Report on the Administration of the Public Service Superannuation Act for the Fiscal Year Ended March 31, 2002

Her Excellency the Right Honourable Adrienne Clarkson, C.C., C.M.M., C.D.
Governor General of Canada

Excellency:

I have the honour to submit to Your Excellency the Report on the Administration of the Public Service Superannuation Act for the Fiscal Year Ended March 31, 2002.

Respectfully submitted,

The paper version was signed by 
Lucienne Robillard
President of the Treasury Board

Public Service Pension Plan

Established in 1924, the Public Service Pension Plan currently provides pension benefits for 255,231 employees of the Government of Canada, certain Crown corporations and territorial governments. It also pays annuities to 159,542 retired employees, 57,344 survivors and 5,429 deferred annuitants. (See membership profile below.)

Over the coming years the proportion of pensioners to current plan members is expected to rise as the baby boomers start to retire. Plan members can continue to be assured that they will obtain their benefits, as their benefits are fully guaranteed by the Government of Canada and the upcoming retirements have been anticipated and incorporated into the financial status of the Plan.

Contributions

In 2001-02, the plan received about $2,400 million in contributions, of which employees paid $702 million (about 30%) and the employer contributed $1,690 million. Employee contributions are compulsory and are set at a rate of 4% of annual salary up to $39,100 (2002 Maximum Pensionable Earnings defined by the Canada Pension Plan and the Quebec Pension Plan) and 7.5% of annual salary above that amount. The employer pays 2.56 times the employee rate for current service.

Benefits

In 2001-02, the plan paid out $3,500 million in benefits, an increase of $164 million over the previous year. Benefits were paid to 216,886 pensioners and survivors, including 3,934 new pensioners during the year. New pensioners received an average annual pension of $23,837 in 2001-02. The number of beneficiaries has been fairly stable over the past few years, but is expected to rise in the future.

Pension benefits are fully indexed to annual increases in the Consumer Price Index. This adjustment is made each January and was 3.0% on January 1, 2002.

Benefits paid to pensioners represented 85.2% of 2001-02 pension payments and benefits paid to survivors represented 14.8%. Included in benefits paid are those to disabled pensioners. These represent 2.8% of the total.

Last year, 2,685 immediate annuities, 297 deferred annuities, and 952 annual allowances started becoming payable to plan members. Of those receiving an immediate annuity last year, 1,372 obtained a normal retirement benefit, 936 an early retirement benefit, and 377 a disability retirement benefit.

The Public Service Pension Plan has pension transfer agreements with some 50 employers, including other levels of government, universities, and private sector employers. Last year, approximately $32 million was transferred into, and $15 million (not including Crown corporations) was transferred out of the Pension Plan under these agreements.

In addition, 1,079 plan members left the Public Service before age 50 and withdrew about $150 million (the present value of their future benefits) as lump sums that were transferred to locked-in retirement vehicles of their choosing.

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Assets Available to Pay Pension Benefits

Up until March 31, 2000, all contributions and benefit payments were recorded in the Public Service Superannuation Account. The balance in the account earns interest income based on the Government of Canada long-term bond rate.

Since April 1, 2000, contributions have been paid into the Public Service Pension Fund. Contributions net of current benefits and plan administration expenses are transferred to the Public Sector Pension Investment Board (PSPIB) for investment in capital markets to build assets to pay future benefits.

On March 31, 2002, net assets available to pay current and future pension benefits consisted of $80,550⁽¹⁾ million recorded in the Superannuation Account and $4,264 million largely invested through the Public Sector Pension Investment Board. These invested assets consisted of approximately one-third each of Canadian equities, foreign equities, and fixed income securities (Canadian federal, provincial and corporate bonds plus short-term cash equivalent investments). These investments earned a time-weighted rate of return of 2.7% in 2001-02.

Retirement Compensation Arrangements Account

A Retirement Compensation Arrangements Account (RCA) has been established to record contributions, benefit payments and interest credits in respect of benefits that are in excess of those permitted under the Income Tax Act for Registered Pension Plans. One portion of the Account provides benefits in relation to salaries above $99,800 in 2002 and certain survivor benefits.

Another portion of the RCA Account records transactions for those employees who left the Public Service under the Early Retirement Incentive Program (between April 1, 1995 to September 30, 1998).

Funded Status

The financial statements for the Public Service Pension Plan (see page 6) indicate that the plan assets exceeded the plan liabilities by $10,290 million in 2001-02. This figure is based on estimates calculated for accounting purposes.

Plan Administration

The costs of administering the plan totalled $48.7 million (or approximately $100 per member) in 2001-02, an increase of $8.6 million from the previous year. Relative to assets, administrative costs were $0.06 per $100 of plan assets.

