Canada Pension Plan

Public Accounts of Canada 2016 Volume I—Top of the page Navigation

Management's responsibility for financial statements

The consolidated financial statements of the Canada Pension Plan are prepared in accordance with the legislation Canada Pension Plan (Canada Pension Plan) by the management of Employment and Social Development Canada. Management is responsible for determining that the applicable financial reporting framework is acceptable and is responsible for the integrity and objectivity of the information in the consolidated 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 consolidated financial statements. The financial information presented throughout the Annual Report is consistent with the consolidated 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 Families, Children and Social Development.

Louise Levonian
Deputy Minister
Employment and Social Development Canada

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

Gatineau, Canada
September 1, 2016

Independent Auditor's Report

To the Minister of Families, Children 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 2016, 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. The consolidated financial statements have been prepared by management of the Canada Pension Plan using the basis of accounting described in Note 2 to the consolidated financial statements.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation of these consolidated financial statements in accordance with the basis of accounting described in Note 2 to the consolidated financial statements, 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 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 of the Canada Pension Plan for year ended 31 March 2016, are prepared, in all material respects, in accordance with the basis of accounting described in Note 2 to the consolidated financial statements.

Basis of accounting

Without modifying my opinion, I draw attention to Note 2 to the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared to comply with the financial reporting provisions of the Canada Pension Plan legislation. As a result, the consolidated financial statements may not be suitable for another purpose.

Robert Wilson, CPA, CA
Principal
for the Auditor General of Canada

1 September 2016
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 rows presents related components for financial assets and a subtotal. The second series of rows presents the related components for liabilities and a subtotal. The following rows presents the financial assets available for benefit payments and the non-financial assets. The last row of this table presents the total assets available for benefit payments.

Consolidated statement of financial position
as at March 31

(in millions of dollars)

  2016 2015
Financial assets
Cash (Note 3) 95 271
Receivables (Note 4) 5,100 5,325
Investments (Note 6) 345,319 318,481
Amounts receivable from pending trades (Note 6) 2,627 2,908
Subtotal 353,141 326,985
Liabilities
Payables and accrued liabilities (Note 8) 1,158 1,106
Investment liabilities (Note 6) 65,379 50,547
Amounts payable from pending trades (Note 6) 3,431 6,087
Subtotal 69,968 57,740
Financial assets available for benefit payments 283,173 269,245
Non-financial assets
Premises, equipment and others 402 370
Assets available for benefit payments 283,575 269,615

Approved by:

Louise Levonian
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 rows for Revenues presents Contributions, related components for Net investment income and subtotals. The last row of the series presents the total for revenues. The second series of rows for Expenses presents related components for Pensions and benefits, Net overpayments and subtotals. The last row of the series presents the total for expenses. The following rows present the net increase in assets available for benefit payments, assets available for benefit payments at beginning of year and assets available for benefit payments at end of year.

Consolidated statement of operations
for the year ended March 31

(in millions of dollars)

  Budget 2016
(Note 9)
Actual 2016 Actual 2015
Revenues
Contributions 46,656 46,119 45,046
Net investment income (Note 10)
Realized gains 11,521 8,797
Unrealized (losses) gains (negative 7,307) 27,208
Interest income 4,081 3,229
Dividend income 2,113 2,324
Other income 1,368 1,413
Transaction costs (negative 437) (negative 273)
Investment management fees (negative 1,330) (negative 1,254)
Subtotal 10,710 10,009 41,444
Total 57,366 56,128 86,490
Expenses
Pensions and benefits
Retirement 32,096 31,407 29,582
Survivor 4,449 4,369 4,334
Disability 4,195 3,958 3,939
Disabled contributor's child 328 316 296
Death 335 347 312
Orphan 230 212 213
Post-retirement 242 142
Net overpayments (Note 4) (negative 97) (negative 71)
Subtotal 41,633 40,754 38,747
Operating expenses (Note 12) 1,220 1,414 1,337
Total 42,853 42,168 40,084
Net increase in assets available for benefit payments 14,513 13,960 46,406
Assets available for benefit payments, beginning of year 269,615 269,615 223,209
Assets available for benefit payments, end of year 284,128 283,575 269,615

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 detailed listing of components; current year's budget—(Note 9); current year's actual; previous year's actual. The rows 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 row of the table presents the financial assets available for benefit payments at end of year.

