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Archived - Annual Report of the Canada Pension Plan 2005-06

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Canada Pension Plan

Consolidated Financial Statements
for the year ended March 31, 2006

Management's responsibility for financial statements

The consolidated financial statements of the Canada Pension Plan have been prepared in accordance with Canadian generally accepted accounting principles for the public sector, by the management of Service Canada with the concurrence of the management of Human Resources and Social Development Canada (the Department).

Management is responsible for the integrity and objectivity of the information in the financial statements, including the amounts which must, of necessity, be based on best estimates and judgement. The financial information presented throughout the Annual Report is consistent with the financial statements.

In support of its responsibilities, management has developed and maintains systems of internal control and supporting procedures. They are designed to provide reasonable assurance that assets are safeguarded, recorded and properly maintained and transactions are properly authorized and are in accordance with the Canada Pension Plan Act and Financial Administration Act and accompanying regulations. These controls include the establishment of an organizational structure that provides a well defined division of responsibilities and accountability, the selection and training of qualified staff, and the communication of policies and guidelines throughout the organization. Internal controls are reviewed and evaluated by both internal and external auditors in accordance with their respective audits. Management also reviews the recommendations of its internal and external auditors for improvements in internal controls.

The Auditor General of Canada, the external auditor of the Canada Pension Plan, has conducted an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and has reported to the Minister of Human Resources and Social Development .

AUDITOR'S REPORT

To the Minister of Human Resources and Social Development

I have audited the consolidated statement of net assets of the Canada Pension Plan as at March 31, 2006 and the consolidated statement of changes in net assets for the year then ended. These financial statements are the responsibility of the management of Human Resources and Social Development. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estfmates made by management, as weil as evaluating the overall financial statement presentation.

ln my opinion, these consolidated financial statements present fairly, in all material respects, the net assets of the Canada Pension Plan as at March 31, 2006 and the changes in ils net assets for the year then ended in accordance with Canadian generally accepted accounting principles.

Sheila Fraser, FCA

Auditor General of Canada

Ottawa, Canada

August 18, 2006

Canada Pension Plan

Consolidated Statement of Net Assets
As at March 31

	2006	2005
	(in millions of dollars)
Assets
Cash - Deposit with Receiver General for Canada	151	2,771
Receivables (Note 7)	3,439	2,363
Investments (Schedule, Note 3)	99,196	78,885
Other Assets	12	7
	102,798	84,026
Liabilities
Accounts payable	41	53
Pensions and benefits payable	62	52
Tax deductions due to Canada Revenue Agency	96	84
Investment liabilities (Schedule, Note 3)	775	279
Due to brokers (Note 3)	703	147
	1,677	615
Net assets	101,121	83,411

Contingencies (Note 13)

The accompanying notes and consolidated schedule are an integral part of these consolidated financial statements.

Approved by:

Canada Pension Plan

Consolidated Statement of Changes in Net Assets
for the year ended March 31

	2006	2005
	(in millions of dollars)
Net assets, beginning of year	83,411	72,511
Increase
Contributions	30,117	28,941
Investment income (Note 9)
Interest income	2,185	2,431
Realised gains	6,448	1,742
Unrealised gains	3,239	1,212
Dividend income	1,031	736
Other income	165	38
Investment management fees	(36)	(20)
	13,032	6,139
	43,149	35,080
Decrease
Pensions and benefits
Retirement	17,698	16,822
Survivors	3,466	3,333
Disability	3,111	2,926
Disabled contributor's child	269	258
Death	264	249
Orphan	218	216
Net overpayments	(49)	(41)
	24,977	23,763
Operating expenses (Note 10)	462	417
	25,439	24,180
Net increase in net assets	17,710	10,900
Net assets, end of year	101,121	83,411
The accompanying notes and consolidated schedule are an integral part of these consolidated financial statements

