Annual Report of the Canada Pension Plan 2001-2002
- Description of the Canada Pension Plan
- Significant accounting policies
- Investments held by the CPP Investment Fund
- Investments held by the CPP Investment Board
- Receivables from beneficiaries
- Canada Pension Plan Account
- Contributions
- Investment Income
- Pensions and benefits mispayments
- Administration costs
- Contingencies
- Subsequent Event
- Comparative figures
1. Description of the Canada Pension Plan
a) Description of the CPP
The Canada Pension Plan (CPP) is a federal/provincial plan established by an Act of Parliament in 1965.
The CPP began operations in 1966. It is a compulsory and contributory social insurance program operating in all parts of Canada, except Quebec, which operates the Régime des rentes du Québec, a comparable program. The Plan's objective is to provide a measure of protection to workers and their families against the loss of earnings due to retirement, disability or death.
The Minister of Human Resources Development Canada is responsible for the administration of the Canada Pension Plan (the CPP Act); the Minister of National Revenue is responsible for collecting contributions. The Minister of Finance and his provincial counterparts are responsible for setting CPP contribution rates, pension and benefit levels and funding policy.
The financial activities of the Canada Pension Plan are recorded in the CPP Account (Note 6). The CPP Investment Fund (Note 3) holds the bond portfolio of the Plan, and the Plan's investments in capital markets are managed by the CPP Investment Board (Note 4). The financial transactions affecting the Account and the Investment Fund are governed by the CPP Act and regulations. The Investment Board's transactions are governed by the Canada Pension Plan Investment Board Act and the accompanying regulations.
As stated in the CPP Act, changes to this Act require the approval of at least two-thirds of the provinces having, in the aggregate, not less than two-thirds of the population of all included provinces.
b) Financing
CPP is financed by contributions and investment returns.
Employers and employees pay contributions equally to CPP. Self-employed workers pay the full amount.
CPP was designed initially to be financed on a pay-as-you-go basis, which means that the Plan would operate on a current basis with pensions and benefits being paid out of current contributions. With changes made to the Act in 1997, CPP is now intended to be funded on a "steady-state" basis — that is, combined contributions are planned to increase to 9.9% of pensionable earnings by 2003 and are then expected to level off.
From 1966 to 1986, the combined employer-employee contribution rate remained at 3.6% of pensionable earnings. In 1987, it was raised to 3.8% and increased yearly by 0.2% to reach 5.6% in 1996. In 1997, 1998, 1999, 2000 and 2001, the combined contribution rate was increased by 0.4%, 0.4%, 0.6%, 0.8% and 0.8% respectively. In 2002, it was increased by 0.8% to reach 9.4%. The maximum combined contribution for 2002 was $3,346 (2001 - $2,993).
The CPP Act provides that an actuarial report shall be prepared every three years for purposes of the review of the financial state of the CPP by the Minister of Finance and his provincial counterparts. The Eighteenth Actuarial Report of the Chief Actuary of the Office of the Superintendent of Financial Institutions was tabled in the House of Commons in December 2001. Federal and provincial ministers of Finance concluded at the end of the 2002 Triennial Review process that the CPP's financial health is sound and that the 9.9% combined employee-employer contribution rate which will be reached in 2003 is expected to be sufficient to sustain the Plan in the face of an aging population.
c) Net assets of the Plan
The net assets of the Plan are composed of the deposit with the Receiver General for Canada, short term and long term investments in bonds and investments in capital markets managed by the CPP Investment Board. The net assets represent funds accumulated for the payment of pensions, benefits and administration costs. This amount does not cover the actuarial present value of accrued pensions and benefits. As at March 31, 2002, the net assets of the Plan are of $51.9 billion (2001 - $45.7 billion). This amount represents 2.5 times the total of pensions and benefits for the year 2001-2002.
d) Pensions and benefits
Retirement pensions - A retirement pension is payable to each contributor at age 60 or older, according to the provisions of the Act. The monthly amount is equal to 25% of the contributor's average monthly pensionable earnings during the pensionable period. The amount may be reduced or increased depending upon whether the contributor applies for a retirement pension before or after age 65. This adjustment cannot exceed 30%. The maximum for new monthly pension payable at age 65 in 2002 is $788.75 (2001 - $775.00).
