consolidated Statement of Financial Position. Notional amounts do not necessarily represent the amount of potential market risk or credit risk arising from a derivative contract.

The fair value of these contracts is reported as derivative receivables and derivative liabilities on the schedule of investments as shown above.

The CPPIB uses derivatives to generate value‑added investment returns and to manage or adjust exposures to interest rate, currency, credit and other market risks without directly purchasing or selling the underlying instrument.

g. Securities sold short

As at March 31, 2015, securities sold short of $22,385 million (2014 — $14,874 million) are considered repayable within one year based on the earliest period in which the counterparty could request payment under certain conditions

h. Debt financing liabilities

Debt financing liabilities are recorded at the amount originally issued, which, together with accrued interest expenses, approximate fair value due to the short‑term nature of these liabilities. The terms to maturity of the undiscounted principal repayments of the debt financing liabilities as at March 31, 2015, are as follows: within 1 year, $9,959 million (2014 — $9,663 million), and 1 year to over 10 years, $nil (2014 — $nil).

7. Collateral

Collateral transactions are conducted to support CPPIB's investment activities under the terms and conditions that are common and customary to collateral arrangements. The net fair value of collateral held and pledged as at March 31 are as follows:

Table Summary

The table presents, in millions of dollars, a two-year comparative of the net fair value of collateral held and pledged at March 31. It consists of three columns: a listing of collateral transactions; current year; previous year. A final line presents the total for this table.

(in millions of dollars)

  2015 2014
Assets held as collateral on:    
Reverse repurchase agreementsLink to footnote 2 10,812 3,221
Over‑the‑counter derivative transactionsLink to footnote 2 33 134
Other debtLink to footnote 2 1,195 1,129
Assets pledged as collateral on:    
Repurchase agreements (negative 15,792) (negative 5,227)
Securities sold short (negative 14,938) (negative 14,690)
Over‑the‑counter derivative transactions (negative 266)  
Debt on private real estate properties (negative 3,266) (negative 2,605)
Total (negative 22,222) (negative 18,038)

8. Payables and accrued liabilities

Payables and accrued liabilities are comprised of the following:

Table Summary

The table presents, in millions of dollars, a two-year comparative of the components of payables and accrued liabilities. It consists of three columns: a detailled listing of components; current year; previous year. A final line presents the total for this table.

(in millions of dollars)

  2015 2014
Operating expenses 566 350
Pensions and benefits payable 372 425
Tax deductions on benefits due to the Canada Revenue Agency 168 152
Total 1,106 927

9. Comparison of results against budget

The budget amounts included in the Consolidated Statement of Operations and the Consolidated Statement of Change in Financial Assets Available for Benefit Payments are derived from the amounts that were originally budgeted in the Employment and Social Development Canada 2014–2015 Report on Plans and Priorities, tabled in Parliament in March 2014 and amounts forecasted by the Office of the Superintendent of Financial Institutions.

10. Net investment income (Loss)

Net investment income (loss) is reported net of transaction costs and investment management fees, and is grouped by asset class based on the risk/return characteristics of the investment strategies of the underlying portfolios.

Net investment income (loss), after giving effect to derivative contracts and investment receivables and liabilities for the year ended March 31, is as follows:

Table Summary

The table presents, in millions of dollars, the information on net investment income for the previous year. It consists of two columns: a listing of transactions grouped by asset class; current year divided into six columns - Investment income (loss), Net gain (Loss) on investments, Total investment income (loss), Investment management fees, Transaction costs and Net investment income (loss). The first series of lines presents the equities and its total. The second series of lines presents the fixed income and its total. The third series of lines presents the real assets and its total. The fourth series of lines presents the interest on operating balance. A final line presents the total for this table.