Canada Pension Plan

Consolidated Schedule of Investments
for the year ended March 31

	2006	2005
Equities	(in millions of dollars)
Canadian equities
Public markets	20,003	21,044
Private markets	628	512
	20,631	21,556
Non-Canadian equities
Public markets	27,743	12,646
Private markets	3,822	2,394
	31,565	15,040
Total equities (Cost 2006 — $43,994; 2005 — $32,141)	52,196	36,596
Real return assets
Public markets real estate	1,178	384
Private markets real estate	3,676	638
Inflation-linked bonds	3,837	-
Private markets infrastructure	350	230
Total real return assets (Cost 2006 — $8,635; 2005 — $1,222)	9,041	1,252
Nominal fixed income
Bonds (Note 3)	26,452	27,841
Money market securities	10,356	12,067
Total nominal fixed income (Cost 2006 — $34,634; 2005 — $36,954)	36,808	39,908
Total investments	98,045	77,756
Investment receivables
Accrued interest	764	803
Derivatives receivables	259	240
Dividends receivables	128	86
Total investment receivables (Cost 2006 — $641; 2005 — $340)	1,151	1,129
Total investments and investments receivable	99,196	78,885
Investments liabilities
Debt on real estate properties	(664)	(242)
Derivatives liabilities	(111)	(37)
Total investments liabilities (Cost 2006 — $666; 2005 — $234)	(775)	(279)
Total net investments	98,421	78,606

Canada Pension Plan

Notes to consolidated financial statements March 31, 2006

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 and 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 responsible for setting CPP contribution rates, pension and benefit levels and funding policy. The CPP Investment Board is responsible for managing amounts that are transferred to it under Section 108.1 of the Canada Pension Plan, and its interest in any debt securities transferred to it, in the best interests of the beneficiaries and contributors under that Act.

In accordance with the CPP Act, the financial activities of the Canada Pension Plan are recorded in the CPP Account (Note 8). The Plan's investments are held by the CPP Investment Fund (Note 4) and the CPP Investment Board (CPPIB). 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. The CPP Investment Board's assets are to be invested 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.

The CPP Investment Board and its subsidiaries are exempt from Part I under paragraphs 149(I)(d) and 149 (I) (d.2) of the Income Tax Act (Canada) on the basis that all of the shares of the CPP Investment Board 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 CPP Investment 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. It provides regular reports of its activities and the results achieved.

As stated in the CPP and CPPIB Acts, changes to these Acts 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

The CPP is financed by contributions and investment returns. Employers and employees pay contributions equally to CPP. Self-employed workers pay the full amount.

The 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 are expected to provide a capitalization level of 25% of the Plan's liability by the year 2025.

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 report concluded that 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 twenty first 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, bonds and other net assets held on behalf of the CPP by the Government of Canada (GoC) and investments held by the CPPIB. They represent funds accumulated for the payment of pensions, benefits and operating expenses. This amount does not cover the actuarial present value of accrued pensions and benefits.

As at March 31, 2006, the value of net assets of the Plan is $101.1 billion (2005 — $83.4 billion). This amount represents approximately 4.0 times the total of pensions and benefits in 2006 (2005 - 3.5 times). According to the twenty first 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 2006 is $844.58 (2005 — $828.75).

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 2006 is $1,031.05 (2005 — $1,010.23).

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 2006 is $506.75 (2005 — $497.25).

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 a child of contributor who is deceased 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 2006 is $200.47 (2005 — $195.96).

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 2006 is $2,500 (2005 — $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 2006 is 2.3% (2005 — 1.7%).

2. Significant accounting policies

a) Basis of presentation

These consolidated financial statements are presented on a consolidated basis. They include the consolidated financial position and the consolidated changes in net assets of the CPP Investment Board and CPP. These financial statements are prepared in accordance with Canadian generally accepted accounting principles for the public sector and conform to the disclosure and accounting requirements of the CPP Act.

These consolidated 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, 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 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.