Disability benefits - A disability benefit is payable to a contributor who is disabled, according to the provisions of the Act. The amount of the disability benefit to be paid includes a flat-rate portion and an amount equal to 75% of the earned retirement pension. The maximum for new monthly disability benefit in 2002 is $956.05 (2001 - $935.12).
Survivor's benefits - A survivor's benefit is payable to the spouse or common-law partner (the beneficiary) of a deceased contributor, according to the provisions of the Act. For a beneficiary under the age of 65, the benefit consists of a flat-rate portion and an amount equal to 37.5% of the deceased contributor's earned retirement pension. A beneficiary between the ages of 35 and 45 who is not disabled or who has no dependent children receives reduced benefits. For beneficiaries aged 65 and over, the benefit is equal to 60% of the retirement pension granted to the deceased contributor. The maximum for new monthly benefit payable to a beneficiary in 2002 is $473.25 (2001 - $465.00).
Disabled contributor's child and orphan benefits - According to the provisions of the Act, each child of a contributor who is receiving disability benefits or who died is entitled to a benefit as long as the child is under the age of 18, or is between the ages of 18 and 25 and attending school full-time. The flat-rate monthly benefit in 2002 is $183.77 (2001 - $178.42).
Death benefits - According to the provisions of the Act, a death benefit is a one-time payment to, or on behalf of, the estate of a contributor. The benefit amounts either to 10% of the maximum pensionable earning in the year of death or six times the monthly retirement pension granted to the deceased contributor, whichever is less. The maximum death benefit in 2002 is $2,500 (2001 - $2,500).
Pensions and benefits indexation - As required by the Act, pensions and benefits are indexed annually based on the Consumer Price Index for Canada. The rate of indexation for 2002 is 3.0% (2001 - 2.5%).
2. Significant accounting policies
a) Basis of presentation
These financial statements present the net assets and the changes in net assets of the Canada Pension Plan. They do not provide information on the actuarial estimates required to meet future obligations of the CPP. The CPP Act does not require that the pensions and benefits be pre-funded.
The financial statements are prepared in accordance with the Canada Pension Plan (the CPP Act). They have been prepared on the accrual basis of accounting and they include amounts which must, of necessity, be based on management's best estimates and judgements.
The CPP, which is under joint control of the Government of Canada and participating provinces, is not considered to be part of the reporting entity of the Government of Canada. Accordingly, its financial activities are not consolidated with those of the Government.
b) Valuation of investments
Bonds are shown at cost, which is equal to the face value of the bonds at the time of purchase. This accounting policy has been selected based on the non-marketable, non-transferable nature of the bonds and on consideration of the likelihood of redemption of the provincial and territorial bonds in the foreseeable future. The bonds issued by the provincial and territorial governments are redeemable prior to maturity at market value equivalent at the option of these governments. In the event that the federal Minister of Finance considers the redemption necessary to pay pensions, benefits and administration costs, the bonds would then be redeemed at face value.
CPP Investment Board's investments 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. Market prices for securities and unit values for pooled and mutual funds are used to represent fair value for the investments. Unit values reflect the quoted market prices of the underlying securities.
c) Contributions to the Plan include CPP contributions collected by the Canada Customs and Revenue Agency (CCRA) for the year, including receivables at year-end. Funds transferred by the CCRA are estimated and are subject to review and adjustments. Adjustments, if any, are recorded as contribution revenue in the year they are known.
d) Investment income recognition
Interest income is recorded in the year in which it is earned.
CPP Investment Board's net income from operations represents the Investment Board's investment income, less investment and administrative expenses. Investment income is recorded on the accrual basis and represents realized gains and losses on disposal or transfer of investments, unrealized gains and losses on investments held at the end of the year, dividend income, interest income, and distributions from mutual and pooled funds. Realized gains and losses on investments sold during the year represent the difference between sale proceeds and cost, less related costs of disposition. Unrealized gains and losses represent the change in the difference between fair value and cost of investments at the beginning and end of each year.
e) Pensions and benefits are recorded when payable.
f) Net overpayments are composed of overpayments of pensions and benefits that were established during the year less remissions of debts granted.
g) Administration costs are recorded in the year to which they relate.