This was due to increased expenditures associated with system upgrades and modernization and the development of Web-based facilities so that members will be able to obtain pension information on the Internet by 2003. One of the new features will allow members to estimate their pensions based on different retirement assumptions, using an on-line "calculator." A communications strategy was also launched to provide plan members with additional information about the benefits offered by their Pension Plan.

For the first time this year, audited financial statements have been included in the annual report. These statements have been prepared in accordance with the federal government's stated accounting policies for the pension plan, which are based on generally accepted accounting principles.

Public Service Pension Advisory Committee

An Advisory Committee comprised of 13 members — one pensioner, six members representing employees and six members chosen from the executive ranks of the Public Service — held meetings during 2001-02. Its mandate is to provide advice to the President of the Treasury Board on matters respecting the benefit design and funding of the Public Service Pension Plan.

Further Information

For additional information on the Public Service Pension Plan, you may consult the www.tbs-sct.gc.ca/hr-rh/bp-rasp Web site.

Financial Statements of the
Public Service Pension Plan and
Notes to the Financial Statements

Public Service Pension Plan
Statement of Responsibility for the Financial Statements

Responsibility for the integrity and objectivity of the financial statements of the Public Service Pension Plan rests with the department of Public Works and Government Services Canada and the Treasury Board of Canada Secretariat. The Treasury Board of Canada Secretariat carries out responsibilities in respect of the overall management of the Plan while Public Works and Government Services Canada is responsible for the day-to-day administration of the Plan and for maintaining the books of accounts.

The financial statements of the Public Service Pension Plan, for the years ended March 31, 2002 and 2001, have been prepared in accordance with the accounting policies set out in Note 2 of the financial statements, which are based on generally accepted accounting principles. They include management's best estimates and judgements where appropriate.

To fulfil its accounting and reporting responsibilities, Public Works and Government Services Canada has developed and maintains 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 Public Service Superannuation Act and regulations, as well as the Financial Administration 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 Public Service Pension Plan in accordance with the Public Sector Pension Investment Board Act and regulations.

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

Approved by:

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To the Minister of Public Works and Government Services and to the President of the Treasury Board

I have audited the statement of net assets available for benefits, of accrued pension benefits and of excess of actuarial value of net assets over accrued pension benefits of the Public Service Pension Plan as at March 31, 2002 and 2001 and the statements of changes in net assets available for benefits, changes in accrued pension benefits and changes in excess of actuarial value of net assets over accrued pension benefits for the years then ended. These financial statements are the responsibility of the Plan's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audits 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 available for benefits, and accrued pension benefits and the excess of actuarial value of net assets over accrued pension benefits of the Plan as at March 31, 2002 and 2001 and the changes in net assets available for benefits, changes in accrued pension benefits and changes in excess of actuarial value of net assets over accrued pension benefits for the years 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 audits of the financial statements have, in all significant respects, been in accordance with the Public Service Superannuation Act and regulations.

The paper version was signed by
Sheila Fraser, FCA
Auditor General of Canada

Ottawa, Canada
February 14, 2003

PUBLIC SERVICE PENSION PLAN
Statement of Net Assets Available for Benefits,
of Accrued Pension Benefits and of
Excess of Actuarial Value of Net Assets over Accrued Pension Benefits

As at March 31

See accompanying notes to financial statements.

PUBLIC SERVICE PENSION PLAN
Statement of Changes in Net Assets Available for Benefits

Year ended March 31

See accompanying notes to financial statements.

PUBLIC SERVICE PENSION PLAN
Statement of Changes in Accrued Pension Benefits

Year ended March 31

See accompanying notes to financial statements.

PUBLIC SERVICE PENSION PLAN
Statement of Changes in Excess of Actuarial Value of Net Assets over Accrued Pension Benefits

Year ended March 31

See accompanying notes to financial statements.

PUBLIC SERVICE PENSION PLAN
Notes to Financial Statements

Years ended March 31, 2002 and 2001

1. Description of Plan:

The Public Service Pension Plan (the "Plan"), which is governed by the Public Service Superannuation Act (the "PSSA" or the "Act"), provides pension benefits for public service employees. This Act has been in effect since January 1, 1954.

The following description of the Plan is a summary only.

(a) General:

The Plan is a contributory defined benefit plan covering substantially all of the employees of the Government of Canada, certain Crown corporations and Territorial Governments. Membership in the Plan is compulsory for all eligible employees.

The Government of Canada is the sole sponsor of the Plan. The President of the Treasury Board is the Minister responsible for the PSSA. The Treasury Board of Canada Secretariat is responsible for the management of the Plan, while Public Works and Government Services Canada ("PWGSC"), provides the day-to-day administration of the Plan. The Office of the Superintendent of Financial Institutions makes 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 Public Service Superannuation Account created by legislation in the Accounts of Canada. Pursuant to the PSSA as amended by the Public Sector Pension Investment Board Act, transactions relating to service subsequent to March 31, 2000 are now recorded in the Public Service Pension Fund (the "Pension Fund"), where the excess of contributions over benefits are invested in capital markets through the Public Sector Pension Investment Board ("PSPIB" or the "Board"). The Board is a separate corporate body that started operations on April 1, 2000. Its goal is to achieve maximum rates of return on investments without undue risk while respecting the requirements and financial obligations of the Plan.

