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 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 29, 2017

Independent Auditor's Report - Canada Pension Plan

To the Minister of Families, Children and Social Development

I have audited the accompanying consolidated financial statements of the Canada Pension Plan, which comprise the consolidated statement of financial position as at 31 March 2017, 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 a summary of significant accounting policies and other explanatory information. The consolidated financial statements have been prepared by management of the Canada Pension Plan using the basis of accounting described in Note 2 to the consolidated financial statements.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation of these consolidated financial statements in accordance with the basis of accounting described in Note 2 to the consolidated financial statements, which includes determining that the basis of accounting is an acceptable basis for the preparation of the consolidated financial statements in the circumstances, 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.

Auditor's responsibility

My responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the consolidated 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 consolidated 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 consolidated financial statements of the Canada Pension Plan for the year ended 31 March 2017, are prepared, in all material respects, in accordance with the basis of accounting described in Note 2 to the consolidated financial statements.

Basis of accounting

Without modifying my opinion, I draw attention to Note 2 to the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared to comply 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.

Robert Wilson, CPA, CA
Principal
for the Auditor General of Canada

29 August 2017
Ottawa, Canada

Actuarial obligation in respect of benefits (Note 14)
Contractual obligations (Note 15)
Contingent liabilities (Note 16)
The accompanying notes are an integral part of these consolidated financial statements.

Approved by:

Louise Levonian
Deputy Minister
Employment and Social Development Canada

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

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

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

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

Notes to consolidated financial statements for the year ended March 31, 2017

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. The CPP is administered by the Government of Canada and the participating provinces.

The CPP began operations in 1966. It is a compulsory and contributory social insurance program operating in all parts of Canada except Quebec, which operates the 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 Minister of Families, Children and Social Development 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. The CPP Investment Board (CPPIB) is responsible for managing the amounts that are being transferred under section 108.1 of the Canada Pension Plan. It acts in the best interests of the beneficiaries and contributors under the Canada Pension Plan.

In accordance with the Canada Pension Plan, the financial activities of the CPP are recorded in the CPP Account (Note 3). The financial transactions affecting the Account are governed by the Canada Pension Plan and its regulations. The CPP's investments are held by the CPPIB. 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 the CPPIB.

The CPPIB was established pursuant to the Canada Pension Plan Investment Board Act (CPPIB Act). The CPPIB is a federal Crown corporation and all of its shares are owned by Her Majesty the Queen in right of Canada. The CPPIB's transactions are governed by the CPPIB Act and its accompanying regulations. The 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.

The CPPIB and its wholly-owned subsidiaries are exempt from Part I income tax under paragraphs 149(1)(d) and 149(1)(d.2) of the Income Tax Act (Canada) on the basis that all of the shares of the 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.

The 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 the CPPIB are audited annually by an external firm and are included in its annual report.

On December 15, 2016 the Canada Pension Plan, the CPPIB Act and the Income Tax Act (Canada) were amended to reflect the CPP enhancement. When implemented, the CPP enhancement will bring a higher income replacement rate and will increase the band of pensionable earnings covered. This will be achieved through an increase in the contribution rate, phased-in over a 7-year period starting on January 1, 2019.

As stated in the Canada Pension Plan and CPPIB Act, changes to these Acts require the approval of at least two-thirds of the provinces that have, in the aggregate, not less than two-thirds of the population of all included provinces.

(b) Pensions and benefits

Retirement pensions – A retirement pension is payable to CPP contributors at age 60 or older, according to the provisions of the Canada Pension Plan. The monthly amount is equal to 25 per cent of the contributor's average monthly pensionable earnings during the pensionable period, up to a maximum amount. The amount is reduced or increased depending upon whether the contributor applies for a retirement pension before or after age 65. The maximum monthly pension payable at age 65 in 2017 is $1,114.17 (2016 – $1,092.50).

Post-retirement benefits – A post-retirement benefit (PRB) is payable to each retirement pension recipient who has continued to work and has made contributions to the PRB while between the ages of 60 and 70. Contribution are mandatory for CPP or QPP retirement pension recipients aged 60-65, however, those between the ages of 65 and 70 can choose not to contribute. The PRB becomes payable the year after contributions are made. The maximum new monthly PRB at age 65 in 2017 is $27.85 (2016 – $27.31).

