ROYAL CANADIAN MOUNTED POLICE PENSION PLAN ANNUAL REPORT 2010-2011
Table of Contents Message from the Minister of Public Safety... 1 Financial Highlights... 2 RCMP Pension Plan at a Glance... 3 Governance and Administration... 6 Investment Management... 9 2010-2011 Results... 11 Financial Statements... 16 Schedule I Public Accounts... 66 Schedule II Plan Membership... 68 Corporate... 69 Glossary of Terms... 70
Message from the Minister of Public Safety 1
Financial Highlights Year End Financial Position Net Assets and Other Accounts Available for Benefits were $16,991 million. Net Assets and Other Accounts Available for Benefits consisted of the balance in the Royal Canadian Mounted Police (RCMP) Superannuation Account of $12,847 million, the Net Investments at fair value of $4,106 million, and other net assets and liabilities of $38 million. Investments managed by the Public Sector Pension Investment Board (PSP Investments) were invested as follows: % of Asset Classes (as at March 31, 2011) Foreign Equity, 24.3% Canadian Equity, 32.2% Private Equity, 9.6% Nominal Fixed Income, 15.5% Real Return Assets, 18.4% Source: Public Sector Pension Investment Board Investment Performance Accrued Pension Benefits were $16,434 million. The Excess of the Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits was $238 million. The RCMP Superannuation Account earned $802 million in interest, representing a 6.4% rate of return. The investments managed by PSP Investments earned $498 million, representing an overall rate of return of 14.5%. 2
RCMP Pension Plan at a Glance Overall The RCMP Pension Plan (the Plan ) is a contributory defined benefit pension plan. Benefits are determined based on a formula set out in the Royal Canadian Mounted Police 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 RCMPSA. 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. 3
Plan Membership As of March 31, 2011, the Plan had 39,415 members. The membership consisted of 23,244 active contributors, 14,163 pensioners, and 2,008 survivors (see membership profile in Schedule II). RCMP Pension Plan Membership Profile (as at March 31, 2011) Survivors 5% Pensioners 36% Active Contributors 59% Source: Morneau Sobeco Contributions During the first 35 years of pensionable service, members contribute a percentage rate (based on calendar year), which is 5.5% for the first nine months of the current fiscal year, April 1, 2010 December 31, 2010 (5.2% in the previous fiscal year, April 1, 2009 December 31, 2009) and 5.8% for the last three months of the current fiscal year, January 1, 2011 March 31, 2011 (5.5% in the previous fiscal year January 1, 2010 March 31, 2010) up to the yearly maximum pensionable earnings (YMPE) in accordance with the Canada Pension Plan and/or Quebec Pension Plan and 8.4% current fiscal year (8.4% in the previous fiscal year) of pensionable earnings above that maximum. 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: 4
Contributions (continued) April 1, 2010 December 31, 2010 Pre-April 1, 2000 Post-March 31, 2000 Current service 2.15 2.15 Elected service Single rate 1.00 2.15 Double rate 0.00 0.58 Double and a half rate 0.00 0.26 January 1, 2011 March 31, 2011 Pre-April 1, 2000 Post-March 31, 2000 Current service 2.07 2.07 Elected service Single rate 1.00 2.07 Double rate 0.00 0.54 Double and a half rate 0.00 0.23 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 or 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. 5
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 (PAC) The mandate of the Pension Advisory Committee (PAC) is to: review matters respecting the administration, design and funding of the benefits provided under the RCMPSA; 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. 6
RCMP Pension Finance Oversight Committee (PFOC) The RCMP Pension Finance Oversight Committee (PFOC) was established on April 6, 2004 to assist the Chief Financial and Administrative Officer (formerly known as the Deputy Commissioner, Corporate Management and Comptrollership) and the Chief Human Resources Officer (formerly known as the Deputy Commissioner, Human Resources) on matters related to the financial administration and management of the RCMP Pension Plan. The Chairpersons of the PFOC report directly to the Chief Financial and 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 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 Chief Human Resources Officer 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 Sponsor (Chief Human Resources Officer) 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 initial contract with Morneau Sobeco was to expire. The PAOP SC was 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. 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 arrangement. 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. 7
