Canada Pension Plan

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Management's responsibility for financial statements - Canada Pension Plan

The consolidated financial statements of the Canada Pension Plan are prepared in accordance with the Canada Pension Plan by the management of Employment and Social Development Canada. Management is responsible for determining that the applicable financial reporting framework is acceptable and is responsible for the integrity and objectivity of the information in the consolidated financial statements, including the amounts which must, of necessity, be based on best estimates and judgment. The significant accounting policies are identified in Note 2 to the consolidated financial statements. The financial information presented throughout the Annual Report is consistent with the consolidated financial statements.

To fulfill its accounting and reporting responsibilities, management has developed and maintains books of account, financial and management controls, information systems and management practices. These systems are designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Financial Administration Act and their accompanying regulations.

The Auditor General of Canada, the external auditor of the Canada Pension Plan, conducts an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and provides a report to the Minister of Employment, Workforce Development and Disability Inclusion.

Graham Flack
Deputy Minister
Employment and Social Development Canada

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

Gatineau, Canada
October 2, 2020

Independent Auditor's Report - Canada Pension Plan

To the Minister of Employment, Workforce Development and Disability Inclusion

Opinion

We have audited the consolidated financial statements of the Canada Pension Plan, which comprise the consolidated statement of financial position as at 31 March 2020, and the consolidated statement of operations, consolidated statement of changes in financial assets available for benefit payments and consolidated statement of cash flow for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements of the Canada Pension Plan for the year ended 31 March 2020 are prepared, in all material respects, in accordance with the basis of accounting described in Note 2 to the consolidated financial statements.

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Canada Pension Plan in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of Matter-Basis of Accounting

We draw attention to Note 2 to the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared to assist management of the Canada Pension Plan in complying with the financial reporting provisions of the Canada Pension Plan legislation. As a result, the consolidated financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation of the consolidated financial statements in accordance with the basis of accounting described in Note 2 to the consolidated financial statements, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Canada Pension Plan's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Canada Pension Plan or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Canada Pension Plan's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Canada Pension Plan's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Canada Pension Plan's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Canada Pension Plan to cease to continue as a going concern.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Canada Pension Plan to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Original signed by
Mathieu Le Sage, CPA, CGA
Principal
for the Auditor General of Canada

Ottawa, Canada
2 October 2020

Approved by:

Graham Flack
Deputy Minister
Employment and Social Development Canada

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

Notes to consolidated financial statements for the year ended March 31, 2020

1. Authority, objective and responsibilities

(a) Description of the Canada Pension Plan

The Canada Pension Plan (CPP) is a federal/provincial plan established by an Act of Parliament in 1965 and its operations began in 1966. It is a compulsory and contributory social insurance program operating in all parts of Canada except Quebec, which operates the Québec Pension Plan (QPP), a comparable program.

The CPP's objective is to provide a measure of protection to workers and their families against the loss of earnings due to retirement, disability or death. The CPP is financed by contributions and investment returns. Employers and employees pay contributions equally to the CPP. Self-employed workers pay the full amount.

The CPP is administered by the Government of Canada (GoC) and the provinces. The Minister of Employment, Workforce Development and Disability Inclusion is responsible for the administration of the CPP, under the Canada Pension Plan; the Minister of National Revenue is responsible for collecting contributions. The Minister of Finance and his provincial counterparts are responsible for setting CPP contribution rates, pension and benefit levels and funding policy.

CPP Investment Board (CPPIB or CPP Investments), a federal Crown corporation, was established in December 1997 pursuant to the Canada Pension Plan Investment Board Act (CPPIB Act) and its transactions are governed by the CPPIB Act and its accompanying regulations. CPPIB's assets are to be invested with a view to achieving a maximum rate of return without undue risk of loss, with regard to the factors that may affect the funding of the CPP and its ability to meet its financial obligations on any given business day.

Under section 108.1 and 108.3 of the Canada Pension Plan, CPPIB is responsible for managing the amounts that are being transferred from the CPP that are not immediately needed to pay CPP pensions, benefits and operating expenses. It acts in the best interests of the beneficiaries and contributors under the Canada Pension Plan.

CPPIB and its wholly-owned subsidiaries are exempt from Part I income tax under paragraph 149(1)(d) of the Income Tax Act (Canada) on the basis that all of the shares of CPPIB and its subsidiaries are owned by Her Majesty the Queen in right of Canada or by a corporation whose shares are owned by Her Majesty the Queen in right of Canada, respectively.

CPPIB is designed to operate at arm's length from the government. It is required to be accountable to the public, Parliament (through the federal Minister of Finance) and the provinces. It provides regular reports of its activities and the results achieved. The financial statements of CPPIB are audited annually by an external firm and are included in its annual report.

As stated in the Canada Pension Plan, changes to the CPPIB Act and major changes to the Canada Pension Plan require the agreement of at least two-thirds of the provinces, representing at least two-thirds of the population of all the provinces.

On December 15, 2016, the Canada Pension Plan, the CPPIB Act and the Income Tax Act (Canada) were amended to reflect the CPP enhancement (Additional CPP). The CPP enhancement is being implemented through a phased-in approach over a 7-year period which began on January 1, 2019. It will increase the amount of CPP contributions and the corresponding pensions and post-retirement benefits that will be paid on CPP contributions made after December 31, 2018.

The CPP now comprises two separate accounts, one for the Base CPP (CPP Account) and one for the Additional CPP (Additional CPP Account), collectively referred to as the CPP Accounts, where the financial activities are recorded in the Account to which they relate (Note 17). The financial transactions affecting the CPP Accounts are governed by the Canada Pension Plan and its regulations. Pursuant to subsections 112(1) and 112(2) of the Canada Pension Plan, one set of annual financial statements is presented on a consolidated basis to include the accounts of the CPP and CPPIB.

(b) Pensions and benefits

Retirement pensions

According to the provisions of the Canada Pension Plan, a retirement pension is payable to CPP contributors who have made at least one valid contribution to the Plan. The monthly pension consists of three components: (i) a base component equal to 25% of the contributor's average monthly pensionable earnings below the annual threshold during the pensionable period; (ii) a first additional component equal to 8.33% of the average of the contributor's 480 highest monthly pensionable earnings during the pensionable period, which began in January 2019; and (iii) a second additional component equal to 33.33% of the average of the contributor's 480 highest monthly additional pensionable earnings during the pensionable period, which begins in January 2024.

The normal age to begin collecting the retirement pension is 65, however, contributors can either elect to take an actuarially-reduced pension as early as age 60, or an actuarially-increased pension as late as age 70. The maximum monthly pension payable at age 65 in 2020 is $1,175.83 (2019 – $1,154.58).

Post-retirement benefits

According to the provisions of the Canada Pension Plan, a post-retirement benefit (PRB) is payable to each individual between the ages of 60 and 70 who has continued to work and has made contributions to the Plan while collecting their CPP or QPP retirement pension. Contributions are mandatory for working retirement pension recipients until the age of 65, at which point they may elect to cease contributing. Contributions are no longer allowed after reaching age 70. The PRB becomes payable the year after contributions were made. The maximum monthly PRB at age 65 in 2020 is $29.40 (2019 – $28.86).