Consolidated statement of changes in financial assets available for benefit payments
for the year ended March 31

(in millions of dollars)

  Budget 2016
(Note 9)
Actual 2016 Actual 2015
Net increase in assets available for benefit payments 14,513 13,960 46,406
Changes in non-financial assets (negative 32) (negative 43)
Increase in financial assets available for benefit payments 14,513 13,928 46,363
Financial assets available for benefit payments, beginning of year 269,245 269,245 222,882
Financial assets available for benefit payments, end of year 283,758 283,173 269,245

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 detailed listing of components; current year; previous year. The first series of rows presents cash flows by operating activities. The second series of rows presents cash flows used in capital activities. The third series of rows presents the cash flows from financing activities. The fourth series of lines presents cash flows used in investing activities. The following rows present the net (decrease) increase in cash and cash at beginning of year. The last row of the table presents the cash at end of year.

Consolidated statement of cash flow
for the year ended March 31

(in millions of dollars)

  2016 2015
Operating activities
Cash receipts
Contributions 46,287 44,301
Dividends on investments 1,829 1,960
Interest on investments 3,949 3,235
Other investment income 1,376 1,223
Cash payments
Pensions and benefits (negative 40,741) (negative 38,845)
Operating expenses (negative 1,299) (negative 1,121)
Investment management fees (negative 1,053) (negative 555)
Transaction costs (negative 446) (negative 241)
Payment of interest on debt (negative 39) (negative 130)
Cash flows from operating activities 9,863 9,827
Capital activities
Acquisition of premises and equipment (negative 50) (negative 43)
Cash flows used in capital activities (negative 50) (negative 43)
Financing activities
Issuance of debt 62,303 34,678
Repayment of debt (negative 55,691) (negative 34,614)
Cash flows from financing activities 6,612 64
Investing activities
Purchases
Equities (negative 214,319) (negative 161,599)
Real assets (negative 11,144) (negative 6,255)
Bonds (negative 375,214) (negative 274,391)
Money market securities and absolute return strategies (negative 4,910,894) (negative 3,331,176)
Other debt (negative 14,260) (negative 10,852)
Disposals
Equities 220,927 150,246
Real assets 2,753 3,539
Bonds 361,636 275,690
Money market securities and absolute return strategies 4,915,750 3,340,393
Other debt 8,164 4,661
Cash flows used in investing activities (negative 16,601) (negative 9,744)
Net (decrease) increase in cash (negative 176) 104
Cash, beginning of year 271 167
Cash, end of year 95 271

Notes to consolidated financial statements for the year ended March 31, 2016

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 Quebec Pension Plan (QPP), 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 Families, Children and Social Development is responsible for the administration of the CPP, under the 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 Canada Pension Plan.

In accordance with the Canada Pension Plan, the financial activities of the CPP are recorded in the CPP Account (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 Canada Pension Plan. The monthly amount is equal to 25 per cent 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 2016 is $1,092.50 (2015 – $1,065.00).

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. 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, however, those between the ages of 65 and 70 can choose not to contribute. The PRB becomes payable the year after contributions are made. PRB payments to eligible contributors came into effect on January 1, 2013. The maximum new monthly PRB at age 65 in 2016 is $27.31 (2015 – $26.63).

Disability benefits – A disability benefit is payable to a contributor who is disabled, according to the provisions of the Canada Pension Plan. The amount of the disability benefit to be paid includes a flat-rate portion and an amount equal to 75 per cent of the earned retirement pension. The maximum new monthly disability benefit in 2016 is $1,290.81 (2015 – $1,264.59).

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 Canada Pension Plan. For a beneficiary under the age of 65, the benefit consists of a flat-rate portion and an amount equal to 37.5 per cent 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 per cent of the retirement pension granted to the deceased contributor. The maximum new monthly benefit payable to a beneficiary in 2016 is $655.50 (2015 – $639.00).

Disabled contributor's child and orphan benefits – According to the provisions of the Canada Pension Plan, 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 2016 is $237.69 (2015 – $234.87).

Death benefits – According to the provisions of the Canada Pension Plan, 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 2016 is $2,500.00 (2015 – $2,500.00).

Pensions and benefits indexation – As required by the Canada Pension Plan, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2016 is 1.2 per cent (2015 – 1.8 per cent).

