Annual Report of the Canada Pension Plan 2001-2002
Financial Accountability
Since 1999-2000, the CPP has used the accrual basis of accounting for revenues and expenses. This method gives administrators a detailed financial picture and allows accurate matching of revenue and expenditures in the year in which they occur.
As of March 31, 2002, the total net assets of the CPP were valued at approximately $51.9 billion (equal to 2.5 years' worth of benefits). Net Plan assets are contributions and investment income accumulated since the Plan's inception in 1966, less benefits and expenditures over the same period. Plan assets are expected to increase appreciably over the next 20 years.
CPP Account
A separate account, the CPP Account, has been established in the accounts of the Government of Canada to record the financial elements of the Plan: contributions, interest, pensions and other benefits paid, and administrative expenditures. The CPP Account also records the amounts transferred to or received from both the CPP Investment Fund and the CPP Investment Board. Spending authority is limited to the Plan's net assets.
For the year ending March 31, 2002, the CPP Account's operating balance was maintained at a level designed to cover three months' worth of forecast benefit payments and administrative charges.
During 2001-02, the operating balance earned an average interest rate of 3.09 percent, or $189 million.
CPP Investment Fund
Before the 1998 changes to the CPP's investment policy, funds not immediately needed to pay benefits and maintain liquidity in the CPP Account were invested only in long-term bonds of the provincial and territorial governments, provincial Crown agencies, and the Government of Canada. The balance in the Investment Fund on March 31, 2002, was $28.3 billion, down slightly from $29.6 billion in March 2001 because of non-renewal of maturing bonds. All securities held were invested for 20-year terms.
Since 1998, funds coming into the Plan that are not immediately needed to pay benefits, and Investment Fund securities that are redeemed, have been transferred to the CPP Investment Board. They will be invested in capital markets. As a transitional measure, all provinces and territories can roll over their CPP borrowings at maturity for one additional 20-year term if they wish, at the same rate of interest as they would pay on their other market borrowings.
During the 1999 federal/provincial triennial review, a decision was made to amend the CPP legislation. The amendment gives the provinces and territories the option of prepaying some or all of their CPP borrowings at market rates of interest, at no cost to the Plan. This option, which was implemented in January 2001, can assist provinces that wish to pay down their debt.
Interest
In 2001-02, the Investment Fund earned about $3 billion in interest, which was deposited in the CPP Account. This compares with $3.3 billion earned in the previous 12 months. The Canada Pension Plan Financial Statements summarize the status of the Investment Fund as of March 31, 2002.
Maturing securities are redeemed as they come due by the federal government, provinces and territories. In 2001-02, $2.4 billion worth of bonds matured, and of those, the provinces and territories renewed $1.1 billion for additional 20-year terms.
Rates of return
The Investment Fund continues to benefit from the high rates of return for securities that were bought in the early 1980s, when interest rates were relatively high. These securities are 20-year government bonds bearing a weighted average annual nominal return of 10.43 percent. The Fund's average nominal rate of return can be expected to remain above nine percent for the next several years. For this reason, the short-term rate of return, based on these investments, will exceed the Fund's expected long-term rate of return of 6.5 percent, or 3.5 percent after inflation.
CPP Investment Board
The CPP Investment Board (CPPIB) was created by an act of Parliament in December 1997 to invest funds not required by the Canada Pension Plan to pay current benefits.
On March 31, 2002, the market value of assets invested by the CPPIB in Canadian and foreign equities totalled $14.3 billion, which represented about 27 percent of the Plan's assets. The CPPIB's annual report, as well as its quarterly financial statements, can be found at: www.cppib.ca 
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The Investment Board operates at arm's length from government. Its legislated mandate is to manage funds transferred from the CPP "in the best interests of the contributors and beneficiaries of the Plan." The Board is to "invest its assets with a view to achieving a maximum rate of return, without undue risk of loss." The Board must also consider the factors that affect the Plan's funding and its ability to meet its financial obligations.
In developing its asset mix policy, the CPP Investment Board considers the Plan's fixed income assets (the bond portfolio and operating balance), which are administered by the Department of Finance. As a result, it has decided to invest solely in equities in order to bring balance to the total CPP portfolio. The CPP Investment Board has a long-term investment horizon. The Chief Actuary estimates that contribution revenues will exceed CPP benefit payments and expenses well into the future, and that the CPP will not need money from the Investment Board for about 20 years.
Further information on the CPPIB's mandate, structure and investment policy can be found on its Web site.
Current investments
As at March 31, 2002, approximately 70 percent of the CPPIB's $14.3 billion in assets was invested in Canadian equity markets and 30 percent in equity markets in the United States, Europe and Asia. The CPPIB has full discretion over its equity policy. It is subject to the foreign property rule and can invest up to 30 percent of the book value of its assets outside Canada.
In the year ended March 31, 2002, the CPPIB was investing mostly in externally managed index funds. These replicated the composition of the Standard & Poor and Toronto Stock Exchange Composite Index (formerly TSE, now referred to as TSX) of approximately 300 companies that trade on the TSX. They also reflect the Standard & Poor's 500 Index of large companies in the US and the Morgan Stanley Capital International EAFE (Europe, Australasia and the Far East) Index of about 1,000 companies.
In June 2001, the CPP Investment Board initiated a program to invest in private equities through external managers to diversify its investment portfolio. As of March 31, 2002, $458 million, or approximately 3.2 percent of the CPPIB's total assets, had been invested in private equities.
During the 2001-02 fiscal year, the CPPIB's equity portfolio earned $316 million, representing a rate of return of 3.4 percent.
Investing for our future
The CPP Investment Board has expanded into private equities through externally managed funds that provide venture capital and expansion financing to private companies. It expects to commit as much as 10 percent of total equities to private equities and five percent to other private market investments such as real estate, infrastructure, and natural resource and energy assets. These investments will be made through limited partnerships or pooled funds managed by investment firms in Canada and around the world.
In compliance with its statutory requirement to hold a public meeting in each participating province at least once every two years, the Board held public meetings in the provincial capitals in January 2001 and June 2002.