Disability benefits – A disability benefit is payable to a contributor who is disabled, according to the provisions of the Canada Pension Plan. The amount of the disability benefit to be paid includes a flat-rate portion and an amount equal to 75 per cent of the earned retirement pension. The maximum monthly disability benefit in 2017 is $1,313.66 (2016 – $1,290.81).

Survivor's pensions – A survivor's pensions is payable to the spouse or common-law partner (the beneficiary) of a deceased contributor, according to the provisions of the Canada Pension Plan. For a beneficiary under the age of 65, the pension consists of a flat-rate portion and an amount equal to 37.5 per cent of the deceased contributor's earned retirement pension, if the spouse or common-law partner is not receiving other CPP pensions. A beneficiary between the ages of 35 and 45 who is not disabled or who has no dependent children receives a reduced pension. For beneficiaries aged 65 and over, the pension is equal to 60 per cent of the retirement pension granted to the deceased contributor, if the spouse or common-law partner is not receiving other CPP pensions. The maximum monthly pension payable to a beneficiary in 2017 is $668.50 (2016 – $655.50).

Disabled contributor's child and orphan benefits – According to the provisions of the Canada Pension Plan, each child of a contributor who is receiving disability benefits 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 2017 is $241.02 (2016 – $237.69).

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. The death benefit amounts to six times the amount of the deceased contributor's monthly retirement pension, up to a maximum of $2,500.00 in 2017 (2016 – $2,500.00).

Pensions and benefits indexation – As required by the Canada Pension Plan, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2017 is 1.4 per cent (2016 – 1.2 per cent).

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 the 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 Government of Canada and participating provinces, is not considered to be part of the reporting entity of the Government of Canada. Accordingly, its financial activities are not consolidated with those of the Government.

(b) International Financial Reporting Standards

The CPPIB, which is a significant component of the CPP consolidated financial statements, adopted International Financial Reporting Standards (IFRS) as of April 1, 2014. While 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's IFRS adoption, CPPIB's incremental financial statement disclosures related to investments, investment receivables and investment liabilities is supplementary information to the requirements of the Canada Pension Plan.

(c) Financial instruments

The CPP, through the CPPIB, measures its investments, investment receivables and investment liabilities at fair value.

The investments and investment receivables are measured at fair value on the basis that they are part of a portfolio managed and evaluated on a fair value basis in accordance with investment strategies and risk management of CPPIB.

Investment liabilities are measured at fair value upon meeting the following criteria:

• It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;
• On initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or
• It is a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument.

The CPP, through the CPPIB, recognizes investments, investment receivables and investment liabilities when, and only when, it becomes a party to the contractual provisions of the instrument. In addition, these are recorded on a trade date basis.

Investments and investment receivables are derecognized when the contractual rights to receive the cash flows expire or where the CPP, through the CPPIB, has transferred the asset and substantially all the risks and rewards of the asset or no longer retains control over the asset. Investment liabilities are derecognized by CPP, through the CPPIB, when the obligation under the liabilities is discharged, cancelled or expires.

Upon initial recognition, investments, investment receivables and investment liabilities are measured at fair value. Subsequent changes in the fair value are recorded as unrealized gain (loss) on investments and included in net investment income (loss), along with the interest and dividend income from such financial instruments.

(d) Valuation of investments, investment receivables and investment liabilities

Investments, investment receivables and investment liabilities are recorded on a trade date basis and are stated at fair value. Fair value is 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 changes in unrealized gains and losses from investments, investment receivables and investment liabilities, dividend income and interest income. 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 using the effective interest rate method.

(g) Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition or disposal of an investment. Transaction costs are expensed as incurred and included in net investment income (loss).

(h) Investment management fees

Investment management fees, which include hedge fund performance fees, are paid to investment managers for externally managed investments. Investment management fees are expensed as incurred and included in net investment income (loss).