2. Significant accounting policies

(a) Basis of accounting

These financial statements have been prepared in accordance with the significant accounting policies described below in compliance with the Canada Pension Plan. The financial statements are presented on a consolidated basis to include the accounts of the CPP and the CPPIB and include a consolidated statement of financial position, a consolidated statement of operations, a consolidated statement of changes in financial assets available for benefit payments and a consolidated statement of cash flow.

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 Canada Pension Plan.

(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:

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 the asset and substantially all the risks and rewards of the asset or no longer retains control over 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 from 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, option 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. CPP, through 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.

(f) Investment income

Income from investments includes realized gains and losses from investments, changes in unrealized gains and losses on investments, dividend income and interest income. 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, which include hedge fund performance 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 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 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. 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 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 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 the Canada Pension Plan requires management to make certain estimates, judgments and assumptions that affect the reported values of assets and liabilities as at the date of the consolidated 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

The CPP is currently analyzing the impact of these new sections relevant to the consolidated financial statements:

Related party disclosures, effective date April 1, 2017

This new section PS 2200 defines a related party and establishes disclosures required for related party transactions. Disclosure of information about related party transactions and the relationship underlying them is required when they have occurred at a value different from that which would have been arrived at if the parties were unrelated, and they have, or could have, a material financial effect on the financial statements.

Assets, effective date April 1, 2017

This new section PS 3210 provides guidance for applying the definition of assets and establishes the general disclosure requirements.

Contingent assets, effective date April 1, 2017

This new section PS 3320 defines contingent assets as possible assets arising from existing conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one or more future events not wholly within the public sector entity's control occurs or fails to occur. Resolution of the uncertainty will confirm the existence or non-existence of an asset.

Contractual rights, effective date April 1, 2017

This new section PS 3380 defines and establishes disclosure standards on contractual rights which are rights to economic resources arising from contracts or agreements that will result in both an asset and revenue in the future.

Inter-entity transactions, effective date April 1, 2017

This new section PS 3420 establishes how to account for and report transactions between public sector entities that comprise a government reporting entity from both a provider and recipient perspective.

Restructuring transactions, effective date April 1, 2018

This new section PS 3430 introduces accounting guidance for both transferors and recipients of a restructuring transaction which is a transfer of an integrated set of assets and/or liabilities, together with related program or operating responsibilities without consideration based primarily on the fair value of the individual assets and liabilities transferred.

Financial instruments, effective date April 1, 2019
  1. Financial instruments

    The new section PS 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. 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.

  2. Foreign currency translation

    The revised section PS 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.

  3. Financial statement presentation

    The revised section PS 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.

Portfolio investments, effective date April 1, 2019

This section PS 3041 establishes standards on how to account for and report portfolio investments in government financial statements.

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, 2016, the deposit with the Receiver General for Canada in the CPP Account is $35 million (2015 – $212 million) and the CPPIB's cash is $60 million (2015 – $59 million) for a total of $95 million (2015 – $271 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. A final row present the total for this table.

(in millions of dollars)

  2016 2015
Contributions 4,945 5,114
Quebec Pension Plan 91 162
Beneficiaries
Balance of pensions and benefits overpayments 192 169
Allowance for doubtful accounts (negative 135) (negative 120)
Others 7
Total 5,100 5,325

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 $102 million (2015 – $75 million) were established and debts totalling $5 million (2015 – $4 million) were forgiven as per the remission provisions of the Canada Pension Plan. A further $74 million (2015 – $49 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 Risk Policy approved by the Board of Directors at least once every fiscal year. This policy 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.

Effective April 1, 2015, changes were made to the Risk/Return Accountability Framework. Upper and Lower Absolute Risk Limits and the Absolute Risk Operating Range are included within the Risk/Return Accountability Framework, and these govern the amount of total investment risk that CPPIB can take in the long term CPP Investment Portfolio. CPPIB monitors the absolute risk, the possible losses of value expressed in absolute dollar or percentage terms, in the CPP Investment Portfolio daily and reports 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 in Canadian dollars. It consists of three columns: Currency; current year; previous year. The current and previous years' columns are divided into two columns, respectively—Net exposure, and Percentage of total. A final row presents the total for this table.

