Government Annuities Account

Public Accounts of Canada 2018 Volume I—Top of the page Navigation

• Previous page: Canada Pension Plan
• Section 6—Table of contents: Section 6—Interest-bearing debt as at March 31
• Next page: Royal Canadian Mounted Police (Dependants) Pension Fund

Management's responsibility for financial statements - Government Annuities Account

The financial statements of the Government Annuities Account are prepared in accordance with Canadian accounting standards for pension plans by the management of Employment and Social Development Canada. Management is responsible for the integrity and objectivity of the information in the financial statements, including the amounts which must, of necessity, be based on best estimates and judgment. The significant accounting policies are identified in Note 2 to the financial statements.

To fulfill its accounting and reporting responsibilities, management has developed and maintains books of account, financial and management controls, information systems and management practices. These systems are designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Government Annuities Improvement Act and the Government Annuities Act and regulations.

The Auditor General of Canada, the external auditor of the Government Annuities Account, conducts an independent audit of the financial statements in accordance with Canadian generally accepted auditing standards and provides a report to the Minister of Families, Children and Social Development.

Louise Levonian
Deputy Minister
Employment and Social Development Canada

Mark Perlman, CPA, CMA
Chief Financial Officer
Employment and Social Development Canada

Gatineau, Canada August 28, 2018

Report of the Actuary

The Office of the Chief Actuary, Office of the Superintendent of Financial Institutions Canada, has the mandate of performing the annual actuarial valuation of the Government Annuities Account (the "Account") as at 31 March 2018. The purpose of this valuation is to determine the actuarial liabilities and financial position of the Account as at 31 March 2018.

As at 31 March 2018, the actuarial liabilities presented in the Public Accounts of Canada and used to determine the amount charged to the Account and credited to the Consolidated Revenue Fund, are based on prescribed mortality and interest rates. In addition, the actuarial liabilities presented in the statement of financial position, statement of changes in net assets available for benefits, and statement of changes in pension obligations of the Account's financial statements, are based on alternative mortality and interest rates.

The valuation of the Account's actuarial liabilities and financial position is therefore based on:

• membership data as at 31 March 2018 provided by Employment and Social Development Canada (ESDC) and Service Canada;
• asset data provided by ESDC;
• For purposes of the Public Accounts of Canada,
  • mortality rates as prescribed by the Government Annuities Regulations, that is, the Annuity Table for 1983, for individual and group annuities, as modified by Projection Scale G published by the Society of Actuaries; and
  • a 7% annual interest rate as prescribed by the Government Annuities Regulations;
• For purposes of the Account's financial statements:
  • best-estimate experience-adjusted mortality rates; and
  • interest rate determined using the yield curve approach. The yield curve is determined by reference to market yields at the end of the reporting period on Government of Canada bonds and treasury bills.

The Account's assets are notional and in the form of a deposit with the Receiver General for Canada. Therefore, actuarial liabilities equal the present value of future payments discounted at the prescribed interest rate. Since administrative expenses are paid by the government out of general funds, no provision for expenses is made in the valuation. This valuation contains no added margins for adverse deviation.

In our opinion, considering that the valuation is prepared pursuant to the Government Annuities Act and the Government Annuities Improvement Act:

• the data on which our valuation is based are sufficient and reliable for the purpose of the valuation;
• the assumptions used for purposes of the Public Accounts of Canada comply with legislative requirements;
• the alternative mortality and interest rates assumptions used for purposes of the Account’s financial statements are reasonable and appropriate;
• the methodology employed is appropriate and consistent with sound actuarial principles; and
• the actuarial valuation is appropriate, it conforms to statutory requirements and the financial statements fairly present its results.

Our valuation has been prepared, and our opinions given, in accordance with accepted actuarial practice in Canada. As at 28 August 2018, there are no subsequent events of which we are aware that would have an impact on the valuation. The next valuation will be performed as at 31 March 2019.