3. Investments held by the CPP Investment Fund
The Canada Pension Plan Investment Fund was established in the accounts of Canada by the CPP Act to record the Plan's investments in bonds of the provinces, territories and Canada. The CPP Investment Fund's bond portfolio is administered by the federal Department of Finance.
Until the end of 1997, the investments in provincial, territorial and federal government bonds were made with the cash on hand in excess of the Plan's forecast three-month operating requirement. These bonds were not marketable and had a 20-year term (or less) as fixed by the Minister of Finance on the recommendation of the Chief Actuary of the Office of the Superintendent of Financial Institutions. The interest rate on the bonds was determined by the Minister of Finance based on the average yield to maturity of all outstanding Government of Canada obligations with terms of 20 years or more. When these bonds matured, funds not required for payment of pensions and benefits were re-invested in new bonds.
Beginning in 1998, a maturing provincial or territorial bond may be re-invested in a new bond only once for a term of 20 years, if both the issuer asks to do so and the operating balance is sufficient to pay current pensions and benefits. Excess funds not re-invested are transferred to the CPP Investment Board.
The re-invested bonds remain not marketable and bear interest at a rate fixed by the Minister of Finance. The interest rate is substantially the same rate that the province would pay if it were to borrow the same amount for the same term through the issuance of a bond on the public capital markets.
During the year, all redemptions of bonds were made, at maturity date, at face value. Interest earned on the investments is paid semi-annually to the CPP Account. The bonds are redeemable in whole or in part before maturity. Since January 31, 2001, the provinces and territories are permitted to redeem their bonds held by the CPP Investment Fund prior to their maturity at a value equivalent to market value. The bonds can also be redeemed at the option of the federal Minister of Finance where he considers the redemption necessary to pay pensions, benefits and administration costs. The bonds are then redeemed at face value. No bonds were redeemed by the provinces and the territories prior to maturity during the year ended March 31, 2002.
At March 31, 2002, the balance in the Investment Fund was $28.3 billion at cost (2001 - $29.6 billion). The estimated fair value of the balance in the Investment Fund, including accrued interest, is $34.3 billion (2001 - $37.6 billion). This estimate is calculated by discounting the bonds' contractual cash flows at rates currently available at year-end for similar investments.
The following schedule provides information on the redemptions, re-investments and balance of the Investment Fund.
| March 31 2001 | Redemptions | Re-investments | March 31 2002 | |
|---|---|---|---|---|
| Newfoundland | 633,656 | 52,973 | 52,376 | 633,059 |
| Prince Edward Island | 140,469 | 11,504 | 11,374 | 140,339 |
| Nova Scotia | 1,173,077 | 96,251 | 96,251 | 1,173,077 |
| New Brunswick | 835,171 | 75,637 | 74,784 | 834,318 |
| Quebec | 95,813 | 6,316 | 6,250 | 95,747 |
| Ontario | 12,708,448 | 1,268,736 | 503,955 | 11,943,667 |
| Manitoba | 1,394,972 | 135,001 | - | 1,259,971 |
| Saskatchewan | 1,329,256 | 109,647 | - | 1,219,609 |
| Alberta | 3,776,251 | 216,739 | - | 3,559,512 |
| British Columbia | 4,096,848 | 378,223 | 308,580 | 4,027,205 |
| Yukon Territory | 3,726 | - | - | 3,726 |
| 26,187,687 | 2,351,027 | 1,053,570 | 24,890,230 | |
| Canada | 3,403,537 | 17,622 | - | 3,385,915 |
| 29,591,224 | 2,368,649 | 1,053,570 | 28,276,145 |
The following schedule presents the classification of bonds by maturity dates and the weighted-average annual rate of return on bonds currently held.