    (in millions of dollars)

    Currency 2016 2015
    Net exposure % of total Net exposure % of total
    United States dollar 138,624 61 116,292 59
    Euro 29,697 13 30,955 16
    British pound sterling 16,245 7 12,595 6
    Japanese yen 14,692 6 11,879 6
    Australian dollar 8,026 4 6,499 3
    Chinese yuan 3,356 1 2,614 1
    Hong Kong dollar 2,592 1 2,425 1
    Chilean peso 2,042 1 1,855 1
    Swiss franc 2,020 1 2,045 1
    South Korean won 1,886 1 1,792 1
    Indian rupee 1,821 1 1,344 1
    Brazilian real 1,309 1 1,404 1
    Other 5,960 2 5,657 3
    Total 228,270 100 197,356 100

    As at March 31, 2016, with all other variables and underlying values held constant, a change in the value of the Canadian dollar against major foreign currencies by 5 per cent 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 investment liabilities in Canadian dollars. It consists of three columns: Currency; current year; previous year. The current and previous years' columns are divided into one column, respectively—Change in investment value. The Change in investment value columns under the current and previous years are divided into two columns, respectively—plus five per cent and minus five per cent. The final row presents the total for this table.

    (in millions of dollars)

    Currency 2016
    Change in investment value
    2015
    Change in investment value
    +5% -5% +5% -5%
    United States dollar (negative 6,931) 6,931 (negative 5,815) 5,815
    Euro (negative 1,485) 1,485 (negative 1,548) 1,548
    British pound sterling (negative 812) 812 (negative 630) 630
    Japanese yen (negative 735) 735 (negative 594) 594
    Australian dollar (negative 401) 401 (negative 325) 325
    Chinese yuan (negative 168) 168 (negative 131) 131
    Hong Kong dollar (negative 130) 130 (negative 121) 121
    Chilean peso (negative 102) 102 (negative 93) 93
    Swiss franc (negative 101) 101 (negative 102) 102
    South Korean won (negative 94) 94 (negative 89) 89
    Indian rupee (negative 91) 91 (negative 67) 67
    Brazilian real (negative 66) 66 (negative 70) 70
    Other (negative 298) 298 (negative 283) 283
    Total (negative 11,414) 11,414 (negative 9,868) 9,868

    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 Note 6f) and guarantees. The carrying amounts of the investments are presented in Note 6 and guarantees are presented in Note 16c).
  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 pensions and benefit payments, investment commitments and investment liabilities as they come due. The CPP manages this risk through cash flow planning for both short-term and long-term requirements. The cash flow is prepared for a two-year period and updated on a weekly basis to inform CPPIB of the fund required by CPP to meet its financial obligations. Also, the CPP, through the CPPIB, supplements its management of liquidity risk through its ability to raise funds through the issuance of commercial paper and term debt and transacting in securities sold under repurchase agreements (refer to Note 6 and Note 7).

    The CPPIB maintains $1.5 billion (2015 – $1.5 billion) of unsecured credit facilities to meet potential liquidity requirements. As at March 31, 2016, the total amount drawn on the credit facilities is $nil (2015 – $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 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 nature of the investment. The investments are as follows:

Table summary

The table presents, in millions of dollars, a two-year comparative of the investments and investment liabilities grouped by asset class. It consists of three columns: a detailled listing of components; current year; previous year. The first series of rows presents the equities. The second series of rows presents the fixed income. A following row presents the absolute return strategies. The third series of rows presents real assets. The fourth series of rows presents investment receivables. A following row presents the total investments. The fifth series of rows presents investment liabilities. The last rows of this table present the amounts receivable and payable from pending trades as well as the net investments.

(in millions of dollars)

  2016 2015
Equities
Canada 7,100 8,798
Foreign developed markets 113,480 116,040
Emerging markets 17,953 14,574
Total equities 138,533 139,412
Fixed income
Bonds 73,061 65,642
Other debt 26,144 21,024
Money market securities 16,732 17,740
Total fixed income 115,937 104,406
Absolute return strategiesLink to footnote 1 17,034 16,185
Real assets
Real estate 35,857 29,656
Infrastructure 20,373 15,013
Total real assets 56,230 44,669
Investment receivables
Securities purchased under reverse repurchase agreements 12,199 10,817
Accrued interest 1,161 928
Derivative receivables 4,060 1,882
Dividends receivable 165 182
Total investment receivables 17,585 13,809
Total investments 345,319 318,481
Investment liabilities
Securities sold under reverse repurchase agreements (negative 19,926) (negative 15,779)
Securities sold short (negative 27,371) (negative 22,385)
Debt financing liabilities (negative 15,568) (negative 9,955)
Derivative liabilities (negative 2,514) (negative 2,428)
Total investment liabilities (negative 65,379) (negative 50,547)
Amounts receivable from pending trades 2,627 2,908
Amounts payable from pending trades (negative 3,431) (negative 6,087)
Net investmentsLink to footnote 2 279,136 264,755