Disability pensions

According to the provisions of the Canada Pension Plan, a disability pension is payable to a working-age contributor who meets both the medical and contributory requirements. The amount of the disability pension to be paid includes a flat rate portion and an amount equal to 75% of the earned retirement pension. The disability pension ends automatically at age 65, when recipients are automatically converted to receive the retirement pension. The maximum monthly disability pension in 2020 is $1,387.66 (2019 – $1,362.30).

Post-retirement disability benefits

According to the provisions of the Canada Pension Plan, a post-retirement disability benefit is payable to an individual under the age of 65 in receipt of a retirement pension who meets the same medical and contributory criteria as the disability pension. The post-retirement disability benefit is equal to the flat rate portion of the disability pension and is added to individual's retirement pension. Like the disability pension, the post-retirement disability benefit ends automatically at age 65, when the recipient becomes eligible for benefits under the Old Age Security program. The flat rate monthly post-retirement disability benefit in 2020 is $505.79 (2019 – $496.36).

Survivor's pensions

According to the provisions of the Canada Pension Plan, a survivor's pension is payable to the spouse or common-law partner of a deceased contributor who made sufficient contributions to the Plan. The pension amount depends on the age of the survivor and whether the survivor also receives other CPP benefits. Survivors aged 65 or older receive a pension equal to 60% of the deceased contributor's retirement pension. Survivors under the age of 65 receive a pension equal to 37.5% of the deceased contributor's retirement pension, plus a flat rate. The maximum monthly pension payable to a survivor under the age of 65 in 2020 is $638.28 (2019 – $626.63) and to a survivor 65 and over in 2020 is $705.50 (2019 – $692.75).

Disabled contributor's child and orphan benefits

According to the provisions of the Canada Pension Plan, each child of a contributor who is receiving a disability pension or a post-retirement disability benefit or a child of a deceased contributor is entitled to a benefit as long as the child is under the age of 18, or is between the ages of 18 and 25 and attending school full-time. The flat rate monthly benefit in 2020 is $255.03 (2019 – $250.27).

Death benefits

According to the provisions of the Canada Pension Plan, a death benefit is a one-time payment to, or on behalf of, the estate of a contributor who made sufficient contributions to the Plan. The death benefit is a flat-rate payment of $2,500.00 in 2020 (2019 – a flat-rate payment of $2,500.00).

Pensions and benefits indexation

As required by the Canada Pension Plan, pensions and benefits are indexed annually to the cost of living, as determined by the Consumer Price Index for Canada. The rate of indexation for 2020 is 1.9% (2019 – 2.3%).

2. Significant accounting policies

(a) Basis of accounting

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

The CPP, which is managed by both the GoC and the provinces, is not considered to be part of the reporting entity of the GoC. Accordingly, its financial activities are not consolidated with those of the GoC.

(b) International Financial Reporting Standards

CPPIB, which is a significant component of the CPP consolidated financial statements, prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). There is no impact on financial assets available for benefit payments and net increase in assets available for benefit payments as a result of CPPIB preparing its financial statements in accordance with IFRS. Certain incremental financial statement disclosures from CPPIB financial statements related to investments and investment liabilities are included as supplementary information in these consolidated financial statements.

(c) Financial instruments

Since CPPIB's IFRS adoption in 2015, the CPP, through CPPIB, classifies its financial assets and financial liabilities, in accordance with IFRS 9, Financial Instruments, as follows:

Financial assets are either classified at fair value through profit or loss (FVTPL) or at amortized cost. The classification depends on (a) the business model for managing the financial assets and (b) the cash flow characteristics of the financial assets. Financial assets are classified at FVTPL on the basis that they are part of a portfolio of investments which is managed to maximize returns without undue risk of loss and whose performance is evaluated on a fair value basis in accordance with investment strategies and risk management of CPPIB. Financial assets classified at FVTPL include investments in equities, fixed income, absolute return strategies, real assets, derivatives, securities purchased under reverse repurchase agreements and cash collateral pledged on securities borrowed. Financial assets carried at amortized cost include pending trades receivable and other assets.

Financial liabilities are either classified at FVTPL or at amortized cost. A financial liability is classified at FVTPL if it is classified as held for trading, it is a derivative, or it is designated as such on initial recognition. Financial liabilities at FVTPL are derivative liabilities and securities sold short. Financial liabilities designated at FVTPL include debt financing liabilities, securities sold under repurchase agreements, cash collateral received on securities lent, short-term secured debt and other investment liabilities. Financial liabilities at amortized cost include pending trades payable and accounts payable and accrued liabilities.

The CPP, through CPPIB, recognizes a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the financial instrument. Investments, investment receivables, investment liabilities, pending trades receivable and pending trades payable are recorded on a trade date basis.

A financial asset is derecognized when (a) the contractual rights to receive the cash flows from the financial asset expire, (b) the CPP, through CPPIB, has transferred the financial asset and substantially all the risks and rewards of the asset, or (c) in cases where CPP, through CPPIB, has neither retained nor transferred substantially all risks and rewards of the asset, it no longer retains control over the asset. CPP, through CPPIB, derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires.

Upon initial recognition, financial instruments are measured at fair value. They continue to be measured at fair value or amortized cost. Subsequent changes in the fair value are recorded as realized and unrealized gains and losses on investments and included in net investment income (loss), along with the interest and dividend incomes from such financial instruments.

(d) Valuation of investments and investment liabilities

Investments and investment liabilities are recorded on a trade date basis and are stated at fair value. Fair value is an estimate of the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act.

In an active market, fair value is best evidenced by an independent quoted market price. In the absence of an active market, fair value is determined by valuation techniques that make maximum use of inputs observed from markets. These valuation techniques include using recent arm's length market transactions, if available, or current fair value of another investment that is substantially the same, discounted cash flow analysis, option pricing models and other accepted industry valuation methods, that may include the use of estimates made by management, appraisers or both where significant judgment is required.

(e) Contributions

Contributions include CPP contributions earned for the year. The Canada Revenue Agency (CRA) collects contributions and measures them using the assessment of tax returns. In determining the amount of contributions earned for the year, the CRA considers cash received and contributions assessed, and makes an estimate for contributions related to tax returns not yet assessed. This estimate is subject to review. Adjustments, if any, are recorded as contributions in the year they are known.

(f) Investment income

Income from investments includes realized and unrealized gains and losses on investments, dividend income and interest income. Realized and unrealized gains and losses on investments include foreign currency gains or losses arising from investments denominated in foreign currencies. Dividend income is recognized on the ex-dividend date, which is when the right to receive the dividend has been established. Interest income is recognized as earned.

(g) Borrowing costs

Borrowing costs include interest and other costs that are incurred when borrowing funds or securities including expenses from debt financing liabilities, securities sold under repurchase agreements, prime brokerage and other securities borrowing and lending transactions where cash is received. Gains and losses associated with certain interest rate derivatives used as part of financing activities are also included in borrowing costs. Borrowing costs are recognized as incurred and included in net investment income (loss).

