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Archived - Annual Report of Canada Pension Plan 2002-2003
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Notes to financial statements March 31, 2003
- Description of the Canada Pension Plan
- Significant accounting policies
- Change in Basis of Accounting
- Change in accounting policy
- Investments held by the CPP Investment Fund
- Investments held by the CPP Investment Board
- Receivables from Beneficiaries
- Canada Pension Plan Account
- Contributions
- Investment Income/(Loss)
- Administration costs
- Contingencies
- Legislative Amendment
- Comparative figures
1. Description of the Canada Pension Plan
a) Description of the CPP
The Canada Pension Plan (CPP) is a federal/provincial plan established by an Act of Parliament in 1965.
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 des rentes du Québec, a comparable program. The Plan'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 Minister of Human Resources Development Canada is responsible for the administration of the Canada Pension Plan (the CPP Act); 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 financial activities of the Canada Pension Plan are recorded in the CPP Account (Note 8). The CPP Investment Fund (Note 5) holds the bond portfolio of the Plan, and the Plan's investments in capital markets are managed by the CPP Investment Board (Note 6). The financial transactions affecting the Account and the Investment Fund are governed by the CPP Act and regulations. The Investment Board's transactions are governed by the Canada Pension Plan Investment Board Act and the accompanying regulations.
As stated in the CPP Act, changes to this Act require the approval of at least two-thirds of the provinces having, in the aggregate, not less than two-thirds of the population of all included provinces.
b) Financing
CPP is financed by contributions and investment returns.
Employers and employees pay contributions equally to CPP. Self-employed workers pay the full amount.
CPP was designed initially to be financed on a pay-as-you-go basis, which means that the Plan would operate on a current basis with pensions and benefits being paid out of current contributions. With changes made to the Act in 1997, CPP is now intended to be funded on a "steady-state" basis – that is, combined contributions increased to 9.9% of pensionable earnings in 2003 and are expected to level off.
From 1966 to 1986, the combined employer-employee contribution rate remained at 3.6% of pensionable earnings. In 1987, it was raised to 3.8% and increased yearly by 0.2% to reach 5.6% in 1996. In the years 1997 to 2002, the combined contribution rate was increased annually to reach 9.9% in 2003. The maximum combined contribution for 2003 was $3,604 (2002 - $3,346).
The CPP Act provides that an actuarial report shall be prepared every three years for purposes of the review of the financial state of the CPP by the Minister of Finance and his provincial counterparts. The Eighteenth Actuarial Report of the Chief Actuary of the Office of the Superintendent of Financial Institutions done as at December 31, 2000 was presented to the Minister of Finance in December 2001, then tabled in the House of Commons on December 10, 2001. Based on this report, federal and provincial ministers of Finance concluded at the end of the 2002 Triennial Review process that the CPP is financially sound and that the 9.9% combined employee-employer contribution rate reached in 2003 is expected to be sufficient to sustain the Plan in the face of an aging population. A number of assumptions such as long term rate of return on assets, inflation rate, mortality rates, increase in salary and benefit rates, among other things, were used in the 18th CPP actuarial report. These assumptions reflect best estimates of future economic and demographic events. The next actuarial report as at December 31, 2003 is expected to be completed by December 2004.
c) Net assets of the Plan
The net assets of the Plan are composed of the deposit with the Receiver General for Canada, short term investments, long term investments in bonds held by the CPP Investment Fund and investments managed by the CPP Investment Board. The net assets represent funds accumulated for the payment of pensions, benefits and administration costs. This amount does not cover the actuarial present value of accrued pensions and benefits. As at March 31, 2003, the net assets of the Plan are of $53.7 billion (2002 - $51.7 billion). This amount represents approximately 2.5 times the total of pensions and benefits for the year 2002-2003.
d) Pensions and benefits
Retirement pensions - A retirement pension is payable to each contributor at age 60 or older, according to the provisions of the Act. The monthly amount is equal to 25% of the contributor's average monthly pensionable earnings during the pensionable period. The amount may be reduced or increased depending upon whether the contributor applies for a retirement pension before or after age 65. This adjustment cannot exceed 30%. The maximum new monthly pension payable at age 65 in 2003 is $801.25 (2002 - $788.75).