Morneau Sobeco Morneau Sobeco, under a contractual agreement, provides day-to-day pension 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 transition the administration of the RCMP Pension Plans to Public Works and Government Services Canada s Government of Canada Pension Modernization Project (GCPMP), effective April 1, 2013. This Treasury Board submission approval included an extension to the terms of the Morneau Sobeco contract until March 31, 2013 with an option to extend the contract for one additional year, providing for transition. 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 the 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 of Canada 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. 8
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 monthly 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 RCMP, 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: 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 Return: achieving a long-term result (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. 9
Investment Policy In fiscal year 2009-2010, PSP Investments implemented its asset-liability modeling capabilities, enabling a more thorough understanding of the linkage between its investment policy and the Plans liabilities. Understanding this link helps ensure that PSP Investments approach and results not only meet the actuarial rate of return, but also contribute to the long-term sustainability of the Plans and the relative stability of funding requirements. This initiative reflects PSP Investments desire to improve the overall alignment of interests between all stakeholders. 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. 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 2011 Annual Report published on PSP Investments website: www.investpsp.ca. 10
2010-2011 Results Net Assets and Other Accounts Available for Benefits Net Assets and Other Accounts Available for Benefits increased by $1,084 million from the previous year, to $16,991 million at March 31, 2011. The reason for the increase 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 increase of $1,084 million are: Interest earned on the RCMP Superannuation Account of $802 million; plus Contributions received of $405 million; plus Earnings on investments managed by PSP Investments of $498 million; less Benefits paid of $584 million; less Refunds and transfers of $20 million. Net Assets and Other Accounts Available for Benefits are valued at fair value. Accrued Pension Benefits Accrued Pension Benefits increased by $899 million to $16,434 million at March 31, 2011. 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 $978 million; plus Benefits earned by members during the year of $395 million; plus Changes in actuarial assumptions of $208 million; less Experience gains of $84 million; less Benefits paid of $584 million; less Refunds and transfers of $20 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, 2011, was $238 million, representing a decrease of $39 million over the previous year. The excess is calculated by deducting the Accrued Pension Benefits from the Actuarial Value of Net Assets and Other Accounts 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 a Net Increase in Accrued Pension Benefits of $899 11
million, offset by an Increase in the Actuarial Value of Net Assets and Other Accounts Available for Benefits of $860 million. Interest on RCMP Superannuation Account The RCMP Superannuation Account earned $802 million in interest in 2010-2011, representing a 6.4% return. In 2009-2010, the RCMP Superannuation Account earned $817 million, representing a 6.6% return. This slight decrease is a result of lower interest rates through 2010-2011 compared to 2009-2010. Earnings on Investments Managed by PSP Investments Investments managed by PSP Investments earned $498 million in 2010-2011. This includes Net Unrealized Gains of $290 million, Net Interest, Dividend, and Other Income of $79 million, and Net Realized Gains of $129 million. 12