(b) Funding policy:

The Plan is funded from contributions whereby plan members contribute 4% of pensionable earnings up to the maximum covered by the Canada or Quebec Pension Plan ("CPP" or "QPP") and 7.5% of pensionable earnings above that maximum, and employer contributions are made monthly to provide for the cost (net of employee contributions) of the benefits that have accrued in respect of that month. The determination of the cost of the benefits is made on the basis of actuarial valuations, whichare performed triennially.

Until April 1, 2000, a separate market invested fund was not maintained, however, the legislation provides that all pension obligations arising from the Plan be met by the Government of Canada. In addition, the legislation governing the Plan requires actuarial deficiencies found in the Public Service Superannuation Account to be dealt with by increasing the Account in equal installments over a period not exceeding fifteen years and actuarial deficiencies found in the Public Service Pension Fund to be dealt with by transferring amounts to the Fund in equal installments over a period not exceeding fifteen years. The legislation allows surpluses in the Public Service Superannuation Account to be dealt with by reducing the Account over a period of up to fifteen years and surpluses in the Pension Fund to be dealt with by a reduction of government and/or plan member contributions, or by withdrawing amounts from the Fund.

(c) Benefits:

The Plan provides benefits based on the number of years of pensionable service to a maximum of 35 years. Benefits are integrated with the CPP and QPP. The basic benefit formula is 2% per year of pensionable service times the average of the best five consecutive years of earnings. When benefits under the CPP/QPP become payable, the basic benefit formula becomes 1.3% per year of pensionable service for earnings subject to the CPP/QPP, up to the average of the maximum earnings under the CPP/QPP for the year of termination and the previous four years, and 2% on earnings above that average. The benefits are fully indexed to the increase in the Consumer Price Index. The benefits are determined by a formula set out in legislation. They are not based on the financial status of the Plan.

Other benefits include survivor pensions, 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 maximum. These arrangements are not part of these financial statements since they are covered by separate legislation.

(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 Public Service Pension Plan on a going concern basis. They are prepared to assist plan members and others in reviewing the activities of the Plan for the fiscal period, 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 generally accepted accounting principles.

The 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 period. Actual results could differ from those estimates.

(b) Valuation of assets:

The Public Service Superannuation Account held in the Accounts of Canada is considered a non-marketable asset and is valued at cost.

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

Fair value for investments in pooled funds is based on unit values, which reflect the quoted market prices of the underlying securities.

Contributions receivable for past service elections are recorded at their estimated net present value, which approximates their fair value.

(c) Income recognition:

Interest income from the Public Service Superannuation Account and investment income are recorded on the accrual basis. Investment income represents realized gains and losses on the disposal of investments, interest and dividend income and distribution from pooled funds.

The current year change in fair value of investments and currency is the difference between the fair value and the cost of investments at the beginning and end of each year.

(d) Contributions:

Contributions for current service are recorded on the accrual basis 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.

(e) Benefits, refunds and transfers:

Benefits are recognized when paid. Refunds and transfers are recognized at the moment the refund or transfer occurs, until which time they remain presented with the net assets available for benefits and the accrued pension benefits.

(f) Translation of foreign currencies:

Transactions in foreign currencies are recorded at the rates of exchange 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 realized gains (losses) on disposal of investments that relate to foreign currency translation are included in investment income. Unrealized gains and losses resulting from year-end translation of foreign currency denominated investments are included in the current year change in fair value of investments and currency.

3. Public Service Superannuation Account and Pension Fund Account:

The Public Service Superannuation Account is held in the Accounts of Canada pursuant to the Public Service Superannuation Act. This Account records transactions such as contributions, benefits and transfers that pertain to pre-April 2000 service. The Account earns interest quarterly at rates that are calculated as though the amounts recorded in the Account were invested quarterly in a notional portfolio of Government of Canada 20 year bonds.

Transactions pertaining to post March 31, 2000, service are recorded in the Public Service Pension Fund through the Public Service Pension Fund Account, which is also held in the Accounts of Canada. The net amount of contributions less benefits and payments is regularly transferred to the PSPIB for investment in the capital markets. The Pension Fund Account is only a flow through account, and, as such, does not earn interest. At March 31, the balance in the Public Service Pension Fund Account represents amounts in transit or impending transfer to the PSPIB.