(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, including hedge funds. As at March 31, 2016, public equities include fund investments with a fair value of $7,807 million (2015 – $8,541 million). Fair value for fund investments is generally based on the net asset value as reported by the external administrators or managers of the funds.
  2. Private equity investments are generally made directly or through ownership in limited partnership funds. As at March 31, 2016, private equities included direct investments with a fair value of $25,161 million (2015 – $15,124 million). The fair value for investments held directly is primarily determined using earnings multiples of comparable publicly traded companies or discounted cash flows. Recent market transactions, where available, are also used. In the case of investments held through a limited partnership fund, fair value is generally determined based on relevant information reported by the general partner using similar accepted industry valuation methods.

(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. In lieu of exercising its statutory rollover right, agreements between CPPIB and the provinces permit each province to repay the bond and concurrently cause 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, at the prevailing yield existing at the time for that province. 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 the maturity date. The replacement bonds are also redeemable before maturity at the option of the issuers. Fair value for non-marketable Canadian provincial government bonds is calculated using discounted cash flows. In the case of marketable bonds, including bond short positions, fair value is based on quoted prices or calculated using discounted cash flows.

  2. Other debt consists of investments in direct private debt, asset-backed securities, intellectual property, royalties, distressed mortgage funds, private debt funds and hedge funds. Fair value for direct investments in private debt and asset-backed securities is based on quoted market prices or broker quotes or recent market transactions, if available. Where the market price is not available, fair value is calculated using discounted cash flows.
  3. Money market securities consist of cash, term deposits, treasury bills, commercial paper and floating rate notes. Fair value is determined using cost, which, together with accrued interest income, approximates fair value due to the short-term or floating rate nature of these securities.

(c) Absolute return strategies

Absolute return strategies consist of investments in hedge 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. Fair value for fund investments is generally based on the net asset value as reported by the external administrators or managers of the funds.

(d) Real assets

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

    Private real estate investments are managed on behalf of the CPPIB by investment managers primarily through co-ownership arrangements. As at March 31, 2016, real estate investments include assets of $35,857 million (2015 – $29,656 million)

  2. Infrastructure investments are generally made directly. As at March, 2016, infrastructure includes direct investments with a fair value of $20,335 million (2015 – $14,956 million) and $38 million in fund investments (2015 – $57 million).

Fair value for private real estate investments and infrastructure investments is primarily determined using discounted cash flows. Fair value for real estate funds and infrastructure funds are generally based on the net asset value as reported by the external managers of the funds.

(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, 2016, are as follows: within 1 year, $12,199 million (2015 – $10,817 million), and 1 year to over 10 years, $nil (2015 – $nil).

The terms to maturity of the undiscounted value of the securities sold under repurchase agreements, as at March 31, 2016, are as follows: within 1 year, $19,919 million (2015 – $15,780 million), and 1 year to over 10 years, $nil (2015 – $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. Fair value for exchange-traded derivatives, which includes futures, options and warrants, is based on quoted market prices. Fair value for over-the-counter derivatives, which includes swaps, options, forward contracts and warrants, is determined based on valuation techniques such as option pricing models, discounted cash flows and consensus pricing from independent brokers and/or third-party vendors.

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, 2016, securities sold short of $27,371 million (2015 – $22,385 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 consist of commercial paper payable and term debt. Commercial paper payable is recorded at the amount originally issued, which, together with accrued interest expense, approximate fair value due to the short-term nature of these liabilities. Fair value for term debt is based on quoted market prices.

The terms to maturity of the undiscounted value of the commercial paper payable as at March 31, 2016, are as follows: within 1 year, $13,425 million (2015 – $9,959 million), and 1 year to over 10 years, $nil (2015 – $nil). The terms to maturity of the undiscounted value of the term debt as at March 31, 2016, are as follows: within 1 year, $nil (2015 – $nil), 1 year to 5 years, $2,149 million (2015 – $nil), and 6 years to over 10 years, $nil (2015 – $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 detailed listing of components; current year; previous year. A final row presents the total for this table.