Earnings on Investments Managed by PSP Investments (continued) The following table summarizes the Portfolio and Benchmark Returns by Asset Class: Portfolio and Benchmark Returns Fiscal Year 2011 5-year Asset Class Portfolio Returns % Benchmark Returns % Portfolio Returns % Benchmark Returns % World Equity Canadian Equity 19.3 19.5 5.8 6.0 Foreign Equity US Large Cap Equity 11.0 10.9-3.8-1.0 EAFE Large Cap Equity 6.6 5.9-2.2-2.3 Small Cap Developed World Equity 19.7 20.1-2.5-0.2 Emerging Markets Equity 12.9 13.6 6.9 6.7 Private Equity 20.9 18.3 4.7-0.3 Nominal Fixed Income Cash & Cash Equivalents 1.1 0.8 2.5 2.4 World Government Bonds (4 years) 2.7 3.7 2.4 1 2.6 1 Canadian Fixed Income 5.4 5.1 5.3 5.3 Real Return Assets World Inflation-Linked Bonds 4.7 4.9 0.9 0.9 Real Estate 13.8 6.2 7.2 6.9 Infrastructure (4.75 years) -1.6 6.8 4.1 1 4.1 1 Total Return 14.5 12.7 3.6 4.4 1 These respective asset classes have existed for less than five years. The respective returns presented are since inception. Source: Public Sector Pension Investment Board Annual Report 2010-2011 13
Earnings on Investments Managed by PSP Investments (continued) Except otherwise indicated, returns are time-weighted rate of return and 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. The total portfolio return includes the performance impact of asset-allocation and absolute-return strategies and is calculated gross of direct expenses. Hedging investment returns are netted against the return of the respective hedged assets for the Private Market asset classes, or included in Total Return, for the Public Markets. Since PSP Investments commenced operations on April 1, 2000, the investments have earned cumulative investment income of $1,108 million on total transfers of $3,044 million, resulting in cumulative annualized five-year total return of 3.6%. PSP Investment Performance The graph below illustrates the rates of return on the consolidated pension plans over the last five years. Source: Public Sector Pension Investment Board 14
Contributions In 2010-2011, $405 million was paid into the Plan, of which members contributed $130 million and the employer $275 million. Schedule II presents the number of Plan contributors as at March 31, 2010 and 2011. The graph below illustrates the contributions made by the Members and the Employer, as a percentage of the total contributions. Benefits Benefits paid increased from $556 million in 2009-2010 to $584 million in 2010-2011.. This increase of $28 million reflects a net increase of 536 annuitants, as well as indexing increases of 0.5% that came into effect on January 1, 2010 and another 1.4% on January 1, 2011 respectively. Schedule II summarizes the number of annuitants as of March 31, 2010 and 2011, and the number of other benefits paid during the year ended March 31, 2010 and 2011. Actuarial Adjustments During 2010-2011, the Government of Canada did not withdraw any amounts from the RCMP Superannuation Account. At March 31, 2011, the Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits in the RCMP Superannuation Account was $923 million. Administrative Expenses Administrative expenses totaled $19.9 million in 2010-2011 ($15.2 million in 2009-2010). The total expenses are comprised of expenses incurred by the RCMP ($6.8 million in 2010-2011, $3.9 million in 2009-2010); Morneau Sobeco ($4.5 million in 2010-2011, $4.3 million in 2009-2010); PWGSC ($0.1 million in 2010-2011, $0.1 million in 2009-20010); PSP Investments ($8.1 million in 2010-2011, $6.6 million in 2009-2010); and OSFI ($0.4 million in 2010-2011, 0.3 million in 2009-2010). These expenses were directly related to administration of the Pension Plan. 15
Financial Statements Financial Statements of ROYAL CANADIAN MOUNTED POLICE PENSION PLAN 16
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STATEMENT OF CHANGES IN NET ASSETS AND OTHER ACCOUNTS AVAILABLE FOR BENEFITS Year ended March 31 ($ millions) 2011 2010 Net Assets and Other Accounts Available for Benefits, Beginning of Year $15,907 $14,774 Increase in Net Assets and Other Accounts Available for Benefits Interest Income on the RCMP Superannuation Account (Note 3) 802 817 Investment Income (Note 13) 498 539 Contributions (Note 12) 405 364 Transfers from Other Pension Funds 3 2 Total Increase in Net Assets and Other Accounts Available for Benefits $ 1,708 $ 1,722 Decrease in Net Assets and Other Accounts Available for Benefits Benefits Paid 584 556 Refunds and Transfers (Note 15) 20 18 Administrative Expenses (Note 16) 20 15 Total Decrease in Net Assets and Other Accounts Available for Benefits $ 624 $ 589 Net Increase in Net Assets and Other Accounts Available for Benefits $ 1,084 $ 1,133 Net Assets and Other Accounts Available for Benefits, End of Year $16,991 $15,907 The accompanying notes are an integral part of these financial statements. 21