(in millions of dollars)

  2015
Investment income (loss)Link to footnote 3 Net gain (loss) on investmentsLink to footnote 4Link to footnote 5Link to footnote 6 Total investment income (loss) Investment management fees Transaction costs Net investment income (loss)
Equities            
Canada 17 1,753 1,770 (negative 12) (negative 12) 1,746
Foreign developed markets 1,692 19,267 20,959 (negative 448) (negative 41) 20,470
Emerging markets 266 3,339 3,605 (negative 121) (negative 7) 3,477
Subtotal 1,975 24,359 26,334 (negative 581) (negative 60) 25,693
Fixed income            
Bonds 1,794 4,526 6,320     6,320
Other debt 909 1,801 2,710 (negative 114) (negative 9) 2,587
Money market securitiesLink to footnote 7 334 2,507 2,841 (negative 467) (negative 62) 2,312
Debt financing liabilities (negative 32) (negative 1,194) (negative 1,226)     (negative 1,226)
Subtotal 3,005 7,640 10,645 (negative 581) (negative 71) 9,993
Real assets            
Real estate 1,261 2,521 3,782 (negative 90) (negative 97) 3,595
Infrastructure 721 1,486 2,207 (negative 2) (negative 45) 2,160
Subtotal 1,982 4,007 5,989 (negative 92) (negative 142) 5,755
Interest on operating balance 3   3     3
Total 6,965 36,006 42,971 (negative 1,254) (negative 273) 41,444

Table Summary

The table presents, in millions of dollars, the information on net investment income for the previous year. It consists of two columns: a listing of transactions grouped by asset class; previous year divided into six columns - Investment income (loss), Net gain (Loss) on investments, Total investment income (loss), Investment management fees, Transaction costs and Net investment income (loss). The first series of lines presents the equities and its total. The second series of lines presents the fixed income and its total. The third series of lines presents the real assets and its total. The fourth series of lines presents the interest on operating balance. A final line presents the total for this table.

(in millions of dollars)

  2014
Investment income (loss)Link to footnote 3 Net gain (loss) on investmentsLink to footnote 4Link to footnote 5Link to footnote 6 Total investment income (loss) Investment management fees Transaction costs Net investment income (loss)
Equities            
Canada 49 2,851 2,900 (negative 9) (negative 14) 2,877
Foreign developed markets 1,422 16,737 18,159 (negative 320) (negative 48) 17,791
Emerging markets 228 1,167 1,395 (negative 108) (negative 7) 1,280
Subtotal 1,699 20,755 22,454 (negative 437) (negative 69) 21,948
Fixed income            
Bonds 1,695 (negative 1,607) 88     88
Other debt 662 1,208 1,870 (negative 83) (negative 6) 1,781
Money market securitiesLink to footnote 7 263 2,085 2,348 (negative 311) (negative 40) 1,997
Debt financing liabilities (negative 33) (negative 704) (negative 737)     (negative 737)
Subtotal 2,587 982 3,569 (negative 394) (negative 46) 3,129
Real assets            
Real estate 967 3,003 3,970 (negative 113) (negative 74) 3,783
Infrastructure 534 1,346 1,880 (negative 3) (negative 27) 1,850
Subtotal 1,501 4,349 5,850 (negative 116) (negative 101) 5,633
Interest on operating balance 3   3     3
Total 5,790 26,086 31,876 (negative 947) (negative 216) 30,713

11. Estimated overpayments and underpayments of benefits

In order to measure the accuracy of CPP benefit payments, the CPP relies on a quality program (the CPP Payment Accuracy Review) which estimates, through statistical extrapolation, the most likely value of incorrect benefit payments.

For benefits paid during the 12 months ended March 31, 2015, undetected overpayments and underpayments are estimated to be $18.4 million and $30.4 million respectively ($0.3 million and $99.7 million in 2013–2014). These estimates are used by the CPP to assess the quality and accuracy of decisions and to continuously improve its systems and practices for processing CPP benefits.

The actual overpayments established during the year, as indicated in Notes to consolidated Financial Statements - Note 4, are not directly linked to the above noted estimated overpayments and underpayments of benefits for the same period.

12. Operating expenses

CPP's operating expenses are composed of costs incurred by various Government of Canada (GoC) departments (refer to Notes to consolidated Financial Statements - Note 17) for the administration of the CPP's activities as well as the CPPIB's operating expenses.

