Royal Canadian Mounted Police Pension Plan 2008-2009

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Table of Content

Message from the Minister of Public Safety
Financial Highlights
RCMP Pension Plan at a Glance
Governance and Administration
Investment Management
2008-2009 Results
Financial Statements
Schedule I – Public Accounts
Schedule II – Plan Membership
Corporate
Glossary of Terms

 

Message from the Minister of Public Safety

Pursuant to Section 31 of the Royal Canadian Police Superannuation Act, I am pleased to submit the Annual Report of the RCMP Pension Plan for the year ending March 31, 2009.

Yours sincerely,

The honourable Vic Toews, P.C., Q.C., M.P.
Minister of Public Safety

 

Financial Highlights

Year End Financial Position

• Net assets and other accounts available for benefits were $14,774 million.  Net assets and other accounts consist of the balance in the RCMP Superannuation Account of $12,307 million, the net investments at fair value of $2,419 million, and other net assets and liabilities of $48 million.
• Investments managed by the Public Sector Pension Investment Board (PSP Investments) were invested as follows:

The above Pie Chart shows Investments managed by the Public Sector Pension Investment Board (PSP Investments):

0% of Asset Classes (As at March 2009)

• Small Cap Developed World Equity - 2.3 percent
• Emerging Markets Equity - 6.3 percent
• Private Equity - 12.4 percent
• Real-Return Assets - 28.1 percent
• Nominal Fixed Income - 19.6 percent
• Developed World Equity - 31.9 percent

Source: Public Sector Pension Investment Board

Investment Performance

• Accrued pension benefits were $14,725 million.
• The excess of the actuarial value of net assets and other accounts available for benefits over accrued pension benefits was $ 291 million.
• The RCMP Superannuation Account earned $ 828 million in interest, representing a 6.8% rate of return.
  
• The investments managed by PSP Investments lost $679 million, representing an overall rate of return of negative 22.7%.

RCMP Pension Plan at a Glance

Overall

• The RCMP Pension Plan is a contributory defined benefit pension plan.
• Benefits are determined based on a formula set out in the RCMP Superannuation Act (RCMPSA) and are not based on the financial status of the Plan or the rate of return on plan assets.
• Membership in the Plan is compulsory for all members of the RCMP, regardless of length of service.

Benefits

• Entitlement to benefits depends on either service in the Force or pensionable service. There are different provisions for regular and civilian members.
• The basic benefit upon retirement is an annuity equal to 2% of average pensionable earnings during the best five years of consecutive service multiplied by the number of years of pensionable service.  The maximum benefit is 70% of average pensionable earnings. 
• Members who do not have the required years of service to obtain an immediate annuity upon termination may be entitled to receive an annual allowance, a deferred annuity, a commuted value, a return of contributions or a cash termination allowance. 
• The Plan also provides benefits to members in case of disability and to the spouse and children in case of death of a member. 
• Benefits are integrated with the Canada Pension Plan and the Quebec Pension Plan. Pursuant to the Budget of May 2, 2006 and ensuing Budget Implementation Act 2006 that received Royal Assent on June 22, 2006, amendments were made to the Royal Canadian Mounted Police Superannuation Act. Effective January 1, 2008, these amendments will decrease from 0.7 per cent to 0.625 per cent over a five-year period, the pension reduction factor that results from the coordination of benefits with the CPP and QPP for plan members reaching age 65 in 2008 and beyond.
• Benefits are indexed to the increase in the cost of living, as measured by the increase in the Consumer Price Index to ensure that benefits are not eroded by inflation. 

Plan Membership

• As of March 31st, 2009, the Plan had 37,330 members. The membership consisted of 22,161 active contributors, 13,371 pensioners, and 1,798 survivors. (See membership profile in schedule II).

The above Pie Chart shows the RCMP Pension Plan Membership Profile (as of March 31, 2009)

• Survivors - 5 percent
• Pensioners - 36 percent
• Active Contributors - 59 percent

Source: Morneau Sobeco

Contributions

• During the first 35 years of pensionable service, members contribute a percentage, which is currently 4.9% (4.6% in 2007) for the first nine months of the fiscal year and 5.2% (4.9% in 2008) for the last three months of the fiscal year up to the yearly maximum  pensionable earnings (YMPE) in accordance with the Canada Pension Plan and/or Quebec Pension Plan and a higher percentage, which is currently 8.4% (8.1% in 2007) for the first nine months and 8.4% (8.4% in 2008) for the last three months of pensionable earnings above that amount.
• Members who have achieved 35 years of pensionable service contribute 1% of pensionable earnings.
• The Government of Canada contributions are based on member contributions multiplied by specified rates determined by the President of the Treasury Board.  The rates are based on whether the member contribution was for current or past service and if the election to purchase prior service was made before or after April 1, 2000.  During the year, the Government of Canada was required to contribute at the following rates:

April 1, 2008 – December 31, 2008

	Pre-April 1, 2000	Post-March 31, 2000
Current service	2.26	2.26
Elected service
Single rate	1.00	2.26
Double rate	0.00	0.63
Double and a half rate	0.00	0.30

January 1, 2009 –March 31, 2009

	Pre-April 1, 2000	Post-March 31, 2000
Current service	2.16	2.16
Elected service
Single rate	1.00	2.16
Double rate	0.00	0.58
Double and a half rate	0.00	0.26

• The elected service rates listed are for contributions for periods of leave without pay which are set out in RCMP Superannuation Regulations. Depending on the type of leave, the member must repay contributions at a rate either equal to single rate, double, or two and one-half times the amount that would have been payable had he/she not been absent.
• Member contribution rates were increased, through a yearly adjustment of 0.3% of salary effective January 1, 2007, to result in a final rate of 6.4% in 2013 on pensionable earnings up to the YMPE under the Canada Pension Plan and/or Quebec Pension Plan and 8.4% of the earnings above the YMPE. The increase in member contributions rates reflects the Government of Canada’s goal of ensuring the costs of the Plan are shared in a balanced way between plan members and the Government, and ultimately, the Canadian taxpayer.

Governance and Administration

The RCMP Pension Plan is governed by the RCMPSA and regulations.

The Government of Canada is the sole sponsor of the Plan and the Minister of Public Safety (the “Minister”) is the Minister responsible for the Plan.  The RCMP is the administrator of the Plan. PSP Investments manages the Plan's investments in the capital markets. 

The Minister is responsible for approving recommendations made by the RCMP Pension Advisory Committee (PAC), for tabling the annual report and for tabling legislative changes to the RCMPSA in Parliament.

RCMP

The RCMP is the administrator of the Plan. Under the direction of the Minister, the Commissioner of the RCMP has the control and management of the RCMP and all matters connected therewith.

The RCMP is responsible for determining eligibility for benefits, calculating and paying benefits, developing legislation and related policies, providing information to plan members, and providing the necessary secretariat support for committees. On April 1, 2003, the RCMP outsourced many of the day-to-day administrative activities of the Plan previously performed by employees of the RCMP and Public Works and Government Services Canada (PWGSC) to Morneau Sobeco, a private sector pension plan administrator.

RCMP Pension Advisory Committee

The mandate of the Pension Advisory Committee is to:  review matters respecting the administration, design and funding of the benefits provided under the Royal Canadian Mounted Police Superannuation Act; make recommendations to the Minister about those matters; and review any other pension-related matters that the Minister may refer to it.  The membership of the Committee consists of eight members including the Chair who are appointed by the Minister:

• One member appointed from among contributors in receipt of an annuity;
• Three members appointed from among persons required to contribute to the Pension Plan who are nominated for appointment by a body that, in the opinion of the Minister, represents such persons;
• Two members appointed from among persons required to contribute to the Pension Plan; and
• Two other members appointed by the Minister.

The activities of the Committee are reported through the Pension Advisory Committee News.

RCMP Pension Finance Oversight Committee

The RCMP Pension Finance Oversight Committee was established on April 6th, 2004 to assist the Chief Financial & Administrative Officer (formerly known as the Deputy Commissioner, Corporate Management & Comptrollership) and the Chief Human Resources Officer on matters related to the financial administration and management of the RCMP Pension Plan. The Chairpersons of the Pension Finance Oversight Committee report directly to the Chief Financial & Administrative Officer and the Chief Human Resources Officer.

The role of the PFOC is to play a challenge function and provide advice and recommendations to the National Compensation Services concerning the review, management and control of total administration costs charged to the RCMP Pension Plan.

Pension Administration Outsourcing Project (PAOP)

On July 10, 2006 the RCMP Senior Executive Committee approved the recommendation of the Deputy Commissioner Human Resources to re-tender to industry the provision of pension administration services on behalf of RCMP Pension Plan members, their survivors and beneficiaries and Preliminary Project Approval to establish the Pension Administration Outsourcing Project (PAOP) was granted.  

The Pension Administration Outsourcing Project Steering Committee (PAOP SC) was formally established, effective April 16, 2007 with a mandate to assist the Project Sponsors (Deputy Commissioner, Corporate Management & Comptrollership and the Deputy Commissioner, Human Resources) on matters related to the provision of pension administration services and the management of the RCMP Pension Plan post March 31, 2010, the date on which the current contract with Morneau Sobeco will expire.

The Steering Committee is established to assure effective controls are in place to ensure alignment with strategic organizational direction and resolution of project issues that could jeopardize the RCMP obligations with respect to continued pension payments after contract expiry on March 31, 2010.

The role of the PAOP SC is to provide strategic leadership, decision support and interface with RCMP Senior Executive Committee on the development of a solid Business Case and TB Submission for the outsourcing of pension administration beyond the current service provider.

PWGSC

PWGSC, under a memorandum of understanding with the RCMP, charges the Pension Plan for printing and mailing pension cheques and direct deposit stubs to pensioners.

Morneau Sobeco

Morneau Sobeco, under a contractual agreement, provides administrative day to day administration services including determining the eligibility and the calculation of pension benefits, providing call centre support and information to Plan members and providing pensioner payroll services.

The Plan entered into a contractual agreement with Morneau Sobeco to function as the administrator of the Plan commencing April 1, 2003.  The initial term of the contract was for a five-year period, ending March 31, 2008, with the option to renew the contract for a further two-year period.  On March 27, 2008, the Plan exercised the option to renew the contract for the first additional year and on March 31, 2009, the Plan exercised the option to renew the contract for the second additional year.  On June 18, 2009, a Treasury Board Submission was approved which obtained the authority to extend the contract with Morneau Sobeco for the provision of pension administration services until March 31, 2013 with an option to extend the contract for one additional year.

Treasury Board

Treasury Board is responsible for establishing principles for the charging of administration costs to the Plan, establishing contribution rates, managing surpluses, and exercising power as the Governor in Council under the RCMPSA. 

The President of the Treasury Board is also responsible for the Public Pensions Reporting Act, the Public Sector Pension Investment Board Act, and the Special Retirement Arrangements Act.

Office of the Superintendent of Financial Institutions

In accordance with the Public Pensions Reporting Act, the Chief Actuary of the Office of Superintendent of Financial Institutions (OSFI) conducts triennial actuarial reviews of the Plan and is required to prepare and file with the President of the Treasury Board a cost certificate, an actuarial valuation report and an assets report on the state of the Plan.

Office of the Auditor General

Pursuant to the Section 11 of the Auditor General Act, the Office of the Auditor General of Canada audits the financial statements of the Plan.

Investment Management

RCMP Superannuation Account (the "Account")

The Account represents contributions, net of benefit payments and administrative charges, in respect of service provided by members prior to April 1, 2000.  The Account earns interest at rates based on long-term Government of Canada bond rates. A summary of transactions during the current and prior periods to the Account is included in Schedule I.

RCMP Pension Fund (the “Fund”)

Contributions, net of benefit payments and administrative charges, in respect of service provided by members on or after April 1, 2000 are transferred periodically to PSP Investments for investment in the capital markets.  The balance at year-end in the Fund represents the amount in transit to PSP Investments. A summary of transactions during the current and prior periods to the Fund is included in Schedule I.

