Canada Pension Plan

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

Management's responsibility for financial statements

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 28, 2018

Independent Auditor's Report

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 2018, 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 2018 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

28 August 2018
Ottawa, Canada

Consolidated statement of financial position
as at March 31
(in millions of dollars)

  2018 2017
Financial assets
Cash (Note 3) 115 174
Receivables (Note 4) 5,377 4,640
Investments (Note 6) 428,827 377,700
Amounts receivable from pending trades (Note 6) 2,613 3,234
Subtotal 436,932 385,748
Liabilities
Payables and accrued liabilities (Note 8) 1,214 1,195
Investment liabilities (Note 6) 72,641 60,423
Amounts payable from pending trades (Note 6) 2,477 3,631
Subtotal 76,332 65,249
Financial assets available for benefit payments 360,600 320,499
Non-financial assets
Premises, equipment and others 397 396
Assets available for benefit payments 360,997 320,895
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

Consolidated statement of operations
for the year ended March 31
(in millions of dollars)

  Budget 2018
(Note 9)
Actual 2018 Actual 2017
Revenues
Contributions 49,283 48,435 46,966
Net investment income (Note 10)
Realized gains 7,301 21,140
Unrealized (losses) gains 25,036 7,536
Interest income 3,074 3,496
Dividend income 3,391 2,590
Other income 1,132 1,512
Transaction costs (negative 401) (negative 447)
Investment management fees (negative 1,738) (negative 1,464)
Subtotal 15,244 37,795 34,363
Total 64,527 86,230 81,329
Expenses
Pensions and benefits
Retirement 35,767 34,560 32,970
Survivor 4,607 4,493 4,427
Disability 4,465 4,133 4,030
Disabled contributor's child 342 311 309
Death 370 368 334
Orphan 234 209 209
Post-retirement 440 341
Net overpayments (Note 4) (negative 54) (negative 118)
Subtotal 45,785 44,460 42,502
Operating expenses (Note 12) 1,587 1,668 1,507
Total 47,372 46,128 44,009
Net increase in assets available for benefit payments 17,155 40,102 37,320
Assets available for benefit payments, beginning of year 320,895 320,895 283,575
Assets available for benefit payments, end of year 338,050 360,997 320,895
The dash means that the amount is 0 or is rounded to 0.
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated statement of changes in financial assets available for benefit payments
for the year ended March 31
(in millions of dollars)

  Budget 2018
(Note 9)
Actual 2018 Actual 2017
Net increase in assets available for benefit payments 17,155 40,102 37,320
Changes in non-financial assets (negative 1) 6
Increase in financial assets available for benefit payments 17,155 40,101 37,326
Financial assets available for benefit payments, beginning of year 320,499 320,499 283,173
Financial assets available for benefit payments, end of year 337,654 360,600 320,499
The dash means that the amount is 0 or is rounded to 0.
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated statement of cash flow
for the year ended March 31
(in millions of dollars)

  2018 2017
Operating activities
Cash receipts
Contributions 47,746 47,470
Interest on investments 3,157 3,624
Dividends on investments 2,981 2,175
Other investment income 1,682 1,546
Cash payments
Pensions and benefits (negative 44,471) (negative 42,516)
Operating expenses (negative 1,658) (negative 1,469)
Investment management fees (negative 867) (negative 758)
Transaction costs (negative 387) (negative 471)
Payment of interest on debt (negative 240) (negative 148)
Cash flows from operating activities 7,943 9,453
Capital activities
Acquisition of premises and equipment (negative 28) (negative 23)
Cash flows used in capital activities (negative 28) (negative 23)
Financing activities
Issuance of debt 60,494 57,969
Repayment of debt (negative 55,539) (negative 54,596)
Cash flows from financing activities 4,955 3,373
Investing activities
Purchases (negative 3,681,090) (negative 5,388,303)
Disposals 3,668,161 5,375,579
Cash flows used in investing activities (negative 12,929) (negative 12,724)
Net (decrease) increase in cash (negative 59) 79
Cash, beginning of year 174 95
Cash, end of year 115 174
The accompanying notes are an integral part of these consolidated financial statements.