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% of the earned retirement pension. The maximum new monthly disability benefit in 2003 is $971.26 (2002 - $956.05).
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% 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% of the retirement pension granted to the deceased contributor. The maximum new monthly benefit payable to a beneficiary in 2003 is $480.75 (2002 - $473.25).
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 who died 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 2003 is $186.71 (2002 - $183.77).
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 benefit amounts either to 10% of the maximum pensionable earnings in the year of death or six times the monthly retirement pension granted to the deceased contributor, whichever is less. The maximum death benefit in 2003 is $2,500 (2002 - $2,500).
Pensions and benefits indexationAs required by the Act, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2003 is 1.6% (2002 - 3.0%).
2. Significant accounting policies
a) Basis of presentation
These financial statements present the financial position, the changes in net assets and the cash flows of the Canada Pension Plan. They include the financial position of the CPP Investment Board and the results of its operations. These financial statements are prepared in accordance with Canadian generally accepted accounting principles and conform to the disclosure and accounting requirements of the CPP Act.
These financial statements do not provide information on the actuarial estimates required to meet future obligations of the CPP since the CPP Act does not require that the pensions and benefits be pre-funded.
The CPP, which is under joint control of 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) Valuation of investments
Bonds are shown at cost, which is equal to the face value of the bonds at the time of purchase. This accounting policy has been selected based on the non-marketable, non-transferable nature of the bonds and on consideration of the likelihood of redemption of the provincial and territorial bonds in the foreseeable future. The bonds issued by the provincial and territorial governments are redeemable prior to maturity at market value equivalent at the option of these governments. In the event that the federal Minister of Finance considers the redemption necessary to pay pensions, benefits and administration costs, the bonds would then be redeemed at face value.
CPP Investment Board's investments are stated at fair value. Fair value is the amount of the consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Quoted market prices for publicly traded equities and unit values for pooled funds are used to represent fair value for the investments. Unit values reflect the quoted market prices of the underlying securities.
In the case of private equity investments, where quoted market prices are not available, fair value is determined annually, commencing after the first year of ownership, based on carrying values and other relevant information reported by external managers of the limited partnerships in which the investments are made. These carrying values are determined by the external managers using accepted industry valuation methods.
The fair value of private market investments in income producing properties is determined annually, commencing after the first year of ownership, using accepted industry valuation methods, such as discounted cash flows and comparable purchase and sales transactions.
Fair value for the over-the-counter derivatives such as swaps is determined based on discounted cash flows and market prices for underlying assets with similar characteristics.
Money market securities are recorded at cost which, together with accrued interest income, approximates fair value.
c) Contributions
Contributions to the Plan include CPP contributions for pensionable income earned and collected by the Canada Customs and Revenue Agency (CCRA) for the year and receivable at year-end. Contributions collected by the CCRA are measured from amounts assessed by the CCRA and from estimates of amounts not assessed based on cash received and are subject to review and adjustments. Adjustments, if any, are recorded as contributions in the year they are known.
d) Investment income recognition
Interest income is recorded in the year in which it is earned.
CPP Investment Board's net income from operations represents the Investment Board's investment income, less investment and administrative expenses. Investment income is recorded on the accrual basis and includes realized gains and losses on disposal or transfer of investments, unrealized gains and losses on investments held at the end of the year, dividend income (recognized on ex-dividend date), interest income, distributions from mutual and pooled funds, and net operating income from private market real estate investments.
Realized gains and losses on investments sold during the year represent the difference between sale proceeds and cost, less related costs of disposition. Unrealized gains and losses represent the change year-over-year in the difference between fair value and cost of investments.
e) Translation of foreign currencies
Transactions in foreign currencies are recorded at the rates of exchange prevailing on the transaction date. Investments denominated in foreign currencies and held at the year end are translated at exchange rates in effect at the year end date. The resulting realized and unrealized gains and losses are included in investment income.
f) Pensions and benefits are recorded when payable.
g) Net overpayments are composed of overpayments of pensions and benefits that were established during the year less remissions of debts granted.
h)Administration costs are recorded in the year to which they relate.
i) Measurement uncertainty
The preparation of financial statements in accordance with the Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as at the date of the financial statements and revenue and expenses for the year. Actual results could differ from these estimates. The most significant estimates are related to contributions, administration costs, allowance for doubtful accounts and the fair value of the bonds held by the CPP Investment Fund.