PSP Investments

PSP Investments is a Crown corporation established to invest the proceeds of the net contributions received from the government since April 1, 2000 for the pension plans of the Public Service, the Canadian Forces and the Royal Canadian Mounted Police, and since March 1, 2007, for the Reserve Force Pension Plan.  PSP Investments operates at arm’s length from the federal government.  Its statutory objectives are to manage the funds entrusted to it in the best interests of the contributors and beneficiaries of the plans and to maximize investment returns without undue risk of loss.

Investment Objectives

The mandate of PSP Investments is set out in section 4 of the Public Sector Pension Investment Board Act (the Act):

• To manage funds in the best interests of contributors and beneficiaries under the Plans and;
  
• To maximize returns without undue risk of loss, having regard to the funding, policies and requirements of the pension plans and the ability of those plans to meet their financial obligations.

Based on these statutory objectives, PSP Investments’ Board of Directors established the following objectives:

• Absolute Performance: achieving a return (net of expenses) at least equal to the actuarial rate of return as determined by the Chief Actuary of Canada; and
  
• Relative Performance: achieving a target return exceeding the Policy Portfolio return and operating expenses.

Investment Policy

In the fiscal year 2009, PSP Investments developed its asset-liability modeling capabilities by building an internal function and teaming up with an external consultant.  This development reflects PSP Investments’ desire to improve the overall alignment of interests between all stakeholders.  Discussions with Treasury Board Secretariat regarding the management of pension financing risks also contributed to a better understanding of related issues. 

Fiscal year 2009 was also characterized by a building up of PSP Investments’ capacity to integrate information into an enhanced Policy Portfolio monitoring dashboard.  The integration of economic and geopolitical scenarios in the investment process is also being improved.

Accountability and Reporting

PSP Investments’ President and CEO is appointed by and reports to the Board of Directors.  In turn, the Board of Directors reports to Parliament through the President of the Treasury Board, who is responsible for PSP Investments’ legislation.  The President of the Treasury Board is also required to table PSP Investments’ annual report in Parliament.  PSP Investments is required to provide its annual report as well as quarterly financial statements to the President of the Treasury Board, the Minister of National Defence and the Minister of Public Safety.  During the last fiscal year, PSP Investments conducted a thorough review of its annual report disclosure with a view of complying with best corporate governance and disclosure practices.

Additional information about the mandate of PSP Investments, the role of the Board of Directors and key policies can be found in the Public Sector Pension Investment Board 2008 Annual Report published on PSP Investments’ Website:  www.investpsp.ca.

2008-2009 Results

Net Assets and Other Accounts Available for Benefits

Net Assets and Other Accounts Available for Benefits decreased by $47 million from the previous year, to $14,774 million at March 31, 2009.  The reason for the decrease is shown in the Statement of Changes in Net Assets and other Accounts Available for Benefits.

As indicated on this Statement, the main reasons for the decrease of $47 million are:

• Interest earned on the RCMP Superannuation Account of $828 million; plus
• Contributions received of $362 million; less
• Losses on investments managed by PSP Investments of $679 million; less
• Benefits paid of $525 million; less,
• Refunds and transfers of $21 million.

Net Assets and Other Accounts Available for Benefits are valued at fair market value.

Accrued Pension Benefits

Accrued Pension Benefits increased by $1,287 million to $14,725 million at March 31, 2009.   The reason for the increase is shown on the Statement of Changes in Accrued Pension Benefits.

As indicated on this Statement, this increase reflects:

• The interest incurred on accrued pension benefits of $906 million; plus
• Additional benefits earned by members during the year of $334 million; plus
• Changes in actuarial assumptions of $243 million; plus
• Experience losses of $354 million; less
• Benefits paid of $525 million; less,
• Refunds and transfers of $21 million.

Accrued pension benefits are based on an actuarial valuation which is performed every three years by the plan’s actuary: the Office of the Superintendent of Financial Institutions. This valuation is updated annually for the purpose of preparing the financial statements.

Excess of Actuarial Value of Net Assets and Other Accounts Available for benefits over Accrued Pension Benefits

The Excess of Actuarial Value of Net Assets and Other Accounts available for benefits over Accrued Pension Benefits, as of March 31, 2009, was $291 million, representing a decrease of $1,074 million over the previous year. The excess is calculated by deducting the accrued pension benefits from the actuarial value of net assets available for benefits.

The reason for the decrease is shown on the Statement of Changes in Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits.  This Statement indicates that the decrease is due to an increase in accrued pension benefits of $1,287 million, offset by an increase in the actuarial value of net assets and other accounts available for benefits of $213 million.

Interest on RCMP Superannuation Account

The RCMP Superannuation Account earned $828 million in interest in 2008-2009, representing a 6.8% return.  In 2007-2008, the RCMP Superannuation Account earned $833 million.  This slight decrease is a result of lower interest rates through 2008-2009 compared to 2007-2008.

Earnings on Investments Managed by PSP Investments

Investments managed by PSP Investments lost $679 million in 2008-2009. This includes the decrease in the fair value of investments of $306 million, interest and dividends and other income of $67 million, and net realized losses of $440 million.

The following table summarizes the Portfolio and Benchmark Returns by Asset Class:

Portfolio and Benchmark Returns	Fiscal Year 2009		5-year
Asset Class	Portfolio Returns %	Benchmark Returns %	Portfolio Returns %	Benchmark Returns %
Developed World Equity
Canadian Equity	-32.3	-32.4	3.4	3.2
US Large Cap Equity	-27.7	-24.1	-7.6	-5.6
EAFE Large Cap Equity	-33.6	-34.4	-3.2	-3.0
Small Cap Developed World Equity (4 years)	-30.0	-26.7	-9.41	-7.31
Emerging Markets Equity (4 years)	-34.0	-35.1	3.51	3.81
Private Equity (4.75 years)	-32.3	-31.6	-17.91	-18.51
Nominal Fixed Income
Cash & Cash Equivalents	2.8	2.4	3.3	3.2
World Government Bonds (2 years)	19.4	19.4	11.81	11.81
Canadian Fixed Income	4.7	4.9	5.2	5.2
Real Return Assets
World Inflation-Linked Bonds (4.9 years)	5.9	6.0	6.11	6.41
Real Estate	-16.8	6.6	9.3	7.1
Infrastructure (3 years)	6.0	5.8	5.51	3.31
Total Return	-22.7	-17.6	2.0	3.0

1. These respective asset classes have existed for less than five years. Their respective returns presented are since inception returns.

Source: Public Sector Pension Investment Board Annual Report 2008-2009

• Returns have been calculated in accordance with the performance calculation methodology recommended by the CFA Institute.
• The internal rate of return methodology is used to calculate the returns for the Real Estate, Private Equity and Infrastructure asset classes.
• PSP Investments has identified relevant benchmarking for each asset class. The asset class benchmark returns are used in evaluating the relative performance of each asset class.
• The total portfolio return includes the performance impact of absolute return strategies. Hedging investment returns are either netted against the return of the respective hedged assets, as is the case with Private Asset classes, or included in total return, as in the case of Public Markets.

Since PSP Investments commenced operations on April 1, 2000, the investments have earned a cumulative net investment gain of $72 million on total transfers of $2,380 million, resulting in cumulative annualized five-year total return of 2.0%.

PSP Investment Performance

The graph below illustrates the rates of return on the consolidated pension plans since PSP Investments’ inception.

The Above Chart shows Rates of Return on Consolidated Pension Plan Account (by fiscal year)

• Fiscal year 2001: - 3.8 %
• Fiscal year 2002:  2.7 %
• Fiscal year 2003: - 13.5 %
• Fiscal year 2004: 26.1 %
• Fiscal year 2005: 7.9 %
• Fiscal year 2006: 19.1 %
• Fiscal year 2007: 11.3 %
• Fiscal year 2008: - 0.3 %
• Fiscal year 2009: - 22.7 %

Source: Public Sector Pension Investment Board

Contributions

In 2008/2009, $362 million was paid into the Plan, of which members contributed $112 million and the employer $250 million. Schedule II presents the number of Plan contributors as of March 31, 2008 and 2009.

The graph below illustrates the contributions made by the Members and the Employer, as a percentage of the total contributions.   

Contributions (2007/2008 - current and elective service)

• Member Share 31 percent
• Employer Share 69 percent

Source: Royal Canadian Mounted Police

Benefits

Benefits paid increased to $525 million in 2008-2009, compared to $488 million in 2007-2008.  This increase of $37 million reflects a net increase of 567 annuitants, as well as indexing increases of 1.8% that came into effect on January 1, 2008 and another 2.5% on January 1, 2009 respectively. Schedule II summarizes the number of annuitants as of March 31, 2008 and 2009, and the number of other benefits paid during the year ended March 31, 2008 and 2009.

Actuarial adjustments

During 2007-2008 and 2008-2009,  the Government of Canada did not withdraw any amounts from the RCMP Superannuation Account. At March 31, 2009, the Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits in the RCMP Superannuation Account was $853 million.

Administrative expenses

Administrative expenses totaled $16.5 million in 2008-2009 ($15.0 million in 2007-2008).  The total expenses are comprised of expenses incurred by the RCMP ($2.8 million in 2008-2009, $2.1 million in 2007-2008); Morneau Sobeco ($5.8 million in 2008-2009, $6.4 million in 2007-2008); PWGSC ($1.4 million in 2008-2009, $0.7 million in 2007-2008); PSP Investments ($6.2 million in 2008-2009, $5.5 million in 2007-2008); and OSFI ($0.3 million in 2008-2009, 0.3 million in 2007-2008).  These expenses were directly related to administration of the Pension Plan.

Financial Statements

ROYAL CANADIAN MOUNTED POLICE PENSION PLAN

Year ended March 31, 2009

Management Responsibility for Financial Statements

Responsibility for the integrity and fairness of the financial statements of the Royal Canadian Mounted Police (RCMP) Pension Plan rests with the Management of the RCMP.

The financial statements of the RCMP Pension Plan for the year ended March 31, 2009, have been prepared in accordance with the accounting policies set out in Note 2 of the of the financial statements which are based on Canadian generally accepted accounting principles. The presentations and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles. The financial statements include management's best estimates and judgements where appropriate.

To fulfill its accounting and reporting responsibilities, management has developed and maintained books, records, internal controls and management practices designed to provide reasonable assurance as to the reliability of the financial information and to ensure that transactions are in accordance with the Royal Canadian Mounted Police Superannuation Act and regulations as well as the Financial Administrationc Act and regulations.

Additional information, as required, is obtained from the Public Sector Pension Investment Board, The Board maintains its own records and systems of internal control to account for the funds managed on behalf of the RCMP Pension Plan in accordance with the Public Sector Pension Investment Board Act, regulations and by-laws.

These statements have been audited by the Auditor General of Canada, the independent auditor for the Government of Canada.

 

Approved by:

 

 

AUDITOR'S REPORT

To the Minister of Public Safety

I have audited the statement of net assets and other accounts available for benefits, of accrued pension benefits and of excess of actuarial value of net assets and other accounts available for benefits over accrued pension benefits of the Royal Canadian Mounted Police Pension Plan as at March 31, 2009 and the statements of changes in net assets and other accounts available for benefits, changes in accrued pension benefits and changes in excess of actuarial value or net assets and other accounts available for benefits over accrued pension benefits for the year then ended, These financial statements are the responsibility of the Plan's management. My responsibility is to expresss an opinion on these financial statements based on my audit.

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

In my opinion, these financial statements present fairly, in all material respects, the net assets and other accounts available for benefits, the accrued pension benefits and the excess of actuarial value of net assets and other accounts available for benefits over accrued pension benefits of the Plan as March 31, 2009 and the changes in net assets and other accounts available for benefits, changes in accrued pension benefits and changes in excess of actuarial value of net assets and other accounts available for benefits over accrued pension benefits for the year then ended in accordance with Canadian generally accepted accounting principles.