Annie St-Jacques
Senior Actuary
Fellow of the Canadian Institute of Actuaries
Office of the Chief Actuary

Thierry Truong
Senior Actuarial Officer
Fellow of the Society of Actuaries
Office of the Chief Actuary

Alice Chiu
Actuarial Officer
Associate of the Society of Actuaries
Office of the Chief Actuary

Office of the Superintendent of Financial Institutions Canada
Ottawa, Canada
28 August 2018

Independent Auditor's Report - Government Annuities Account

To the Minister of Families, Children and Social Development

Report on the Financial Statements - To the Minister of Employment and Social Development

I have audited the accompanying financial statements of the Government Annuities Account, which comprise the statement of financial position as at 31 March 2018, and the statement of changes in net assets available for benefits and statement of changes in pension obligations for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

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

Auditor's Responsibility

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

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

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

Opinion

In my opinion, the financial statements present fairly, in all material respects, the financial position of the Government Annuities Account as at 31 March 2018, and the changes in its net assets available for benefits and changes in its pension obligations for the year then ended in accordance with Canadian accounting standards for pension plans.

Report on Other Legal and Regulatory Requirements - Government Annuities Account

In my opinion, the transactions of the Government Annuities Account that have come to my notice during my audit of the financial statements have, in all significant respects, been in accordance with the Government Annuities Improvement Act, and the Government Annuities Act and regulations.

Heather McManaman, CPA, CA
Principal
for the Auditor General of Canada

28 August 2018
Halifax, Canada

Approved by:

Louise Levonian
Deputy Minister
Employment and Social Development Canada

Mark Perlman, CPA, CMA
Chief Financial Officer
Employment and Social Development Canada

Notes to the financial statements for the year ended March 31, 2018

1. Authority, objective and responsibilities

The Government Annuities Account (the Account) was established in 1908 by the Government Annuities Act, as modified by the Government Annuities Improvement Act.

The purpose of the Government Annuities Act was to assist individuals and groups of Canadians to prepare financially for their retirement by purchasing Government Annuities. In 1975, the Government Annuities Improvement Act discontinued future sales of Government Annuity contracts. Annuities are deferred until their maturity date, at which time payments to annuitants begin.

The Account is administered by Employment and Social Development Canada (ESDC) and operates through the Consolidated Revenue Fund.

2. Significant accounting policies

a. Basis of presentation

The financial statements of the Account are prepared in accordance with Canadian accounting standards for pension plans (Section 4600) on a going concern basis. They are prepared in Canadian dollars, the Account’s functional currency. Section 4600 provides specific accounting guidance on investments and pension obligations. For accounting policies that do not relate to either investments or pension obligations, the Account complies with International Financial Reporting Standards (IFRS) in Part I of the CPA Canada Handbook. To the extent that IFRS in Part I are inconsistent with Section 4600, Section 4600 takes precedence.

The financial statements for the year ended March 31, 2018 were authorized for issue by the signatories on August 28, 2018.

b. Pension obligations

The method utilized to calculate the pension obligations comprises, in respect of deferred and matured annuities, the present value of such annuities determined on an actuarial basis using best estimate experience-adjusted mortality tables as at March 31, 2018. The discount rates used to measure the present value are based on the Government of Canada’s cost of borrowing derived from the yields on the actual zero-coupon yield curve for Government of Canada bonds which reflect the timing of the expected future cash flows.

c. Services received without charge

Administrative services received without charge from ESDC are recorded in the statement of changes in net assets available for benefits at their estimated cost. A corresponding amount is credited directly to the statement of changes in net assets available for benefits.

d. Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, pension obligations, and interest at the date of the financial statements. The pension obligations depend on factors that are determined on an actuarial basis using assumptions such as mortality and discount rates. Any changes in these assumptions will impact the carrying amount of the pension obligations. The carrying amount of the pension obligations as at the end of the reporting fiscal years is presented in Note 4. Actual results may differ significantly from the estimates and assumptions; therefore it is possible that the amounts for the pension obligations and related accounts could change materially in the near term. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

3. Changes in accounting policy and restatement

The Government of Canada adopted a new discount rate methodology to determine the present value of expected future payments to measure the unfunded pension benefits in the Public Accounts of Canada 2018. For greater comparability, this methodology was also adopted for these financial statements.

As per the Government Annuities Regulations, the Account must use the prescribed interest rate of 7%. As this prescribed rate does not reflect current discount rates, a new discount rate methodology considered to reflect current rates was chosen to provide a more accurate and timely assessment of the present value of expected future payments, and therefore to provide financial statements users with more reliable and relevant information. This policy change adopted by the Account is to measure the pension obligations at the amount determined by the plan’s sponsor (the Government of Canada).