(in millions of dollars)

  2016 2015
Assets held as collateral on:
Reverse repurchase agreementsLink to footnote 3 10,289 10,812
Over-the-counter derivative transactionsLink to footnote 3 1,653 33
Other debtLink to footnote 3 887 1,195
Assets pledged as collateral on:
Repurchase agreements (negative 18,858) (negative 15,792)
Securities sold short (negative 23,508) (negative 14,938)
Over-the-counter derivative transactions (negative 50) (negative 266)
Debt on private real estate properties (negative 3,624) (negative 3,266)
Total (negative 33,211) (negative 22,222)

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 row presents the total for this table.

(in millions of dollars)

  2016 2015
Operating expenses 669 566
Pensions and benefits payable 306 372
Tax deductions on benefits due to the Canada Revenue Agency 183 168
Total 1,158 1,106

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 2015–2016 Report on Plans and Priorities, tabled in Parliament in March 2015 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), for the year ended March 31, is as follows:

Table summary

The table presents, in millions of dollars, the information on net investment income (loss) grouped by asset class for the current year. It consists of two columns: a detailed listing of components; 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 rows presents the equities. The second series of rows presents the fixed income. The third series of rows presents the real assets. The following row presents the interest on operating balance. A final row presents the total for this table.

(in millions of dollars)

  2016
Investment income (loss)Link to footnote 4 Net gain (loss) on investmentsLink to footnote 5Link to footnote 6Link to footnote 7 Total investment income (loss) Investment management feesLink to footnote 9 Transaction costs Net investment income (loss)
Equities
Canada (negative 10) (negative 1,133) (negative 1,143) (negative 7) (negative 36) (negative 1,186)
Foreign developed markets 1,886 908 2,794 (negative 445) (negative 203) 2,146
Emerging markets 230 (negative 168) 62 (negative 217) (negative 9) (negative 164)
Subtotal 2,106 (negative 393) 1,713 (negative 669) (negative 248) 796
Fixed income
Bonds and money market securitiesLink to footnote 8 2,145 776 2,921 (negative 419) (negative 75) 2,427
Other debt 1,168 85 1,253 (negative 110) (negative 20) 1,123
Subtotal 3,313 861 4,174 (negative 529) (negative 95) 3,550
Real assets
Real estate 1,365 2,758 4,123 (negative 131) (negative 48) 3,944
Infrastructure 776 988 1,764 (negative 1) (negative 46) 1,717
Subtotal 2,141 3,746 5,887 (negative 132) (negative 94) 5,661
Interest on operating balance 2 2 2
Total 7,562 4,214 11,776 (negative 1,330) (negative 437) 10,009

Table summary

The table presents, in millions of dollars, the information on net investment income (loss) grouped by asset class for the previous year. It consists of two columns: a detailed listing of components; 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 rows presents the equities. The second series of rows presents the fixed income. The third series of rows presents the real assets. The following row presents the interest on operating balance. A final row presents the total for this table.

(in millions of dollars)

  2015
Investment income Link to footnote 4 Net gain on investmentsLink to footnote 5Link to footnote 6Link to footnote 7 Total investment income Investment management feesLink to footnote 9 Transaction costs Net investment income
Equities
Canada 17 1,753 1,770 (negative 12) (negative 12) 1,746
Foreign developed markets 1,693 19,266 20,959 (negative 448) (negative 41) 20,470
Emerging markets 266 3,339 3,605 (negative 121) (negative 7) 3,477
Subtotal 1,976 24,358 26,334 (negative 581) (negative 60) 25,693
Fixed income
Bonds and money market securitiesLink to footnote 8 2,096 5,839 7,935 (negative 467) (negative 62) 7,406
Other debt 909 1,801 2,710 (negative 114) (negative 9) 2,587
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 6,966 36,005 42,971 (negative 1,254) (negative 273) 41,444

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, 2016, undetected overpayments and underpayments are estimated to be $0.2 million and $24.8 million respectively ($18.4 million and $30.4 million in 2014–2015). 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 Note 4, were recorded as accounts receivable for recovery and are not directly linked to the above noted estimated overpayments and underpayments of benefits for the same period as these are an evaluation of potential overpayments and underpayments based on the extrapolation described above.