Further , in my opinion, the transactions of the Plan that have come to my notice during my audit of the financial statements have, in all significant respects, been in accordance with the Royal Canadian Mounted Police Supperannuation Act and regulations, the Public Sector Pension Investment Board Act and regulations and the by-laws of the Public Sector Pension Investment Board.

 

Nancy Y. Cheng, FCA
Assistant Auditor General
for the Auditor General of Canada

Ottawa, Canada
December 10, 2009

Statement of Net Assets and Other Accounts Available for Benefits, OF Accrued Pension Benefits and Of Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits

As at March 31

($ millions)	2009	2008
Net Assets and Other Accounts Available for Benefits
Assets
RCMP Pension Fund Account (Note 3)	12	11
Investments (Note 4)	2,751	3,020
Investment-related assets (Note 4)	53	167
Contributions receivable—post-March 31, 2000 service (Note 6)	22	15
Other assets	2	1
	2,840	3,214
Liabilities
Accounts payable	3	1
Investment–related liabilities(Note 4)	385	396
Due to Public Service Pension Plan (Note 7)	2	4
Net Assets	2,450	2,813
Other Accounts
RCMP Superannuation Account (Note 3)	12,307	11,989
Contributions receivable—pre-April 1, 2000 service (Note 6)	17	19
Net Assets and Other Accounts Available for Benefits	14,774	14,821
Actuarial asset value adjustment Note 10)	242	(18)
Actuarial Value of Net Assets and Other Accounts Available for Benefits	15,016	14,803
Accrued Pension Benefits (Note 10)	14,725	13,438
Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits (Note 11)	291	1,365

Commitments and Contingency (Notes 19 & 20)
The accompanying notes are an integral part of these financial statements.

Statement of Changes in Net Assets and Other Accounts Available for Benefits

Year ended March 31

($ millions)	2009	2008
Net Assets and Other Accounts Available for Benefits, Beginning of Year	14,821	14,205
Increase in Net Assets and Other Accounts Available for Benefits
Interest income from the RCMP Superannuation Account (Note 3)	828	833
Contributions Note 12)	362	323
Transfers from other pension funds	4	1
Total Increase in Net Assets and Other Accounts Available for Benefits	1,194	1,157
Decrease in Net Assets and Other Accounts Available for Benefits
Investment loss (Note 13)	679	14
Benefits paid	525	488
Refunds and transfers (Note 15)	21	24
Administrative expenses (Note 16)	16	15
Total Decrease in Net Assets and Other Accounts Available for Benefits	1,241	541
Net Increase (Decrease)in Net Assets and Other Accounts Available for Benefits	(47)	616
Net Assets and Other Accounts Available for Benefits, End of Year	14,774	14,821

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

Statement of Changes in Accrued Pension Benefits

Year ended March 31

($ millions)	2009	2008
Accrued Pension Benefits, Beginning of Year	13,438	12,656
Increase in Accrued Pension Benefits
Interest on accrued pension benefits	906	888
Benefits earned	334	317
Changes in actuarial assumptions (Note 10)	243	104
Cost of new elections	2	2
Transfers from other pension funds	4	1
Total Increase in Accrued Pension Benefits	1,489	1,312
Decrease in Accrued Pension Benefits
Benefits paid	525	488
Experience gains (losses)	(354)	9
Refunds and transfers (Note 15)	21	24
Administrative expenses included in the service cost (Note 16)	10	9
Total Decrease in Accrued Pension Benefits	202	530
NetIncrease in Accrued Pension Benefits	1,287	782
Accrued Pension Benefits, End of Year	14,725	13,438

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

Statement of Changes in Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits

Year ended March 31

($ millions)	2009	2008
Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits, Beginning of Year	1,365	1,306
Increase (decrease) in net assets and other accounts available for benefits	(47)	616
Change in actuarial asset value adjustment	260	225
Increase in actuarial value of net assets and other accounts available for benefits	213	841
Net increase in accrued pension benefits	(1,287)	(782)
Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits, End of Year	291	1,365

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

Notes to Financial Statements

Year ended March 31, 2009

1. Description of Plan

The Royal Canadian Mounted Police Pension Plan (the “Plan”), which is governed by the Royal Canadian Mounted Police Superannuation Act (the “RCMPSA” or the “Act”), provides pension benefits to all members of the Royal Canadian Mounted Police (“RCMP”).  This Act has been in effect since April 1, 1960.

The following description of the Plan is a summary only.

(a) General

The Plan is a contributory defined benefit plan covering all Regular and Civilian members of the RCMP.  Membership in the Plan is compulsory for all members of the RCMP regardless of length of service.

The Government of Canada is the sole sponsor of the Plan.  The Minister of Public Safety is the Minister responsible for the RCMPSA. The RCMP is responsible for the management of the Plan. Responsibility for the day-to-day administration of the Plan was outsourced to Morneau Sobeco. The Office of the Superintendent of Financial Institutions (“OSFI”) performs periodic actuarial valuations of the Plan.

Until April 1, 2000, separate market-invested funds were not set aside to provide for payment of pension benefits.  Instead, transactions relating to the Plan were recorded in a RCMP Superannuation Account created by legislation in the Accounts of Canada. Pursuant to the RCMPSA as amended by the Public Sector Pension Investment Board Act, transactions relating to service subsequent to March 31, 2000, are now recorded in the RCMP Pension Fund (the “Pension Fund”), where the excess of contributions over benefits and administration costs is invested in capital markets by the Public Sector Pension Investment Board (“PSP Investments”).  PSP Investments is a separate Crown corporation that started operations on April 1, 2000. Its statutory objectives are to manage the funds transferred to it in the best interests of the contributors and beneficiaries and to maximize investment returns without undue risk of loss having regard to the funding requirements of the Plan.

(b) Funding policy

The Plan is funded from members and Government contributions. Plan members contributed 4.9 per cent (2008 - 4.6 per cent) for the first nine months and 5.2 per cent (2008 - 4.9 per cent) for the last three months of pensionable earnings up to the maximum covered by the Canada Pension Plan or Quebec Pension Plan ("CPP" or "QPP") and 8.4 per cent (2008 - 8.1 per cent) for the first nine months and 8.4 per cent (2008 - 8.4 per cent) for the last three months of pensionable earnings above that maximum. The Government’s contribution is made monthly to provide for the cost (net of member contributions) of the benefits that have accrued in respect of that month at a rate determined by the President of the Treasury Board. The cost of the benefits is determined based on actuarial valuations, which are performed triennially.

The RCMPSA requires actuarial deficiencies found in the RCMP Pension Fund to be dealt with by transferring amounts to the Pension Fund in equal instalments over a period not exceeding 15 years. It also allows excesses in the Pension Fund to be dealt with by a reduction of Government and/or plan member contributions or by withdrawing amounts from the Pension Fund.

Until April 1, 2000, a separate market‑invested fund was not maintained; however, the RCMPSA provides that all pension obligations arising from the Plan be met by the Government of Canada. For service that pre-dates April 1, 2000, the RCMPSA requires deficiencies found between the balance of the RCMP Superannuation Account and the actuarial liability to be reduced by increasing the Account in equal instalments over a period not exceeding 15 years. When the balance of the RCMP Superannuation Account exceeds the actuarial liability, it also allows the excess to be reduced by decreasing the Account over a period of up to 15 years.

(c) Benefits

The Plan provides pension benefits based on the number of years of pensionable service to a maximum of 35 years.  The benefits are determined by a formula set out in legislation; they are not based on the financial status of the Plan. The basic benefit formula is 2 per cent per year of pensionable service multiplied by the average of the five consecutive years of highest paid service. Benefits are coordinated with the CPP and QPP, and the resulting pension reduction factor for Plan members reaching age 65 is decreasing from 0.7 per cent to 0.625 per cent over a five-year period, starting in 2008.  Also, benefits are fully indexed to the increase in the Consumer Price Index.

Other benefits include survivor pensions, minimum benefits in the event of death, unreduced early retirement pensions and disability pensions. To reflect the Income Tax Act restrictions on registered pension plan benefits, separate Retirement Compensation Arrangements have been implemented to provide benefits that exceed the income tax limit. Since these arrangements are covered by separate legislation, their net assets available for benefits and accrued pension benefits are not consolidated in these financial statements; however, condensed information is presented in Note 17.

(d) Income Taxes

The Plan is a registered pension plan under the Income Tax Act and, as such, is not subject to income taxes.

2. Significant accounting policies

(a) Basis of presentation

These financial statements present information on the Plan on a going concern basis.   They are prepared to assist Plan members and others in reviewing the activities of the Plan for the year, but they are not meant to portray the funding requirements of the Plan.

These financial statements are prepared using the accounting policies stated below, which are based on Canadian generally accepted accounting principles. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

(b) Changes in accounting policies

During the year, the Plan implemented new disclosures related to the management of capital and enhanced disclosures related to financial instruments, which are consistent with Canadian Institute of Chartered Accountants (CICA) Handbook Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures” and Section 3863, “Financial Instruments – Presentation”.

The new capital management disclosures specify (i) the objectives, policies, and processes for managing capital, (ii) quantitative data about what is regarded as capital, (iii) whether the Plan has complied with any capital requirements, and (iv) if the Plan has not complied, the consequences of the non-compliance. The implementation of these disclosures had no significant impact on the Plan’s financial statements other than additional disclosures in Note 9.

The enhanced disclosures for financial instruments provide details regarding the significance of financial instruments to the Plan’s financial position and performance, the nature and extent of the risks arising from financial instruments, and how PSP Investments, as the investment fund manager, manages those risks. These additional disclosures are included in Note 5.

In addition, the Emerging Issues Committee (EIC) released EIC-173 “Credit risk and the fair value of financial assets and financial liabilities” in January 2009, which requires that the fair value of financial instruments (including derivative financial instruments) take into account the counterparties’ credit risk for assets and PSP Investments’ credit risk for liabilities. PSP Investments, as the investment manager, adopted this requirement which did not have a significant impact on the Plan’s financial statements.

(c) Valuation of assets and other accounts

The RCMP Superannuation Account portrays a notional portfolio of bonds and is presented at the amount at which it is carried in the Accounts of Canada.

The investments of the Plan are held and managed through PSP Investments. Investments for each asset class are recorded as of the trade date (the date upon which the substantial risks and rewards are transferred) 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.

Market prices or rates are used to determine fair value where an active market exists (such as a recognized stock exchange), as it is the best evidence of the fair value of an investment. If quoted market prices or rates are not available, then fair values are estimated using present value or other valuation techniques, using inputs existing at the financial statements dates. If available, market observable inputs are applied to valuation models.

Valuation techniques are generally applied to private equity, infrastructure and real estate investments as well as over-the-counter (OTC) derivatives. The values derived from applying these techniques are impacted by the choice of valuation model and the underlying assumptions made concerning factors such as the amounts and timing of future cash flows, discount rates, volatility and credit risk.

Fair values of investments are determined as follows:

1. Cash and cash equivalent investments are recorded at cost plus accrued interest, which approximates fair value, and are mostly comprised of cash, floating rate notes, term deposits and government short term securities.
   
2. Quoted market prices for public equities, using the bid price for long positions and the ask price for short positions, are used to determine the fair value of these investments.
   
   Unit values, obtained from each of the funds’ administrators, reflecting the market prices, are used to present the fair value of pooled funds.
   
3. Private equity and infrastructure investments are fair-valued at least annually. The fair value for investments held directly by PSP Investments is determined using acceptable industry valuation methods such as earnings multiples, discounted cash flows analysis, price of recent investments and publicly traded comparables. Valuation techniques involve assumptions including discount rates and the projected length of cash flows. The valuation methodologies have been developed based on the International Private Equity and Venture Capital Valuation Guidelines. In the case of investments in fund portfolios, fair value is generally determined based on the audited fair values reported by the fund’s general partner using acceptable industry valuation methods. For each investment, the relevant methodology is applied consistently over time.
   