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

Securities purchased under reverse repurchase agreements represent the purchase of securities effected 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. These securities are not recognized as an investment of the CPP, through the CPPIB. The fair value of securities to be resold under these reverse repurchase agreements is monitored and additional collateral is obtained, when appropriate, to protect against credit exposure. In the event of counterparty default, the CPP, through the 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 continue to be recognized as an investment of the CPP, through the CPPIB, 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 and interest incurred on repurchase agreements is included in net investment income (loss) (refer to Note 10).

(j) Securities sold short

Securities sold short represent securities that are sold, but not owned, by the CPP, through the CPPIB. The CPP, through the 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, when appropriate (refer to Note 7). Interest and dividend expense on securities sold short are included in net investment income (loss) (refer to Notes to consolidated Financial Statements - Note 10).

(k) Translation of foreign currencies

Transactions, including purchases and sales of investments, income and expenses, are translated at the rate of exchange prevailing on the date of the transaction. 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 that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.

Foreign currency transaction gains and losses on financial instruments are included in net investment income (loss) (refer to Note 10).

(l) 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.

(m) 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).

(n) Net overpayments

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

(o) Operating expenses

Operating expenses are recorded as incurred.

(p) 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.

(q) Measurement uncertainty

The preparation of consolidated financial statements in accordance with the Canada Pension Plan requires management to make certain estimates, judgments and assumptions that affect the reported values of assets and liabilities as at the date of the consolidated financial statements and revenues and expenses during the reporting period. Estimates are based on the best information available at the time of preparation of the consolidated financial statements and are reviewed annually to reflect new information as it becomes available. Significant estimates and judgments are required principally in determining the reported estimated contributions, allowance for doubtful accounts, contingent liabilities, actuarial obligation in respect of benefits and valuation of financial instruments which are not actively traded. Measurement uncertainty exists in these consolidated financial statements. Actual results could significantly differ from those estimates.

(r) Future changes in accounting standards

The CPP has completed its assessment of the following sections and has concluded that their adoption will not have a significant impact on the consolidated financial statements:

Related party disclosures, effective date April 1, 2017

This new section PS 2200 defines a related party and establishes disclosures required for related party transactions. Disclosure of information about related party transactions and the relationship underlying them is required when they have occurred at a value different from that which would have been arrived at if the parties were unrelated, and they have, or could have, a material financial effect on the financial statements.

Assets, effective date April 1, 2017

This new section PS 3210 provides guidance for applying the definition of assets and establishes the general disclosure requirements.

Contingent assets, effective date April 1, 2017

This new section PS 3320 defines contingent assets as possible assets arising from existing conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one or more future events not wholly within the public sector entity's control occurs or fails to occur. Resolution of the uncertainty will confirm the existence or non-existence of an asset.

Contractual rights, effective date April 1, 2017

This new section PS 3380 defines and establishes disclosure standards on contractual rights which are rights to economic resources arising from contracts or agreements that will result in both an asset and revenue in the future.

Inter-entity transactions, effective date April 1, 2017

This new section PS 3420 establishes how to account for and report transactions between public sector entities that comprise a government reporting entity from both a provider and recipient perspective.

The CPP is currently analyzing the impact of these new sections relevant to the consolidated financial statements:

Restructuring transactions, effective date April 1, 2018

This new section PS 3430 introduces accounting guidance for both transferors and recipients of a restructuring transaction which is a transfer of an integrated set of assets and/or liabilities, together with related program or operating responsibilities without consideration based primarily on the fair value of the individual assets and liabilities transferred.

Financial instruments, effective date April 1, 2019

1. Financial instruments

   The new section PS 3450 (financial instruments) establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. Items within the scope of the section are assigned to one of two measurement categories: fair value and cost or amortized cost. Until an item is derecognized, gains and losses arising as a result of fair value remeasurement will be reported in the consolidated statement of remeasurement gains and losses.

2. Foreign currency translation

   The revised section PS 2601 (foreign currency translation) requires that remeasurement gains and losses on foreign currency translation be reported in a new consolidated statement of remeasurement gains and losses until such time as the financial instrument is derecognized, at which point, the accumulated remeasurement gain and loss is recognized in the consolidated statement of operations.

3. Financial statement presentation

   The revised section PS 1201 (financial statements presentation) establishes the general principles and information standards applicable to consolidated financial statements. It requires that remeasurement gains and losses be reported in a new statement. Also, the assets available for benefit payments will be presented as the total of the net increase in assets available for benefit payments for the year and the accumulated remeasurement gains and losses.