(h) Investment management fees

Investment management fees include payments to external managers who invest and manage capital committed by CPP, through CPPIB, whether directly or through funds. They also include performance fees paid when CPP, through CPPIB, earns a return above a pre-determined hurdle. Investment management fees are expensed as incurred and included in net investment income (loss).

(i) Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition or disposal of an investment. These costs comprise a variety of non-recurring expenses, including due diligence on potential investments, legal and tax advisory fees required to support the acquisition and disposition of private market assets, or, in the case of public markets, commissions paid when trading securities. Transaction costs are expensed as incurred and included in net investment income (loss).

(j) Foreign currency translation

Transactions, including purchases and sales of investments, income and expenses, are translated at the rate of exchange prevailing on the date of the transaction. Investments and monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates prevailing on the year-end date. Non-monetary items in a foreign currency are measured at historical cost using the exchange rates at the dates of the initial transactions.

Foreign currency transaction gains and losses on financial instruments classified at FVTPL are included in net investment income (loss).

(k) Pensions and benefits

Pensions and benefits expenses are recorded when incurred and are net of overpayments established during the year. Accruals are recorded at year-end for pensions and benefits owed to beneficiaries but not paid, based on management's best estimate.

(l) Tax deductions due to the Canada Revenue Agency

Tax deductions due to the CRA consist primarily of voluntary and non-resident taxes withheld from pensions and benefit payments to CPP beneficiaries (refer to Note 8).

(m) Net overpayments

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

(n) Operating expenses

Operating expenses are recorded as incurred.

(o) Other claims and legal actions

The CPP records an allowance for claims and legal proceedings when it is likely that there will be a future payment and a reasonable estimate can be made.

(p) Related party transactions

Inter-entity transactions are transactions between commonly controlled entities. Inter-entity transactions are recorded on a gross basis and are measured at the carrying amount, except for the following:

1. Inter-entity transactions are measured at the exchange amount when undertaken on similar terms and conditions to those adopted if the entities were dealing at arm's length, or when the costs of goods or services are provided on a recovery basis.
2. Goods or services received without charge between commonly controlled entities are not recorded.

Related parties include key management personnel having authority and responsibility for planning, directing and controlling the activities of the CPP, including their close family members. Related party transactions, other than inter-entity transactions, are recorded at the exchange amount.

(q) Measurement uncertainty

The preparation of the consolidated financial statements in accordance with the Canada Pension Plan requires management to make estimates, judgments and assumptions that affect the amounts recognized for assets and liabilities, principally the valuation of financial instruments, which are not actively traded. Uncertainty about these estimates, judgments and assumptions may result in outcomes that could require a material adjustment to the carrying amount of the affected assets or liabilities in the future.

Significant estimates, judgments and assumptions are also required for the revenues and expenses during the reporting period, principally in determining the estimated contributions, allowance for doubtful accounts, contingent liabilities, and actuarial obligation in respect of benefits. Although the actuarial obligation in respect of benefits is reviewed triennially as per Note 13, management makes estimates, judgment and assumptions based on the best information available at the time of the preparation of these financial statements. Measurement uncertainty exists in these consolidated financial statements. Actual results could significantly differ from those estimates.

COVID-19, the novel coronavirus, has created global economic disruption and uncertainty. Despite the uncertainty as to the outcome and ultimate effects of the pandemic, CPP, through CPPIB, has used extensive sources of available information in providing its best estimate of the impact that the COVID-19 pandemic has had on the valuations of its investments and investment liabilities as of the date of these financial statements. However, these estimates are sensitive to key assumptions and drivers that are subject to material changes. The key assumptions and drivers include, but not limited to, weakening business outlook and economic contraction, the oil price drop, discount rate assumptions, modelling assumptions and operating assumptions related to business performance of the specific investments. CPP, through CPPIB, is monitoring developments relating to the global spread of COVID-19 and continuing to assess the ongoing impact on its investments.

3. Cash

Cash consists of the total cash held by the CPP Accounts and CPPIB. The CPP Accounts were established in the accounts of Canada by the Canada Pension Plan to record the contributions, interest, pensions, benefits and operating expenses of the CPP. The CPP Accounts also record the amounts transferred to or received from CPPIB. As at March 31, 2020, the deposit with the Receiver General for Canada in the CPP Accounts is $279 million (2019 – $163 million) and CPPIB's cash is $194 million (2019 – $88 million) for a total of $473 million (2019 – $251 million).

4. Receivables

Receivables comprise the following:

Contributions receivable represent the estimated amount to be collected by the CRA and transferred to the CPP relating to contributions earned at year end and adjusted for tax returns not yet assessed. The amount includes an estimate that takes into consideration the number of contributors and the average contribution to be received, which is based on the average earning and the CPP contribution rate. On an annual basis, the model used to make the estimate is reviewed. The difference between the estimate and the actual amount has not been significant in the past.

The CPP has procedures to detect benefits overpayments. During the year, overpayments totalling $122 million (2019 – $91 million) were established and debts totalling $28 million (2019 – $37 million) were forgiven as per the remission provisions of the Canada Pension Plan. A further $89 million (2019 – $88 million) was recovered through collection of payments and withholdings from beneficiaries.

5. Investment activities risk management

The CPP, through the investment activities carried out by CPPIB, is exposed to a variety of financial risks. These risks include market risk, credit risk and liquidity and leverage risk. CPPIB employs the Integrated Risk Framework, which establishes accountability of the Board of Directors, the various committees, including the Risk Committee, and the investment departments to manage investment related risks. CPPIB manages and mitigates investment risks through the Risk Policy approved by the Board of Directors at least once every fiscal year. This policy contains risk limits and risk management provisions that govern investment decisions. It has been designed to achieve the mandate of CPPIB, which is to invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP and the ability of the CPP to meet its financial obligations on any given business day.

Upper and lower absolute risk limits and the absolute risk operating range are included within the Risk Policy, and these govern the amount of total investment risk that CPPIB can take in the CPP Investment Portfolios. CPPIB monitors potential investment losses in CPP Investment Portfolios daily and reports to the Board of Directors on at least a quarterly basis.

In the fourth quarter of the fiscal year, the COVID-19 pandemic resulted in reduced economic activity, exceptional volatility in financial markets and a widespread impact on people around the world. Despite the significant market movements, CPP, through CPPIB, remains within all risk limits established by the Board of Directors of CPPIB, including limits related to market, credit, liquidity and leverage risks.

As part of the ongoing monitoring, CPP, through CPPIB, perform scenario analysis to quantify the impact of potential stress events, including how severe market or geopolitical events could affect its portfolios, which are run on a quarterly basis. CPP, through CPPIB, has developed a series of scenarios in an attempt to assess the potential economic and financial impacts on the investment portfolios arising from COVID-19, such as the impacts of lower CPP contributions due to increasing unemployment in Canada on CPP's liquidity, as well as impacts on investment losses. Initial results indicate potential severe-case losses similar in magnitude to the historical market-stress scenarios. However, these estimates are highly sensitive to the assumptions made regarding the length and severity of the pandemic. The actual impacts could differ materially from this estimate. CPP, through CPPIB, will continue to refine the views and assumptions underlying the assessment as the situation unfolds.

