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Archived - Annual Report of Canada Pension Plan 2004-2005

Notes to financial statements March 31, 2005

1. Description of the Canada Pension Plan
2. Significant Accounting Policies
3. Change in Basis of Accounting
4. Implementation of the Legislative Amendment
5. Investments held by the CPP Investment Fund
6. Investments held by the CPP Investment Board
7. Receivables from Beneficiaries
8. Canada Pension Plan Account
9. Contributions
10. Investment Income
11. Administration costs
12. Contingencies
13. Related Party Transactions

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 Social Development 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 reponsible 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 plan assets are held by the CPP Investment Fund (Note 4) and 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 of 9.9% of pensionable earnings will provide a capitalization level of 25% of the Plan’s liability within about 15 years.

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 2003, the combined contribution rate was increased annually to reach 9.9%. The maximum combined contribution for 2005 was $3,722 (2004 – $3,663).

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 Twenty-first Actuarial Report of the Chief Actuary of the Office of the Superintendent of Financial Institutions was tabled on December 8, 2004. The CPP is financially sound and 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 21st CPP actuarial report. These assumptions reflect best estimates of future economic and demographic events. The next actuarial report as at December 31, 2006 is expected to be completed by December 2007.

c) Net assets of the Plan

The net assets of the Plan are composed of the deposit with the Receiver General for Canada and investments held by the CPP Investment Fund and the CPP Investment Board. They 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, 2005, the net assets of the Plan are of $83 billion (2004 – $72.5 billion). This amount represents approximately 3.5 times the total of pensions and benefits in 2005 (2004 – 3.2 times). According to the 21st Actuarial Report, this is expected to grow to 5.6 times by 2021.

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 2005 is $828.75 (2004 – $814.17).

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 2005 is $1,010.23 (2004 – $992.80).

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 2005 is $497.25 (2004 – $488.50).

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 2005 is $195.96 (2004 – $192.68).

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 2005 is $2,500 (2004 – $2,500).

Pensions and benefits indexation – As required by the Act, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2005 is 1.7% (2004 – 3.2%).

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 for public sector entities 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

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.

Bonds held by the CPP Investment Fund and the CPP Investment Board – The fair value is determined by calculating the present value of bonds’ projected cash flows. The discount rate used is based as appropriate on the provincial, territorial or government of Canada market rates. The fair value includes a further discount for the non-marketable, non-transferable, and rollover characteristics of the bonds.

Bonds issued by the provincial and territorial governments can be redeemed prior to maturity at the option of these governments or renewed for another 20 years. There are distinct calculation methods for bonds early redemption or renewal that do not take into consideration the non-marketable and non-transferable characteristics.

Any early redemption or renewal could therefore result in transactions at amounts that differ from the recorded fair value of the bonds.

Other investments held by the CPP Investment Board – The fair value is determined as follows: quoted market prices for publicly traded equities and unit values for pooled funds. 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 or funds in which the investments are made. These carrying values are determined by the external managers using accepted industry valuation methods. These methods include considerations such as earnings multiples of comparable publicly traded companies, discounted cash flows and third party transactions, or other events which suggest material impairment or improvement in the value of the investment. On a quarterly basis, when, there is evidence of a significant change in fair value, the valuation is adjusted, as appropriate. In the first year of ownership, cost is generally considered to be an appropriate estimate of fair value for private equity investments and infrastructure funds, unless there is an indication of permanent impairment of value.

The fair value of private market investments in real estate 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. In the first year of ownership, cost is generally considered to be an appropriate estimate for fair value of real estate unless there is an indication of permanent impairment of value. Debt on real estate investments is valued using discounted cash flows based on current market yields for instruments with similar characteristics.

Fair value for over-the-counter derivatives such as swaps and forward contracts is determined based on market prices for underlying assets. Fair value of exchange-traded futures is based on quoted market prices.

Money market securities are recorded at cost which, together with accrued interest income, approximates fair value.

c) Contributions

Contributions include CPP contributions earned for the year. The Canada Customs and Revenue Agency collects contributions and measures them using the assessment of tax returns. In determining the amount of contributions earned for the year, the Agency 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 and adjustments. Adjustments, if any, are recorded as contributions in the year they are known.

d) Investment income recognition

CPP Investment Fund income is recorded on the accrual basis and includes unrealized gains and losses on bonds held at the end of the year.