Table Summary

The table presents, in millions of dollars, a two-year comparative of the operating expenses. It consists of three columns: a listing of transaction types; current year; previous year, each divided into the same three columns - GoC, CPPIB, and Total. A final line presents the total for this table.

(in millions of dollars)

  2015 2014
GoC CPPIB Total GoC CPPIB Total
Personnel related costs, including the Health Insurance Plan 255 558 813 226 400 626
Collection of contributions and investigation services 173   173 169   169
Operational business services   89 89   59 59
Program policy and delivery, accomodation and corporate services 88   88 102   102
Professional and consulting fees   61 61   43 43
Premises   28 28   20 20
Amortization of premises and equipment   25 25   24 24
Cheque issue and computer services 9   9 9   9
Support services of the Social Security Tribunal 7   7      
Others 2 42 44 3 30 33
Total 534 803 1,337 509 576 1,085

13. Financing of the Canada Pension Plan

The CPP is financed by contributions and investment returns. Employers and employees pay contributions equally to the CPP, and self-employed workers pay the full amount. At the time of the Plan's inception in 1965, the demographic and economic conditions made pay‑as‑you‑go financing appropriate. The pay‑as‑you‑go financing, along with a small reserve equivalent to about two years' worth of expenditures, meant the pensions and benefits for one generation would be paid largely from the contributions of later generations. However, changing demographics and economic conditions over time led to increasing CPP costs, and by the mid‑1990s the fall in the level of assets of the CPP resulted in a portion of the reserve being required to cover expenditures. Therefore, for the CPP to remain unchanged, the contribution rate would have needed to be increased regularly.

As a result, the CPP was amended in 1997 to restore its long‑term financial sustainability and to improve fairness across generations by changing its financing approach from a pay‑as‑you‑go basis to a form of partial funding called steady‑state funding, along with incremental full funding rules for new or enhanced benefits, and reducing the growth of benefits over the long term. In addition, a new investment policy was put in place, along with the creation of the CPPIB. Moreover, the statutory periodic reviews of the Plan by the federal and provincial financial ministers were increased from once every five years to every three years.

Key among the 1997 changes was the introduction of self‑sustaining provisions to safeguard the Plan: in the event that the projected minimum contribution rate is greater than the legislated contribution rate and no recommendations are made by the Finance Ministers to correct the situation, the contribution rate would automatically increase and the indexation of the current benefits would be suspended.

The federal, provincial and territorial finance ministers took additional steps in 1999 to strengthen the transparency and accountability of actuarial reporting on the CPP by endorsing regular independent peer reviews of actuarial reports and consultations by the Chief Actuary with experts on the assumptions to be used in the actuarial reports.

The most recent triennial report, the Twenty‑sixth Actuarial Report on the Canada Pension Plan as at December 31, 2012, was tabled in Parliament on December 3, 2013. The next triennial actuarial report as at December 31, 2015, is expected to be tabled by December 2016. According to the Twenty‑sixth Actuarial Report, under the current legislated contribution rate of 9.9 percent, the Plan's assets are expected to increase significantly, with the asset/expenditure ratio growing from 4.7 in 2013 to about 5.4 by 2025 and to 5.9 by 2075.

A number of assumptions were used in the Twenty‑sixth Actuarial Report to project the CPP's revenues and expenditures over the long projection period of 75 years, and to determine the minimum contribution rate. The assumptions provided in the table below represent the best estimates according to the Chief Actuary's professional judgment relating to demographic, economic, and other factors; and have been peer reviewed by an independent expert actuary's panel.

Table Summary

The table presents information on actuarial assumptions. It consists of three columns: a listing of factors; as at 31 December 2012; as at 31 December 2009, each divided into the same two columns - Males and Females. The gender columns are then combined into one column for each of the two periods - as at 31 December 2012; as at 31 December 2009. A row presents the factor used to determine actuarial best estimates.