Portfolio investments, effective date April 1, 2019

This section PS 3041 establishes standards on how to account for and report portfolio investments in government financial statements.

3. Cash

Cash consists of the total cash held by the CPP Account and the CPPIB. The CPP Account was established in the accounts of Canada by the Canada Pension Plan to record the contributions, interest, pensions, benefits and operating expenses of the CPP. It also records the amounts transferred to or received from the CPPIB. As at March 31, 2017, the deposit with the Receiver General for Canada in the CPP Account is $106 million (2016 – $35 million) and the CPPIB's cash is $68 million (2016 – $60 million) for a total of $174 million (2016 – $95 million).

4. Receivables

Receivables comprise the following:

Contributions receivable represent the estimated amount to be collected from the CRA 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 overpayments. During the year, overpayments totalling $122 million (2016 – $102 million) were established and debts totalling $4 million (2016 – $5 million) were forgiven as per the remission provisions of the Canada Pension Plan. A further $92 million (2016 – $74 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 the CPPIB, is exposed to a variety of financial risks. These risks include market risk, credit risk and liquidity risk. The CPPIB manages and mitigates financial risks through the Risk/Return Accountability Framework that is contained within 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 the 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/Return Accountability Framework, and these govern the amount of total investment risk that CPPIB can take in the long term CPP Investment Portfolio. CPPIB monitors the absolute risk, the possible losses of value expressed in absolute dollar or percentage terms, in the CPP Investment Portfolio daily and reports risk exposures to the Board of Directors on at least a quarterly basis.

1. Market Risk: Market risk (including equity risk, currency risk, interest rate risk and other price risk) is the risk that the fair value or future cash flows of an investment, investment receivable 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 or volatilities.

   The CPP, through the CPPIB, invests in both publicly traded and private equities. In terms of relative size, publicly traded equities represent the most significant equity risk. After taking into account derivative positions and with all other variables held constant, a 1 percent decrease/increase in the S&P 500 Index inclusive of correlation to other equity markets would result in a loss/profit of $1,000 million (2016 ‒ $642 million) on public equity investments.

   Currency Risk: The CPP, through the CPPIB, is exposed to currency risk through holdings of investments, investment receivables or investment liabilities in various currencies.

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

   (in millions of dollars)

   Currency	2017		2016Link to footnote 1
   	Net exposure	% of total	Net exposure	% of total
   United States dollar	122,750	39	102,128	37
   Euro	34,003	11	30,364	11
   Japanese yen	20,788	7	16,007	6
   British pound sterling	18,839	6	14,959	5
   Australian dollar	10,790	3	8,368	3
   Hong Kong dollar	4,423	1	2,704	1
   Swiss franc	4,381	1	1,305	–
   Indian rupee	3,586	1	2,239	1
   Chinese yuan	3,434	1	3,356	1
   Brazilian real	3,425	1	1,320	–
   South Korean won	2,857	1	1,292	–
   Chilean peso	2,387	1	2,370	1
   Other	8,424	3	8,880	4
   Total foreign exposure	240,087	76	195,292	70
   Canadian dollar	76,793	24	83,844	30
   Total	316,880	100	279,136	100

   As at March 31, 2017, with all other variables and underlying values held constant, a change in the value of the Canadian dollar against major foreign currencies by 1 per cent would result in an approximate increase (decrease) in the value of investments, investment receivables and investment liabilities as follows:

   (in millions of dollars)

   Currency	2017 Change in net investments		2016Link to footnote 1 Change in net investments
   	+1%	-1%	+1%	-1%
   United States dollar	(negative 1,228)	1,228	(negative 1,021)	1,021
   Euro	(negative 340)	340	(negative 304)	304
   Japanese yen	(negative 208)	208	(negative 160)	160
   British pound sterling	(negative 188)	188	(negative 150)	150
   Australian dollar	(negative 108)	108	(negative 84)	84
   Hong Kong dollar	(negative 44)	44	(negative 27)	27
   Swiss franc	(negative 44)	44	(negative 13)	13
   Indian rupee	(negative 36)	36	(negative 22)	22
   Chinese yuan	(negative 34)	34	(negative 33)	33
   Brazilian real	(negative 34)	34	(negative 13)	13
   South Korean won	(negative 29)	29	(negative 13)	13
   Chilean peso	(negative 24)	24	(negative 24)	24
   Other	(negative 84)	84	(negative 89)	89
   Total	(negative 2,401)	2,401	(negative 1,953)	1,953

   Interest Rate Risk: Interest rate risk is the risk that the fair value or future cash flows of an investment, investment receivable or investment liability will fluctuate because of changes in market interest rates.