Fair value is determined as follows:

1. Quoted market prices for publicly traded equities and unit values for public equity funds are used to represent fair value for these investments. Unit values reflect the quoted market prices of the underlying securities. In the case where quoted market prices are not reliable, such as those for securities that are not sufficiently liquid to be used as a basis for fair value, fair value is determined using accepted industry valuation methods.
2. In the case of private equity and infrastructure investments, where quoted market prices are not available, fair value is determined based on carrying values and other relevant information reported by external managers of the investments. 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 would suggest a significant change 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 and infrastructure investments unless there is evidence of a significant change in value.
3. The fair value of private markets real estate investments is determined using accepted industry valuation methods, such as discounted cash flows and comparable purchase and sales transactions. Debt on real estate investments is valued using discounted cash flows based on current market yields for instruments with similar characteristics. 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 real estate investments unless there is evidence of a significant change in value.
4. Fair value for over-the-counter derivatives such as swaps and forward contracts is determined based on the quoted market prices for underlying assets. Fair value for exchange-traded futures is based on quoted market prices.
5. Quoted market prices are used to represent the fair value for inflation-linked bonds.
6. Quoted market prices are used to represent the fair value for public markets real estate.
7. Fair value for non-marketable federal, provincial and territorial bonds is calculated using discounted cash flows based on current market yields of instruments with similar characteristics, adjusted for the non-marketability and rollover provisions of the bonds.
8. 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 Revenue Agency (CRA or the 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

Investment income is recorded on the accrual basis and includes realized gains and losses from investments, unrealized gains and losses on investments held at the end of the year, dividend income (recognized on ex-dividend date), interest income and net operating income from private markets 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 difference between the fair value and cost of the investments at the end of the year. 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) Tax deductions due to Canada Revenue Agency

Tax deductions due to CRA consists primarily of voluntary and non resident taxes withheld from pensions and benefit payments to CPP beneficiaries.

h) Net overpayments

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

i) Operating expenses

Operating expenses are recorded in the year to which they relate.

j) Use of estimates

The preparation of consolidated financial statements in accordance with Canadian generally accepted accounting principles for the public sector requires management to make estimates and assumptions that affect the reported values of assets and liabilities as at the date of the financial statements, and income and expenses during the reporting period. Significant estimates and judgments are required principally in determining the reported estimated contributions, allowance for doubtful accounts and fair values of investments since these determinations include estimates of expected future cash flows, rates of return and the impact of future events. Actual results could differ significantly from those estimates.

k) Cash flow statement

It is management's opinion that a cash flow statement for the CPP Account is not necessary since information concerning operating activities, and their effects on the balance of the account with the Receiver General for Canada, are readily apparent in the Consolidated Statement of Changes in Net Assets.

3. Investments, investment receivables and investment liabilities

The CPP Investment Board has established investment policies in accordance with the CPPIB regulations which set out the manner in which their assets shall be invested. In setting the policies, the CPP Investment Board takes into consideration certain assets which are held outside of the CPP Investment Board and which are in the process of being transferred to the CPP Investment Board as set out in the following paragraph.

The CPP Act and an administrative agreement between Her Majesty the Queen in right of Canada and the CPP Investment Board (the "Agreement") together provide for the transfer of certain specified CPP assets, currently administered by the federal government, to the CPP Investment Board. These assets, totalling $9.4 billion at fair market value as at March 31, 2006, consist of a portfolio of non-marketable federal, provincial and territorial bonds to be transferred to the CPP Investment Board in 36 instalments over a period that began May 1, 2004 and ends on April 1, 2007 (see Note 3d). The assets also included a cash operating reserve which was transferred to the CPP Investment Board in 12 equal installments over a period that began in September 2004 and ended in August 2005.

a) 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 to replicate the returns of Canadian equities, Non-Canadian equities and Non-Canadian inflation-linked bonds, and to manage asset weights and currency exposure. The CPP Investment Board has swaps outstanding to exchange money market interest payments for equity and inflation-linked bond payments. The CPP Investment Board also uses exchange-traded futures contracts and foreign exchange forwards to either increase or reduce exposure to underlying equity market or currency movements.

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 the Consolidated Statement of Net Assets.