  As at 31 December 2012 As at 31 December 2009
Male Female Male Female
Canadian life expectancy        
at birth in 2013 (2009 ‑ in 2010) 86.1 years 89.1 years 85.4 years 88.3 years
at age 65 in 2013 (2009 ‑ in 2010) 20.9 years 23.3 years 20.2 years 22.6 years
Retirement rates for cohort at age 60 34% (2016+) 38% (2016+) 38% (2016+) 41% (2016+)
CPP disability incidence rates (per 1,000 eligible) 3.30 (2017+) 3.75 (2017+) 3.40 (2015+)Link to footnote 8 3.79 (2015+)Link to footnote 8
Total fertility rate 1.65 (2015+) 1.65 (2015+)
Net migration rate 0.60% of population for 2017+ 0.58% of population for 2023+
Participation rate (age group 15–69) 76.8% (2030) 75.2% (2030)
Employment rate (age group 15–69) 72.1% (2030) 70.6% (2030)
Unemployment rate 6.0% (2023+) 6.1% (2022+)
Rate of increase in prices 2.2% (2021+) 2.3% (2019+)
Real‑wage increase 1.2% (2020+) 1.3% (2019+)
Real rate of return 4.0% (2019+) 4.0% (2017+)Link to footnote 9

In the Twenty‑sixth Actuarial Report, the minimum contribution rate, which is the lowest rate to sustain the CPP, was determined to be 9.84 percent of contributory earnings for the year 2016 and thereafter (9.86 percent before 2023 and 9.85 percent for the year 2023 and thereafter in the Twenty‑Fifth Actuarial Report).

The CPP assets available for benefit payments represent the funds accumulated for the payment of pensions, benefits, and operating expenses, i.e. total CPP expenditures. The partial funding nature of the CPP means that contributions as opposed to these assets are the main source for financing CPP expenditures. The Twenty‑sixth Actuarial Report confirms that, on the basis of the assumptions selected, the current legislated combined employer‑employee contribution rate of 9.9 percent is and will continue to be sufficient to pay for future expenditures over the period 2013 to 2022. Thereafter, a portion of investment income (27 percent in 2050) will be required to make up the difference between contributions and expenditures. Under the current legislated contribution rate of 9.9 percent, total assets available for benefit payments are expected to grow to $300 billion by the end of 2020.

As at March 31, 2015, the value of CPP assets available for benefit payments is $269.6 billion (2014 ‑ $223.2 billion). This amount represents approximately 6.3 times the 2016 planned expenditures of $42.9 billion (2014 ‑ 5.6 times).

A variety of tests were performed to measure the sensitivity of the long-term projected financial position of the CPP to future changes in the demographic and economic environments. Key best-estimate demographic and economic assumptions were varied individually to measure the potential impact on the financial status of the CPP.

The low‑cost and high‑cost alternatives for the three most sensitive assumptions are shown in the table below. In the case of mortality, the assumptions for the low‑cost and high‑cost alternatives were developed using a combination of confidence intervals and different long-term trajectories. In the case of real wage increase and real rate of return, these assumptions are defined as the upper and lower boundaries of the 80 percent confidence intervals.

Table Summary

The table presents information on the three most sensitive demographic assumptions on mortality. It consists of four columns: a listing of factors; Low‑Cost; Best‑Estimates; High‑Cost. The first two rows present the Canadian life expectancy at age 65 in 2050 and is subdivided into two rows — Males and Females and their respective life expectancies. The next two rows present the real wage increase and real rate of return.

  Low-Cost Best-Estimate High-Cost
Mortality:      
Canadian life expectancy at age 65 in 2050 with future improvements Males 20.7
Females 22.9
Males 23.0
Females 25.3
Males 25.6
Females 27.7
Real wage increase 1.9% 1.2% 0.4%
Real rate of return 5.5% 4.0% 2.5%

Mortality is the most sensitive demographic assumption as it impacts the length of the benefit payment period. If male and female life expectancies at age 65 were to increase by approximately 2.5 years more than expected by 2050, the minimum contribution rate in 2016 and thereafter would increase to 10.22 percent, well above the legislated rate of 9.9 percent. On the other hand, if male and female life expectancies at age 65 were to be about 2.5 years lower than expected, the minimum contribution rate would decrease significantly to 9.46 percent.