   Other Price Risk: Other price risk is the risk that the fair value or future cash flows of an investment will fluctuate because of changes in market prices arising from other risk factors such as commodity price risk, credit spread risk, basis risk and volatility.

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 borrower, counterparty, guarantor or the assets (collateral) supporting the credit exposure. The CPP's, through the CPPIB, credit risk exposure arises through its investment in debt securities, over-the-counter derivatives (as discussed in Note 6f) and guarantees. The carrying amounts of the investments are presented in Note 6 and guarantees are presented in Note 16c.
3. Liquidity Risk: Liquidity 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. 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 fund required by CPP to meet its financial obligations. Also, the CPP, through the 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).

   The CPPIB maintains $6.2 billion (2016 – $1.5 billion) of unsecured credit facilities to meet potential liquidity requirements. As at March 31, 2017, the total amount drawn on the credit facilities is $nil (2016 – $nil). The CPPIB also has the ability to readily dispose of certain investments that are traded in an active market. These include a liquid portfolio of publicly traded equities, money market securities and marketable bonds.

   The CPPIB is also exposed to liquidity risk through its obligation to remit cash to the (refer to Note 18). In order to manage associated liquidity risk certain assets are segregated and managed separately. 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.

6. Investments, investment receivables and investment liabilities

As stated in Note 1, the role of the 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, the 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 Risk/Return Accountability Framework.

The schedule below provides information on CPPIB's investments, investment receivables and investment liabilities:

(a) Equities

Equities consist of public and private investments in each of these three markets: Canadian, foreign developed and emerging.

1. Public equity investments are made directly or through funds, including hedge funds. As at March 31, 2017, public equities included fund investments with a fair value of $8,022 million (2016 – $7,807 million). Fair value for fund investments is generally based on the net asset value as reported by the external administrators or managers of the funds.
2. Private equity investments are generally made directly or through ownership in limited partnership funds. As at March 31, 2017, private equities included direct investments with a fair value of $29,965 million (2016 – $25,161 million). The fair value for investments held directly is primarily determined using 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 determined based on relevant information reported by the general partner using similar accepted industry valuation methods.

(b) Fixed income

1. Bonds consist of non-marketable and marketable bonds.

   Fair value for non-marketable Canadian provincial government bonds is calculated using discounted cash flows. 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 consists of investments in direct private debt, asset-backed securities, intellectual property, royalties, distressed mortgage funds, private debt funds and hedge funds. 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. 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 consist of investments in hedge funds and internally managed portfolios 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 and the internally managed portfolios 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. The CPPIB obtains exposure to real estate through direct investments in privately held real estate and real estate funds.

   Private real estate investments are managed on behalf of the CPPIB by investment managers primarily through co-ownership arrangements. As at March 31, 2017, real estate investments include assets of $38,732 million (2016 – $35,857 million).

2. Infrastructure investments are generally made directly. As at March 31, 2017, infrastructure includes direct investments with a fair value of $27,860 million (2016 – $20,335 million) and $39 million in fund investments (2016 – $38 million).

Fair value for private real estate investments and infrastructure investments is primarily determined using discounted cash flows. Fair value for real estate funds and infrastructure investments held through limited partnership funds are generally based on the net asset value as reported by the external managers of the funds.

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

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 securities.

The terms to maturity of the securities purchased under reverse repurchase agreements, as at March 31, 2017, are as follows: within 1 year, $5,207 million (2016 – $12,199 million), and 1 year to over 10 years, $nil (2016 – $nil).