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

	2006	2005
		(in millions of dollars)
	Notional Amount	Fair Value	Notional Amount	Fair Value
Equity swaps	8,874	169	5,918	206
Equity futures	1,047	(2)	6,061	(6)
Foreign exchange forwards	6,184	(14)	2,094	3
Inflation-linked bond swaps	126	(5)	-	-
Total	16,231	148	14,073	203

b) Private equity investments

Private equity investments are generally made through ownership in limited partnership arrangements with a typical term of 10 years. The private equity 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 the general partners to select and provide ongoing management support to the underlying companies. Management fees generally vary between 1% and 2% 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, 2006, management fees of $87 million (2005 — $70 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 quarterly and any resulting adjustments are reflected as unrealized gains or losses in investment income (see Note 9).

c) Real return assets

The CPP Investment Board obtains exposure to real estate through investments in publicly traded securities and privately held real estate. Private markets real estate investments are held by a wholly-owned subsidiary and are managed on behalf of the CPP Investment Board by external advisors and managers through co-ownership arrangements. As at March 31, 2006, the subsidiary's share of these investments includes assets of $3,676 million (March 31, 2005 — $638 million) and $664 million of liabilities related to mortgage debt (March 31, 2005 — $242 million), with a weighted average fixed interest rate of 6.94% and terms to maturity of one to 21 years.

Included in the private markets real estate are investments in joint ventures. The CPP Investment Board's proportionate share of the fair value of assets and liabilities in joint ventures at March 31, 2006 is $3,312 million (March 31, 2005 — $481 million) and $664 million (March 31, 2005 — $242 million), respectively. The proportionate share of the revenues and expenses in joint ventures for the year ended March 31, 2006 is included in investment income (see Note 9) and totals $273 million (March 31, 2005 — $63 million) and $183 million (March 31, 2005 — $44 million), respectively.

Infrastructure investments are generally made directly or through limited partnership arrangements. The investments represent ownerships in entities that invest in infrastructure assets. Management fees for limited partnership infrastructure investments are treated similarly to private equity management fees as discussed in Note 3b. During the year ended March 31, 2006, management fees included in the capital advanced to the limited partnerships were $5.4 million (March 31, 2005 — $1.8 million).

Inflation-linked bonds provide for an average effective yield of 4.8% and the terms to maturity are as follows:

Terms to Maturity
(in millions of dollars)	Within 1 year	1 to 5 years	6 to 10 years	Over 10 years	Total
Inflation-linked bonds	-	429	623	2,785	3,837

Bonds

The following table provides information on disposals, re-investments, unrealized gains (losses) of bonds:

Provincial, territorial and Canada bonds
(in millions of dollars)

	March, 31 2005 at cost	Disposals	Re-Investments	March, 31 2006 at cost	March, 31 2006 at fair value	March, 31 2005 at fair value
Newfoundland and Labrador	633	51	24	606	662	698
Prince Edward Island	140	8	10	142	154	155
Nova Scotia	1,079	92	92	1,079	1,168	1,196
New Brunswick	834	46	46	834	906	921
Quebec	96	6	7	97	106	108
Ontario	10,233	1,214	1,372	10,391	11,287	11,377
Manitoba	883	126	-	757	821	997
Saskatchewan	978	113	20	885	964	1,095
Alberta	2,883	283	141	2,741	2,983	3,253
British Columbia	3,778	185	75	3,668	4,043	4,234
Yukon Territory	4	-	-	4	4	4
	21,541	2,124	1,787	21,204	23,098	24,038
Canada	3,335	240	-	3,095	3,354	3,803
Provincial, territorial and Canada bonds	24,876	2,364	1,787	24,299	26,452	27,841
CPP Investment Fund's share	17,275	1,289	397	8,355	9,164	19,334
CPP Investment Board's share	*7,601	1,075	1,390	15,944	17,288	8,507
	24,876	2,364	1,787	24,299	26,452	27,841

* CPP transferred to CPP Investment Board bonds with a cost of $8,028 million during the year ending March 31, 2006 ($7,697 million — 2005)

The transfer to the CPP Investment Board of the CPP portfolio of non-marketable federal, provincial and territorial bonds began on May 1, 2004. Bonds of $9.2 billion based on fair market value at the time of transfer were transferred during the year ended March 31, 2006.

The non-marketable bonds issued by the provinces and territories and purchased by the CPP prior to 1998 contained a rollover provision which will permit these issuers, at their option, to roll over the bonds for a further 20-year term at a rate based on capital markets borrowing rates existing at the time of rollover. The non-marketable bonds are also redeemable at the option of the issuers for redemption amounts calculated in accordance with Section 110 of the Canada Pension Plan.