The most sensitive economic assumptions are the real wage increase and the real rate of return on investments. The growth in real wage directly impacts the amount of future CPP contributions. If an ultimate real wage increase of 1.9 percent is assumed for 2020 and thereafter, the minimum contribution rate would decrease to 9.26 percent. However, if an ultimate real wage increase of 0.4 percent is assumed for 2014 and thereafter, the minimum contribution rate would increase to 10.51 percent.

Real rates of return can fluctuate greatly from year to year and can have a significant impact on the size of assets and on the ratio of assets to the following year expenditures. If a real rate of return of 5.5 percent is assumed for 2019 and thereafter, the minimum contribution rate will decrease to 8.97 percent. However, if the real rate of return is assumed to be 2.5 percent for 2019 and thereafter, the minimum contribution rate increases to 10.73 percent.

The table below summarises the results of the sensitivity of the minimum contribution rate and the ratio of the assets to the next year expenditures under the legislated 9.9 percent contribution rate to the changes in mortality, real wage increase and real rate of return on investments assumptions:

Table Summary

The table summarises the results of the sensitivity of the minimum contribution rate and the ratio of assets to the next year expenditures. It consists of four columns: a listing of factors; Scenario; Minimum contribution rate; Ratio of assets to expenditure under 9.9 percent contribution rate; this last columns being divided in three sub-columns; 2025, 2050 and 2087. The first two rows present the mortality rates; low cost and high cost. The second two rows present the real wage increases; low cost and high cost. The two final rows present the real rate of return on investments; low cost and high cost.

Assumption Scenario Minimum Contribution RateLink to footnote 10
(percent)
Ratio of Assets to Expenditure under 9.9 percent Contribution Rate
2025 2050 2087
  Best Estimate 9.84 5.35 6.02 5.70
Mortality Rates Low Cost 9.46 5.54 7.45 11.64
High Cost 10.22 5.15 4.67 0.50
Real Wage Increases Low Cost 9.26 5.56 8.07 12.09
High Cost 10.51 5.09 3.40 Link to footnote 11
Real Rate of Return on Investments Low Cost 8.97 6.31 11.23 30.49
High Cost 10.73 4.54 2.98 Link to footnote 12

14. Actuarial obligation in respect of benefits

The Twenty‑sixth Actuarial Report on the CPP measures the actuarial obligation under an open group approach, which is consistent with the partial funding nature of the CPP financing, and provides information under a closed group approach, in a footnote. With the current legislated combined contribution rate of 9.9 percent, the table below presents the asset excess (shortfall) and the assets to actuarial obligation ratio under open and closed group approaches at valuation dates of the current and previous actuarial reports:

Table Summary

The table presents, in billions of dollars, the asset shorfall and the assets to actuarial obligation ratio under the open and closed group approaches. It consists of three columns: a detailed listing of components; As at 31 December, 2012 divided into two columns - open group and closed group; As at 31 December, 2009 divided into two columns — open group and closed group.

(in billions of dollars)

  As at December 31, 2012 As at December 31, 2009
Open Group Closed Group Open Group Closed Group
Actuarial obligation 2,254.7 1,004.9 1,995.0 874.8
Assets available for benefit payments 2,245.8 175.1 1,988.1 126.8
Asset ShortfallLink to footnote 13 (negative 8.9) (negative 829.8) (negative 6.9) (negative 748.0)
Assets to actuarial obligation ratio 99.6% 17.4% 99.7% 14.5%

The open group approach takes into consideration all current and future participants of the CPP, including their future contributions and associated benefits, to determine whether current assets and future contributions will be sufficient to pay for all future expenditures. The closed group includes only current participants of the CPP, with no new entrants permitted and no new benefits accrued. The choice of the methodology used to produce a social security system's balance sheet is mainly determined by the system's financing approach.