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

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 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) 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. The CPP enhancement will be implemented through a phased-in approach over a 7-year period starting on January 1, 2019, and will bring a higher income replacement rate and increase the range of pensionable earnings covered.

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

(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 amount is equal to 25% of the contributor's average monthly pensionable earnings during the pensionable period, up to a maximum amount. 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 2018 is $1,134.17 (2017 – $1,114.17).

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 2018 is $28.35 (2017 – $27.85).

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 2018 is $1,335.83 (2017 – $1,313.66).

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 varies depending on a number of factors, including the age of the surviving spouse or common-law partner at the time of the contributor's death 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 in 2018 is $680.50 (2017 – $668.50).

Disabled contributor's child and orphan benefits

According to the provisions of the Canada Pension Plan, each child of a contributor who is receiving a disability pension 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 2018 is $244.64 (2017 – $241.02).

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 equal to six times the amount of the deceased contributor's monthly retirement pension, up to a maximum of $2,500.00 in 2018 (2017 – $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 2018 is 1.5% (2017 – 1.4%).

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 the 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, prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). 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 preparing its financial statements in accordance with IFRS, 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:

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 (refer to Note 10).

(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) (refer to Note 10).

(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) (refer to Note 10).

(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 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 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 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) 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.

(r) 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.

(s) Adoption of new accounting standards

Although these financial statements are prepared in compliance with the Canada Pension Plan, the CPP analyzes Canadian Public Sector Accounting Standards as they are the source on which the CPP's accounting policies are based. The CPP has adopted the following sections effective April 1, 2017:

Related party disclosures

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. There were no financial impacts on the financial statements from adopting this section. Details of the CPP's related party transactions accounting policy are provided in Note 2(q). Additional disclosures for related party transactions are provided in Note 17.

Assets

This new section PS 3210 provides guidance for applying the definition of assets and establishes the general disclosure requirements. There were no significant impacts on the financial statements from adopting this section.

Contingent assets

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. There were no significant impacts on the financial statements from adopting this section.

Contractual rights

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. There were no significant impacts on the financial statements from adopting this section.

Inter-entity transactions

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. There were no financial impacts on the financial statements from adopting this section. Details of the CPP's inter-entity transactions accounting policy are provided in Note 2(q).

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, 2018, the deposit with the Receiver General for Canada in the CPP Account is $32 million (2017 – $106 million) and the CPPIB's cash is $83 million (2017 – $68 million) for a total of $115 million (2017 – $174 million).

4. Receivables

Receivables comprise the following:

(in millions of dollars)

  2018 2017
Contributions 5,131 4,442
Québec Pension Plan 122 99
Additional CPP Account 16
Beneficiaries
Balance of pensions and benefits overpayments 188 218
Allowance for doubtful accounts (negative 102) (negative 134)
Others 22 15
Total 5,377 4,640
The dash means that the amount is 0 or is rounded to 0.

Contributions receivable represent the estimated amount to be collected from 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.

During the year, the CPP Account funded the Additional CPP Account for the implementation of the CPP enhancement. These initial costs of administration and the related interests incurred totalled $16 million (2017 – $nil) of which $8 million (2017 – $nil) was incurred by the Government of Canada (GoC) and $8 million (2017 – $nil) was incurred by the CPPIB. Details of the CPP enhancement are provided in Note 18.

The CPP has procedures to detect overpayments. During the year, overpayments totalling $99 million (2017 – $122 million) were established and debts totalling $45 million (2017 – $4 million) were forgiven as per the remission provisions of the Canada Pension Plan. A further $84 million (2017 – $92 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 employs the Risk/Return Accountability Framework, which establishes accountability of the Board of Directors, the various committees and the investment departments to manage investment related risks. The CPPIB manages and mitigates financial 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 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 Policy, 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. It is a significant source of risk of the CPP Investment Portfolio.