1. Market risk

   Market risk (including equity risk, interest rate risk, spread risk and currency risk) is the risk that the fair value or future cash flows of an investment or investment liability will fluctuate because of changes in market prices and rates.

   Equity risk

   Equity risk is the risk that the fair value or future cash flows will fluctuate because of changes in equity prices. It is a significant source of risk of the CPP Investment Portfolios.

   The CPP, through CPPIB, invests in both publicly traded and private equities. With all other variables held constant, a 1% decrease/increase in the S&P 500 Index would result in a loss/profit of $944 million (2019 – $1,021 million) on public equity investments. This calculation assumes that equities other than the S&P 500 Index would move in accordance with their historical behaviour conditional on a 1% decrease/increase in the S&P 500 Index.

   Interest rate risk

   Interest rate risk is the risk that the fair value or future cash flows of an investment or investment-related liability will fluctuate because of changes in market interest rates.

   Applicable to debt instruments and interest-sensitive derivatives, with all other variables held constant, a 25 basis points increase/decrease in nominal risk-free rates would result in a decrease/increase of $2,462 million (2019 – $2,068 million) in the value of investments directly impacted by interest rate changes.

   Spread risk

   Spread risk is the difference in yield on certain securities compared to a comparable risk-free security (i.e. government issued) with the same maturity date. Spread risk is the risk that the fair value of these securities will fluctuate because of changes in spread.

   With all other variables held constant, a 1 basis point widening of spread rates would result in a decrease in net assets by $37 million (2019 – $31 million).

   Currency risk

   The CPP, through CPPIB, is exposed to currency risk through holdings of investments or investment liabilities in various currencies. Their fair value will fluctuate in the relative value of foreign currencies against the Canadian dollar.

   In Canadian dollars, the net currency exposures, after allocating foreign currency derivatives, as at March 31, are as follows:

   (in millions of dollars)

   Currency	2020		2019
   	Net exposure	% of total	Net exposure	% of total
   United States dollar	230,536	56	204,605	52
   Euro	25,921	6	33,539	9
   British pound sterling	15,438	4	18,219	5
   Chinese renminbi	14,954	4	12,577	3
   Australian dollar	12,669	3	13,587	3
   Hong Kong dollar	11,526	3	10,376	3
   Japanese yen	8,153	2	8,416	2
   Indian rupee	7,897	2	6,509	2
   Brazilian real	3,813	1	3,620	1
   Swiss franc	3,286	1	2,623	1
   Chilean peso	2,652	1	2,722	1
   Mexican peso	1,948	–	1,782	–
   Other	8,824	2	13,227	3
   Total foreign exposure	347,617	85	331,802	85
   Canadian dollar	62,027	15	60,192	15
   Total	409,644	100	391,994	100

   As at March 31, 2020, with all other variables and underlying values held constant, a 10% appreciation/depreciation of the Canadian dollar against all other currencies would result in an decrease/increase in net investments by $34,762 million (March 31, 2019 – $33,180 million).

2. Credit risk

   Credit risk is the risk of financial loss due to a counterparty failing to meet its contractual obligations, or a reduction in the value of the assets due to a decline in the credit quality of the underlying entity. The CPP's, through CPPIB, credit risk exposure arises primarily through its investment in debt securities, over-the-counter derivatives (as discussed in Note 6g) and guarantees. The carrying amounts of the investments are presented in Note 6 and guarantees are presented in Note 15c).

3. Liquidity and leverage risk

   Liquidity and leverage risk is the risk of being unable to generate sufficient cash or its equivalent in a timely and cost-effective manner to meet pensions and benefit payments, investment commitments and investment liabilities as they come due. Leverage risk increases when excessive on-and-off balance sheet leverage accelerates the worsening of market and liquidity risk factors during periods of stress. The CPP manages this risk through cash flow planning for both short-term and long-term requirements. The cash flow is prepared for a two-year period and updated on a weekly basis to inform CPPIB of the funds required by CPP to meet its financial obligations (refer to Note 17). In order to manage associated liquidity risk, certain assets are segregated and managed separately by CPPIB. Liquidity risk is also managed by investing these assets in liquid money market instruments with the primary objective of ensuring that the CPP has the necessary liquidity to meet benefit payment obligations on any business day. Also, the CPP, through CPPIB, supplements its management of liquidity risk through its ability to raise funds through the issuance of commercial paper and term debt and transacting in securities sold under repurchase agreements (refer to Note 6 and Note 7).

   CPPIB maintains $6,482 million (2019 – $6,176 million) of unsecured credit facilities to meet potential liquidity requirements. There were no credit facilities drawn as at March 31, 2020, and March 31, 2019. The ability to readily dispose of certain investments to meet liquidity needs is facilitated by maintaining a liquid portfolio of publicly traded equities, money market securities and marketable bonds.

6. Investments and investment liabilities

As stated in Note 1, the role of CPPIB is to invest the assets with a view to achieving a maximum rate of return without undue risk of loss, with regard to the factors that may affect the funding of the CPP and the ability of the CPP to meet its financial obligations on any given business day. To achieve its mandate, CPPIB has established investment policies in accordance with its regulations. These set out the manner in which their assets shall be invested and their financial risks managed and mitigated through the Integrated Risk Framework.

The total of net investments not actively traded as at March 31, 2020 is $302,348 million (2019 – $272,609 million).

The Consolidated Schedule of Investment Portfolio below provides information on CPPIB's investments and investment liabilities:

(a) Equities

Equities consist of public and private investments.

1. Public equities are made directly or through funds, including hedge funds. Fair value for publicly traded equities, including equity short positions, is based on quoted market prices. Fair value for fund investments is generally based on the net asset value reported by the external administrators or managers of the funds.
2. Private equities are generally made directly or through ownership in limited partnership funds. As at March 31, 2020, private equities included direct investments with a fair value of $55,893 million (2019 – $47,446 million). The fair value for investments held directly is primarily determined using accepted industry valuation methods such as earnings multiples of comparable publicly traded companies or discounted cash flows. Recent market transactions, where available, are also used. In the case of investments held through a limited partnership fund, fair value is generally based on relevant information reported by the general partner using similar accepted industry valuation methods.

(b) Fixed income

1. Bonds include non-marketable and marketable bonds. Fair value for non-marketable Canadian provincial government bonds is calculated using discounted cash flows based on current market yields of instruments with similar characteristics. In the case of marketable bonds, including bond short positions, fair value is based on quoted prices or calculated using discounted cash flows.
2. Other debt includes investments in direct private debt, asset-backed securities, distressed mortgage funds, private debt funds, hedge funds and investments in royalty-related income streams. Fair value for direct investments in private debt and asset-backed securities is based on quoted market prices or broker quotes or recent market transactions, if available. Where the market price is not available, fair value is calculated using discounted cash flows.
3. Money market securities consist of cash, term deposits, treasury bills, commercial paper and floating rate notes. Cash equivalents consist of short-term deposits with a maturity of 90 days or less. Fair value is determined using cost, which, together with accrued interest income, approximates fair value due to the short-term or floating rate nature of these securities.