Under the partial funding financing approach of the CPP, in any given year, current contributors allow the use of their contributions to pay current beneficiaries' benefits. This financial arrangement creates claims for current and past contributors to contributions of future contributors. As such, the most appropriate assessment of the financial sustainability of partially funded plans by means of their balance sheets should reflect these claims.

The open group approach does account explicitly for these claims by considering the benefits and contributions of both the current and future plan participants. In comparison, the closed group approach does not reflect these claims, since only current participants are considered. To determine the CPP actuarial obligations under the open group approach, the projections of the CPP's revenues and expenditures were projected over the period of 150 years using the assumptions of the Twenty‑sixth Actuarial Report shown in Notes to consolidated Financial Statements - Note 13. The projection period longer than 75 years used to calculate the minimum contribution rate is necessary to ensure that the future expenditures for cohorts that will enter the labour force during that time are included in the liabilities. It is noted that if a projection period slightly shorter than 150 years is used, there will be no asset shortfall.

The CPP was never intended to be a fully‑funded plan and the financial sustainability of the CPP is not assessed based on its actuarial obligation in respect of benefits. According to the Twenty-sixth Actuarial Report, the CPP is intended to be long-term and enduring in nature, a fact that is reinforced by the federal, provincial, and territorial governments' joint stewardship through the established strong governance and accountability framework of the CPP. Therefore, if the CPP's financial sustainability is to be measured based on its asset excess or shortfall, it should be done on an open group basis that reflects the partially funded nature of the CPP, that is, its reliance on both future contributions and invested assets as a means of financing its future expenditures. Using the open group approach, the Chief Actuary confirms that the CPP, on the basis of the assumptions selected, will continue to meet its financial obligations and is sustainable in the long term.

15. Contractual obligations

The CPP, through the CPPIB, has committed to enter into contractual obligations related to the funding of investments. These contractual obligations are generally payable on demand based on the funding needs of the investment subject to the terms and conditions of each agreement. As at March 31, 2015, the contractual obligations totalled $30.7 billion (2014 — $27.9 billion).

As at March 31, 2015, the CPP, through the CPPIB, has made lease and other contractual obligations, which will require future annual payments as follows:

Table Summary

The table presents in millions of dollars, a two-year comparative of the contractual obligation of the Canada Pension Plan. It consists of three columns: a listing of transactions; current year; previous year. The first line presents payments require within a year. The second line presents payments require for more than a year but not more than five years. The third line present payment require for more than five years. A final line presents the total of this table.

(in millions of dollars)

  2015 2014
Within one year 36 27
After one year but not more than five years 114 107
More than five years 40 32
Total 190 166

16. Contingent liabilities

a. Appeals relating to the payment of pensions and benefits

At March 31, 2015, there were 14,007 (2014 – 13,195) appeals relating to the payment of CPP disability benefits. These contingencies are reasonably estimated, using historical information, at an amount of $164.4 million (2014 – $175.3 million), which was recorded as an accrued liability in the CPP 2014–2015 consolidated financial statements.

b. Other claims and legal proceedings

In the normal course of operations, the CPP is involved in various claims and legal proceedings.

Starting in 2004, 417 medical adjudicators (MAs) filed human rights complaints with the Canadian Human Rights Commission (CHRC) alleging gender discrimination. The complaint was upheld by the Canadian Human Rights Tribunal (CHRT) in 2007, which ordered that the discriminatory practice cease and directed the parties to attempt to negotiate a settlement of the appropriate measures to redress the practice. These negotiations were not successful and in May 2009, the CHRT ordered that a new nursing (NU) subgroup be created in the Health Services Group and that the MAs be placed in this group. It also ordered that damages be paid to two MAs for pain and suffering, but it did not order compensation for wage loss.

The complainants and the CHRC challenged the CHRT's decision on the issues of lost wages and pain and suffering. The application was allowed by the Federal Court, which set aside the CHRT's decision and referred the matters back to the CHRT for redetermination. An appeal by the Attorney General of Canada of the Federal Court decision was unsuccessful.

In October 2011 and on July 31, 2012 respectively, the CHRT endorsed the settlement entered into by the parties on the outstanding issues of damages for pain and suffering and for wage loss.