    The CPP, through the CPPIB, invests in both publicly traded and private equities. After taking into account derivative positions and with all other variables held constant, a 1% decrease/increase in the S&P 500 Index would result in a loss/profit of $1,200 million (2017 – $1,000 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.

    Currently 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 2018 2017
    Net exposure % of total Net exposure % of total
    United States dollar 171,898 48 122,750 39
    Euro 36,135 10 34,003 11
    British pound sterling 19,329 5 18,839 6
    Japanese yen 15,019 4 20,788 7
    Australian dollar 11,889 3 10,790 3
    Hong Kong dollar 8,086 2 4,423 1
    Chinese yuan 6,412 2 3,434 1
    Indian rupee 4,947 1 3,586 1
    Swiss franc 4,002 1 4,381 1
    South Korean won 3,680 1 2,857 1
    Chilean peso 2,695 1 2,387 1
    Brazilian real 2,422 1 3,425 1
    Other 12,694 5 8,424 3
    Total foreign exposure 299,208 84 240,087 76
    Canadian dollar 57,114 16 76,793 24
    Total 356,322 100 316,880 100

    As at March 31, 2018, with all other variables and underlying values held constant, a change in the value of the Canadian dollar against major foreign currencies by 1% would result in an approximate increase (decrease) in the value of investments, investment receivables and investment liabilities as follows:

    (in millions of dollars)

    Currency 2018
    Change in net investments
    2017
    Change in net investments
    +1% -1% +1% -1%
    United States dollar (negative 1,719) 1,719 (negative 1,228) 1,228
    Euro (negative 361) 361 (negative 340) 340
    British pound sterling (negative 193) 193 (negative 188) 188
    Japanese yen (negative 150) 150 (negative 208) 208
    Australian dollar (negative 119) 119 (negative 108) 108
    Hong Kong dollar (negative 81) 81 (negative 44) 44
    Chinese yuan (negative 64) 64 (negative 34) 34
    Indian rupee (negative 50) 50 (negative 36) 36
    Swiss franc (negative 40) 40 (negative 44) 44
    South Korean won (negative 37) 37 (negative 29) 29
    Chilean peso (negative 27) 27 (negative 24) 24
    Brazilian real (negative 24) 24 (negative 34) 34
    Other (negative 127) 127 (negative 84) 84
    Total (negative 2,992) 2,992 (negative 2,401) 2,401
    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 primarily 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 $6,012 million (2017 – $6,168 million) of unsecured credit facilities to meet potential liquidity requirements. As at March 31, 2018, the total amount drawn on the credit facilities is $nil (2017 – $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 exposed to liquidity risk through its obligation to remit cash to the CPP (refer to Note 19). 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:

(in millions of dollars)

  2018 2017Link to footnote 1
Equities
Canada 12,292 8,624
Foreign developed markets 181,244 148,897
Emerging markets 34,151 24,989
Total equities 227,687 182,510
Fixed income
Bonds 63,851 61,240
Other debt 22,183 19,764
Money market securities 8,213 19,408
Total fixed income 94,247 100,412
Absolute return strategies 21,027 19,371
Real assets
Real estate 44,712 38,732
Infrastructure 30,399 27,899
Total real assets 75,111 66,631
Investment receivables
Securities purchased under reverse repurchase agreements 6,164 5,207
Accrued interest 2,026 1,561
Derivative receivables 1,918 1,718
Other 647 290
Total investment receivables 10,755 8,776
Total investments 428,827 377,700
Investment liabilities
Securities sold under repurchase agreements (negative 32,504) (negative 14,749)
Securities sold short (negative 13,574) (negative 24,177)
Debt financing liabilities (negative 24,056) (negative 19,873)
Derivative liabilities (negative 1,712) (negative 1,401)
Other (negative 795) (negative 223)
Total investment liabilities (negative 72,641) (negative 60,423)
Amounts receivable from pending trades 2,613 3,234
Amounts payable from pending trades (negative 2,477) (negative 3,631)
Net investmentsLink to footnote 2 356,322 316,880