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. 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, 2006 (2005 —none).

Effective June 2005, the Agreement was amended to permit the CPP Investment Board to purchase replacement bonds directly from a province or territory upon the maturity of the non-marketable bonds issued by the provinces and territories prior to 1998, subject to the relevant province or territory having entered into an agreement with the CPP Investment Board. The maximum term of such securities is 30 years including rollover periods. The issuer may elect to have the CPP Investment Board purchase a replacement debt security or securities 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 greater than 30 years. Such replacement bonds contain rollover provisions which will permit the issuer, at its option, to roll over the debt security for successive terms of not less than five years and subject in all cases to the maximum 30 years outside maturity date. The replacement bonds are also redeemable at the option of the provinces or territories prior to maturity. Agreements between the CPP Investment Board and the relevant provinces or territories were effective commencing July 1, 2005.

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:

	2006		2005
	(in millions of dollars)
	Investments at fair value	Effective yield	Investments at fair value	Effective yield
Investments maturing
Within 1 year	2,837	4.71%	2,332	5.26 %
1 — 5 years	11,965	5.02%	10,467	5.01 %
Over 5 years	11,650	5.17%	15,042	5.54 %
Total — Investments	26,452		27,841
Average effective yield on investments		5.05%		5.32 %

d) Commissions

Commissions are paid to brokers on purchases and sales of publicly traded equities. Commissions on purchases are included as part of the cost of publicly traded equities. Commissions on sales are deducted from realized gains and added to losses as a cost of disposition. During the year ended March 31,2006, the CPP Investment Board paid total brokerage commissions of $28 million (2005 — $11 million).

e) 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, 2006, the CPP Investment Board's investments include securities loaned with an estimated fair value of $1,847 million (March 31, 2005 — $1,423 million). The fair value of collateral received in respect of the securities loaned is $1,942 million (March 31, 2005 — $1,496 million).

4. 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.

In accordance with the amended legislation and the related administrative agreement, the bonds held by the CPP Investment Fund are transferred to the CPP Investment Board. As at March 31, 2006, 23/36th of the Investment Fund has been transferred for approximately $18 billion (2005 — 11/36th for approximately $8.8 billion). Once all the bonds are transferred to the CPP Investment Board in April 2007, the CPP Investment fund will cease to exist.

For further bond details see Note 3d.

5. Investment risks

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

CURRENCY RISK. The CPP is exposed to currency risk through holdings of investments, investment receivables and investment liabilities in various currencies. Fluctuations in the relative value of the Canadian dollar against foreign currencies can result in a positive or negative effect on the fair value of investments. The net underlying currency exposures, after allocating foreign currency derivatives, are as follows:

(in millions of dollars)	2006		2005
Currency	Net Exposure	% of Total	Net Exposure	% of Total
Canadian Dollar	65,326	66	62,223	79
United States Dollar	17,353	18	7,804	10
Euro	5,900	6	3,464	4
Japanese Yen	3,370	4	1,256	2
British Pound Sterling	3,269	3	2,086	3
Swiss Franc	1,090	1	340	-
Australian Dollar	895	1	462	1
Other	1,218	1	971	1
	98,421	100	78,606	100

INTEREST RATE RISK. Interest rate risk refers to the effect on the fair value of investments and investment liabilities due to fluctuations in interest rates. The fair value of the bonds and debt on real estate investments is directly affected 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 the individual investment or factors affecting all securities traded in the market. The CPP Investment Board manages market risk by investing across a wide spectrum of asset classes and investment strategies to earn a diversified risk premium at the total fund, based on asset mix and risk limits established in the investment policies.

CREDIT RISK. The CPP 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 is exposed to liquidity risk through its responsibility to pay benefits on a timely basis.

6. Credit facilities

The CPP Investment Board maintains $1.5 billion (March 31, 2005 - $1.6 billion) of unsecured credit facilities to meet potential liquidity requirements. As at March 31, 2006, the total amount drawn on the credit facilities is $nil (March 31, 2005 — $nil).