4. The fair value of investments in real estate held directly is determined at least annually, using acceptable industry valuation methods, such as discounted cash flows and comparable transactions. Valuation techniques involve various assumptions including capitalization rate and the projected cash flows and/or net operating income. The assumptions are supported by observable market data. PSP Investments uses the services of a third-party appraiser to determine the fair value of real estate investments.
   
   These valuations are prepared using professional appraisal standards, such as the Canadian Uniform Standards of Professional Appraisal Practice and the Uniform Standards of Professional Appraisal Practice in the United States of America. In the case of investments in fund portfolios, fair value is generally determined based on the audited fair values reported by the fund’s general partner using acceptable industry valuation methods. The fair value of real estate loans is estimated by discounting expected future cash flows using interest rates offered for similar loans to borrowers with similar credit ratings. PSP Investments may use the services of a third-party appraiser to determine the fair value of real estate loans. For each investment the relevant methodology is applied consistently over time.
5. Fixed income securities are valued at quoted market prices using the bid price for long positions and the ask price for short positions, where available. Where quoted market prices are not available, estimated values are calculated using either an appropriate interest rate curve with a spread associated with the credit quality of the issuer or other generally accepted pricing methodologies.
6. All listed derivative financial instruments are recorded at fair value using quoted market prices with the bid price for long positions and the ask price for short positions. For derivatives traded over-the-counter (OTC), appropriate valuation techniques, such as discounted cash flows using current market yields, are used to determine fair value. The assumptions used include the statistical behaviour of the underlying instruments and the ability of the model to price consistently with observed market transactions. For many pricing models there is no material subjectivity because the methodologies employed do not necessitate significant judgment and the pricing inputs are observed from actively quoted markets. Additionally, the pricing models used are widely accepted and used by other market participants. The fair value of credit derivatives, including credit default swaps and synthetic collateralized debt obligations, are also determined based on valuation techniques. Certain assumptions are made with respect to the probability of the event of default of the underlying securities, of its recovery rate and its corresponding impact on cash distributions. The instrument is then valued by discounting the expected cash flows by an appropriate discount factor.
   
   

Contributions receivable for past service elections made after March 31, 2000 are recorded at their estimated net present value, which approximates their fair value. Contributions receivable for past service elections made prior to April 1, 2000, that will be credited to the RCMP Superannuation Account once the member’s share is received, are also presented at their estimated net present value.

The actuarial value of net assets is based on the market-related value of investments, whereby the fluctuations between the market and expected market value are deferred and recognized over a five year period within a ceiling of plus or minus 10 per cent of the market value. Market-related value of investments is used to mitigate the impact of large fluctuations in the market value of plan investments.

(d) Valuation of capital debt financing

The fair value of PSP Investments’ short-term capital debt financing includes the cost amount and accrued interest, which approximates fair value. The fair value of PSP Investments’ long-term capital debt financing is determined based on quoted market prices

(e) Transaction costs

Transaction costs are incremental costs directly attributable to the acquisition, issue, or disposal of a financial asset or financial liability. Transaction costs are expensed as incurred and recorded as a component of investment income (loss) (Note 13).

(f) Investment management fees

Investment management fees are costs directly attributable to the external management of funds on behalf of PSP Investments. Investment management fees incurred for the Private Equity, Real Estate and Infrastructure asset classes are paid, as determined by the fund manager, either by the investment directly, through capital contributions by PSP Investments or offset against distributions received from the investment (Note 4 (a) (ii)). These amounts are recorded against investment income. Investment management fees are also incurred for certain public equity investments and these amounts are paid directly by PSP Investments and recorded against investment income (loss) (Note 13).

(g) Income recognition

The investment income (loss) is allocated proportionately based on the asset value held by the Plan. Investment income (loss) is made up of dividends, accrued interest income, realized gains and losses on the disposal of investments and unrealized gains and losses which reflect the change in unrealized appreciation (depreciation) of investments held at the end of the year. Dividend income is recognized on the ex-dividend date. Investment income from private market investments also includes the related distributions from pooled funds, limited partnerships as well as from direct and co-investments.

Interest on the RCMP Superannuation Account is recognized on an accrual basis.

(h) Contributions

Contributions for current service are recorded in the year in which the related payroll costs are incurred. Contributions for past service that are receivable over a period in excess of one year are recorded at the estimated net present value of the contributions to be received.

(i) Benefits, refunds, and transfers

Benefits are accrued as pensionable service accumulates and are recognized as a reduction of accrued pension benefits and net assets and other accounts available for benefits when paid. Refunds and transfers are recognized at the moment the refund or transfer occurs; until that time they are presented with the net assets and other accounts available for benefits and with related accrued pension benefits.

(j) Translation of foreign currencies

Transactions in foreign currencies are recorded at the rates of exchange prevailing on the transaction date. Investments denominated in foreign currencies and held at year-end are translated at exchange rates in effect at the year-end date. The resulting realized and unrealized gains and losses on foreign exchange are recorded as a component of  investment income (loss).

(k) Use of estimate

Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the year, principally those related to the fair value of investments and the estimation of accrued pension benefits that are management’s and Government’s best estimates. Actual results could differ significantly from those estimates, although at the time of their preparation, management believes the estimates and assumptions to be reasonable.

3. RCMP Superannuation Account and RCMP Pension Fund Account

The RCMP Superannuation Account is established in the Accounts of Canada pursuant to the RCMPSA. It portrays a notional portfolio of bonds and is not funded by the Government of Canada.  The RCMPSA requires that this Account record transactions such as contributions, benefits paid and transfers that pertain to pre-April 1, 2000 service, and that the Account be credited with interest. The Royal Canadian Mounted Police Superannuation Regulations require that the interest be credited quarterly at rates calculated as though the amounts recorded in the Account were invested quarterly in a notional portfolio of Government of Canada 20‑year bonds held to maturity.

Transactions pertaining to post March 31, 2000 service are recorded in the RCMP Pension Fund through the RCMP Pension Fund Account, which is also included in the Accounts of Canada.  The net amount of contributions less benefits and other payments is regularly transferred to PSP Investments for investment in capital markets. The RCMP Pension Fund Account is only a flow-through account, and, as such, does not earn interest.  At March 31, the balance in the RCMP Pension Fund Account represents amounts of net contributions in transit awaiting imminent transfer to PSP Investments.

 

4. Investments

(a) Investment Portfolio

At March 31, the portfolio of investments held through PSP Investments, before allocating the effect of derivative contracts and investment-related assets and liabilities to the asset classes to which they relate, is as follows:

	2009		2008
($millions)	Fair Value	Cost	Fair Value	Cost
Developed World Equity
Canada Equity	455	545	545	502
US Large Cap Equity	52	70	132	149
Europe, Australasia and the Far East (EAFE) Large Cap Equity	83	132	142	151
Small Cap Developed World Equity	53	70	98	115
Emerging Markets Equity	105	132	131	117
Private Equity	304	358	289	279
Nominal Fixed Income
Cash & Cash Equivalents	220	238	263	261
World Government Bonds	54	50	128	130
Canadian Fixed Income	521	524	624	656
Real Return Assets
World Inflation-linked Bonds	14	15	15	14
Real Estate	508	461	411	333
Infrastructure	194	167	99	96
Absolute Return	188	194	143	144
Investments	2,751	2,956	3,020	2,947
Investment-Related Assets
Amounts receivable from pending trades	18	19	127	127
Derivative-related receivables	35	5	40	6
Total Investment-Related Assets	53	24	167	133
Investment-Related Liabilities
Amounts payable from pending trades	(36)	(36)	(142)	(142)
Securities sold short	(38)	(44)	(52)	(53)
Derivative-related payables	(122)	(8)	(92)	(4)
Capital debt financing
Short-term	(113)	(113)	(110)	(110)
Long-term	(76)	(74)	–	–
Total Investment-Related Liabilities	(385)	(275)	(396)	(309)
Net Investments	2,419	2,705	2,791	2,771

1. Developed World Equity, Small Cap Developed World Equity and Emerging Markets Equity
   
   Developed World Equity, Small Cap Developed World Equity and Emerging Markets Equity (referred to as “Public Market Equities”) include common shares, American depository receipts, global depository receipts, participation notes, preferred shares, income trust units, exchange traded funds, and securities convertible into common shares of publicly listed issuers.
   
   
2. Private Equity, Real Estate and Infrastructure
   
   The private equity asset class is comprised of direct investments and fund portfolios in equity ownerships or investments with the risk and return characteristics of equity. They include investments in private companies, mezzanine debt and distressed debt. As at March 31, 2009, the total amount of financing included in the private equity portfolio for direct investments controlled by PSP Investments for the Plan is nil (2008 – nil).
   
   The real estate asset class is comprised of direct ownerships in properties, third-party debts and fund investments in the real estate sector. The real estate investments are classified into two portfolios (an equity portfolio and a debt portfolio). The equity portfolio is comprised of direct ownerships in income-producing properties in office, retail, industrial, hospitality and residential sectors, as well as private funds and publicly traded securities invested in real estate assets. The debt portfolio is comprised of third-party loans such as junior and senior debts, construction loans, bridge loans, income-participating loans, mezzanine loans and other structured investments where significant portions of the value are attributed to the underlying real estate assets. Real estate investments are made in accordance with the approved policies for leverage specifically applicable for this asset class. The real estate asset class is accounted for in the investment portfolio net of all third-party financings. As at March 31, 2009, the total amount of financing included in the real estate portfolio for direct investments controlled by PSP Investments for the Plan is approximately $270 million (2008 - $200 million).
   
   Infrastructure investments are comprised of direct investments and fund portfolios in equity and debt instruments in public and private companies primarily engaged in the management, ownership or operation of assets in power, regulated businesses, transportation, telecom or social infrastructure. Infrastructure investments are made in accordance with the approved policies for leverage specifically applicable for this asset class. As at March 31, 2009, the total amount of financing included in the infrastructure portfolio for direct investments controlled by PSP Investments for the Plan is approximately $50 million (2008 - $30 million).
   
   The fair value of certain direct investments in Private Equity and Infrastructure are determined using valuation techniques whereby certain assumptions cannot be fully supported by prices from observable current market transactions. Varying certain key elements of the valuation technique have an impact on the fair value of the investments as at March 31, 2009. For example, increasing the discount rate by 50 bps would result in a decrease to the fair value of these investments of $17 million; decreasing the discount rate by 50 bps would result in an increase to the fair value of these investments of $28 million.
   
   The Private Equity, Real Estate and Infrastructure asset classes are referred to as “Private Market Investments”. The fair values of the majority of private market investments are reviewed at least annually, and any resulting adjustments are reflected as unrealized gains or losses in investment income. The fair value of private market investments that are invested in funds are determined based on the audited annual financial statements received from external investment managers.
   
   Investment management fees, as disclosed in Note 2(f), are incurred for private market investments and generally vary between 0.2% and 5.5% of the total invested amount. Investment management fees of $14 million for the year ended March 31, 2009 (2008 - $8 million) were recorded as a component of investment income (loss).
3. Nominal Fixed Income and World Inflation-Linked Bonds Nominal Fixed Income includes Cash & Cash Equivalents and Bonds. Cash on hand and cash equivalents include the following instruments having a maximum term of one year or less: demand deposits, Treasury bills, short-term notes, bankers’ acceptances, term deposits and guaranteed investment certificates. Floating rate notes are considered cash equivalents provided the coupons reset more than once per year. Bonds include Canadian government bonds, Canadian provincial and territorial bonds, Canadian municipal and corporate bonds, as well as international sovereign bonds.
   
   The Plan held third-party or non-bank sponsored asset-backed commercial paper (ABCP) that suffered a liquidity disruption in mid-August 2007.
   