(c) Absolute return strategies

Absolute return strategies include investments in hedge funds whose objective is to generate positive returns regardless of market conditions, that is, returns with a low correlation to broad market indices. The underlying securities of the funds could include, but are not limited to, equities, fixed income securities and derivatives. Fair value for fund investments is generally based on the net asset value as reported by the external administrators or managers of the funds.

(d) Real assets

1. Real estate investments are generally made through direct private investments, or through ownership of real estate funds. Private real estate investments are managed by investment partners primarily through co-ownership arrangements.

   Fair value for private real estate investments is determined using accepted industry valuation methods such as discounted cash flows, and net asset value provided by the investment partner. Fair value for real estate funds is generally based on the net asset value reported by the investment partner.

   As at March 31, 2020, real estate investments include assets of $43,718 million (2019 – $45,846 million).

2. Infrastructure, power and renewables and energy and resources are generally made directly, but can also occur through limited partnership funds.

   Fair value of these investments is primarily determined using discounted cash flows based on significant inputs including projected cash flows and discount rates. Fair value for investments held through limited partnership funds are generally based on the net asset value as reported by the external managers of the funds.

   As at March 31, 2020, infrastructure, energy and resources, and power and renewables include direct investments with a fair value of $50,641 million (2019 – $46,157 million) and $30 million in fund investments (2019 – $51 million).

(e) Securities purchased under reverse repurchase agreements and sold under repurchase agreements

Securities purchased under reverse repurchase agreements represent the purchase of securities with a simultaneous agreement to sell them back at a specified price at a specified future date and are accounted for as an investment receivable. The purchased securities under these agreements are not recognized on the consolidated statement of financial position. The fair value of securities to be resold under reverse repurchase agreements is monitored and additional collateral is obtained, when appropriate, to protect against credit exposure. In the event of counterparty default, CPP, through CPPIB, has the right to liquidate the collateral held.

Securities sold under repurchase agreements are accounted for as collateralized borrowing because they represent the sale of securities with a simultaneous agreement to buy them back at a specified price at a specified future date. The securities sold under these agreements continue to be recognized on the consolidated statement of financial position with any changes in fair value recorded as net gain (loss) on investments and included in net investment income (loss).

Interest earned on reverse repurchase agreements is included in interest income within investment income. Interest incurred on repurchase agreements is included in borrowing costs.

Reverse repurchase and repurchase agreements are carried at the amounts at which the securities were initially acquired or sold, which, together with accrued interest income or expense, approximates fair value due to the short-term nature of these agreements.

The fair value of the securities purchased under reverse repurchase agreements, as at March 31, 2020, are all within 1 year from the reporting date, $17,665 million (2019 – $8,205 million).

The fair value of the securities sold under repurchase agreements, as at March 31, 2020, are all within 1 year from the reporting date, $52,261 million (2019 – $38,548 million).

(f) Securities borrowed and lent

Securities borrowing and lending agreements are transactions in which CPP, through CPPIB, borrows securities from or lends securities to third parties. Borrowed securities are not recognized on the consolidated statement of financial position. The lent securities remain on the consolidated statement of financial position as CPP, through CPPIB, retains substantially all of the risks and rewards of ownership of the transferred securities.

Collateral received or pledged is generally in the form of cash, equities or fixed income securities. Cash collateral received is accounted for as an investment liability while equities and fixed income securities received as collateral are not recognized on the consolidated statement of financial position. Cash collateral pledged is accounted for as an investment receivable, while securities collateral pledged by CPP, through CPPIB, in securities borrowing agreements remain on the consolidated statement of financial position. Costs relating to securities borrowing and lending are included in borrowing costs.

The fair value of the cash collateral pledged on securities borrowed as at March 31, 2020, are all within 1 year from the reporting date, $993 million (2019 – $4,327 million).

The fair value of the cash collateral pledged on securities lent as at March 31, 2020, are all within 1 year from the reporting date, $158 million (2019 – $1,116 million).

(g) Derivative assets and liabilities

A derivative is a financial contract, the value of which is derived from the value of underlying assets, indices, interest rates, currency exchange rates or other market-based factors. Derivatives are transacted through regulated exchanges or negotiated in over-the-counter markets. CPPIB uses different types of derivative instruments, which include futures and forwards, swaps, options and warrants.

Fair value for exchange-traded derivatives, which includes futures, options and warrants, is based on quoted market prices. Fair value for over-the-counter derivatives, which includes forwards, swaps, options and warrants, is determined based on valuation techniques such as option pricing models, discounted cash flows and consensus pricing from independent brokers and/or third-party vendors.

(h) Securities sold short

Securities sold short represent securities that are sold, but not owned, by the CPP, through CPPIB. The CPP, through CPPIB, has an obligation to cover these short positions, which are accounted for as an investment liability based on the fair value of the securities sold. Collateral is pledged to the counterparty, as required (refer to Note 7). Interest and dividends accrued on securities sold short are included in net investment income (loss).

As at March 31, 2020, securities sold short of $20,776 million (2019 – $29,027 million) are considered repayable within one year based on the earliest period in which the counterparty could request payment under certain conditions.

(i) Debt financing liabilities

Debt financing liabilities consist of commercial paper payable and term debt. Commercial paper payable is recorded at the amount originally issued, which, together with accrued interest expense, approximates fair value due to the short-term nature of these liabilities. Fair value for term debt is based on quoted market prices. Interest expense and associated costs on debt financing liabilities are included in borrowing costs.

The fair value of the commercial paper payable as at March 31, 2020, are all within 1 year from the reporting date, $5,775 million (2019 – $4,378 million).

The fair value of the term debt as at March 31, 2020, are as follows: within 1 year, $5,626 million (2019 – $4,590 million), 1 year to 5 years, $13,969 million (2019 – $12,673 million), and 6 years to over 10 years, $11,577 million (2019 – $8,836 million).

The following table provides a reconciliation of debt financing liabilities arising from financing activities in the Consolidated Statement of Cash Flow:

(j) Short-term secured debt

Short-term secured debt consists of cash advances from prime brokers that are fully collateralized by securities. Short-term secured debt is carried at the amounts at which the funding was initially transferred, which together with accrued interest, approximates fair value due to the short-term nature of the debt and variable interest rate. Interest expense on short-term secured debt is included in borrowing costs.

The terms to maturity of the undiscounted value of short-term secured debt as at March 31, 2020, are $1,430 million (2019 – $1,358 million).