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 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 partnerships and trusts, 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 in the difference between the fair value and cost of investments. The current year unrealized gains and losses represent the year-over-year change in this difference.

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

Pensions and benefits are recorded when payable.

g) Net overpayments

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

h) Administration costs

Administration costs are recorded in the year to which they relate.

i) Use of estimates

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, allowance for doubtful accounts, the fair value of the bonds held by the CPP Investment Fund and the fair value of investments held by the CPP Investment Board.

3. Implementation of the Legislative Amendment

Legislation to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act came into force on April 1, 2004. The amended legislation and a related administrative agreement provide for the transfer of CPP assets, that were administered by the federal government, to the CPP Investment Board, beginning in 2004. These assets consist of the bonds held by the CPP Investment Fund and a portion of the Deposit with the Receiver General of Canada. The CPP Investment Board, and the federal government have signed an agreement governing the process for the transfer of the assets.

The bonds will be transferred to the CPP Investment Board over a three year period beginning in May 2004. Funds on Deposit with the Receiver General for Canada will be transferred over a period of twelve months beginning in September 2004.

The amended legislation and related administrative agreement also provide for the weekly transfer of any amounts held in the Canada Pension Plan Account to the CPP Investment Board that exceed the immediate obligations of the CPP.

4. Investments help by the Invenstment 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.

Since 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. No bonds were redeemed by the provinces and the territories prior to maturity during the year ended March 31, 2005 (2004 – none).

In accordance with the amended legislation and the related administrative agreement, the bonds held by the CPP Investment Fund will be transferred to the CPP Investment Board on a monthly basis as explained in note 3. As at March 31, 2005, 11/36th of the Investment Fund was transferred (approximately $8.8 billion).

The bonds held by the CPP Investment Fund are exposed to interest rate risk. Interest rate risk refers to the risk of an adverse change in the fair value of the bonds as a result of an unfavourable movement in market interest rates.

The following table provides information on disposals, re-investments, unrealized gains/ (losses) of bonds as well as bonds transferred to the CPP Investment Board and the remaining balance held by the CPP Investment Fund:

CPP Investment Fund (in millions of dollars)

	March 31, 2004 at cost	Disposals	Re- Investments	March 31, 2005 at cost	March 31, 2005 at fair value	March 31, 2005 at fair value
Newfoundland	633	47	47	633	698	714
Prince Edward Island	140	11	11	140	155	159
Nova Scotia	1,079	86	86	1,079	1,196	1,232
New Brunswick	834	67	67	834	921	940
Quebec	96	5	5	96	108	111
Ontario	10,233	1,133	1,133	10,233	11,377	11,687
Manitoba	1,002	119	-	883	997	1,167
Saskatchewan	1,082	104	-	978	1,095	1,241
Alberta	3,144	339	78	2,883	3,253	3,661
British Columbia	3,934	355	199	3,778	4,234	4,481
Yukon Territory	4	-	-	4	4	4
	22,181	2,266	1,626	21,541	24,038	25,397
Canada	3,352	17	-	3,335	3,803	4,070
	25,533	2,283	1,626	24,876	27,841	29,467
CPP Investment Board’s share	*0	(237)	(141)	(7,601)	(8,507)	-
CPP’s share	25,533	2,046	1,485	17,275	19,334	29,467

* CPP transferred to CPP Investment Board bonds with a cost of $7,697 during the year ending March 31, 2005.

In order to reflect the non-marketable and non-transferable characteristics of the bonds, an additional discount factor has been used in determining the fair value. The use of this additional discount factor reduced the reported fair value by $1.19 billion ($1.26 billion in 2004). The following schedule presents the fair value of the bonds by maturity dates and the average annual rate of return on bonds currently held based on current effective yields for similar type bonds.