   Subsequent to the liquidity disruption event, PSP Investments, as the investment manager, participated in a restructuring process with other investors. On August 16, 2007, a standstill agreement was entered into by a number of significant investors and financial institutions that transacted with the non-bank sponsored conduits. The Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper (“the Investors’ Committee”) was subsequently formed, consisting of an important number of major ABCP investors, to oversee the restructuring process during this standstill period. As at January 21, 2009, the Investors’ Committee implemented and closed the ABCP restructuring transaction. Pursuant to the terms of the restructuring, ABCP holders exchanged their investments for long-term floating rate notes.
   
   >As part of the Investors’ Committee restructuring plan, the following asset categories were pooled together under three separate vehicles: (1) leveraged super senior (LSS) tranches of collateralized debt obligations and other assets (collectively referred to as “LSS/Hybrid Assets”); (2) Traditional Assets (TA) which include securitized assets (for example, credit card receivables and auto loans); and (3) Ineligible Assets (IA) which include assets with uncertain credit quality by reason of their exposure to US subprime mortgages or otherwise.
   
   Under the Investors’ Committee restructuring plan, the LSS/Hybrid Assets were split into two separate and distinct master asset vehicles (MAV); the first, referred to as “MAV 1”, in which case investors elected to commit their pro rata share of a margin funding facility associated with their underlying assets; and the second, referred to as “MAV 2”, whereby investors are able to commit less than, or none of their pro rata share of a margin funding facility, in which case certain investors, foreign banks and Canadian banks will fund the remaining portion. PSP Investments participated in MAV 1. Within the MAV 1, the LSS/Hybrid assets were further restructured into different classes (Class A-1, Class A-2, Class B, Class C, Traditional Assets (TA) and Ineligible Assets (IA)) of floating rate notes in order to permit a credit rating to be obtained on two of these notes (Class A-1 and Class A-2). A third MAV, referred to as “MAV 3”, includes series secured solely by TA and IA notes. Additionally, the margin funding facilities in MAV 1 and MAV 2 are provided by third-party lenders, Canadian banks, asset providers, noteholders and the Federal and Provincial governments of Canada. These facilities are designed to reduce the risk that the newly formed vehicles will not be able to meet margin calls if future circumstances warrant them.
   
   The Plan, as an ABCP holder through PSP Investments, received long-term floating rate notes (for each of the aforementioned investment vehicles) with maturities based upon the maturity of the underlying assets. The summary of these transactions follows:

Asset Class	Terms and conditions of restructured assets	Investors’ Committee restructuring plan
		Final approved 21 Jan 2009	Initial proposal 25 Apr 2008
		Notional value of converted notes ($millions)
MAV 1
Class A-1	A-rated tracking notes; Average yield: Banker’s Acceptance (BA) Rate + 30 bps Average Term: 8 Years	63	62
Class A-2		42	43
Class B	BB-rated tracking notes; Average yield: BA Rate + 30 bps Average Term: 8 Years	7	7
Class C		3	4
TA	AAA-rated tracking notes Average yield: BA Rate + 40 bps Average term: 8 years	2	--
IA	Ratings, yield and terms as per underlying asset(1), see above	6	--
MAV 3
TA	Asset definitions are as above, however, assets in this class are not guaranteed margin funding facilities by 3rd parties	9	10
IA	9	15
Total restructured notes		141	141

(1) These notes principally contain assets that have an exposure to US subprime loans and mortgage

The long-term floating rate notes allocated to the Plan are reported as Canadian Fixed Income under the investment portfolio (Note 4(a)). The write-down on the ABCP is included as part of the absolute return on investment income in Note 13(b). The following table summarizes the impact of the ABCP liquidity disruption and the subsequent restructuring as at March 31:

($ millions)	2009	2008
Notional value of held investments	141	141
Fair value at valuation date	74	109
Cumulative write-down	67	32

In addition, PSP Capital Inc., a wholly-owned subsidiary of PSP Investments, has provided funding facilities of a maximum amount of $969 million to support potential margin calls on the long-term floating rate notes. The fair value of the long-term floating rate notes was established as a function of the information available as at March 31, 2009, which includes certain assumptions used in the valuation model such as interest rate spreads, assumed credit rating of restructured notes, expected returns of the restructured notes, as well as the maturity and liquidity of the restructured notes. Varying certain key elements of the valuation technique have an impact on the fair value of the long-term floating rate notes allocated to the Plan as at March 31, 2009. For example, increasing interest rate spreads by 50 bps would result in a decrease to the fair value of the long-term floating rate notes allocated to the Plan by $4 million. The fair value of the long-term floating rate notes allocated to the Plan may change in future periods as a result of fluctuations in the major elements of the valuation methodology.

Absolute Return

In addition to the different asset classes outlined in the asset mix policy, a number of absolute return strategies are employed, consisting of derivative financial products such as those described in Note 4(b), whose objective is to generate positive returns regardless of market conditions.

(b) Derivative financial instruments

Derivative financial instruments are financial contracts, the value of which is derived from changes in underlying assets, interest or exchange rates. Derivative financial instruments are used to increase returns or to replicate investments synthetically. Derivatives are also used to reduce the risk associated with existing investments.

The following types of derivative financial instruments are used as described below:

1. Swaps
   Swaps are transactions whereby two counterparties exchange cash flow streams with each other based on predetermined conditions that include a notional amount and a term. Swaps are used to increase returns or to adjust exposures of certain assets without directly purchasing or selling the underlying assets.
2. Futures
   Futures are standardized contracts to take or make delivery of an asset (buy or sell) at a specific time in the future for a specific price that has been agreed upon today. Futures are used to adjust exposures to specified assets without directly purchasing or selling the underlying assets.
3. Forwards
   Forwards are contracts involving the sale by one party and the purchase by another party of a predefined amount of an underlying instrument, at a predefined price and a predefined date in the future. Forwards are used for yield enhancement purposes or to manage exposures to currencies and interest rates.
4. Options
   Options are the right, but not the obligation, to buy or sell a given amount of an underlying security, index, or commodity, at an agreed-upon price stipulated in advance, either at a determined date or at any time before the predefined maturity date.
5. Warrants and Rights
   

   Warrants are options on an underlying asset which is in the form of a transferable security and which can be listed on an exchange.

   Rights are securities giving shareholders entitlement to purchase new shares issued by a corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire.
6. Collateralized Debt Obligations
   
   A type of asset-backed security that is constructed from a portfolio of credit-related assets. Collateralized debt obligations are usually divided into several tranches with different credit risk levels and corresponding interest payments. Any losses are applied first to the more junior tranches (lowest risk rating) before moving up in seniority.
   

Notional values of derivative financial instruments are not recorded as assets or liabilities as they represent the face amount of the contract. Notional values do not represent the potential gain or loss associated with the market or credit risk of such transactions. Rather, it serves as the basis upon which the cash flows and the fair value of the contracts are determined.

The following table summarizes the derivatives portfolio as at March 31:

	2009		2008
($ millions)	Notional Value	Fair Value	Notional Value	Fair Value
Equity and Commodity Derivatives
Futures	45	--	63	1
Total Return Swaps	208	8	370	(3)
Variance Swaps	8	--	16
Warrants	--	--	3	1
Options: Listed-purchased	--	--	13	--
Listed-written	--	--	14	--
Currency Derivatives
Forwards	1,476	12)	1,028	(13)
Swaps	--	--	60	(5)
Options: OTC-purchased	44	1	124	2
OTC-written	11	--	66	2)
Interest Rate Derivatives
Bond forwards	25	--	198	--
Futures	--	--	102	--
Interest Rate Swaps	282	--	393	1
Total Return Swaps	252	4	241	1
Swaptions	179	--	517	--
Options: Listed-purchased	--	--	62	--
Listed-written	179	--	88	--
OTC-written	107	--	--	--
Credit Derivatives(1)
Purchased	5	4	4	2
Sold	117	(92)	97	(37)
Total investments	2,938	(87)	3,459	(52)

(1) Credit derivatives include collateralized debt obligations and a credit default swap. PSP Investments, through sold credit derivatives, indirectly guarantees the underlying reference obligations. The maximum potential exposure is the notional amount of the sold credit derivatives as shown in the table above.

The fair value of derivative contracts, as at March 31, is represented by:

($ millions)	2009	2008
Derivative-related receivables	35	40
Derivative-related payables	(122)	(92)
Total	(87)	(52)

The term to maturity based on notional value for the derivatives, as at March 31, is as follows:

($ millions)	2009	2008
Under 1 year	2,596	2,477
1 to 5 years	298	841
Over 5 years	44	141
Total	2,938	3,459

(c) Investment asset mix

PSP Investments, as the investment manager, has established investment policies, standards and procedures that determine the manner in which the assets shall be invested. Investments are classified by asset mix category based on the economic intent of the investment strategies of the underlying assets.

The net investments, as at March 31, are as follows:

Asset Class	($ millions)	2009		($ millions)	2008
		Fair Value(%)	Policy Portfolio (%)		Fair Value (%)	Policy Portfolio (%)
Developed World Equity
Canadian Equity	631	26.1	30.0	826	29.6	30.0
US Large Cap Equity	66	2.7	5.0	127	4.5	5.0
EAFE Large Cap Equity	75	3.1	5.0	131	4.7	5.0
Small Cap Developed World Equity	56	2.3	5.0	138	5.0	5.0
Emerging Markets Equity	152	6.3	7.0	195	7.0	7.0
Private Equity	300	12.4	10.0	284	10.2	10.0
Nominal Fixed Income
Cash & Cash Equivalents(1)	5	0.2	2.0	39	1.4	2.0
World Government Bonds	151	6.2	5.0	161	5.8	5.0
Canadian Fixed Income	304	12.6	8.0	346	12.4	8.0
Real Return Assets
World Inflation-Linked Bonds	171	7.1	5.0	159	5.7	5.0
Real Estate	333	13.8	10.0	289	10.3	10.0
Infrastructure	175	7.2	8.0	96	3.4	8.0
Net investments	2,419	100.0	100.0	2,791	100.0	100.0

(1) Includes amounts related to absolute return and real estate debt strategies.

(d) Securities lending

The Plan participates in securities lending programs whereby it lends securities in order to enhance portfolio returns. Any such securities lending requires collateral in cash, high-quality debt instruments or shares securities with a fair value equal to no less than 102% of the value of the securities lent. As at March 31, 2009, securities with an estimated fair value of $194 million (2008 - $365 million) were loaned out, while securities contractually receivable as collateral had an estimated fair value of $202 million (2008 - $379 million).

(e) Securities collateral

The Plan deposited or pledged securities with a fair value of $75 million as collateral with various financial institutions as at March 31, 2009 (2008 - $29 million). Securities with a fair value of $8 million (2008 - $2 million) have been received from other counterparties as collateral. PSP Investments does not repledge any collateral held. All collateral deposited, pledged and received were held with counterparties who had a minimum credit rating of “A-” as at March 31, 2009. The terms and conditions are outlined in Note 5(b)(i).the Government of Canada through holdings of $0.2 billion of Government of Canada issued securities. In order to minimize derivative contract credit risk, PSP Investments deals only with counterparties that are major financial institutions with a minimum credit rating of “A” as at the trade date, as supported by a recognized credit rating agency by utilizing an internal credit-limit monitoring process, as well as through the use of credit mitigation techniques such as master-netting arrangements (which provide for certain rights of offset) and obtaining collateral, including the use of credit-support annexes, where appropriate.

 

5. Investment risk management

Investment risk management is a central part of the strategic management of the investment portfolio. It is a continuous process whereby PSP Investments, as the investment manager, methodically addresses the risks related to its various investment activities with the goal of achieving a maximum rate of return without undue risk of loss and a sustained benefit within each activity and across the total portfolio.