As of March 31, 2015, the terms of the settlement have been completed and the total expense for this settlement since 2011‑2012 was revised to $138 million ($139 million in 2013–2014).

On June 27, 2014, a group of individuals filed a motion before the CHRT challenging one aspect of the Settlement Agreement endorsed by the CHRT in the above matter. The potential financial impact and the outcome of this claim are not determinable.

c. Guarantees

As part of certain investment transactions, the CPP, through the CPPIB, agreed to guarantee, as at March 31, 2015, up to $1.9 billion (2014 — $1.5 billion) to other counterparties in the event certain investee entities default under the terms of loan and other related agreements.

d. Indemnifications

The CPPIB provides indemnifications to its officers, directors, certain others and, in certain circumstances, to various counterparties and other entities. The CPPIB may be required to compensate these indemnified parties for costs incurred as a result of various contingencies such as changes in laws, regulations and litigation claims. The contingent nature of these indemnification agreements prevents the CPPIB from making a reasonable estimate of the maximum potential payments the CPPIB could be required to make. To date, the CPPIB has not received any claims nor made any payments pursuant to such indemnifications.

17. Related party transactions

As stated in Notes to consolidated Financial Statements - Note 4, the CPP has $5,114 million (2014 – $4,368 million) of contributions receivable from the Canada Revenue Agency.

The CPP enters into transactions with the Government of Canada in the normal course of business, which are recorded at the exchange value. The costs are based on estimated allocations of costs and are charged to the CPP in accordance with various memoranda of understanding.

Table Summary

The table presents in millions of dollars, a two-year comparative of costs charged to the Canada Pension Plan. It consists of three columns: a listing of transactions; current year; previous year. A final line presents the total of this table.

(in millions of dollars)

Transactions for the year

  2015 2014
Employment and Social Development Canada    
Personnel related costs 238 211
Program policy and delivery, accomodation and corporate services 88 102
Canada Revenue Agency    
Collection of contributions and investigation services 173 169
Treasury Board Secretariat    
Health Insurance Plan 17 15
Public Works and Government Services Canada    
Cheque issue and computer services 9 9
Administrative Tribunals Support Service Canada    
Support services of the Social Security Tribunal 7  
Office of the Superintendent of Financial Institutions and Department of Finance    
Actuarial services 2 3
Total 534 509

18. Supplementary information

The administration of the CPP's assets and activities is shared between various Government of Canada (GoC) departments and the CPPIB. The CPPIB is responsible for investing the majority of the CPP's assets, while the GoC through various federal departments, manages the remainder of the assets, as well as the collection of the CPP contributions and the administration and payments of the CPP benefits. For accountability purposes, the following table presents summary information on the levels of assets and liabilities and sources of income and expenses managed by the GoC and the CPPIB respectively.

Table Summary

The table presents in millions of dollars, a two-year comparative summary of the levels of assets and liabilities and sources of income and expenses managed by the Government of Canada (GoC) and the Canada Pension Plan Investment Board (CPPIB). It consists of three columns: a detailled listing of components; current year; previous year, each divided into the same three columns - GoC, CPPIB, and Total. The first series of lines presents the activity by level of asset including liabilities and the total of assets. The second series of lines presents the income activities and the subtotal. The third series of line presents the expense activities and the total of expenses. A final line presents the increase in assets available.

(in millions of dollars)

  2015 2014
GoC CPPIB Total GoC CPPIB Total
Financial assets 5,537 321,448 326,985 4,659 251,949 256,608
Non‑financial assets   370 370   327 327
Liabilities 545 57,195 57,740 542 33,184 33,726
Assets available for benefit payments 4,992 264,623 269,615 4,117 219,092 223,209
Income            
Contributions 45,046   45,046 43,181   43,181
Investment income 3 41,441 41,444 3 30,710 30,713
Subtotal 45,049 41,441 86,490 43,184 30,710 73,894
Expenses            
Pensions and benefits 38,747   38,747 37,324   37,324
Operating expenses 534 803 1,337 509 576 1,085
Total 39,281 803 40,084 37,833 576 38,409
Net increase in assets available for benefit payments 5,768 40,638 46,406 5,351 30,134 35,485

Pursuant to section 108.1 of the Canada Pension Plan and the Agreement dated as of April 1, 2004, amounts not required to meet specified obligations of the CPP are transferred weekly to the CPPIB. The funds originate from employer and employee contributions to the CPP and interest income generated from the deposit with the Receiver General.