(in millions of dollars)

		2005		2004
		Investment at fair value	Effective yield	Investment at fair value	Effective yield
Investments maturing
Within 1 year		1,620	5.26%	2,254	5.31%
1 - 5 years		7,268	5,01%	10,812	4.62%
Over 5 years		10,446	5.54%	16,401	5.35%
Total - Invsetments		19,334		29,467
Average effective yield on invstments		5.32%		5.08%

5. Accumulated Transfers to the CPP Investment Board

(in millions of dollars)

		2005	2004
Accumulated transfers, beginning of year		29,824	21,690
Transfers of bonds titles and accrued interest		*8,804	–
Transfers of funds to CPPIB		18,668	8,134
Transfers of funds from CPPIB		(6,669)	–
		50,627	29,824

* Based on fair market value at the time of transfer.

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.

(in millions of dollars)

	2005	2004
Canadian equities, at fair value
Public Markets	21,044	18,046
Private Markets	512	282
	21,556	18,328
Non-Canadian equities, at fair value
Public Markets	12,646	7,552
Private Markets	2,394	1,530
	15,040	9,082
Total Equities
(Cost 2005 – $32,141; 2004 – $25,034)	36,596	27,410
Real Return Assets
Public markets real estate	384	350
Private markets real estate	638	432
Private markets infrastructure	230	22
Total Real Return Assets (Cost 2005 – $1,222; 2004 – $829)	1,252	804
Nominal Fixed Income
Bonds transferred from the CPP Investment Fund	8,507	–
Money Market Securities (Cost 2005 – $20,614; 2004 – $4,784)	12,067	4,777
Total Nominal Fixed Income	20,574	4,777
Investment Receivables (Cost 2005 – $340; 2004 – $68)	339	68
Derivatives Receivable	240	35
Investment Liabilities (Cost 2005 – $234; 2004 – $170)	(242)	(171)
Derivatives Liabilities	(37)	(29)
Total Net Investments	58,722	32,894

The CPP Investment Board has established investment policies which set out the manner in which assets shall be invested. In determining its target asset weights, the CPP Investment Board takes into consideration certain assets of the CPP which are held outside the CPP Investment Board.

Private equity investments

Private equity investments are generally made by buying interests in limited partnerships with a typical term of 10 years. The private equity limited partnership’s underlying investments represent equity ownerships or investments with the risk and return characteristics of equity.

The CPP Investment Board advances capital to the limited partnerships, a portion of which, commonly referred to as management fees, is used by general partners to select and provide ongoing management support to the underlying companies. Management fees generally vary between 1 per cent to 2 per cent of the total amount committed to the limited partnerships, and are included as part of the CPP

Investment Board’s cost of the investments. During the year ended March 31, 2005, management fees totalling $70 million (2004 – $64 million) were included in the capital advanced to the limited partnerships and recorded as part of the cost of the investment. As discussed more fully in note 2b), the carrying values of these investments are reviewed at least annually and any resulting adjustments are reflected as unrealized gains or losses in investments income.

Real return assets

As at March 31, 2005, investments total $780,448,000 in real estate investments (March 31, 2004 –$611,531,000) and $230,125,000 in private market infrastructure (March 31, 2004 – $22,013,000).

The CPP Invesment Board 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. As at March 31, 2005, the subsidiary’s share of these investments includes assets of $638,200,000 (March 31, 2004 – $431,848,000) and $241,752,000 of liabilities related to mortgage debt (March 31, 2004 – $170,797,000), with a weighted average fixed interest rate of 7.64 per cent and terms to maturity of two to 16 years.

The CPP investment Board currently uses limited partnership arrangements to invest in infrastructure. The underlying investments of these limited partnerships represent equity ownerships in entities that invest in infrastructure assets which are expected to provide predictable cash flows. Management fees for infrastructure investments are treated similar to private equity management fees as discussed in the previous section. During the year ended March 31, 2005, management fees included in the capital advanced to the limited partnerships were $1,777,000 (2004 – $214,000).

Derivative Contracts

A derivative is a financial contract, the value of which is derived from the value of underlying assets, indexes, interest rates or currency exchange rates.

The CPP Investment Board uses derivatives primarily to replicate the return of Canadian and Non-Canadian equities and to manage asset weights and currency exposure. The CPP Investment Board has equity swaps outstanding to exchange money market interest payments for equity returns. The CPP

Investment Board also uses exchange-traded futures contracts and foreign exchange forwards to either buy or sell a specified index or currency at a specificied price and date in the future. Futures are used to achieve the desired market exposure to equity markets, and foreign exchange forwards to manage currency exposure.