7. Collateral

Collateral transactions are conducted to support CPPIB's investment activities under the terms and conditions that are common and customary to collateral arrangements. The net fair value of collateral held and pledged as at March 31 was as follows:

8. Payables and accrued liabilities

Payables and accrued liabilities are comprised of the following:

9. Comparison of results against budget

The budget amounts included in the Consolidated statement of operations and the Consolidated statement of changes in financial assets available for benefit payments are derived from the amounts that were originally budgeted in the 2019–2020 Employment and Social Development Canada Departmental Plan, tabled in Parliament in April 2019 and amounts forecasted by the Office of the Superintendent of Financial Institutions.

10. Estimated overpayments and underpayments of benefits

In order to measure the accuracy of CPP benefit payments, the CPP relies on a quality program (the CPP Payment Accuracy Review) which estimates, through statistical extrapolation, the most likely value of incorrect benefit payments.

For benefits paid during the 12 months ended March 31, 2020, undetected overpayments and underpayments are estimated to be $15.4 million and $55.6 million respectively ($14.5 million and $54.7 million in 2019). These estimates are used by the CPP to assess the quality and accuracy of decisions and to continuously improve its systems and practices for processing CPP benefits.

The actual overpayments established during the year, as indicated in Note 4, were recorded as accounts receivable for recovery and are not directly linked to the above noted estimated overpayments and underpayments of benefits for the same period as these are an evaluation of potential overpayments and underpayments based on the extrapolation described above.

11. Operating expenses

CPP's operating expenses are composed of costs incurred by various GoC departments (refer to Note 16) for the administration of the CPP's activities as well as CPPIB's operating expenses.

12. Financial sustainability of the Canada Pension Plan

As of January 1, 2019, the CPP has two components: the base and additional CPP. The CPP consisted only of the base CPP prior to 2019, and this component continues. The additional CPP is the new enhancement to the CPP as of 2019. Both the base and additional CPP are financed by contributions and investment returns. Employers and employees pay contributions equally to the base and additional CPP, and self-employed workers pay the full amount.

Base CPP

At the time of the Plan's inception in 1965, the demographic and economic conditions made pay-as-you-go financing appropriate. The pay-as-you-go financing, along with a small reserve equivalent to about two years' worth of expenditures, meant the pensions and benefits for one generation would be paid largely from the contributions of later generations. However, changing demographics and economic conditions over time led to increasing CPP costs, and by the mid-1990s the fall in the level of assets of the CPP resulted in a portion of the reserve being required to cover expenditures. Therefore, for the CPP benefits to remain unchanged, the contribution rate would have needed to be increased regularly.

As a result, the base CPP was amended in 1997 to restore its long-term financial sustainability and to improve fairness across generations. This was achieved by changing its financing approach from a pay-as-you-go basis to a form of partial funding called steady-state funding, along with incremental full funding rules for new or enhanced benefits, and by reducing the growth of benefits over the long term. In addition, a new investment policy was put in place, along with the creation of CPPIB. Moreover, the statutory periodic reviews of the Plan by the federal and provincial governments were increased from once every five years to every three years.

Key among the 1997 changes were the introduction of self-sustaining provisions to safeguard the base CPP; in the event that the projected minimum contribution rate is greater than the legislated contribution rate and no recommendations are made by the Finance Ministers to correct the situation, the contribution rate would automatically increase and the indexation of the current benefits would be suspended.

The federal and provincial Finance Ministers took additional steps in 1999 to strengthen the transparency and accountability of actuarial reporting on the CPP by endorsing regular independent peer reviews of actuarial reports and consultations by the Chief Actuary with experts on the assumptions to be used in the actuarial reports.

Additional CPP

With the challenge facing younger generations of securing adequate retirement savings at a time when fewer can expect to work in jobs that will include a workplace pension plan, the federal and provincial governments agreed in 2016 to expand the CPP by creating the additional CPP. The additional CPP took effect on January 1, 2019.

In accordance with the Canada Pension Plan, the additional retirement, survivor, and disability benefits provided by the additional Plan are financed by additional contribution rates that:

1. are no lower than the lowest constant rates that can be maintained over the foreseeable future, and
2. that result in projected revenues (contributions and investment income) that are sufficient to fully pay the projected expenditures of the additional CPP over the long term.

The financing of the additional CPP is a result of the 1997 reforms to the Plan, specifically the requirement to fully fund any increased or new benefits. Similar to the base CPP, the Canada Pension Plan includes the self-sustaining provisions that provide for actions to be taken if minimum additional contribution rates deviate significantly from their legislated values and no recommendations are made by the Finance Ministers to correct the situation. These actions are described in the proposed Additional Canada Pension Plan Sustainability Regulations that are awaiting formal consent by provinces. Since the minimum additional contribution rates from the most recent actuarial report (30th CPP report) fall within the no action ranges there is no impact on the financial statements as at March 31, 2020.

Triennial actuarial report

The most recent triennial report prepared by the Chief Actuary, the 30th Actuarial Report on the CPP as at December 31, 2018, was tabled in Parliament on December 10, 2019. The next triennial actuarial report as at December 31, 2021, is expected to be tabled by December 2022.

A number of assumptions were used in the 30th CPP Actuarial Report to project the base and additional CPP's revenues and expenditures over the long projection period of over 75 years, and to determine the minimum contribution rates. The assumptions provided in the table below represent the best estimates according to the Chief Actuary's professional judgment relating to demographic, economic, investment and other factors; and have been peer reviewed by an independent expert actuary's panel.

According to the 30th CPP Actuarial Report, with the legislated contribution rate of 9.9% for the base CPP, assuming all assumptions are realized, the base CPP assets are expected to increase significantly, with the asset/expenditure ratio remaining relatively stable at a level of 7.6 over the period 2021 to 2031 and then growing to reach 8.8 in 2050 and 9.5 in 2095.

The minimum contribution rate, which is the lowest rate to sustain the base CPP, was determined to be 9.75% of contributory earnings for years 2022 to 2033 and 9.72% for years 2034 and thereafter (9.79% for the year 2019 and thereafter in the 27th CPP Actuarial Report).

The partial funding nature of the base CPP means that contributions as opposed to investment income are the main source for financing base CPP expenditures. The 30th CPP Actuarial Report confirms that, based on the Chief Actuary's best-estimate assumptions, the current legislated contribution rate of 9.9% is higher than the minimum contribution rate needed to sustain the base CPP, and thus is sufficient to finance the base CPP over the long term. By 2050, investment income is expected to represent approximately 37% of revenues. Under the legislated contribution rate and the assumed average expected nominal return on base CPP assets of 5.6% over the period 2019 to 2030, total base CPP assets available for benefit payments are expected to grow to approximately $688 billion by the end of 2030.

As at March 31, 2020, the value of base CPP assets available for benefit payments is $413.0 billion (2019 – $396.5 billion). This amount represents approximately 7.5 times the 2021 planned expenditures of $55.0 billion (2019 – 7.7 times the 2020 planned expenditures of $51.5 billion).