Table notes

(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. Fair value for publicly traded equities, including equity short positions, is based on quoted market prices. As at March 31, 2018, public equities included fund investments with a fair value of $8,331 million (2017 – $8,022 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, 2018, private equities included direct investments with a fair value of $39,377 million (2017 – $29,965 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 include 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 includes investments in direct private debt, asset-backed securities, distressed mortgage funds, private debt funds, hedge funds and investments in income streams of intellectual properties and royalties. 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 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. 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, 2018, real estate investments include assets of $44,712 million (2017 – $38,732 million).

  2. Infrastructure investments are generally made directly, but can also occur through limited partnership funds. As at March 31, 2018, infrastructure includes direct investments with a fair value of $30,350 million (2017 – $27,860 million) and $49 million in fund investments (2017 – $39 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, 2018, are as follows: within 1 year, $6,164 million (2017 – $5,207 million), and 1 year to over 10 years, $nil (2017 – $nil).

The terms to maturity of the undiscounted value of the securities sold under repurchase agreements, as at March 31, 2018, are as follows: within 1 year, $32,559 million (2017 – $14,753 million), and 1 year to over 10 years, $nil (2017 – $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, 2018, securities sold short of $13,574 million (2017 – $24,177 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, 2018, are as follows: within 1 year, $6,263 million (2017 – $11,120 million), and 1 year to over 10 years, $nil (2017 – $nil). The terms to maturity of the undiscounted value of the term debt as at March 31, 2018, are as follows: within 1 year, $1,250 million (2017 – $nil), 1 year to 5 years, $10,614 million (2017 – $8,783 million), and 6 years to over 10 years, $6,046 million (2017 – $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:

(in millions of dollars)

  2018 2017Link to footnote 3
Third-party assets held as collateral on:
Reverse repurchase agreementsLink to footnote 4 6,187 5,196
Over-the-counter derivative transactionsLink to footnote 4 692 493
Other debtLink to footnote 4 760 726
Own and third-party assets pledged as collateral on:
Repurchase agreementsLink to footnote 4 (negative 32,621) (negative 14,785)
Securities sold shortLink to footnote 4 (negative 16,610) (negative 30,603)
Over-the-counter derivative transactions (negative 315)
Private equities (negative 5,942) (negative 5,291)
Other debt (negative 4,417) (negative 3,957)
Total (negative 52,266) (negative 48,221)

Table notes 1

The dash means that the amount is 0 or is rounded to 0.

8. Payables and accrued liabilities

Payables and accrued liabilities are comprised of the following:

(in millions of dollars)

  2018 2017
Operating expenses 702 684
Pensions and benefits payable 298 310
Tax deductions on benefits due to Canada Revenue Agency 214 201
Total 1,214 1,195

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 2017–2018 Employment and Social Development Canada Departmental Plan, tabled in Parliament in March 2017 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.

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

(in millions of dollars)

  2018
Investment income (loss)Link to footnote 5 Net gain (loss) on investmentsLink to footnote 6Link to footnote 7Link to footnote 8 Total investment income (loss) Investment management feesLink to footnote 9 Transaction costs Net investment income (loss)
Equities
Canada 44 282 326 (negative 7) (negative 2) 317
Foreign developed markets 2,315 18,196 20,511 (negative 419) (negative 129) 19,963
Emerging markets 328 4,419 4,747 (negative 285) (negative 11) 4,451
Subtotal 2,687 22,897 25,584 (negative 711) (negative 142) 24,731
Fixed income
Non-marketable bonds 952 (negative 313) 639 639
Marketable bonds, cash and absolute return strategiesLink to footnote 10 496 4,847 5,343 (negative 886) (negative 110) 4,347
Credit investments 1,371 185 1,556 (negative 13) (negative 32) 1,511
Subtotal 2,819 4,719 7,538 (negative 899) (negative 142) 6,497
Real assets
Real estate 1,341 2,811 4,152 (negative 128) (negative 61) 3,963
Infrastructure 891 2,710 3,601 (negative 14) 3,587
OtherLink to footnote 11 150 (negative 951) (negative 801) (negative 36) (negative 837)
Subtotal 2,382 4,570 6,952 (negative 128) (negative 111) 6,713
Debt financing liabilities (negative 294) 151 (negative 143) (negative 6) (negative 149)
Interest on operating balance 3 3 3
Total 7,597 32,337 39,934 (negative 1,738) (negative 401) 37,795