4. Investments:

(a) The portfolio of investments held through the PSPIB at March 31, is as follows:

At March 31, 2001, the investments were exclusively in pooled funds managed by State Street Global Advisors (SSgA). On October 2, 2001, the PSPIB created the PSP Funds and the investments in SSgA pooled funds previously held were transferred into the PSP Funds. PSP Funds represent unit interests in the assets of the PSPIB.

(b) Investment policy:

At March 31, asset mix policy and benchmarks of the investment portfolio held through the PSPIB are as follows:

* Benchmarks include the following:

TSE 300 - Toronto Stock Exchange 300 Composite Index
S&P 500 - Standard and Poor's 500 Composite Index
MSCI EAFE - Morgan Stanley Capital International Index (Europe, Australia, Far East)
SC Bond Universe - Scotia Capital Bond Universe Index
SC 91-day T-bill - Scotia Capital 91-day Treasury Bill Index

(c) Foreign currency exposure:

The Plan's investments are exposed to currency risk through holdings of units in pooled funds of non-Canadian equities where investment values will fluctuate due to changes in foreign exchange rates. The underlying foreign currency exposure by currency as at March 31, is as follows:

(d) Investment (loss) income:

5. Contributions receivable:

6. Accrued pension benefits:

(a) Present value of accrued pension benefits:

The present value of accrued pension benefits is determined using the projected benefit method pro-rated on service. Actuarial valuations are performed triennially for funding purposes and are updated annually for accounting purposes, using the government's best estimate assumptions. The information in these financial statements is based on this annual valuation. The most recent actuarial valuation for funding purposes was made as of March 31, 1999 by the Chief Actuary of the Office of the Superintendent of Financial Institutions.

The assumptions used in determining the actuarial value of accrued pension benefits were developed by reference to short-term forecast 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, work-force composition, retirement rates and mortality rates. The accounting assumption for the long-term rate of inflation used in the valuation is 2% (2% in 2001). The assumed rate of return on investments and on the Public Service Superannuation Account is 6.5% (6.5% in 2001) and 8.2% (9.0% in 2001), respectively, for the year.

(b) Actuarial asset value adjustment:

The actuarial value of net assets available for benefits has been determined at amounts that reflect long-term market trends consistent with assumptions underlying the valuation of the accrued pension benefits. Marketable investments are valued at market related values, whereby fluctuations in market values are averaged over a five-year period. The actuarial asset value adjustment represents the difference between investments valued at fair value and investments valued at market related values.

7. Excess of actuarial value of net assets over accrued pension benefits:

For funding purposes, the pre-April 1, 2000 and post-March 31, 2000 excess of actuarial value of net assets over the accrued pension benefits is determined separately. Based on the accounting assumptions used for these financial statements, the breakdown as at March 31, 2002 is as follows:

8. Contributions:

During the period, employees contributed approximately 28% (28% in 2001) of the total contributions made in respect of current service.

9. Benefits:

10. Refunds and transfers:

During the year ended March 31, 2001, Canada Post Corporation and three other corporations implemented their own pension plans and their employees ceased to be members of the Public Service Pension Plan. In partial settlement, amounts totaling approximately $4,500 million ($1,300 million in 2001) were transferred to the pension plans of these corporations during the year. An additional amount estimated at $2,100 million before interest is expected to be transferred to these pension plans within the next year. This amount remains part of the Public Service Superannuation Account and of the accrued pension benefits at March 31, 2002.

11. Public Service Superannuation Account 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 either the Public Service Superannuation Account or the Pension Fund be credited to the Plan in equal installments over a period not exceeding fifteen years commencing in the year in which the actuarial report is laid before Parliament.

The legislation also provides comparable provisions, which grant authority to deal with surpluses in the Public Service Superannuation Account by reducing the Account over a period of up to fifteen years. Surpluses 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. As a result of the triennial actuarial valuation of the Public Service Pension Plan, which was tabled in Parliament in 2001, the Public Service Superannuation Account was reduced by an adjustment of $8,100 million in 2001. No additional adjustment was required during the year ended March 31, 2002.

12. Administrative expenses:

Administrative expenses consist of the following:

The legislation provides for administrative expenses to be charged to the Plan. PWGSC, as the administrator of the Plan recovers from the Plan administrative expenses for the activities directly attributable to its administration. These costs include salaries and benefits, systems maintenance and development, accommodation and other operating costs of administering the Plan within the department.

The Treasury Board of Canada Secretariat, as the program manager of the Plan, provides program advice to the members and charges its administrative costs to the Plan.

The PSPIB, as the manager of the investment funds of the Plan, charges its operating expenses, salaries and benefits, as well as other operating and investment expenses.

13. Contingency:

The Public Sector Pension Investment Board Act that received Royal Assent in September, 1999 amended the PSSA to enable the federal government to deal with surpluses in the Public Service Superannuation Account and the Public Service Pension Fund. The legal validity of these provisions has been challenged in the courts. The outcome of these lawsuits is not determinable at this time.