For the additional CPP, the 30th CPP Actuarial Report projects that with the legislated first and second additional contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter, assuming all assumptions are realized, total additional CPP assets are expected to increase rapidly over the first several decades as contributions are projected to exceed expenditures. The ratio of assets to the following year's expenditures is projected to increase rapidly until 2025 and then decrease after that, reaching a level of about 26 by 2075 and remaining at that level for the years following up to 2095.

The first additional minimum contribution rate applicable to contributory earnings below the Year's Maximum Pensionable Earnings is 1.49% in 2022 and 1.98% for the year 2023 and thereafter. The second additional minimum contribution rate applicable to contributory earnings above the Year's Maximum Pensionable Earnings up to the Year's Additional Maximum Pensionable Earnings is 7.92% for the year 2024 and thereafter. The phased-in legislated first additional contribution rates of 0.3%, 0.6%, and 1.0% apply respectively to the first three years after the valuation year, that is, to the current triennial review period of 2019–2021.

The full funding nature of the additional CPP means that investment income as opposed to contributions is the main source for financing additional CPP expenditures. The 30th CPP Actuarial Report confirms that, on the basis of the Chief Actuary's best-estimate assumptions, the current legislated contribution rates of 2.0% for 2023 and thereafter and 8.0% for 2024 and thereafter are higher than the minimum contribution rates needed to sustain the additional CPP, and thus are sufficient to finance the additional CPP over the long term. By 2050, investment income is expected to represent approximately 61% of revenues. Under the current legislated contribution rates and the average expected nominal return on additional CPP assets of 4.4% over the period 2019 to 2030, total additional CPP assets available for benefit payments are expected to grow to approximately $191 billion by the end of 2030.

As at March 31, 2020, the value of additional CPP assets available for benefit payments is $2.6 billion (2019 – $0.5 billion).

Sensitivity tests

A variety of tests was performed to measure the sensitivity of the long-term projected financial position of both components of the CPP to future changes in the demographic, economic and investment environments. Key best-estimate demographic economic and investment assumptions were varied individually to measure the potential impact on the financial status of both components of the CPP.

Lower cost and higher cost alternatives for three important assumptions are shown in the table below. For each test, the assumptions for the lower cost and higher cost alternatives were developed considering alternative assumed mortality improvement rates, real wage increases and real rates of return. It is possible that a lower cost scenario for the base CPP will be a higher cost scenario for the additional CPP, and vice versa. This is the case, for example, for the test regarding the real wage increase, described below.

The table below summarizes, for both the base and additional CPP, the sensitivity results of the minimum contribution rates to the changes in mortality, real wage increase and real rate of return on investments assumptions:

Mortality

Mortality is a very important demographic assumption as it affects the length of the benefit payment period. If male and female life expectancies at age 65 were to increase by approximately 2.4 years more than expected by 2050, the base CPP minimum contribution rate for 2034 and thereafter would increase to 10.06%, above the base CPP legislated contribution rate of 9.9%. For the additional CPP the first and second additional minimum contribution rates would increase to 2.15% and 8.60%, respectively. These would be above the legislated rates of 2% and 8%, respectively.

On the other hand, if male and female life expectancies at age 65 were to be about 2.2 years lower than expected by 2050, the base CPP minimum contribution rate for years 2034 and thereafter would decrease to 9.38% while the first and second additional CPP minimum contribution rates would decrease to 1.80% and 7.20%, respectively.

Real wage increase

Real wage increases directly affect the amount of future CPP contributions. Note that for this test, the opposite effects for the base and additional CPP are attributable to the different financing approaches. As a result of the different financing approaches, the base CPP is more dependent on contributions while the additional CPP is more dependent on investment income.

For the base CPP, if an ultimate real wage increase of 0.3% is assumed for 2019 and thereafter, the base CPP minimum contribution rate for years 2034 and thereafter would increase to 10.15%. On the other hand, for the additional CPP, under the above assumption, the first and second additional minimum contribution rates would decrease to 1.78% and 7.12%, respectively.

For the base CPP, if an ultimate real wage increase of 1.7% is assumed for 2025 and thereafter, the base CPP minimum contribution rate for years 2034 and thereafter would decrease to 9.29%. On the other hand, for the additional CPP, under the above assumption, the first and second additional minimum contribution rates would increase to 2.22% and 8.88%, respectively.

Real rate of return

Real rates of return can fluctuate greatly from year to year and can have a significant impact on the size of assets and on the ratio of assets to the following year expenditures.

If for the base CPP, the average real rate of return is assumed to be 1% lower (2.95% vs 3.95%) over the next 75 years (2019 to 2093), the base CPP minimum contribution rate for years 2034 and thereafter will increase to 10.62%. For the additional CPP if the average real rate of return is assumed to be 1% lower (2.38% vs 3.38%) over the same period then the first and second additional minimum contribution rates increase to 2.69% and 10.76%, respectively.

However, if for the base CPP the average real rate of return is assumed to be 1% higher (4.95% vs 3.95%) over the next 75 years, the base CPP minimum contribution rate decreases to 8.82%. For the additional CPP, if the average assumed real rate of return over the same period is 1% higher (4.38% vs 3.38%) then the first and second additional minimum contribution rates decrease to 1.49% and 5.96%, respectively.

13. Actuarial obligation in respect of benefits

The 30th CPP Actuarial Report is a triennial report that measures the actuarial obligation of both the base and additional CPP under an open group approach, which is consistent with the funding nature of both components. It also provides information under a closed group approach, in footnotes. The open group approach takes into consideration all current and future participants of the CPP, including their future contributions and associated benefits, to determine whether current assets and future contributions will be sufficient to pay for all future expenditures. The closed group approach includes only current participants of the CPP, with no new entrants permitted and no new benefits accrued.

The choice of the methodology used to produce a social security system's balance sheet is mainly determined by the system's financing approach. Partially funded plans like the base CPP represent a social contract where, in any given year, current contributors allow the use of their contributions to pay current beneficiaries' benefits. This social contract creates claims for current and past contributors to contributions of future contributors. As such, the proper assessment of the financial sustainability of partially funded plans by means of their balance sheets should reflect these claims. The open group approach does account explicitly for these claims by considering the benefits and contributions of both the current and future plan participants. In comparison, the closed group methodology does not reflect these claims since only current participants are considered.

The determination of the additional minimum contribution rates (namely the Calculation of Contribution Rates Regulations, 2018) requires the use of an open group approach. Since the open group methodology is based on projections of future income and expenditures, the requirement of the additional CPP open group assets to be at least 100% of its open group actuarial obligations ensures that, at the valuation date, the projected additional contributions and investment income are sufficient to cover the projected additional expenditures over the long term.

To determine the base and additional CPP actuarial obligations under the open group approach and the legislated contribution rates, the base and additional CPP's revenues and expenditures were projected using the assumptions of the 30th CPP Actuarial Report shown in Note 12. The projection period longer than 75 years that is used to calculate the minimum contribution rates is necessary to ensure that the future expenditures for cohorts that will enter the labour force during that time are included in the liabilities. The present values of the assets and obligations of the base CPP and additional CPP are determined using a discount rate equal to the assumed nominal rate of return on the base CPP and additional CPP assets respectively.