| 2002 | 2001 | ||||
|---|---|---|---|---|---|
| Investment at cost | Average yield | Investment at cost | Average yield | ||
| Investments maturing | |||||
| Within 1 year | 2,383 | 14.80% | 2,369 | 15.31% | |
| 1 - 5 years | 10,020 | 11.46% | 9,529 | 12.84% | |
| Over 5 years | 15,873 | 9.13% | 17,693 | 9.38% | |
| Total Invsetments | 28,276 | - | 29,591 | - | |
| Weighted-average yield on invstments | - | 10.43% | - | 10.97% | |
4. Investments held by the CPP Investment Board
The Canada Pension Plan Investment Board was established by an Act of Parliament in 1997. The Canada Pension Plan Investment Board Act came into force on April 1, 1998. The purpose of the Board is to invest the funds transferred by the CPP in a diversified portfolio of securities. The Board is designed to operate at arm's length from the government and it is required to be accountable to the public, the Minister of Finance and his provincial counterparts through regular reports.
The following schedule provides information on the Board's investments as at March 31.
| 2002 | 2001 | ||
|---|---|---|---|
| Canadian equities, at fair value | |||
| Public Markets | 9,970 | 5,024 | |
| Private Markets | 144 | - | |
| 10,114 | 5,024 | ||
| United States | |||
| Public Markets | 1,861 | 1,070 | |
| Private Markets | 304 | - | |
| 2,165 | 1,070 | ||
| Non-North America | |||
| Private Markets | 12 | - | |
| 1,983 | 1,061 | ||
| Total Equities (Cost 2002 - $14,690; 2001 - $8,042) | 14,262 | 7,155 | |
| Other Investments Money Market Securities (Cost 2002 - $27; 2001 - Nil) | 27 | - | |
| Total Investments | 14,289 | 7,155 | |
In accordance with its Investment Policy, 100% of the CPP Investment Board's investments are allocated to equities, with at least 70% of the book value allocated to Canadian equities and the remainder to non-Canadian equities.
The regulations governing the CPP Investment Board allow the active management of up to 50% of Canadian equities, on a book value basis. The regulations restrict the remaining investments in Canadian equities to substantially replicate the composition of one or more broad market indices.
As at March 31, 2002, 96,6% (2001 - 100%) of investments are held in public market equities. Approximately 99% (2001 - 61%) of investments in Canadian public market equities are held in funds that substantially replicate the composition of the Toronto Stock Exchange 300 Composite Index.
All United States and Non-North America (collectively "Non-Canadian") public market equities are held in funds that substantially replicate the Standard & Poor's ("S&P") 500 Index and the Morgan Stanley Capital International ("MSCI") EAFE Index, respectively.
As at March 31, 2002, 3.2% (2001 - nil) of investments are held in private market equities. These investments, currently in Canada, the United States, and Western Europe, are generally made by taking an interest in funds managed by third parties. The underlying investments represent equity ownership or investments with the risk and return characteristics of equity.
The CPP Investment Board's audited financial statements for the year ended March 31, 2002 are publicly available and provide details concerning the Board's investment policy, its investments and portfolio return.
5. Receivables from beneficiaries
(in millions of dollars)
| 2002 | 2001 | ||
|---|---|---|---|
| Balance of pensions and benefits overpayments | 73 | 76 | |
| Less: allowance for doubtful accounts | 30 | 30 | |
| 43 | 46 | ||
Human Resources Development Canada has procedures to detect overpayments. During the year, overpayments totalling $38 million (2001 - $33 million) were established and remissions of debts totalling $10 million (2001 - $8 million) were granted. A further $ 32 million was recovered (2001 - $24 million).
6. Canada Pension Plan Account
The CPP Account was established in the accounts of Canada by the CPP Act, to record the contributions, interest, pensions, benefits and administration costs of the Plan. It also records the amounts transferred to or received from the CPP Investment Fund and the CPP Investment Board.
The balance of the CPP Account includes the Deposit with the Receiver General for Canada and short-term investments, if any. As at March 31, the Deposit with Receiver General for Canada amounts to $6,770 million (2001 - $6,420 million).
7. Contributions
The Department of Finance estimates annual contributions based on a forecast of pensionable earnings. That forecast of pensionable earnings is based on a formula using many factors such as the growth in the number of contributors and in the average pensionable earnings. Although the Department of Finance uses recent data and statistics in the calculation, a variation may occur in the factors used to estimate those earnings. For example, a variation of one percentage point in the number of contributors or in the average pensionable earnings for 2001, would result, in each case, in a change of $ 227 million (2000 - $201 million) in estimated contributions.