In September 2004, the CPPIB assumed responsibility for providing cash management services to the CPP, including periodic return, on at least a monthly basis, of funds required to meet CPP pension, benefits and operating expenses obligations.

During the year ended March 31, 2015, a total of $36 billion was transferred to the CPPIB and a total of $31 billion was returned to the CPP to meet its liquidity requirements.

Table Summary

The table presents in millions of dollars, a two-year comparative of information on accumulated transfers. It consists of three columns: a detailled listing of components; current year; previous year. The first series of lines presents the transfer activities to CPPIB and the total accumulated transfers to CPPIB at end of year. The second series of lines presents the transfer activities from CPPIB and the total accumulated transfers from CPPIB at end of year. A final line presents the net amount of accumulated transfers to CPPIB.

(in millions of dollars)

Activities during the year

  2015 2014
Canada Pension Plan Investment Board    
Accumulated transfers to CPPIB, beginning of year 341,662 307,330
Transfers of funds to CPPIB 36,023 34,332
Accumulated transfers to CPPIB, end of year 377,685 341,662
Accumulated transfers from CPPIB, beginning of year (negative 218,237) (negative 189,599)
Transfers of funds from CPPIB (negative 31,130) (negative 28,638)
Accumulated transfers from CPPIB, end of year (negative 249,367) (negative 218,237)
Net accumulated transfers to CPPIB 128,318 123,425

19. Comparative information

Certain comparative figures have been reclassified to conform to the current year's presentation.

Footnotes

Footnote 1

The total of net investments not actively traded as at March 31, 2015 is $166,210 million (2014 ‑ $144,146 million).

Return to footnote 1 referrer

Footnote 2

The fair value of the collateral held that may be sold or repledged as at March 31, 2015 is $12,009 million (2014 ‑ $4,371 million). The fair value of collateral sold or repledged as at March 31, 2015 is $10,368 million (2014 ‑ $3,216 million).

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Footnote 3

Includes interest income, dividends, private real estate operating income (net of interest expense), interest expense on the debt financing liabilities and other investment‑related income and expenses.

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Footnote 4

Includes realized gains and losses from investments, and unrealized gains and losses on investments held at the end of the year.

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Footnote 5

Includes foreign exchange gains of $7,800 million (2014 ‑ gains of $9,700 million).

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Footnote 6

Includes net unrealized gains of $9,197 million (2014 ‑ $10,203 million) which represents the change in fair value on those investments where the fair value is derived primarily from assumptions based on non‑observable market data and still held at the end of the year.

Return to footnote 6 referrer

Footnote 7

Includes absolute return strategies, consisting of investments in funds and internally managed portfolios.

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Footnote 8

The ultimate disability incidence rates assumption of the 25th CPP Actuarial Report has been adjusted based on the 2012 eligible population in order to compare with the assumption for this 26th CPP Actuarial Report on the same basis.

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Footnote 9

For the 26th CPP Actuarial Report, the real rate of return assumption is net of all investment expenses, including CPPIB operating expenses. On a comparable basis, the ultimate real rate of return assumption of the 25th CPP Actuarial Report would be restated as 3.9 percent to reflect this improvement in the methodology.

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Footnote 10

The minimum contribution rate in this table refers to the rate applicable for 2016 and thereafter.

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Footnote 11

Assets depleted by 2069.

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Footnote 12

Assets depleted by 2076.

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Footnote 13

The determination of the asset shortfall is based on the projections of the CPP's revenues and expenditures projected over the period of 150 years. There will be no asset shortfall, using the open group approach, if the projection period slightly shorter than 150 years is used.

Return to footnote 13 referrer

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