The Board of Directors of PSP Investments and its committees oversee various risk related issues affecting the investments through a risk governance structure that includes required reporting on risk to all levels within the organization and also ensures that appropriate objectives are pursued and achieved in line with the fulfillment of PSP Investments’ legislated mandate.

The use of financial instruments exposes the Plan to credit and liquidity risks as well as market risks including foreign exchange and interest rate risks. These risks are managed by PSP Investments in accordance with the Investment Risk Handbook, which is an integral part of its risk control system. The Investment Risk Handbook contains an Investment Risk Management Policy which supplements the established investment policy, guidelines and procedures (Policy Portfolio). The Policy Portfolio determines a diversification strategy to mitigate risk whereby investments are made in a diversified portfolio of investments based on established criteria. Additionally, the objective of these policies is to provide a framework for the management of credit, liquidity and market risks. Derivative financial instruments, traded either on exchanges or OTC are one of the vehicles used to mitigate the impact of market risk.

PSP Investments is responsible for overseeing the various risk management functions on behalf of the Plan and monitors these risks on a continuous basis.

(a) Market risk

Market risk is the risk that the value of an investment will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual investment, volatility in share and commodity prices, interest rate, foreign exchange or other risk variables affecting all securities traded in the market.

Market risk is measured using the method known as Value-at-Risk (VaR). VaR is the maximum loss not exceeded with a given probability defined as the confidence level, over a given period of time. PSP Investments has chosen a yearly 95% confidence level to measure and report VaR. A Historical VaR model is used incorporating three years of monthly market returns which are scaled to a twelve-month holding period. PSP Investments is responsible for implementing and maintaining a VaR measurement methodology for all asset classes and all financial risk factors.

Historical VaR is statistically valid under normal market conditions and does not specifically consider losses from severe market events. The Historical VaR model also assumes that the future will behave in a similar pattern to the past. If future market conditions differ significantly from those of the past, potential losses may differ from those originally estimated. The VaR is an estimate of a single value in a distribution of potential losses that can be experienced. As a result, it is not an estimate of the maximum potential loss.

The goal of actively managing the portfolio is to outperform the policy portfolio benchmarks while maintaining the active risk under 400 basis points. Relative VaR, as a result, is the maximum amount of loss of total investments, with 95% certainty, relative to the Policy Portfolio benchmark over a twelve-month period.

The following table shows the total Relative VaR and the diversification effect as at March 31. The diversification effect captures the effect of holding different types of assets which may react differently in various types of situations and thus having the effect of reducing overall Relative VaR.

Active Risk Taken
(Relative VaR - $ millions)	2009h	2008
Public Market Equities	56	30
Nominal Fixed Income	--	1
Real Return Assets	76	60
Absolute Return	83	15
Total Relative VaR (Undiversified)	215	106
Diversification Effect	(119)	(42)
Total Relative VaR	96	64

PSP Investments monitors the absolute risk of the Policy Portfolio on a quarterly basis to ensure no undue loss may be experienced by the Plan.

Generally, changes in VaR between reporting periods are due to changes in the level of exposure, volatilities and/or correlations among asset classes. Although VaR is a widely accepted risk measure, it must be complemented by other risk measures. Therefore, stress testing and scenario analysis are used to examine the impact on financial results of abnormally large movements in risk factors. Stress testing and scenario analysis test a portfolio’s sensitivity to various risk factors and key model assumptions. These methods also use historically stressed periods to evaluate how a current portfolio would fare under such circumstances. Stress testing is also deployed to assess new product behaviour. Stress testing and scenario analysis are utilized as a complement to the Historical VaR measure in order to provide greater insight on the size of potential losses that may be experienced. PSP Investments uses the expected shortfall and tail analysis measures to determine this.

Expected shortfall is defined as the conditional expectation beyond the VaR level. It is measured by averaging all data points showing a loss greater than VaR measured at a given confidence level. By increasing the confidence level of the VaR measure from 95% to 99%, the size of the potential loss that would be exceeded one year out of 100 (instead of one year out of 20) can be assessed. Therefore, there is a greater probability for larger losses, at the 99% confidence level, in extreme market conditions. PSP Investments reviews stress testing and scenario analysis reports on a quarterly basis.

1. Interest rate risk
   

   Interest rate risk refers to the effect on the fair value of net asset value due to fluctuations in interest rates. Changes in interest rates will directly affect the fair value of Plan’s assets. The most significant exposure to interest rate risk is the investment in bonds and real estate loans.

   The terms to maturity of the investments, before allocating the effect of derivative contracts and investment-related assets and liabilities, as at March 31 are as follows:

($ millions)	Within 1 Year	1 to 5 Years	5 to 10 Years	Over 10 Years	2009 Total	2008 Total
Government of Canada bonds	92	88	16	32	228	128
Provincial and Territorial bonds	22	30	19	35	106	93
Municipal bonds	1	2	4	--	7	9
Corporate bonds	9	42	29	100	180	394
Total Canadian Fixed Income	124	162	68	167	521	624
Total World Government Bonds	--	22	18	14	54	128
Total World Inflation-Linked Bonds	--	1	2	11	14	15
Real Estate Loans (1)	26	26	--	2	54	36
Grand Total	150	211	88	194	643	803

(1) Real Estate Loans are a component of the Real Estate asset class disclosed in Note 4 (a).

The terms to maturity of capital debt financing employed by PSP Investments are disclosed in Note 8. Absolute return strategies, as described in Note 4, and derivative contracts are also subject to interest rate risk exposures. These exposures are reflected in the VaR calculation described in Note 5(a). Accounts receivable from pending trades and Cash & Cash equivalents are considered short-term in nature, and, as a result, their exposure to interest rate risk would not be significant.

ii. Foreign currency risk

The underlying net foreign currency exposures, after allocating the effect of derivative contracts and investment-related assets and liabilities for both monetary and non-monetary items, as at March 31, are as follows:

	2009		2008
Currency	Fair value	% of total	Fair value	% of total
(In Canadian $)	($ millions)		($ millions)
US Dollar (USD)	331	52.9	417	52.8
Euro (EUR)	148	23.6	164	20.8
British Pound (GBP)	37	5.9	66	8.3
Yen (JPY)	28	4.5	46	5.8
Hong Kong Dollar (HKD)	22	3.4	18	2.2
New Taiwan Dollar (TWD)	12	2.0	17	2.1
Korean Won (KRW)	12	1.9	18	2.2
Australian Dollar (AUD)	12	1.9	13	1.7
Brazilian Real (BRL)	5	0.7	31	3.9
Others	19	3.2	1	0.2
Total foreign currency	626	100.0	791	100.0

The Plan has also made commitments, denominated in foreign currencies of $509 million (339 million USD, 47 million EUR, and 31 million South African Rands (ZAR)), which are not included in the foreign currency exposure table.

(b) Credit risk

The Plan is exposed to the credit risk that the issuer of a debt security or a counterparty to a derivative contract could be unable to meet its financial obligations.

Credit risk encompasses the risk of a deterioration of creditworthiness and the respective concentration risk. To monitor credit risk, PSP Investments, as the investment manager, relies on four recognized credit rating agencies to evaluate the credit quality of each issuer to which the investments are exposed. Risk is minimized by requiring a minimum of two ratings and applying the lowest rating. If a security fails to meet the minimum number of ratings, it is classified as “not rated”. If the agencies disagree as to a security credit quality, the lowest of the available ratings is used.

To monitor the evolution of credit risk, PSP Investments periodically produces a concentration report by credit rating of all credit-sensitive financial securities, excepting those held in pooled funds or private market investments. Concentration tables are listed by issuer, geographic area, and industry for each security.

As at March 31, the Plan’s concentration of credit risk by credit ratings is as follows:

Per cent %	2009	2008
Investment grade (AAA to BBB-)	88.7	86.5
Below investment grade (BB+ and below)	--	0.3
Not rated:
Rated by a single credit rating agency(1)	8.5	0.4
Not rated by credit rating agencies(2)	2.8	12.8
Total	100.0	100.0

1. As at March 31, 2009, includes Class A-1, and Class A-2 ABCP holdings that were restructured and converted to floating rate long-term notes on January 21, 2009. These notes are A-rated by Dominion Bond Rating Service (DBRS) (Note 4(a)(iii)).
2. Includes Class A-1 and Class A-2 ABCP holdings that were rated by DBRS as at March 31, 2008.

The breakdown of credit concentration risk does not include investments in distressed debt included in pooled funds in the amount of approximately $2 billion as at March 31, 2009 (2008 - $507 million). Such investments are excluded as they typically include debt securities of issuers close to default, and the investment in such securities are quasi-equity in nature.

As at March 31, 2009, PSP Investments also has a net notional exposure of $1.4 billion to collateralized debt obligations, of which 71% of the dollar exposure is rated “Investment grade”, as well as funding facilities of a maximum amount of $969 million to support potential margin calls on the long-term floating rate notes (Note 4(a)(iii)).

As at March 31, 2009, PSP Investments’ maximum exposure to credit risk, not taking into consideration the excluded elements described above, amounts to approximately $11.0 billion (2008 - $13.6 billion).

1. Counterparty risk
   

   Counterparty risk represents the credit risk from current and potential exposure related to transactions involving derivative contracts. In order to minimize derivative contract counterparty risk to the Plan, PSP Investments deals only with counterparties with a minimum credit rating of “A-” as at the trade date, as provided by a recognized credit rating agency. PSP Investments monitors the credit ratings of counterparties on a daily basis and has the ability to terminate all trades with counterparties who have their credit rating downgraded below “A-” subsequent to the trade date. PSP Investments also uses credit mitigation techniques such as master-netting arrangements and collateral transfers through the use of Credit Support Annexes (CSA).
   
   Investment policy for the Plan also requires the use of the International Swaps and Derivative Association (ISDA) Master Agreement with all counterparties to derivative contracts. The ISDA Master Agreement provides the contractual framework within which dealing activities across a full range of OTC products are conducted and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other pre-determined events occur.
   
   Additionally, the CSA to the ISDA Master Agreement enables PSP Investments, as the investment manager, to realize any collateral placed with it in the event of the failure of the counterparty and requires PSP Investments, on behalf of the Plan, to contribute further collateral when requested. The CSA also regulates the exchange of collateral when the credit exposure to a counterparty exceeds a predetermined threshold. Note 4(e) provides information on the collateral deposited and received.
   
   PSP Investments, as the investment manager, is responsible for counterparty risk monitoring and mitigation as well as maintaining a comprehensive, disciplined, and enterprise-wide process for tracking and managing counterparty risk. As such, PSP Investments measures counterparty risk on an ongoing basis, evaluates and tracks the creditworthiness of current counterparties and mitigates counterparty risk through collateral management.

(c) Liquidity risk

Liquidity risk corresponds to the ability to meet financial obligations. The cash position is monitored on a daily basis. In general, investments in cash and cash equivalents, debt and public equities are expected to be highly liquid, as they will be invested in securities that are actively traded. PSP Investments, as the investment manager, utilizes appropriate measures and controls to monitor liquidity risk in order to ensure that there is sufficient liquidity to meet financial obligations as they come due. PSP Investments prepares a liquidity report taking into consideration future forecasted cash flows which is presented to its senior management on a weekly basis. This ensures that sufficient cash reserves are available to meet forecasted cash outflows. Additionally, a contingency plan, involving back-up sources of liquidity, is maintained and can be deployed in case of market disruption.

The ability to raise additional capital exists through the use of PSP Investments’ capital debt program. This program allows PSP Investments to issue short-term promissory notes and medium-term notes to a maximum amount of $3 billion and $1 billion, respectively. Note 8 provide additional information on the usage of the capital debt program.

The terms to maturity of the notional amount of derivatives, including related payable amounts, are disclosed in Note 4(b). All other significant financial liabilities have a term to maturity of one year or less.