12. Operating expenses

CPP's operating expenses are composed of costs incurred by various Government of Canada (GoC) departments (refer to 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 administrative or operating activities; current year; previous year. The current and previous years' columns are divided into three columns, respectively—GoC, CPPIB, and Total. A final row presents the total for this table.

(in millions of dollars)

  2016 2015
GoC CPPIB Total GoC CPPIB Total
Personnel related costs, including the Health Insurance Plan 246 594 840 255 558 813
Collection of contributions and investigation services 175 175 173 173
Operational business services 104 104 89 89
Program policy and delivery, accommodation and corporate services 92 92 88 88
Professional and consulting fees 51 51 61 61
Premises 39 39 28 28
Amortization of premises and equipment 30 30 25 25
Support services of the Social Security Tribunal 17 17 7 7
Cheque issue and computer services 6 6 9 9
Others 2 58 60 2 42 44
Total 538 876 1,414 534 803 1,337

13. Financial sustainability 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 per cent, 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 assuming all assumptions are realized.

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 actuarial assumptions relating to demographic, economic, and other factors. It consists of three columns: a listing of assumptions; as at December 31, 2012; as at December 31, 2009. The 2012 and 2009 columns are divided into two columns, respectively—Males, Females. To display other assumptions, the gender columns are combined into one for each three-year period, respectively. A row presents the factor used to determine the actuarial best estimates.

  As at December 31, 2012Link to footnote 10 As at December 31, 2009Link to footnote 10
Males Females Males Females
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 11 3.79 (2015+)Link to footnote 11
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 12

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 per cent of contributory earnings for the year 2016 and thereafter (9.86 per cent before 2023 and 9.85 per cent 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 per cent 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 per cent in 2050) will be required to make up the difference between contributions and expenditures. Under the current legislated contribution rate of 9.9 per cent and the average expected nominal return on assets of 5.26 per cent, total assets available for benefit payments are expected to grow to $300 billion by the end of 2020.

As at March 31, 2016, the value of CPP assets available for benefit payments is $283.6 billion (2015 – $269.6 billion). This amount represents approximately 6.3 times the 2017 planned expenditures of $45.2 billion (2015 – 6.3 times the 2016 planned expenditures of $42.9 billion).

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 per cent confidence intervals.

Table summary

The table presents information on the three most sensitive actuarial assumptions related to mortality. It consists of four columns: a listing of assumptions; Low-cost; Best-estimates; High-cost. The first row present the Canadian life expectancy at age 65 in 2050 with future improvements. The row is subdivided into two, displaying by Male and Female, their respective life expectancies. The following rows present the real wage increase and the 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 Males 23.0 Males 25.6
Females 22.9 Females 25.3 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 per cent, well above the legislated rate of 9.9 per cent. 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 to 9.46 per cent.

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 per cent is assumed for 2020 and thereafter, the minimum contribution rate would decrease to 9.26 per cent. However, if an ultimate real wage increase of 0.4 per cent is assumed for 2014 and thereafter, the minimum contribution rate would increase to 10.51 per cent.

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 per cent is assumed for 2019 and thereafter, the minimum contribution rate will decrease to 8.97 per cent. However, if the real rate of return is assumed to be 2.5 per cent for 2019 and thereafter, the minimum contribution rate increases to 10.73 per cent.

The table below summarizes 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 per cent contribution rate to the changes in mortality, real wage increase and real rate of return on investments assumptions:

Table summary

The table presents a summary of 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 assumptions; Scenario; Minimum contribution rate (%); Ratio of assets to expenditures under 9.9 per cent contribution rate, divided into three columns—2025, 2050, and 2087. The first row presents the best estimate according to the set factors. The following three series of rows present assumptions: Mortality, Real wage increases; and Real rate of return on investments. Each series of rows is subdivided into two to present results according to low cost and high cost.

Assumption Scenario Minimum contribution rateLink to footnote 13 (per cent) Ratio of assets to expenditures under 9.9 per cent contribution rate
2025 2050 2087
  Best estimate 9.84 5.35 6.02 5.70
Mortality 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 14
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 15

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 per cent, 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 excess (shortfall) and the assets to actuarial obligation ratio under open and closed group approaches at valuation. It consists of three columns: a detailed listing of components; As at 31 December, 2012; As at 31 December, 2009. The 2012 and 2009 columns are divided into two columns, respectively—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 16 (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 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, 2016, the contractual obligations totalled $34.7 billion (2015 – $30.7 billion).