3. Change in Basis of Accounting
During the year, the CPP adopted Canadian generally accepted accounting principles as the basis of presentation of its financial statements.
This change resulted in the addition of a statement of cash flow to the existing set of financial statements.
4. Change in accounting policy
During the year, the methodology used to measure contributions was changed to conform with the new assessment-based methodology developed by the Government of Canada for determining tax revenues, CPP contributions and Employment Insurance premiums. The new methodology is further described in Note 9.
Prior to 2002-2003, contributions were measured using an economic/statistical methodology developed by the Department of Finance including many factors such as the growth in the number of contributors and the average pensionable earnings.
This change in accounting policy has been applied retroactively and the 2001-2002 financial statements have been restated accordingly. The effect of the change for contributions on the current year and previous year's results is presented below:
| 2003 | 2002 | ||
|---|---|---|---|
| in millions of dollars | |||
| Statement of Changes in Net Assets | |||
| Contributions | 160 | (542) | |
| Net Assets | 160 | (542) | |
| Net Assets, beginning of year | (216) | 326 | |
| Net Assets, end of year | (56) | (216) | |
| Statement of Net Assets | |||
| Contribution receivables | (56) | (216) | |
5. Investments held by the CPP Investment Fund
The Canada Pension Plan Investment Fund was established in the accounts of Canada by the CPP Act to record the Plan's investments in bonds of the provinces, territories and Canada. The CPP Investment Fund's bond portfolio is administered by the federal Department of Finance.
Until the end of 1997, the investments in provincial, territorial and federal government bonds were made with the cash on hand in excess of the Plan's forecast three-month operating requirement. These bonds were not marketable and had a 20-year term (or less) as fixed by the Minister of Finance on the recommendation of the Chief Actuary of the Office of the Superintendent of Financial Institutions. The interest rate on the bonds was determined by the Minister of Finance based on the average yield to maturity of all outstanding Government of Canada obligations with terms of 20 years or more. When these bonds matured, funds not required for payment of pensions and benefits were re-invested in new bonds.
Beginning in 1998, a maturing provincial or territorial bond may be re-invested in a new bond only once for a term of 20 years, if both the issuer asks to do so and the operating balance is sufficient to pay current pensions and benefits. Excess funds not re-invested are transferred to the CPP Investment Board.
The re-invested bonds remain not marketable and bear interest at a rate fixed by the Minister of Finance. The interest rate is substantially the same rate that the province would pay if it were to borrow the same amount for the same term through the issuance of a bond on the public capital markets. Interest earned on the investments is paid semi-annually to the CPP Account.
During the year, all disposals of bonds were made, at maturity date, at face value. The bonds are redeemable in whole or in part before maturity. Since January 31, 2001, the provinces and territories are permitted to redeem their bonds held by the CPP Investment Fund prior to their maturity at a value equivalent to market value. The bonds can also be redeemed at the option of the federal Minister of Finance where he considers the redemption necessary to pay pensions, benefits and administration costs. The bonds are then redeemed at face value. No bonds were redeemed by the provinces and the territories prior to maturity during the year ended March 31, 2003.
At March 31, 2003, the balance in the Investment Fund was $26.6 billion at cost (2002 - $28.3 billion). The estimated fair value of the balance in the Investment Fund, including accrued interest, is $32.6 billion (2002 - $34.3 billion). This estimate is calculated by discounting the bonds' contractual cash flows at rates currently available at year-end for similar investments.