Table notes 2

The dash means that the amount is 0 or is rounded to 0.

(in millions of dollars)

  2017
Investment income Link to footnote 12 Net gain (loss) on investmentsLink to footnote 13Link to footnote 14Link to footnote 15 Total investment income (loss) Investment management feesLink to footnote 16 Transaction costs Net investment income (loss)
Equities
Canada (negative 107) 2,382 2,275 (negative 13) (negative 9) 2,253
Foreign developed markets 2,411 19,727 22,138 (negative 488) (negative 93) 21,557
Emerging markets 226 2,976 3,202 (negative 225) (negative 8) 2,969
Subtotal 2,530 25,085 27,615 (negative 726) (negative 110) 26,779
Fixed income
Non-marketable bonds 957 (negative 517) 440 440
Marketable bonds, cash and absolute return strategiesLink to footnote 17 362 24 386 (negative 452) (negative 108) (negative 174)
Credit investments 1,339 1,246 2,585 (negative 133) (negative 39) 2,413
Subtotal 2,658 753 3,411 (negative 585) (negative 147) 2,679
Real assets
Real estate 1,508 1,806 3,314 (negative 153) (negative 100) 3,061
Infrastructure 1,022 692 1,714 (negative 15) 1,699
OtherLink to footnote 18 23 720 743 (negative 66) 677
Subtotal 2,553 3,218 5,771 (negative 153) (negative 181) 5,437
Debt financing liabilities (negative 144) (negative 380) (negative 524) (negative 9) (negative 533)
Interest on operating balance 1 1 1
Total 7,598 28,676 36,274 (negative 1,464) (negative 447) 34,363

Table notes 3

The dash means that the amount is 0 or is rounded to 0.

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, 2018, undetected overpayments and underpayments are estimated to be $3.0 million and $70.4 million respectively ($9.6 million and $30.3 million in 2016–2017). 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.

(in millions of dollars)

  2018 2017Link to footnote 19
GoC CPPIB Total GoC CPPIB Total
Personnel related costs, including the Health Insurance Plan 298 712 1,010 257 625 882
Collection of contributions and investigation services 190 190 203 203
Information technology and data services 98 98 92 92
Program policy and delivery, accommodation and corporate services 104 104 102 102
Professional and consulting fees 71 71 54 54
Tax on international operations 40 40 32 32
Premises and equipment 38 38 32 32
Amortization of premises and equipment 27 27 30 30
Support services of the Social Security Tribunal 14 14 13 13
Cheque issue and computer services 6 6 6 6
Others 3 67 70 3 58 61
Total 615 1,053 1,668 584 923 1,507

Table notes 4

The dash means that the amount is 0 or is rounded to 0.

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 benefits 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 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 the 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 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 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.

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%, 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.