As at March 31, 2016, 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 Canada Pension Plan's contractual obligations. It consists of three columns: a listing of timelines; current year; previous year. A final row presents the total for this table.

(in millions of dollars)

  2016 2015
Within one year 34 36
After one year but not more than five years 115 114
More than five years 67 40
Total 216 190

16. Contingent liabilities

(a) Appeals relating to the payment of pensions and benefits

At March 31, 2016, there were 7,619 appeals (2015 – 14,007) relating to the payment of CPP disability benefits. These contingencies are reasonably estimated, using historical information, at an amount of $60.5 million (2015 – $164.4 million), which was recorded as an accrued liability in the CPP 2015–2016 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. The total amount claimed in these actions and their outcomes are not determinable at this time. 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 of the loss can be made. No such allowance was recognized in the financial statements for the 2015–2016 and 2014–2015 fiscal years for these claims and legal proceedings.

(c) Guarantees

As part of certain investment transactions, the CPP, through the CPPIB, agreed to guarantee, as at March 31, 2016, up to $2.5 billion (2015 – $1.9 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 Note 4, the CPP has $4,945 million (2015 – $5,114 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.

Transactions for the year are comprised of the following:

Table summary

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

(in millions of dollars)

  2016 2015
Employment and Social Development Canada
Personnel related costs 229 238
Program policy and delivery, accomodation and corporate services 92 88
Canada Revenue Agency
Collection of contributions and investigation services 175 173
Treasury Board Secretariat
Health Insurance Plan 17 17
Administrative Tribunals Support Service Canada
Support services of the Social Security Tribunal 17 7
Public Services and Procurement Canada
Cheque issue and computer services 6 9
Office of the Superintendent of Financial Institutions and Department of Finance
Actuarial services 2 2
Total 538 534

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 on the levels of assets and liabilities as well as on the sources of income and expenses managed by the Government of Canada (GoC) and by the Canada Pension Plan Investment Board (CPPIB). It consists of three columns: a detailed listing of components; current year; previous year. The current and previous years' columns are divided into three columns, respectively—GoC, CPPIB, and Total. The first series of rows presents the assets available for benefit payments. The second series of rows presents the income. The third series of rows presents the expenses. A final row presents the net increase in assets available for benefit payments.

(in millions of dollars)

  2016 2015
GoC CPPIB Total GoC CPPIB Total
Financial assets 5,128 348,013 353,141 5,537 321,448 326,985
Non-financial assets 402 402 370 370
Liabilities 494 69,474 69,968 545 57,195 57,740
Assets available for benefit payments 4,634 278,941 283,575 4,992 264,623 269,615
Income
Contributions 46,119 46,119 45,046 45,046
Investment income 2 10,007 10,009 3 41,441 41,444
Subtotal 46,121 10,007 56,128 45,049 41,441 86,490
Expenses
Pensions and benefits 40,754 40,754 38,747 38,747
Operating expenses 538 876 1,414 534 803 1,337
Subtotal 41,292 876 42,168 39,281 803 40,084
Net increase in assets available for benefit payments 4,829 9,131 13,960 5,768 40,638 46,406

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 pensions, benefits and operating expenses obligations.

During the year ended March 31, 2016, a total of $38 billion (2015 – 36 billion) was transferred to the CPPIB and a total of $33 billion (2015 – $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 accumulated transfers. It consists of three columns: a detailled listing of components; current year; previous year. The first series of rows presents the transfer activities to CPPIB. The second series of rows presents the transfer activities from CPPIB. A final row presents the net amount of accumulated transfers to CPPIB.

Activities during the year
(in millions of dollars)

  2016 2015
Canada Pension Plan Investment Board
Accumulated transfers to CPPIB, beginning of year 377,685 341,662
Transfers of funds to CPPIB 38,406 36,023
Accumulated transfers to CPPIB, end of year 416,091 377,685
Accumulated transfers from CPPIB, beginning of year (negative 249,367) (negative 218,237)
Transfers of funds from CPPIB (negative 33,219) (negative 31,130)
Accumulated transfers from CPPIB, end of year (negative 282,586) (negative 249,367)
Net accumulated transfers to CPPIB 133,505 128,318

19. Comparative information

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

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