All derivative contracts have a term to maturity of one year or less. Notional amounts of derivative contracts are used to compute the cash flows and for determining the fair value of the contracts. Notional amounts are not recorded as assets or liabilities on CPP’s Statement of net assets.

The notional amounts and fair value of derivative contracts held as at March 31 are as follows:

(in millions of dollars)

			2005		2004
		Notional Amount	Fair Value	Notional Amount	Fair Value
Equity swaps		5,918	206	4,034	9
Equity futures		6,061	(6)	448	(3)
Foreign exchange forwards		2,093	3	-	-
Total		14,072	203	4,482	6

Securities Lending

The CPP Investment Board participates in a securities lending program to enhance portfolio returns. Credit risk associated with the securities lending program is mitigated by requiring the borrower to provide daily collateral in the form of readily marketable investments of greater market value than the securities loaned. As at March 31, 2005, the CPP Investment Board’s investments include loaned securities with an estimated fair value of $1.4 billion (2004 – 721 million). The fair value of collateral received in respect of these loans is $1.5 billion (2004 – 758 million).

CPP Investment Board’s Investment Risks

Invesments, investments receivables and investments liabilities may be exposed to one or more of the following risks:

Currency Risk

The CPP Investment Board is exposed to currency risk through holdings of investments, investment receivables and investment liabilities in various currencies. The net underlying currency exposures, after allocating foreign currency derivatives, as at March 31, 2005 are as follows:.

(in millions of dollars)

			2005		2004
		Net Exposure	% of total	Net Exposure	% of total
Currency
Canadian Dollar		$ 42,339	72	$ 23,280	71
United States Dollar		7,804	13	5,599	17
Euro		3,464	6	1,557	5
British Pound Sterling		2,086	3	932	3
Japanese Yen		256	2	698	2
Australian Dollar		462	1	137	-
Swiss Franc		340	1	349	1
Other		971	2	342	1
		$ 58,722	100	$ 32,894	100

Interest Rate Risk

Interest Rate Risk refers to the effect on the fair value of investments and liabilities due to fluctuations of interest rates. The fair value of the CPP Investment Board’s bonds and mortgage debt is affected directly by changes in interest rates.

Market Risk

Market Risk is the risk that the value of an investment will be adversely affected by changes in market prices, whether those changes are caused by factors specific to individual investment or factors affecting all securities traded in the market. The CPP Investment Board mitigates market risk through diversification of its investment portfolio, based on asset and risk limits established in the investment policies. Credit Risk

Credit Risk

The CPP Investment Board 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 as specified in the investment policies.

Liquidity Risk

The CPP Investment Board is exposed to liquidity risk through its responsibility for providing cash management services to the CPP. The CPP Investment Board mitigates liquidity risk through its unsecured credit facilities.

Commitments

The CPP Investment Board has committed to enter into investment transactions, which will be funded over the next several years in accordance with the agreed terms and conditions. As at March 31, 2005, these remaining commitments total $5.4 billion (2004 – $3.9 billion). As at March 31, 2005, the organisation has made lease commitments of $20 million (March 31, 2004 – $21 million) over the next nine years.

Other Information

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 the Queen 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 the Queen in right of Canada.

The CPP Investment Board’s audited financial statements for the year ended March 31, 2005 are publicly available and provide details concerning the Board’s investment policy, its investments and portfolio returns.

return to CPP Investment Fund

7. Receivables from Beneficiaries

(in millions of dollars)

		2005	2004
Balance of pensions and benefits overpayments		82	81
Allowance for doubtful accounts		(46)	(45)
		36	36

Social Development Canada has procedures to detect overpayments. During the year, overpayments totalling $46 million (2004 – $45 million) were established and remissions of debts totalling $5 million (2004 – $4 million) were granted. A further $41 million was recovered (2004 – $37 million).

return to CPP Investment Fund

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.