7. Receivables

	2006 (in millions of dollars)	2005
Receivables
Contributions	3,085	2,278
Régime des rentes du Québec	49	30
Beneficiaries
Balance of pensions and benefits overpayments	86	82
Allowance for doubtful accounts	(50)	(46)
Due from brokers	255	19
Other	14	-
	3,439	2,363

The Department has procedures to detect overpayments. During the year, overpayments totalling $53 million (2005 — $46 million) were established and remissions of debts totalling $4 million (2005 — $5 million) were granted. A further $45 million was recovered (2005 — $41 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 operating expenses 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 have been transferred to the CPP Investment Board on a monthly basis as explained in Note 3. As at March 31, 2006, all of the funds have been transferred (approximately $6.5 billion). As at March 31, 2006, the Deposit with the Receiver General for Canada is $151 million (2005 - $2,771 million).

9. Investment income

Investment income is reported net of external investment management fees. Investment management fees in respect of public markets investments are expensed as incurred. These fees include an incentive portion that fluctuates with investment performance. Investment management fees for private market real estate investments are deducted by the asset manager before the CPP Investment Board receives its share of net operating income from the properties. For a discussion of private equity and infrastructure management fees, see Notes 3b and 3c.

Investment income by asset class, net of external investment management fees and after giving effect to derivative contracts and investment receivables and liabilities, is as follows:

	2006	2005
	(in millions of dollars)
Canadian equities1,7
Public markets	7,567	3,827
Private markets2	(25)	70
	7,542	3,897
Non-Canadian equities
Public markets	3,054	398
Private markets2	597	311
	3,651	709
Less : Public markets external investment management fees	(30)	(16)
	11,163	4,590
Real return assets
Public markets real estate3	298	53
Private markets real estate4	183	48
Less : Private markets real estate external investment management fees	(6)	(4)
	177	44
Inflation-linked bonds	57	-
Private markets infrastructure	(8)	(2)
	524	95
Nominal Fixed Income5
Bonds	1,283	1,315
Money market securities	41	10
	1,324	1,325
Interest on operating balance	21	129
Total investment income, net of external investment management fees6	13,032	6,139

¹ Includes unrealized gains of $3,715 million (2005 — unrealized gains of $2,141 million), realized gains of $6,449 million net of external investment management fees (2005 — realized gains of $1,729 million net of external investment management fees), dividends of $993 million (2005 — $717 million) and securities lending income of $6 million (2005 — $3 million).

² As described more fully in Note 2b, the carrying values of private equity investments are reviewed quarterly and any resulting adjustments are reflected as unrealized gains or losses in investment income.

³ Includes unrealized gains of $260 million (2005 — unrealized gains of $30 million), realized losses of $0.3 million (2005 — realized gains of $3.7 million) and dividends of $38 million (2005 — $19.6 million).

⁴ Includes private markets real estate operating income of $110 million (2005 — $37 million), which is net of debt interest of $42 million (2005 — $23 million), and unrealized gains of $73 million (2005 — unrealized gains of $11 million).

⁵ Includes interest income of $2,185 million (2005 — $2,431 million), realized losses of $31 million (2005 — realized losses of $7 million) and unrealized losses of $809 million (2005 — unrealized losses of $970 million).

⁶ Includes foreign exchange losses of $1,679 million (2005 — foreign exchange losses of $867 million).

⁷ In fiscal 2006, as a result of the removal of the foreign property restrictions under the Income Tax Act (Canada), the CPP Investment Board elected to change its method of accounting for the cost of public markets equity investments from a total portfolio average cost basis to an individual portfolio-based approach. The change resulted in a reclassification of $443 million from realized gains to unrealized gains in fiscal 2006.

10. Operating expenses

	2006	2005
	(in millions of dollars)
General operating expenses	222	205
Salaries and benefits	232	206
Professional and consulting fees	8	6
Total Operating expenses	462	417

11. Net Assets and Changes in Net Assets for accountability purposes

The administration of the Canada Pension Plan's assets and activities is split between various federal departments and the Canada Pension Plan Investment Board. The CPPIB is now responsible for managing the majority of the Plan's assets, while the Government of Canada, 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 each the GoC and the CPPIB.