Base CPP

The table below presents the asset excess (shortfall) and the assets to actuarial obligation ratio of the base CPP under open and closed group approaches at valuation dates of the current and previous actuarial reports with the legislated contribution rate of 9.9%:

The base CPP was never intended to be a fully funded plan and the financial sustainability of the base CPP is not assessed based on its actuarial obligation in respect of benefits. According to the 30th CPP Actuarial Report, the CPP is intended to be long-term and enduring in nature, a fact that is reinforced by the federal and provincial governments' joint stewardship through the established strong governance and accountability framework of the CPP. Therefore, if the base CPP's financial sustainability is to be measured based on its asset excess or shortfall, it should be done on an open group basis that reflects the partially funded nature of the base CPP, that is, its reliance on both future contributions and invested assets as a means of financing its future expenditures.

Additional CPP

For the additional CPP, with the first and second legislated contribution rates of 2.0% and 8.0%, respectively, the table below presents the asset excess (shortfall) and the assets to actuarial obligation ratio under open and closed group approaches at the valuation date:

Using the open group approach, the Chief Actuary confirms that both the base CPP and additional CPP, based on the best-estimate assumptions selected and under the legislative contribution rates, will continue to meet their financial obligations and are sustainable in the long term.

14. Contractual obligations and commitments

The nature of CPP's and CPPIB's activities can result in some large multi-year contracts and agreements whereby the CPP and CPPIB will be obligated to make future payments in order to carry out its activities.

Operating costs are charged to the CPP in accordance with various memoranda of understanding (MoU) between the CPP and various GoC departments for the administration of the CPP's activities (refer to Note 16). The MoUs require written notification for termination and require one year advanced notification. Therefore, as at March 31, 2020, the operating costs of $673 million (2019 – $645 million) are an estimation of the costs that will be charged to the CPP Accounts in the next fiscal year. Operating costs are expected to continue to be charged to the CPP Accounts in the upcoming fiscal years, but cannot be reasonably estimated at this time.

The CPP, through CPPIB, has entered into commitments related to the funding of investments. These commitments are generally payable on demand based on the funding needs of the investment subject to the terms and conditions of each agreement. As at March 31, 2020, the unfunded commitments totalled $55,393 million (2019 – $47,408 million).

15. Contingent liabilities

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

At March 31, 2020, there were 5,074 appeals (2019 – 4,669) relating to the payment of CPP disability pensions. These contingencies are reasonably estimated, using historical information, at an amount of $37.7 million (2019 – $31.5 million), and have been recorded as an accrued liability in these consolidated financial statements.

(b) Other claims and legal proceedings

In the normal course of operations, the CPP is involved in various claims and legal proceedings. The total amount claimed in these actions and their outcomes are not determinable at this time. The CPP records an allowance for claims and legal proceedings when it is likely that there will be a future payment and a reasonable estimate of the loss can be made. No such allowance was recognized in the consolidated financial statements for the 2020 and 2019 fiscal years for these claims and legal proceedings.

(c) Guarantees

As part of certain investment transactions, the CPP, through CPPIB, agreed to guarantee, as at March 31, 2020, up to $5,095 million (2019 – $4,437 million) to other counterparties in the event certain investee entities default under the terms of loan and other related agreements.

(d) Indemnifications

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

16. Related party transactions

The CPP enters into transactions with the GoC in the normal course of business, which are recorded at the exchange value. The costs are based on estimated allocations of costs and are charged to the CPP in accordance with various memoranda of understanding (MoU). Details of these transactions are provided in the GoC operating expenses in Note 11 and contractual obligations in Note 14.

Expenses for the year are comprised of the following:

The CPP receives audit services without charge from the Office of the Auditor General of Canada. The value of these audit services is not material for the purpose of these consolidated financial statements and has not been recorded.

17. Supplementary information

The administration of the CPP is shared between various GoC departments. The GoC transfers to CPPIB amounts that are not immediately needed to pay CPP pensions, benefits and operating expenses, and CPPIB invests those amounts. The GoC, through various federal departments, manages the remainder of the assets, as well as the collection of the CPP contributions and the administration and payments of the CPP benefits. For accountability purposes, the following tables present summary information on the levels of assets and liabilities and sources of income and expenses managed by the GoC and CPPIB broken out by the base CPP and additional CPP respectively.

Pursuant to Section 108.1 and 108.3 of the Canada Pension Plan and the Agreement dated as of April 1, 2004, amounts not required to meet specified obligations of the CPP are transferred weekly to CPPIB. The funds originate from employer and employee contributions to the CPP and interest income generated from the deposit with the Receiver General.

CPPIB remits cash to the CPP as required, including the periodic return, on at least a monthly basis, of funds required to meet CPP pensions, benefits and operating expenses obligations.

The accumulated transfers to/from CPPIB, since inception, are as follows:

18. Comparative information

Borrowing costs

Starting in fiscal year 2020, CPP, through CPPIB, began disclosing borrowing costs as part of its investment-related expenses in addition to investment management fees and transaction costs. CPP, through CPPIB, uses leverage as part of an integrated strategy in seeking to maximize the rate of return without undue risk of loss. Given the growing size and prominence of leverage in our investment strategy, CPPIB is providing additional disclosure regarding its borrowing costs. The related expenses were previously included in investment income.

As a result, the comparative figures in the Consolidated Statement of Operations and Consolidated Statement of Cash Flow have been updated as well. Refer to Table 2 and Table 3 below for a reconciliation of the Consolidated Statement of Operations and Consolidated Statement of Cash Flow between what has been previously presented and what has been reclassified in the current year presentation.

Short-term secured debt

Short-term secured debt, which consists of cash advances from prime broker that are fully collateralized by securities, was previously included in investment receivables, as part of the cash collateral pledged on securities borrowed (Note 6). To provide better presentation based on the nature of the asset, starting in fiscal year 2020, short-term secured debt is presented as a separate line item under investment liabilities in the Consolidated Schedule of Investment Portfolio in Note 6.

As a result, the investments and investment liabilities in the Consolidated Statement of Financial Position have been reclassified. Refer to Table 1 below for a reconciliation of the Consolidated Statement of Financial Position between what has been previously presented and what has been reclassified in the current year presentation.

Real estate investments

Starting in fiscal year 2020, the presentation of income and cash flows associated with real estate investments has been changed to be consistent with other investment asset classes. The change in fair value generated by real estate investments has been reclassified from other investment income to realized and unrealized gains or losses in the Consolidated Statement of Operations. The cash portion of realized gains is reclassified from other investment income to disposals, and distributions from real estate investments are reclassified as dividend income rather than disposals on the Consolidated Statement of Cash Flows.

As a result, comparative figures have been updated in the Consolidated Statement of Operations and the Consolidated Statement of Cash Flow. Refer to Table 2 and Table 3 below for a reconciliation of the Consolidated Statement of Operations and Consolidated Statement of Cash Flow between what has been previously presented and what has been reclassified in the current year presentation.

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