  As at December 31, 2015Link to footnote 20 As at December 31, 2012Link to footnote 20
Males Females Males Females
Canadian life expectancy
at birth in 2016 86.7 years 89.7 years 86.3 years 89.3 years
at age 65 in 2016 21.3 years 23.7 years 21.1 years 23.5 years
Retirement rates for cohort at age 60 34% (2016) 38% (2016) 34% (2016) 38% (2016)
CPP disability incidence rates (per 1,000 eligible) 3.10 (2020) 3.65 (2020) 3.32 (2017)Link to footnote 21 3.77 (2017)Link to footnote 21
Total fertility rate 1.65 (2019) 1.65 (2015)
Net migration rate 0.62% of population (2016) 0.60% of population (2017)
Participation rate (age group 15-69) in 2035 (2012 - in 2030) 77.5% 76.8%
Employment rate (age group 15-69) in 2035 (2012 - in 2030) 72.6% 72.1%
Unemployment rate 6.2% (2025) 6.0% (2023)
Rate of increase in prices 2.0% (2017) 2.2% (2021)
Real-wage increase 1.1% (2025) 1.2% (2020)
Real rate of return (75-year average) 3.9% 3.9%

Table notes 5

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% of contributory earnings for the year 2019 and thereafter (9.84% 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% 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% in 2050) will be required to make up the difference between contributions and expenditures. Under the current legislated contribution rate of 9.9% and the average expected nominal return on assets of 5.1% over the period 2016 to 2025, total assets available for benefit payments are expected to grow to $476 billion by the end of 2025.

As at March 31, 2018, the value of CPP assets available for benefit payments is $361.0 billion (2017 – $320.9 billion). This amount represents approximately 7.4 times the 2019 planned expenditures of $48.7 billion (2017 – 6.8 times the 2018 planned expenditures of $47.4 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% confidence intervals.

  Low-cost Best-estimate High-cost
Mortality: Canadian life expectancy at age 65 in 2050 with future improvements Males 20.9 Males 23.3 Males 25.8
Females 23.2 Females 25.6 Females 27.9
Real wage increase 1.8% 1.1% 0.4%
Average real rate of return (2016‒2090) 5.6% 3.9% 2.2%

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%, above the current legislated contribution rate of 9.9%. 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%.

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% is assumed for 2025 and thereafter, the minimum contribution rate would decrease to 9.31%. However, if an ultimate real wage increase of 0.4% is assumed for 2017 and thereafter, the minimum contribution rate would increase to 10.32%.

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

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 contribution rate of 9.9% to the changes in mortality, real wage increase and real rate of return on investments assumptions:

Assumption Scenario Minimum contribution rate Link to footnote 22
(%)
Ratio of assets to expenditure under 9.9% contribution rate
2025 2050 2090
  Best estimate 9.79 6.49 7.28 7.39
Mortality Low cost 9.46 6.50 7.97 13.12
High cost 10.10 6.47 6.67 3.20
Real wage increases Low cost 9.31 6.54 8.70 12.61
High cost 10.32 6.37 5.50 Link to footnote 23
Real rate of return on investments Low cost 8.54 7.52 14.07 47.47
High cost 11.05 5.58 3.42 Link to footnote 24

Table notes 6

The dash means that the amount is 0 or is rounded to 0.

14. Actuarial obligation in respect of benefits

The Twenty-seventh Actuarial Report on the Canada Pension Plan 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%, 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:

(in billions of dollars)

  As at December 31, 2015 As at December 31, 2012
Open group Closed group Open group Closed group
Assets available for benefit payments 2,547.4 285.4 2,245.8 175.1
Actuarial obligation 2,546.1 1,171.1 2,254.7 1,004.9
Asset excess (shortfall)Link to footnote 25 1.3 (negative 885.7) (negative 8.9) (negative 829.8)
Assets to actuarial obligation ratio 100.1% 24.4% 99.6% 17.4%

Table notes 7

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 and provincial 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 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 the CPPIB will be obligated to make future payments in order to carry out its activities. Significant contractual obligations and commitments that can be reasonably estimated are summarized as follows:

(in millions of dollars)

  Within one year After one year but not more than five years More than five years Total
Lease and other 36 115 26 177
Operating costs 625 625
Total 661 115 26 802
The dash means that the amount is 0 or is rounded to 0.