The Canada Customs and Revenue Agency (CCRA) transfers contributions to the CPP based on the Department of Finance's estimate of contributions to be collected for a calendar year and on its own contribution collection schedule for the year. Actual pensionable earning and contribution amounts for 2001 and 2002 will only be known once the CCRA has processed all employers' and self-employed workers' declarations of contributions for 2001 and 2002.
Adjustments, if any, are recorded in the year in which they are known. The CPP reimbursed $396 million to CCRA in 2001-2002 as an adjustment for 2000 and preceding years (2000-2001 - CPP received $357 million for 1999 and preceding years).
8. Investment Income
| 2002 | 2001 | ||
|---|---|---|---|
| Interest on bonds held by the CPP Investment Fund | 3,071 | 3,326 | |
| Interest on deposit with the Receiver General for Canada at a weighted-average rate of 3.09% (2001 - 5.27%) | 189 | 362 | |
| Interest on short term investments with Canada (2001 - weighted-average rate of 5.63%) | - | 12 | |
| >Investment Board net income / (loss) from operations: | |||
| Net unrealized gains / (losses) | 459 | (1,247) | |
| Fund distributions of capital gains and dividends | 213 | 213 | |
| Net realized gains / (losses) | (378) | 180 | |
| Dividend Income | 12 | 3 | |
| Other investment income | 10 | 6 | |
| Less: Investment and administrative expenses | 11 | 6 | |
| 305 | (851) | ||
| 3,565 | 2,849 | ||
9. Pensions and benefits mispayments
Given the nature of the Plan and the number of applicants and beneficiaries, from time to time overpayments and underpayments of pension and benefit payouts may be made. Periodically, Human Resources Development Canada undertakes studies of the extent and nature of pension and benefit mispayments. The most recent review was completed for the 1999 benefit year. The most likely value of undetected mispayments for that year was $32.4 million (under-payments - $21.3 million and overpayments - $11.1 million).
In July 2002, a new approach in the management of risk for the CPP program was initiated. As HRDC moves towards Modernizing Service for Canadians, corrective and preventative initiatives to mitigate pension and benefit payment risks will be identified, prioritised and managed through the recently introduced Integrated Risk Management approach. This new practice replaces studies on the extent and nature of pension and benefits mispayments which were reported in the previous years.
10. Administration costs
| 2002 | 2001 | ||
|---|---|---|---|
| Pension and benefit delivery, accommodation and corporate services (Human Resources Development Canada) | 279 | 243 | |
| Collection of contributions (Canada Customs and Revenue Agency) | 78 | 78 | |
| Cheque issue and computer services (Public Works and Government Services Canada) | 13 | 13 | |
| Actuarial services (Office of the Superintendent of Financial Institutions) | 1 | 1 | |
| 371 | 335 | ||
Administration costs of the CPP represent the cost of services received from a number of federal government departments and an agency. Those costs are charged to the CPP in accordance with memoranda of understanding.
11. Contingencies
At March 31, 2002, there were 8,185 (8,224 in 2001) appeals relating to the payment of CPP pensions and benefits. Claims for these appeals could reach a maximum of $35 million ($21 million in 2001). Any claims resulting from the resolution of these appeals will be accounted for as an expenditure of the period in which the claim will be paid.
12. Subsequent Event
In June 2002, a Bill was tabled in the House of Commons to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act in order to implement a federal-provincial agreement to transfer CPP assets (the Deposit with the Receiver General and the Canada Pension Plan Investment Fund) that are managed by the federal government to the CPP Investment Board. The adoption of the new law would make it possible for the transfers to begin in 2003 and to continue over a three-year period.
As a result of the tabling of the Bill in the House of Commons, the Chief Actuary of the Office of the Superintendent of Financial Institutions has submitted a Nineteenth Actuarial Report on the Canada Pension Plan. This report, tabled in the House of Commons in June 2002, reflects the changes in the assets of the Plan following the transfer of funds to the Board.
13. Comparative figures
Certain comparative figures have been reclassified to conform to the current year's presentation.