6. Contributions receivable

($ millions)	2009	2008
Pre-April 1, 2000 service
Member contributions for past service elections	9	10
Employer’s share of contributions for past service elections	8	9
	17	19
Post-March 31, 2000 service
Member contributions for past service elections	6	5
Employer’s share of contributions for past service elections	16	10
	22	15
Total	39	34

7. Due to the Public Service Pension Plan

The costs of operation of PSP Investments are charged to the four plans for which PSP Investments provides investment services, namely, the Public Service Pension Plan, the Canadian Forces Pension Plan, the Reserve Force Pension Plan and the Royal Canadian Mounted Police Pension Plan. The direct costs of investment activities, such as external investment management fees and custodial fees, are allocated to each plan and their operating expenses on a quarterly basis based upon the asset value of each plan’s investments under management.

In 2009, 7.2 per cent of the operating expenses were allocated to the Plan (2008 - 7.2 per cent). PSP Investments initially charges all the expenses to the Public Service pension plan, which then charges the Plan on a quarterly basis.

8. Capital debt financing

As of March 31, 2009, PSP Capital Inc., a wholly-owned subsidiary of PSP Investments, has $1,579 million (2008 - $1,551 million) of short-term promissory notes outstanding with maturity dates within 28 to 364 days of issuance, of which $113 million (2008 - $110 million) has been allocated to the Plan and included in Note 4 (a) as a short term investment-related liability. The maximum authorized by the Board of the Directors of PSP Investments for the short term promissory notes and medium-term notes is $3 billion and $1 billion, respectively. As at March 31, 2009, PSP Capital Inc. has $1 billion (2008 - nil) of medium-term notes issued and outstanding of which $72 million (2008 - nil) has been allocated to the Plan. The capital raised was used primarily to finance real estate and infrastructure investments and is unconditionally and irrevocably guaranteed by PSP Investments. The operating expenses incurred by PSP Capital Inc. were allocated to the Plan and include interest expense on the short-term promissory notes of $5 million (2008 - $4 million) and on medium-term notes of $1 million (2008 - nil).

9. Capital management

Plan capital consists of the funding surplus or deficit determined regularly by the funding valuation prepared by the Office of the Chief Actuary. The purpose of this valuation is to determine the long-term health of the Plan by testing its ability to meet obligations to current Plan members and their survivors. Using various assumptions, the actuary projects the Plan’s benefits to estimate the current value of the pension liability, which is compared with the sum of the Plan Assets and other Accounts and the present value of future employee contributions related to past service elections. The result of this comparison is either a surplus or a deficit.

The objective of managing the capital of the Plan is to ensure that the sum of the balance of the RCMP Superannuation Account, which is maintained in the Accounts of Canada, and the Plan Assets invested externally through PSP Investments is sufficient to meet benefit obligations. Management establishes policies, guidelines and procedures to ensure that transactions are recorded in the Superannuation Account in accordance with the Royal Canadian Mounted Police Superannuation Act. PSP Investments, as the investment manager for the Plan Assets invested in capital markets related to post March 31, 2000 service, establishes investment policies, guidelines and procedures to maximize investment returns without undue risk of loss in accordance with its legislated mandate. Investment performance is monitored and compared to benchmark portfolio returns on a regular basis.

The Government of Canada has a statutory obligation to pay benefits to current Plan members and their survivors. The Plan is also subject to the Public Pension Reporting Act, which requires that an actuarial valuation for funding purposes be conducted at dates no more than three years apart and tabled in Parliament. The date of the latest actuarial valuation performed was March 31, 2008.

10. Accrued pension benefits

(a) Present value of accrued pension benefits

The present value of accrued pension benefits is calculated actuarially by the Chief Actuary of the Office of the Superintendent of Financial Institutions (OSFI) using the projected benefit method prorated on service. Actuarial valuations are performed triennially for funding purposes and are updated annually by the Chief Actuary of OSFI for accounting purposes, using the Government’s best estimate assumptions. The information in these financial statements is based on this annual valuation. The Chief Actuary of the Office of the Superintendent of Financial Institutions conducted the most recent actuarial valuation of the Plan for funding purposes as of March 31, 2008 and it was tabled in Parliament on October 23, 2009. However, the accounting actuarial valuation has been updated as at March 31, 2009 using the demographic assumptions and base populations of the funding actuarial valuation as at March 31, 2008.

The assumptions used in determining the actuarial value of accrued pension benefits were developed with reference to short-term forecasts and expected long-term market conditions. Many assumptions are required in the actuarial valuation process, including estimates of future inflation, interest rates, expected return on investments, general wage increases, workforce composition, retirement rates, and mortality rates.

The assumptions for the long-term rate of inflation and long-term general wage increase used in the accounting valuation are 2.0 per cent and 2.9 per cent respectively (2008 - 2.0 per cent and 2.9 per cent). The discount rates used to value the liabilities at March 31, 2009 and the corresponding assumptions used in the cost of current service and in the interest expense are as follows:

(Percent %)	2009			2008
	Liability valuation		Expense valuation	Liability valuation		Expense valuation
	Short-term	Long-term		Short-term	Long-term
Expected rate of return on pension investments	5.3	6.3	5.9	5.9	6.3	6.0
Expected weighted average of long-term bond rates	6.8	5.0	7.1	7.1	5.0	7.3

(b) Actuarial asset value adjustment

The actuarial value of net assets available for benefits has been determined from short‑term forecasts consistent with the assumptions underlying the valuation of the accrued pension benefits. The actuarial asset value adjustment represents the difference between investments valued at fair value and investments valued at market‑related values.

(c) Plan amendments

During the year, no amendments were made to the Plan

11. Excess of actuarial value of net assets and other accounts available for benefits over accrued pension benefits

For funding purposes, the actuarial value of net assets and other accounts available for benefits and the accrued pension benefits are tracked separately for service prior to April 1, 2000 and after March 31, 2000. Based on the accounting assumptions used for these financial statements, the breakdown as at March 31, 2009 is as follows:

($ millions)	Pre-April 1, 2000	Post-March 31, 2000	Total
Net assets and other accounts available for benefits	12,324	2,450	14,774
Actuarial asset value adjustment	–	242	242
Actuarial value of net assets and other accounts available for benefits	12,324	2,692	15,016
Accrued pension benefits	(11,471)	(3,254)	(14,725)
Excess of actuarial value of net assets and other accounts available for benefits over accrued pension benefits	853	(562)	291

12. Contributions

($ millions)	2009	2008
From employees	112	98
From employer	250	225
Total	362	323

During the year, employees contributed approximately 31 per cent (2008 - 30 per cent) of the total contributions made.

13. Investment income (loss)

(a)  Investment income (loss)

Investment income (loss) for the year ended March 31 is as follows:

($ millions)	2009	2008
Interest income	34	52
Dividend income	29	26
Other income	17	8
Security lending income	1	--
Interest expense (Note 8)	(6)	(4)
Transaction costs	(4)	(2)
External investment management fees(1)	(4)	(4)
	67	76
Net realized (losses) gains(2)	(440)	109
Net unrealized losses(3)	(306)	(199)
Investment loss	(679)	(14)

1. These are amounts incurred for public market investments and paid directly by PSP Investments (Note 2). Amounts incurred for Private Market Investments are disclosed in Note 4(a)(ii).
2. Includes realized foreign currency losses of $44 million for the year ended March 31, 2009 (2008 - $42 million).
3. Includes unrealized gains of $13 million for the year ended March 31, 2009 for certain direct investments in Private Equity and Infrastructure determined using valuation techniques for which certain assumptions cannot be fully supported by prices from observable current market transactions.

(b) Investment income (loss) by asset mix

Investment income (loss) by asset mix, for the year ended March 31, after allocating net realized and unrealized gains and losses on investments, is as follows:

($ millions)	2009	2008
Developed World Equity
Canadian Equity	(256)	17
US Large Cap Equity	(32)	(33)
EAFE Large Cap Equity	(42)	(17)
Small Cap Developed World Equity	(35)	(46)
Emerging Markets Equity	(70)	12
Private Equity	(115)	19
Nominal Fixed Income
Cash & Cash Equivalents	3	4
World Government Bonds	34	12
Canadian Fixed Income	13	21
Real Return Assets
World Inflation-linked Bonds	11	6
Real Estate	(57)	54
Infrastructure	9	2
Absolute return(1)	(142)	(65)
Investment loss	(679)	(14)

(1)     Includes amounts related to real estate debt strategies.

14. Actuarial adjustment

In accordance with the legislation governing the Plan, the President of the Treasury Board is required to direct that any actuarial deficiency found in the RCMP Pension Fund be credited to the Fund in equal instalments over a period not exceeding 15 years, commencing in the year in which the actuarial report is tabled in Parliament. Excesses in the Pension Fund may be dealt with by a reduction of Government and/or Plan member contributions or by withdrawing amounts from the Fund.

The legislation also requires that deficiencies between the balance of the RCMP Superannuation Account and the actuarial liability are eliminated by increasing the Account in equal instalments over a period not exceeding 15 years. When the balance of the RCMP Superannuation Account exceeds the actuarial liability, it also allows the excess to be reduced by decreasing the Account over a period of up to 15 years.

As a result of the March 31, 2008 triennial actuarial valuation of the RCMP Pension Plan, which was tabled in Parliament on October 23, 2009, no adjustment was made to the RCMP Pension Fund (nil in 2008) nor to the RCMP Superannuation Account (nil in 2008).

15. Refunds and transfers

($ millions)	2009	2008
Pension division payments	13	17
Returns of contributions and transfer value payments	8	7
Total	21	24

16.  Administrative expenses

The legislation provides for administrative expenses to be charged to the Plan. These administrative services are provided by government organizations related to the Plan and a private sector pension administration service provider, Morneau Sobeco. The administrative expenses relating to the RCMP, Public Works and Government Services Canada (PWGSC), OSFI, and Morneau Sobeco are approved annually by the Treasury Board. The administrative expenses incurred by PSP Investments are also charged to the Plan.

The RCMP, as the program manager of the Plan, provides operational support, policy interpretation, financial accounting services, and pension committee support. These costs are charged to the Plan. They include salaries and benefits, systems maintenance and development, accommodation, and other operating costs of administering the Plan within the department.

Morneau Sobeco, under a contractual agreement, provides administrative services to the Plan and charges costs to the Plan on a monthly basis. Morneau Sobeco provides day to day administration services including determining the eligibility and the calculation of pension benefits, providing call centre support and information to Plan members, and providing pension payroll services.

PWGSC, under a memorandum of understanding with the RCMP, charges the Plan for printing and mailing pension cheques and direct deposit stubs to pensioners.

OSFI provides actuarial valuation services and charges these costs to the Plan.

PSP Investments, as the manager of the investments of the Plan, charges Plan-related operating expenses, salaries and benefits as well as other operating expenses and external investment management fees to the Plan.

($thousands)	2009	2008
RCMP	2,778	2,106
Morneau Sobeco	5,763	6,376
PWGSC	1,408	679
OSFI	354	335
Total administrative expenses included in the service cost	10,303	9,496
PSP Investments
Total PSP Investments operating expenses	6,155	5,551
Total administrative expenses	16,458	15,047

17. Retirement Compensation Arrangement

A Retirement Compensation Arrangement (RCA) Account has been established under the authority of the Special Retirement Arrangements Act to provide supplementary pension benefits to certain RCMP members. The RCA Account provides for benefits in excess of those permitted under the Income Tax Act for registered pension plans.

Pursuant to the legislation, transactions pertaining to this arrangement such as contributions, benefits and interest credits are recorded in the RCA Account, which is maintained in the Accounts of Canada. The legislation also requires that the RCA Account be credited with interest quarterly at the same rates as those credited to the RCMP Superannuation Account. The RCA is registered with the Canada Revenue Agency (CRA) and a transfer is made annually between the RCA Account and CRA either to remit a 50 per cent refundable tax in respect of the net contributions and interest credits, or to be credited a reimbursement based on the net benefit payments.