Operating costs are charged to the CPP in accordance with various memoranda of understanding (MoU) between the CPP and various Government of Canada (GoC) departments for the administration of the CPP's activities (refer to Note 17). The MoUs require written notification for termination and require one year advanced notification. Therefore, the operating costs disclosed are an estimation of the costs that will be charged to the CPP Account in the next fiscal year. Operating costs are expected to continue to be charged to the CPP Account in the upcoming fiscal years, but cannot be reasonably estimated at this time.

The CPP, through the 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, 2018, the unfunded commitments totalled $41,767 million (2017 – $38,886 million).

16. Contingent liabilities

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

At March 31, 2018, there were 4,480 appeals (2017 – 7,182) relating to the payment of CPP disability pensions. These contingencies are reasonably estimated, using historical information, at an amount of $26.5 million (2017 – $39.7 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 financial statements for the 2017–2018 and 2016–2017 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, 2018, up to $2,842 million (2017 – $3,073 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 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 and contractual obligations in Note 15.

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.

18. Canada Pension Plan enhancement

On December 15, 2016, legislation to enact the CPP enhancement received Royal Assent, amending the Canada Pension Plan, the CPPIB Act and the Income Tax Act (Canada). These legislative amendments will increase the amount of CPP contributions and the corresponding pensions and post-retirement benefits that will be paid on CPP contributions made after 2018. The Canada Pension Plan now defines two separate accounts, the CPP Account (existing CPP), and the Additional CPP Account (enhanced CPP), where the financial activities of each account are accounted for separately. As a result of the legislated requirement for the incremental full funding of any new or increased benefit (refer to the second paragraph in Note 13), the Additional CPP Account is fully funded, unlike the CPP Account.

The Additional CPP Account contributions will begin on January 1, 2019. In order to prepare for the Additional CPP Account, costs are being incurred by the CPP and the CPPIB. As defined in the Canada Pension Plan as well as in the CPPIB Act, initial costs of administration and the related interests incurred in relation to CPP enhancement via the Additional CPP Account are temporarily funded by the CPP Account. Details of these initial costs of administration and the related interests incurred are provided in Note 4.

The Additional CPP Account will report these initial costs of administration and the related interests incurred in 2018–2019 when contributions are received, beginning on January 1, 2019. The Additional CPP Account will start to reimburse these costs at a date determined by the Minister, which can be no later than December 31, 2020 and must be fully reimbursed by March 31, 2021.

19. 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.

(in millions of dollars)

  2018 2017Link to footnote 26
GoC CPPIB Total GoC CPPIB Total
Financial assets 5,388 431,544 436,932 4,731 381,017 385,748
Non-financial assets 397 397 396 396
Liabilities 525 75,807 76,332 513 64,736 65,249
Assets available for benefit payments 4,863 356,134 360,997 4,218 316,677 320,895
Income
Contributions 48,435 48,435 46,966 46,966
Investment income 3 37,792 37,795 1 34,362 34,363
Subtotal 48,438 37,792 86,230 46,967 34,362 81,329
Expenses
Pensions and benefits 44,460 44,460 42,502 42,502
Operating expenses 615 1,053 1,668 584 923 1,507
Subtotal 45,075 1,053 46,128 43,086 923 44,009
Net increase in assets available for benefit payments 3,363 36,739 40,102 3,881 33,439 37,320

Table notes 8

The dash means that the amount is 0 or is rounded to 0.

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, 2018, a total of $36,425 million (2017 – $39,517 million) was transferred to the CPPIB and a total of $33,707 million (2017 – $35,220 million) was returned to the CPP to meet its liquidity requirements.

Net accumulated transfers to CPPIB
(in millions of dollars)

  2018 2017
Canada Pension Plan Investment Board
Accumulated transfers to CPPIB 492,033 455,608
Accumulated transfers from CPPIB (negative 351,513) (negative 317,806)
Total 140,520 137,802

20. Comparative information

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

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