The terms to maturity of the undiscounted value of the securities sold under repurchase agreements, as at March 31, 2017, are as follows: within 1 year, $14,753 million (2016 – $19,919 million), and 1 year to over 10 years, $nil (2016 – $nil).

(f) Derivative contracts

A derivative contract 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. The CPPIB uses different types of derivative instruments, which include futures and forwards, swaps, options and warrants.

Notional amounts of derivative contracts represent the contractual amounts to which a rate or price is applied for computing the cash flows to be exchanged. The notional amounts are used to determine the gains/losses and fair value of the contracts.

The fair value of these contracts is reported as derivative receivables and derivative liabilities on the schedule of investments as shown above. 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 swaps, options, forward contracts 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.

(g) Securities sold short

As at March 31, 2017, securities sold short of $24,177 million (2016 – $27,371 million) are considered repayable within one year based on the earliest period in which the counterparty could request payment under certain conditions.

(h) 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, approximate fair value due to the short-term nature of these liabilities. Fair value for term debt is based on quoted market prices.

The terms to maturity of the undiscounted value of the commercial paper payable as at March 31, 2017, are as follows: within 1 year, $11,120 million (2016 – $13,425 million), and 1 year to over 10 years, $nil (2016 – $nil). The terms to maturity of the undiscounted value of the term debt as at March 31, 2017, are as follows: within 1 year, $nil (2016 – $nil), 1 year to 5 years, $8,783 million (2016 – $2,149 million), and 6 years to over 10 years, $nil (2016 – $nil).

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 are 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 change in financial assets available for benefit payments are derived from the amounts that were originally budgeted in the Employment and Social Development Canada 2016–2017 Report on Plans and Priorities, tabled in Parliament in March 2016 and amounts forecasted by the Office of the Superintendent of Financial Institutions.

10. Net investment income (loss)

Net investment income (loss) is reported net of transaction costs and investment management fees, and is grouped based on the asset class categories in accordance with CPPIB's Strategic Portfolio.

Net investment income (loss), for the year ended March 31, is as follows:

11. 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, 2017, undetected overpayments and underpayments are estimated to be $9.6 million and $30.3 million respectively ($0.2 million and $24.8 million in 2015–2016). 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.

12. Operating expenses

CPP's operating expenses are composed of costs incurred by various Government of Canada (GoC) departments (refer to Note 17) for the administration of the CPP's activities as well as the CPPIB's operating expenses.

13. Financial sustainability of the Canada Pension Plan

The CPP is financed by contributions and investment returns. Employers and employees pay contributions equally to the CPP, and self-employed workers pay the full amount. 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 to remain unchanged, the contribution rate would have needed to be increased regularly.

As a result, the CPP was amended in 1997 to restore its long-term financial sustainability and to improve fairness across generations 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 reducing the growth of benefits over the long term. In addition, a new investment policy was put in place, along with the creation of the CPPIB. Moreover, the statutory periodic reviews of the Plan by the federal and provincial financial ministers were increased from once every five years to every three years.

Key among the 1997 changes was the introduction of self-sustaining provisions to safeguard the Plan: 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, provincial and territorial 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.

The most recent triennial report, the Twenty-seventh Actuarial Report on the Canada Pension Plan as at December 31, 2015, was tabled in Parliament on September 27, 2016. The next triennial actuarial report as at December 31, 2018, is expected to be tabled by December 2019. The most recent actuarial report, the Twenty-eighth Actuarial Report supplementing the Actuarial Report on the Canada Pension Plan as at December 31, 2015, was tabled in Parliament on October 28, 2016. It was prepared on the basis of the Twenty-seventh Actuarial Report to show the effect of the proposed changes to the Canada Pension Plan, which was amended on December 15, 2016, to reflect the CPP enhancement as described in Note 1.

According to the Twenty-seventh Actuarial Report, under the current legislated contribution rate of 9.9 per cent, the Plan's assets are expected to increase significantly, with the asset/expenditure ratio remaining relatively stable at a level of 6.5 over the period 2016 to the early 2030s and then growing to reach 7.4 by 2090 assuming all assumptions are realized.