The new discount rate methodology establishes the Government of Canada’s cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds, and affects the pension obligations related to the Account. As this new methodology produces a discount rate that is lower than the prescribed rate of 7%, the actuarial present value of expected future payments is estimated to be higher for prior and current years. The pension obligations are $134.6 million ($154.1 million in 2017) compared to $102.3 million ($114.3 million in 2017) under the previous discount rate methodology.

As a result, the tables below show the impact of the revised accounting policy on the prior year Statement of financial position and Statement of changes in pension obligations estimated using experience-adjusted mortality rates and the prescribed interest rate of 7% “As previously reported”. “As restated” is estimated using both experience-adjusted mortality rates and the new discount rate methodology. The Statement of changes in net assets available for benefits was not affected by this change in accounting policy.

Comparative information within Note 5 Deficit to be financed by the Government of Canada was also restated as a result in change in accounting policy. For further information, refer to Note 5.

4. Pension obligations

The Office of the Chief Actuary, Office of the Superintendent of Financial Institutions Canada, performs the annual actuarial valuation of the Government Annuities Account as at March 31.

As per the Government Annuities Improvement Act and Government Annuities Regulations, expected future payments are to be discounted using an annual interest rate of 7%. Future payments are to be estimated using the mortality rates from the 1983 mortality tables published by the Society of Actuaries, for individual and group annuities respectively, modified by Projection Scale G. Pension obligations are to be initially recorded through the Government Annuities Account established within the Public Accounts of Canada. Based on these Act and Regulations, the balance of the Government Annuities Account is $107.8 million ($120.5 million in 2017). Any adjustments required under the accounting policies are then recorded through an allowance for pension adjustment account.

Per the actuarial valuation for accounting purposes, the pension obligations amounted to $134.6 million as at March 31, 2018 ($154.1 million in 2017).

The average age of annuitants was estimated to be 84.3 years and the remaining life of the Account was estimated at 41 years as at March 31, 2018.

The next actuarial valuation will be performed as at March 31, 2019.

5. Deficit to be financed by the Government of Canada

The Government Annuities Act provided authority for the Government of Canada to sell annuities to the Canadian public. The Government of Canada entered into annuity contracts with a promise to pay the annuities and is required under the Act to keep an account, the Government Annuities Account, in the Consolidated Revenue Fund to record all transactions related to these annuities. These transactions include all moneys received and paid, the assets and obligations relating to the granting of an annuity, unclaimed and reclaimed annuities and the obligations representing the present value of prospective annuities contracted. It also includes the accrual of interest on the pension obligations.

Interest

Interest is recorded on an accrual basis and is calculated on the pension obligations using a discount rate based on the Government of Canada’s cost of borrowing by reference to the actual zero-coupon yield curve for Government of Canada bonds as at March 31, 2018. The discount rate was at 1.79% as at March 31, 2017 (1.47% as at March 31, 2016).

Premiums

Premiums are deposited in the Consolidated Revenue Fund.

Reclaimed annuities

Reclaimed annuities represent previously unclaimed amounts of annuitants that could not be located. If the annuitants are subsequently located, the actuarial present value of these annuities is paid.

Unclaimed annuities

Unclaimed annuities represent amounts of annuities that could not be paid because the annuitants could not be located.

Experience losses (gains)

At the end of any fiscal year, the amount of the pension obligations may be different than expected due to changes resulting from experience adjustment and the effects of changes in actuarial assumptions.

As there are no new contracts purchased under the Government Annuities Act, the main sources of experience gains or losses are mortality and retirements of existing members. Mortality gains and losses include changes in expected future payments due to death or survival of annuitants and the difference between actual and expected benefit payments during the year.

Management’s best estimate of the pension obligations is based on mortality rates used for the actuarial assessments of the Canada Pension Plan and discount rate using the zero-coupon yield curve for Government of Canada bonds as at March 31, 2018. The pension obligations as at March 31, 2018 was estimated based on mortality rates used in the Twenty-seventh Actuarial Report on the Canada Pension Plan. The discount rate was 2.1% as at March 31, 2018 (1.79% as at March 31, 2017).

6. Related party transactions

The Account is related to Government departments, agencies and Crown corporations through common control held by the Government of Canada. There were no further significant transactions with related parties other than those described in Note 2(c) Services received without charge. These administrative services include the following:

Public Accounts of Canada 2018 Volume I—Bottom of the page Navigation

• Previous page: Canada Pension Plan
• Section 6—Table of contents: Section 6—Interest-bearing debt as at March 31
• Next page: Royal Canadian Mounted Police (Dependants) Pension Fund