	2006			2005
	GoC	CPPIB	Total	GoC	CPPIB	Total
	(in millions of dollars)
Assets	12,750	90,048	102,798	24,998	59,028	84,026
Liabilities	161	1,516	1,677	167	448	615
Net assets	12,589	88,532	101,121	24,831	58,580	83,411
Income :
Contributions	30,117	-	30,117	28,941	-	28,941
Investment income	839	12,193	13,032	1,125	5,014	6,139
	30,956	12,193	43,149	30,066	5,014	35,080
Expenses :
Pensions and benefits	24,977	-	24,977	23,763	-	23,763
Operating expenses	408	54	462	386	31	417
	25,385	54	25,439	24,149	31	24,180
Increase in net assets	5,571	12,139	17,710	5,917	4,983	10,900

Pursuant to Section 108.1 of the CPPIB Act and the Agreement dated as of April 1, 2004, amounts not required to meet specified obligations of the CPP are transferred to the CPPIB. The funds originate from employer and employee contributions to the CPP, proceeds of maturing and redeemed government bonds held by the GoC on behalf of the CPP and interest income generated from this portfolio.

CPP transfers include an interest in the bond portfolio administered by the GoC for the CPP and a portion of the amount on 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 expenses and benefits. In accordance with the Agreement dated April 1, 2004, the 12 monthly payments to the CPPIB of a portion of the amount on deposit with the Receiver General were used to reduce the payments to the CPP for expenses and benefits as noted previously.

During the year ended March 31, 2006, the total of $34.5 billion transferred to the CPPIB includes bonds of $9.2 billion based on fair market value at the time of transfer and cash of $25.3 billion. During the same year a total of $16.7 billion (net of the amount on deposit with Receiver General transferred to CPPIB of $2.7 billion) was returned to the CPP to meet its liquidity requirements.

Transaction total for the year
	2006	2005
	(in millions of dollars)
Canada Pension Plan Investment Board
Accumulated transfers to CPPIB, beginning of year	57,296	29,824
Transfers of bonds titles and accrued interest	9,201	8,804
Transfers of funds to CPPIB	25,298	18,668
Accumulated transfers to CPPIB, end of year	91,795	57,296
Accumulated transfers from CPPIB, beginning of year	(6,669)	-
Transfers of funds from CPPIB	(16,686)	(6,669)
Accumulated transfers from CPPIB, end of year	(23,355)	(6,669)
Accumulated net transfers to CPPIB	68,440	50,627

12. 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, 2006, the remaining commitments total $8.3 billion (March 31, 2005 — $5.4 billion).

As at March 31, 2006, the CPPIB has made lease commitments of $26.0 million (March 31, 2005 — $20 million) over the next eight years.

13. Contingencies

a) Appeals relating to the payment of pensions and benefits

At March 31, 2006, there were 8,226 (8,331 in 2005) appeals relating to the payment of CPP pensions and benefits. These contingencies are estimated at an amount of $36 million ($33 million in 2005). Any award made in favour of beneficiaries will be accounted for as an expense of the period in which the amount becomes determinable.

b) Class action

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. On May 16, 2006, the case was heard by the Supreme Court of Canada. The decision of the Supreme Court is expected later this year.

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 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 estimated at an amount between $71 and $132 million.

c) Guarantees and indemnifications

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

14. Related party transactions

In addition to the information already disclosed in the other notes to the consolidated financial statements, the CPP has $3,085 million (2005 - $2,278 million) of contributions receivable from the Canada Revenue Agency and accounts receivable of $14 million (2005 — accounts payable of $32 million) from 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. The costs are based on estimated allocations of costs and are charged to the CPP in accordance with the memoranda of understanding.

Transaction total for the year
	2006	2005
	(in millions of dollars)
Pension and benefit delivery, accommodation and corporate services
Social Development Canada	269	263
Human Resources and Skills Development Canada	21	10
	290	273
Collection of contributions
Canada Revenue Agency	101	96
Cheque issue and computer services
Public Works and Government Services Canada	16	16
Actuarial services
Office of the Superintendent of Financial Institutions	1	1
	408	386

15. Comparative figures

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

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Date Modified:

2011-11-18