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

In the Twenty-seventh Actuarial Report, the minimum contribution rate, which is the lowest rate to sustain the CPP, was determined to be 9.79 per cent of contributory earnings for the year 2019 and thereafter (9.84 per cent for the year 2016 and thereafter in the Twenty sixth Actuarial Report).

The CPP assets available for benefit payments represent the funds accumulated for the payment of pensions, benefits, and operating expenses, i.e. total CPP expenditures. The partial funding nature of the CPP means that contributions as opposed to these assets are the main source for financing CPP expenditures. The Twenty-seventh Actuarial Report confirms that, on the basis of the assumptions selected, the current legislated contribution rate of 9.9 per cent is and will continue to be sufficient to pay for future expenditures over the period 2016 to 2020. Thereafter, a portion of investment income (26 per cent in 2050) will be required to make up the difference between contributions and expenditures. Under the current legislated contribution rate of 9.9 per cent and the average expected nominal return on assets of 5.1 per cent, total assets available for benefit payments are expected to grow to $476 billion by the end of 2025.

As at March 31, 2017, the value of CPP assets available for benefit payments is $320.9 billion (2016 – $283.6 billion). This amount represents approximately 6.8 times the 2018 planned expenditures of $47.4 billion (2016 – 6.3 times the 2017 planned expenditures of $45.2 billion).

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

The low-cost and high-cost alternatives for three important assumptions are shown in the table below. In the case of mortality, the assumptions for the low-cost and high-cost alternatives were developed by considering alternative assumed mortality improvement rates. In the case of real wage increase and real rate of return, these assumptions are defined as the upper and lower boundaries of the 80 per cent confidence intervals.

Mortality is a very important demographic assumption as it impacts the length of the benefit payment period. If male and female life expectancies at age 65 were to increase by approximately 2.5 years more than expected by 2050, the minimum contribution rate in 2019 and thereafter would increase to 10.10 per cent, above the current legislated contribution rate of 9.9 per cent. On the other hand, if male and female life expectancies at age 65 were to be about 2.5 years lower than expected, the minimum contribution rate would decrease to 9.46 per cent.

The most sensitive economic assumptions are the real wage increase and the real rate of return on investments. The growth in real wage directly impacts the amount of future CPP contributions. If an ultimate real wage increase of 1.8 per cent is assumed for 2025 and thereafter, the minimum contribution rate would decrease to 9.31 per cent. However, if an ultimate real wage increase of 0.4 per cent is assumed for 2017 and thereafter, the minimum contribution rate would increase to 10.32 per cent.

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 an average real rate of return of 5.6 per cent is assumed over the next 75 years (2016 to 2090), the minimum contribution rate will decrease to 8.54 per cent. However, if the average real rate of return is assumed to be 2.2 per cent over the next 75 years, the minimum contribution rate increases to 11.05 per cent.

The table below summarizes the sensitivity results of the minimum contribution rate and the ratio of the assets to the next year expenditures under the current legislated 9.9 per cent contribution rate to the changes in mortality, real wage increase and real rate of return on investments assumptions:

14. Actuarial obligation in respect of benefits

The Twenty-seventh Actuarial Report on the CPP measures the actuarial obligation under an open group approach, which is consistent with the partial funding nature of the CPP financing, and provides information under a closed group approach, in a footnote. 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.

With the current legislated contribution rate of 9.9 per cent, the table below presents the asset excess (shortfall) and the assets to actuarial obligation ratio under open and closed group approaches at valuation dates of the current and previous actuarial reports:

Under the partial funding financing approach of the CPP, in any given year, current contributors allow the use of their contributions to pay current beneficiaries' benefits. This financial arrangement creates claims for current and past contributors to contributions of future contributors. As such, the most appropriate 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 approach does not reflect these claims, since only current participants are considered. To determine the CPP actuarial obligations under the open group approach, the CPP's revenues and expenditures were projected over the period of 150 years using the assumptions of the Twenty-seventh Actuarial Report shown in Note 13. The projection period longer than 75 years that is used to calculate the minimum contribution rate 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 CPP was never intended to be a fully-funded plan and the financial sustainability of the CPP is not assessed based on its actuarial obligation in respect of benefits. According to the Twenty-seventh Actuarial Report, the CPP is intended to be long-term and enduring in nature, a fact that is reinforced by the federal, provincial, and territorial governments' joint stewardship through the established strong governance and accountability framework of the CPP. Therefore, if the 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 CPP, that is, its reliance on both future contributions and invested assets as a means of financing its future expenditures. Using the open group approach, the Chief Actuary confirms that the CPP, on the basis of the assumptions selected, will continue to meet its financial obligations and is sustainable in the long term.