Since this arrangement is covered by separate legislation, the balance in the RCA Account and related accrued pension benefits are not consolidated in the financial statements of the Plan.

The following summarizes the financial position of the RCA Account that relates to the Plan as at March 31:

($thousands)	2009	2008
Net balance and accrued pension benefitss
Balance of Account
RCA Account	26,020	23,717
Refundable tax receivable	25,456	23,144
	51,476	46,861
Accrued pension benefits	35,700	22,700
Excess of the balance of the Account over the accrued pension benefits	15,776	24,161

The actuarial assumptions used to value the accrued pension benefits pertaining to the RCA Account are consistent with those used for the Plan in all respects, except that they take into consideration the impact of the refundable tax on the notional rate of return expected for the Account.

The following summarizes the changes in the RCA Account for the year:

($ thousands)	2009	2008
Changes in the balance of the RCA Account
Increase
Contributions—members	366	190
Contributions—employer	2,915	1,306
Interest income	1,747	1,656
Increase in refundable tax receivable	929	1,382
	5,957	4,534
Decrease
Benefits paid	403	311
Refunds and transfers	11	--
Refundable tax remittance	929	1,382
	1,343	1,693
Net increase in the balance of the RCA Account	4,614	2,841

Actuarial deficiencies found between the balance in the RCA Account and the actuarial liabilities are credited to the RCA Account in equal instalments over a period not exceeding 15 years.  As a result of the triennial valuation of March 2008, no adjustment was made to the RCA Account (nil in 2008) during the year.

18. Guarantees and Indemnity

PSP Investments provides indemnification to its Directors, its Officers and to certain PSP Investments representatives who are asked to serve the boards or like bodies of entities in which substantial investments have been made. As a result, but subject to the Public Sector Pension Investment Board Act, PSP Investments may be required to indemnify these parties for costs incurred, such as claims, actions or litigations in connection with the exercise of their duties. The Plan would assume a proportionate share of any indemnification costs incurred. To date, PSP Investments has not received any claims nor made any payment for such indemnity.
As part of investment transactions, PSP Investments and its subsidiaries guaranteed letter of credit facilities. The beneficiaries of these letter of credit facilities have the ability to draw against these facilities to the extent that the contractual obligations, as defined in the related agreements, are not met. As at March 31, 2009, the maximum exposure of the Plan was $1 million (2008 - $1 million).

As at March 31, 2009, PSP Investments agreed to guarantee, as part of an investment transaction, a non-revolving term loan. In the event of default, the Plan would assume the obligation up to $29 million plus interest and other related costs.

PSP Investments also unconditionally and irrevocably guarantees all credit facilities, short-term promissory notes and medium-term notes issued by its wholly-owned subsidiary, PSP Capital Inc.

19.  Commitments

The Plan entered into a contractual agreement with Morneau Sobeco to function as the administrator of the Plan commencing April 1, 2003. The initial term of the contract was for a five-year period, ending March 31, 2008; with the option to renew the contract for a further two-year period. On March 27, 2008, the Plan exercised the option to renew the contract for the first additional year and on March 31, 2009, the Plan exercised the option to renew the contract for the second additional year, resulting in the commitment below:

($ thousands)	Firm Annual Commitment
2009-2010	4,699

On June 18, 2009, a Treasury Board Submission was approved which obtained the authority to extend the contract with Morneau Sobeco for the provision of Pension Plan administration services until  March 31, 2013, with the option to extend the contract for an additional year.

PSP Investments and its subsidiaries have committed to enter into certain investment transactions, which will be funded over the next several years in accordance with agreed terms and conditions. As at March 31, 2009, the outstanding commitments for the Plan amounted to $542 million ($331 million for private equity investments, $129 million for real estate related investments, $41 million for public market investments and $41 million for infrastructure investments).

20.  Contingency

The Public Sector Pension Investment Board Act, amended the RCMPSA to enable the Federal government to deal with excess amounts in the RCMP Superannuation Account and the RCMP Pension Fund.  The legal validity of these provisions has been challenged in the Ontario Superior Court of Justice.  On November 20, 2007, the Court rendered its decision and has dismissed all the claims of the plaintiffs. Several of the plaintiffs are currently appealing this decision to the Ontario Court of Appeal. The outcome of these appeals is not determinable at this time.

21.  Comparative figures

Certain comparative figures have been reclassified to conform to the current years’ presentation.

Schedule I - Public Accounts

ROYAL CANADIAN MOUNTED POLICE SUPERANNUATION ACCOUNT
(unaudited)

	2008-2009 $	2007-2008 $
Opening balance	11,989,179,669	11,640,608,898
RECEIPTS AND OTHER CREDITS
Contributions from members	922,134	1,181,241
Contributions by the Government	889,328	1,092,284
Transfers from other pension funds	-	25,237
Interest	827,331,011	833,400,029
	829,142,473	835,698,791
	12,818,322,142	12,476,307,689
PAYMENTS AND OTHER CHARGES
Annuities and allowance payments	489,924,289	461,615,671
Pension division payments	10,611,187	14,711,255
Returns of contributions	116	1,621
Cash termination allowances and gratuities	-	58,933
Commuted value payments	3,053,328	2,948,174
Transfers to other pension funds	99,649	196,717
Interest on returns of contributions	-	1,491
Administrative expenses	8,040,931	7,594,230
	511,729,500	487,128,020
Closing balance	12,306,592,642	11,989,179,669

Schedule I - Public Accounts

ROYAL CANADIAN MOUNTED POLICE PENSION FUND ACCOUNT (unaudited) (continued)

	2008-2009 $	2007-2008 $
Opening balance	11,186,955	11,140,358
RECEIPTS AND OTHER CREDITS
Contributions from members	109,897,405	93,643,110
Contributions by the Government	245,189,558	221,154,465
Transfers from other pension funds	3,889,001	1,194,760
	358,975,964	315,992,335
PAYMENTS AND OTHER CHARGES
Annuities and allowance payments	34,899,605	26,400,435
Pension Benefit Division Act payments	2,399,360	2,395,629
Returns of contributions	150,643	86,513
Cash termination allowance and gratuities	-	734
Commuted value payments	4,106,913	3,170,600
Transfers to other pension funds	358,422	314,011
Interest on returns of contributions	15,413	20,577
Administrative expenses	2,261,585	1,901,917
	44,191,941	34,290,416
Receipts and other credits less payments and other charges	314,784,023	281,701,919
Transfers to Pension Investment Board	314,272,140	281,655,322
Closing balance	11,698,838	11,186,955

Schedule II - Plan Membership

(Unaudited)

Plan Membership

Number of Contributors

	March 31, 2009	March 31, 2008
Contributors	22,161	21,136

Number of Annuitant

	March 31, 2009	March 31, 2008
Pensioners	13,371	12,892
Surviving Children	86	101
Surviving Widows	1,636	1,489
Surviving Children over 18 attending school	76	71
Total	15,169	14,553

Number of Other Benefits Paid

	April 1, 2008- March 31, 2009	April 1, 2007- March 31, 2008
Cash Termination Allowance	-	-
Minimum Death Benefit	9	7
Return of Contributions and Commuted Value	138	108
Total	147	115

Corporate

RCMP Pension Advisory Committee at March 31, 2009

Peter D. Martin, Chair
Alain Seguin
Steve Graham
Gene Swimmer
Kim Floyd
Bill Gidley
Kevin Boisclair
Gord Dalziel

Investment Managers

Public Sector Pension Investment Board
www.investpsp.ca

Professional Advisors

Actuary

Office of the Superintendent of Financial Institutions
www.osfi-bsif.gc.ca

Auditor

Auditor General of Canada www.oag-bvg.gc.ca

Legal Advisor

Department of Justice Canada www.canada.justice.gc.ca

Glossary of Terms

Accrued Pension Benefits – The present value of benefits to be paid under the Plan for services provided by members up to the date of the financial statements.

Actuarial Adjustment – The amount withdrawn from the Plan in respect of a surplus or the additional amount contributed by the government in respect of a deficit.

Actuarial Asset Value Adjustment – The difference between investments valued at fair value and investments valued at market related values.

Actuarial Assumptions – Predictions made by actuaries about rates of return on plan assets, retirement age, mortality rates, future salary levels and other factors.

Actuarial Valuation - An assessment of the financial status of a pension plan. It consists of the valuation of assets held by the fund and the accrued pension benefits.

Administrator – The person or group of persons responsible for the overall operation of a pension plan.

Annuities - Monthly payments of a set amount to a retired member.

Benefits Earned – The cost of benefits for services provided by members during the fiscal year.

Best Estimate Assumptions - A set of actuarial assumptions which reflect the administrator’s judgment of the most likely set of conditions affecting future events.

Canada Pension Plan (CPP) — Amandatory earnings-related pension plan implemented January 1, 1966, to provide basic retirement income to Canadians between the ages of 18 and 70 who work in all the provinces and territories, except in the province of Quebec, which operates its own pension plan similar to the CPP for persons who work in that province.

Commuted Value – A lump sum payment that represents the present value of future benefits.

Consumer Price Index (CPI) – A measure of changes in the cost of living using a hypothetical basket of consumer goods.

Contributions Receivable – An amount owing to the Plan in respect of services provided by members up to the date of the financial statements.

Currency Risk - The risk that the value of investments purchased in foreign currency will fluctuate due to changes in exchange rates.

Current Service – Service provided by members during the current fiscal year. Current year change in fair value of investments – The unrealized gain or loss on investments held at year-end resulting from differences between fair value and cost on the date of the financial statements.

Deficit – The amount by which the Plan is under-funded. Defined Benefit Pension Plan – A pension plan that specifies the benefits that the employee will receive at the time of retirement.

EAFE – Europe, Australasia, Far East.

Excess of actuarial value of net assets over accrued pension benefits – The funded status of the Plan. A positive amount indicates that the Plan is over–funded, while a negative amount indicates that the Plan is under-funded.

Experience gains and losses – The difference between what has occurred and what was expected.

Fair value – The amount of the consideration that would be agreed upon in an arms length transaction between knowledgeable, willing parties who are under no compulsion to act.

Foreign Currency Exposure - The amount by which the Plan’s investments are exposed to currency risk.

Market Related Value – The value of an investment based on actuarial assumptions used to value the accrued pension benefits. This is used to reduce the impact of large fluctuations in the market value of the Plan’s investments.

Net Assets Available for Benefits – The cash, receivables and investments net of liabilities available to pay for pension benefit payments expected to be paid in the future. For the purposes of this definition, a Plan’s liabilities do not include accrued pension benefits.

Net Present Value - The present value of an investment's future net cash flows minus the initial investment. If positive, the investment should be made (unless an even better investment exists), otherwise it should not.

Past Service – Service provided by members prior to the start of the current fiscal year.

Pension Plan – An arrangement whereby an employer provides benefits to employees after they retire for services provided while they were working.

Projected Benefit Method Prorated on Services – A method of measuring the amount of the accrued pension benefit which requires the actuary to allocate an equal portion of the total estimated benefit to each year of the employee’s service.

Public Sector Pension Investment Board (PSP Investments) - A crown corporation established to invest net contributions received from the Public Service Pension Plan, the Canadian Forces Pension Plan, the Reserve Force Pension Plan and the RCMP Pension Plan.

RCMP Pension Fund – An account established by the RCMP Superannuation Act to record transactions relating to service provided by members on or after April 1, 2000. The account is used to transfer funds to and from PSP Investments; the balance represents an amount owing to the Plan from the Government of Canada.

RCMP Superannuation Account – An account established by the RCMP Superannuation Act to record transactions relating to service provided by members before April 1, 2000. The balance represents an amount owing to the Plan from the Government of Canada.

Registered Pension Plan – A pension plan that has a tax-exempt status.

Sponsor – The employer.

Surplus – The amount by which the Plan is over funded.

Triennially - Every three years.