In accordance with the amended legislation and the related agreement, funds on deposit with the Receiver General for Canada will be transferred to the CPP Investment Board on a monthly basis as explained in Note 3. As at March 31, 2005, 7/12th of the funds to be transferred (approximately $3.8 billion) have been transferred.

As at March 31, 2005, the Deposit with the Receiver General for Canada is $2,771 million (2004 – $7,483 million).

return to CPP Investment Fund

9. Contributions

Contributions for the year are measured by Canada Customs and Revenue Agency (CCRA) using the assessment of tax returns. In determining the amount of contributions earned for the year, the Agency considers cash received and contributions assessed and makes an estimate for contributions related to tax returns not yet assessed.

Actual results may differ from these estimates. Actual contribution amounts for calendar years 2004 and 2005 will only be known once CCRA has processed all employer’s and self-employed workers’ declarations of contributions for these years. An adjustment for the difference between actual and estimated contributions will be recorded in the fiscal year in which the adjustment is known.

return to CPP Investment Fund

10. Investment Income

(in millions of dollars)

	2005	2004
CPP Investment Fund income:
Interest on bonds	1,941	2,500
Investment income (loss) on bonds	(945)	357
	996	2,857
Interest on deposit with the Receiver General for Canada at a weighted-average annual rate of 2.11% (2004– 2.59%)	129	182
CPP Investment Board net income from operations:
Net unrealized gains	2,182	6,050
Net realized losses	1,762	658
Investment income on bonds	319	-
Dividend Income	737	504
Other investment income	35	21
Investment and administrative expenses	(52)	(24)
	*4,983	* 7,209
Investment Income	6,108	10,248

* Includes foreign exchange losses of $867.4 million (2004 – $392.6 million).

return to CPP Investment Fund

11. Administration costs

(in millions of dollars)

		2005	2004
Pension and benefit delivery, accommodation and corporate services
Social Development Canada		263	-
Human Resources and Skills Development Canada *		10	-
Human Resources Development Canada		-	309
Collection of contributions (Canada Customs and Revenue Agency)		96	85
Cheque issue and computer services (Public Works and Government Services Canada)		16	15
Actuarial services (Office of the Superintendent of Financial Institutions)		1	1
		386	410

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. For the year ended March 31, 2005, pension and benefit delivery, accommodation and corporate services, formerly provided by HRDC, were provided by SDC and HRSDC following the creation of the two new departments.

return to CPP Investment Fund

12. Contingencies

At March 31, 2005, there were 8,331 (4,403 in 2004) appeals relating to the payment of CPP pensions and benefits. These contingencies are estimated at an amount of $33 million ($22 million in 2004). Any award made in favour of beneficiaries will be accounted for as an expense of the period in which the amount becomes determinable.

A class action was filed against the CPP for discrimination against survivors whose same-sex common-law partners died on or after April 17, 1985 and before January 1, 1998. On November 26, 2004, the Court of Appeal for Ontario ruled that eligible class members, whose partners died between April 17, 1985 and January 1, 1998, will be entitled to receive pension payments. On January 25, 2005, both the government and counsel for the class members sought leave to appeal to the Supreme Court of Canada. Both requests for leave were granted on June 23, 2005. At the time of the preparation of the financial statements the Supreme Court of Canada had not yet set a hearing date.

On July 12, 2005, the Ontario Superior Court endorsed the agreement of the Government of Canada and the counsel for the class members to pay interim Survivor’s Pensions to class members who currently have an active and complete application with the department. Where the CPP eligibility criteria are met, the interim payment may have a maximum retroactive date of January 1st, 2003. In the event that the Supreme Court of Canada ultimately reverses the decisions of the lower courts, these interim payments would have to be reimbursed to the CPP. The ultimate contingency involved in this class action is still estimated at an amount between $71 and $132 million.

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13. Related Party Transactions

In addition to the transactions disclosed in the other notes to the financial statements, the CPP has $2,278 million (2004 – $1,946 million) of contributions receivable from the Canada Customs and Revenue Agency and accounts payable of $32 million (2004 – $55 million) to the Government of Canada for the administration of the Plan.

The CPP enters into transactions with the Government of Canada in the normal course of business at exchange value.

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Date Modified:

2011-11-15