The following schedule provides information on the disposals, re-investments and balance of the Investment Fund.
| March 31, 2002 | Disposals | Re-Investments | March 31, 2003 | |
|---|---|---|---|---|
| Newfoundland | 633 | 52 | 52 | 633 |
| Prince Edward Island | 140 | 11 | 11 | 140 |
| Nova Scotia | 1,173 | 94 | - | 1,079 |
| New Brunswick | 834 | 73 | 73 | 834 |
| Quebec | 96 | 5 | 5 | 96 |
| Ontario | 11,944 | 1,236 | 38 | 10,746 |
| Manitoba | 1,260 | 132 | - | 1,128 |
| Saskatchewan | 1,219 | 110 | 42 | 1,151 |
| Alberta | 3,560 | 275 | 100 | 3,385 |
| British Columbia | 4,027 | 378 | 359 | 4,008 |
| Yukon Territory | 4 | - | - | 4 |
| 24,890 | 2,366 | 680 | 23,204 | |
| Canada | 3,386 | 17 | - | 3,369 |
| 28,276 | 2,383 | 680 | 26,573 |
The following schedule presents the bonds by maturity dates and the weighted-average annual rate of return on bonds currently held.
| 2003 | 2002 | ||||
|---|---|---|---|---|---|
| Investment at cost | Average yield | Investment at cost | Average yield | ||
| Investments maturing | |||||
| Within 1 year | 2,499 | 11.77% | 2,383 | 14.80% | |
| 1 - 5 years | 9,700 | 10.99% | 10,020 | 11.46% | |
| Over 5 years | 14,374 | 8.90% | 15,873 | 9.13% | |
| Total Invsetments | 26,573 | - | 28,276 | - | |
| Weighted-average yield on invstments | - | 9.93% | - | 10.43% | |
6. Investments held by the CPP Investment Board
The Canada Pension Plan Investment Board (CPPIB) was established by an Act of Parliament in 1997. The Canada Pension Plan Investment Board Act came into force on April 1, 1998. The purpose of the Board is to invest the funds transferred by the CPP in a diversified portfolio of investments. The Board 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 and provides regular reports of its activities and the results achieved.
The following schedule provides information on the Board's investments as at March 31.
| 2003 | 2002 | ||
|---|---|---|---|
| Canadian equities, at fair value | |||
| Public Markets | 11,051 | 9,825 | |
| Private Markets | 261 | 144 | |
| 11,312 | 9,969 | ||
| Non-Canadian equities, at fair value | |||
| Public Markets | 4,245 | 3,832 | |
| Private Markets | 1,265 | 316 | |
| 5,510 | 4,148 | ||
| Total Equities (Cost 2003 - $20,336; 2002 - $14,546) | 16,822 | 14,117 | |
| Real Return Assets | |||
| Public markets real estate | 219 | 145 | |
| Private markets real estate | 246 | - | |
| Total Real Return Assets (Cost 2003 - $645; 2002 - $145) | 465 | 145 | |
| Money Market Securities (Cost 2003 - $575; 2002 - $27) | 575 | 27 | |
| Investment Receivables (Cost 2003 - $41; 2002 - Nil) | 41 | - | |
| Investment Liabilities (Cost 2003 - $452; 2002 - Nil) | (450) | - | |
| Total Net Investments | 17,453 | 14,289 | |
The CPP Investment Board has established investment policies which set out the manner in which assets shall be invested. In determining the asset mix, the CPPIB takes into consideration certain assets of the CPP which are held outside the CPP Investment Board.
In accordance with its Investment Policy, at least 70% of the book value of the CPP Investment Board's portfolio is allocated to Canadian investments and the remainder to non-Canadian investments.
The CPPIB's investments are mainly allocated to equities. During the current year, the CPP Investment Board sold units held in index pooled and mutual funds and purchased the individual securities underlying the funds. The CPP Investment Board also obtains exposure to real estate through investments in publicly traded securities and privately held real estate. Private real estate investments are held by a subsidiary and are managed on behalf of the CPP Investment Board by external advisors and managers through co-ownership arrangements.
The CPPIB limits credit risk by dealing with counterparties that have a minimum credit rating of A or R-1 (short term) as determined by a recognized credit rating agency, where available, or as determined through an internal credit rating process. Credit exposure is limited to maximum amounts approved by the Board of Directors.
The CPP Investment Board is exposed to currency risk through holdings of non-Canadian investments and investment receivables. Investments are not hedged against changes in foreign exchange rates.