15. Contractual obligations

The CPP, through the CPPIB, has committed to enter into contractual obligations related to the funding of investments. These contractual obligations 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, 2017, the contractual obligations totalled $38.9 billion (2016 – $34.7 billion).

As at March 31, 2017, the CPP, through the CPPIB, has made lease and other contractual obligations, which will require future annual payments as follows:

16. Contingent liabilities

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

At March 31, 2017, there were 7,182 appeals (2016 – 7,619) relating to the payment of CPP disability benefits. These contingencies are reasonably estimated, using historical information, at an amount of $39.7 million (2016 – $60.5 million), which was recorded as an accrued liability in the CPP 2016–2017 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 financial statements for the 2016–2017 and 2015–2016 fiscal years for these claims and legal proceedings.

(c) Guarantees

As part of certain investment transactions, the CPP, through the CPPIB, agreed to guarantee, as at March 31, 2017, up to $3.1 billion (2016 – $2.5 billion) to other counterparties in the event certain investee entities default under the terms of loan and other related agreements.

(d) Indemnifications

The CPPIB provides indemnifications to its officers, directors, certain others and, in certain circumstances, to various counterparties and other entities. The 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 the CPPIB from making a reasonable estimate of the maximum potential payments the CPPIB could be required to make. To date, the CPPIB has not received any material claims nor made any material payments pursuant to such indemnifications.

17. Related party transactions

The CPP enters into transactions with the Government of Canada 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. Details of these transactions are provided in the Government of Canada (GoC) operating expenses in Note 12.

As stated in Note 4, the CPP has $4,442 million (2016 – $4,945 million) of contributions receivable from the Canada Revenue Agency.

18. Supplementary information

The administration of the CPP's assets and activities is shared between various Government of Canada (GoC) departments and the CPPIB. The CPPIB is responsible for investing the majority of the CPP's assets, while 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 table presents summary information on the levels of assets and liabilities and sources of income and expenses managed by the GoC and the CPPIB respectively.

Pursuant to Section 108.1 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 the CPPIB. The funds originate from employer and employee contributions to the CPP and interest income generated from the deposit with the Receiver General.

The 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.

During the year ended March 31, 2017, a total of $39,517 million (2016 – $38,406 million) was transferred to the CPPIB and a total of $35,220 million (2016 – $33,219 million) was returned to the CPP to meet its liquidity requirements.

19. Comparative information

Effective April 1, 2016, currency exposure relating to foreign exchange forward contracts are reflected based on the gross pay and receive amounts in their respective currencies, to reflect the underlying exposures to each currency (refer to Note 5i). These were previously presented based on the fair value of the contract in its settlement currency.

This change in presentation of the currency exposure has been reflected in the comparative figures. Changes to the comparative figures resulted in an overall decrease in net foreign currency exposure of $32,978 million as at March 31, 2016.

As a result of the change identified above, the comparative figures for the sensitivity analysis of currency exposure based on the currency risk sensitivity of +/- 5 per cent used last year resulted in an overall decrease in change in net investments of $1,649 million. In addition, the currency risk sensitivity was updated from +/- 5 per cent to +/- 1 per cent to provide a unit percentage change impact of the potential appreciation/depreciation of the Canadian dollar against other currencies resulting in a further overall decrease in change in net investments of $7,812 million. The combined effect of these changes resulted in an overall decrease in change in net investments of $9,461 million as at March 31, 2016.

During the year the CPP, through CPPIB, identified two transactions from 2015—2016 that were not previously disclosed. Comparative figures have been updated in Note 7 to reflect these transactions resulting in an increase of $5,456 million in private equities pledged as collateral and an increase of $46 million in other debt pledged as collateral as at March 31, 2016.

Public Accounts of Canada 2017 Volume I—Bottom of the page Navigation

• Other liabilities
• Government Annuities Account