The CPP Investment Board is exempt from Part I tax under paragraph 149 (1) (d) of the Income Tax Act (Canada) on the basis that all of the shares of the CPP Investment Board are owned by Her Majesty in right of Canada. The CPP Investment Board's subsidiaries are exempt from Part I tax under paragraph 149(1)(d.2) of the Income Tax Act (Canada) on the basis that all of the shares of the subsidiaries are owned by a corporation whose shares are owned by Her Majesty in right of Canada.
The CPP Investment Board's audited financial statements for the year ended March 31, 2003 are publicly available and provide details concerning the Board's investment policy, its investments and portfolio return.
7. Receivables from Beneficiaries
| 2003 | 2002 | ||
|---|---|---|---|
| Balance of pensions and benefits overpayments | 77 | 73 | |
| Allowance for doubtful accounts | (28) | (30) | |
| 49 | 43 | ||
Human Resources Development Canada has procedures to detect overpayments. During the year, overpayments totalling $45 million (2002 - $38 million) were established and remissions of debts totalling $4 million (2002 - $10 million) were granted. A further $37 million was recovered (2002 - $32 million).
8. Canada Pension Plan Account
The CPP Account was established in the accounts of Canada by the CPP Act, to record the contributions, interest, pensions, benefits and administration costs of the Plan. It also records the amounts transferred to or received from the CPP Investment Fund and the CPP Investment Board.
The balance of the CPP Account includes the Deposit with Receiver General for Canada and short-term investments, if any. As at March 31, the Deposit with Receiver General for Canada amounts to $7,093 million (2002 - $6,770 million).
9. Contributions
As indicated in Note 4, contributions for the year are measured by Canada Customs and Revenue Agency (CCRA). Contributions are measured based on amounts assessed and reassessed by CCRA at the time of preparation of its financial statements and an estimate of contributions for the period that were not yet assessed or reassessed at that time based on cash amounts received.
Actual results may differ from these estimates. Actual contribution amounts for calendar years 2002 and 2003 will only be known once the CCRA has processed all employers' and self-employed workers' declarations of contributions for these years. An adjustment for the variation between actual and estimated contributions will be recorded in the fiscal year in which the adjustment is known.
10. Investment Income/(Loss)
| 2003 | 2002 | ||
|---|---|---|---|
| Interest on bonds held by the CPP Investment Fund | 2,741 | 3,071 | |
Interest on deposit with the Receiver General for Canada |
169 | 189 | |
| Investment Board net income / (loss) from operations: | |||
| Net unrealized gains / (losses) | (3,264) | 459 | |
| Fund distributions of capital gains and dividends | 361 | 213 | |
| Net realized losses | (1,533) | (378) | |
| Dividend Income | 288 | 12 | |
| Other investment income | 9 | 10 | |
| Investment and administrative expenses | (13) | (11) | |
| (4,152) | 305 | ||
| (1,242) | 3,565 | ||
11. Administration costs
| 2003 | 2002 | ||
|---|---|---|---|
| Pension and benefit delivery, accommodation and corporate services (Human Resources Development Canada) |
328 | 279 | |
| Collection of contributions (Canada Customs and Revenue Agency) | 80 | 78 | |
| Cheque issue and computer services (Public Works and Government Services Canada) | 13 | 13 | |
| Actuarial services (Office of the Superintendent of Financial Institutions) | 1 | 1 | |
| 422 | 371 | ||
Administration costs of the CPP represent the cost of services received from a number of federal government departments and an agency. Those costs are based on estimated allocations of costs and are charged to the CPP in accordance with the memoranda of understanding.
12. Contingencies
At March 31, 2003, there were 5,140 (8,185 in 2002) appeals relating to the payment of CPP pensions and benefits. Claims for these appeals could reach a maximum estimated amount of $22 million ($35 million in 2002). Any award made in favour of beneficiaries will be accounted for as an expenditure of the period in which the amount becomes payable.
13. Legislative Amendment
Legislation to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act was passed by Parliament on April 3, 2003, and is now subject to provincial approval. The provisions of the amending legislation contemplate a transfer of the CPP assets currently managed by the federal government to the CPP Investment Board. These assets consist of the bonds held by the CPP Investment Fund and the Deposit with Receiver General for Canada. If the legislative change is approved by the provinces, these assets will be transferred over a period of three years.
14. Comparative figures
Certain comparative figures have been reclassified to conform to the current year's presentation.