STATEMENT OF CHANGES IN ACCRUED PENSION BENEFITS Year ended March 31 ($ millions) 2011 2010 Accrued Pension Benefits, Beginning of Year $15,535 $14,725 Increase in Accrued Pension Benefits Interest on Accrued Pension Benefits 978 939 Benefits Earned 395 364 Changes in Actuarial Assumptions (Note 10) 208 (103) Cost of New Elections 16 11 Transfers from Other Pension Funds 2 2 Total Increase in Accrued Pension Benefits $ 1,599 $ 1,213 Decrease in Accrued Pension Benefits Benefits Paid 584 556 Experience Gains (Losses) 84 (180) Refunds and Transfers (Note 15) 20 18 Administrative Expenses included in the Service Cost (Note 16) 12 9 Total Decrease in Accrued Pension Benefits $ 700 $ 403 Net Increase in Accrued Pension Benefits $ 899 $ 810 Accrued Pension Benefits, End of Year $16,434 $15,535 The accompanying notes are an integral part of these financial statements. 22
STATEMENT OF CHANGES IN EXCESS OF ACTUARIAL VALUE OF NET ASSETS AND OTHER ACCOUNTS AVAILABLE FOR BENEFITS OVER ACCRUED PENSION BENEFITS Year ended March 31 ($ millions) 2011 2010 Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits, Beginning of Year $ 277 $ 291 Increase in Net Assets and Other Accounts Available for Benefits 1,084 1,133 Change in Actuarial Asset Value Adjustment (224) (337) Increase in Actuarial Value of Net Assets and Other Accounts Available for Benefits $ 860 $ 796 Net Increase in Accrued Pension Benefits (899) (810) Excess of Actuarial Value of Net Assets and Other Accounts Available for Benefits over Accrued Pension Benefits, End of Year $ 238 $ 277 The accompanying notes are an integral part of these financial statements. 23
1. Description of the Royal Canadian Mounted Police Pension 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 main provisions of the Plan are summarized below. (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 Chief Actuary ( OCA ) of 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, contributions relating to service since April 1, 2000, are now recorded in the RCMP Pension Fund (the Pension Fund ). An amount equal to contributions in excess of benefit payments and administrative costs is transferred regularly to the Public Sector Pension Investment Board ( PSP Investments ) and invested in capital markets. PSP Investments is a Crown corporation whose statutory objectives are to manage the funds transferred to it for investment and to maximize investment returns without undue risk of loss, having regard to the funding, policies and requirements of the four major public sector pension plans. (b) Funding Policy The Plan is funded from Plan members and Government contributions. Plan members contributed 5.5 per cent (2010 5.2 per cent) for the first nine months and 5.8 per cent (2010-5.5 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 (2010-8.4 per cent) for the fiscal year of pensionable earnings above that maximum. The Government s contribution is made monthly to provide for the cost (net of Plan 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 last valuation was performed as at March 31, 2008. The RCMPSA provides that all pension obligations arising from the Plan be met by the Government. In the case of the Pension Fund, the RCMPSA requires that any actuarial 24
deficit be dealt with by transferring equal instalments to the Pension Fund over a period of up to 15 years, commencing in the year in which the actuarial report is tabled in Parliament. It also allows any excess to be lowered by reducing Government and Plan member contributions. In addition, if there is an amount considered to be non-permitted surplus related to the Pension Fund, no further Government pension contributions are permitted while Plan member contributions under the Pension Fund may be reduced and amounts from PSP Investments may be transferred to the Consolidated Revenue Fund. For service that pre-dates April 1, 2000, the RCMPSA further requires that any actuarial shortfall resulting from a lower balance in the Superannuation Account than the actuarial liability be addressed by increasing the Superannuation Account in equal instalments over a period of up to 15 years. It also allows the excess to be reduced by decreasing the Superannuation Account over a period of up to 15 years; however, if the balance of the Superannuation Account exceeds one hundred and ten percent (110%) of the amount required to meet the cost of the benefits payable, the excess amount must be reduced by decreasing the Superannuation Account annually 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. Benefits are determined by a formula set out in the 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 or earlier if totally or permanently disabled, has been lowered from a level of 0.7 percent for those turning age 65 in calendar year 2007 or earlier to 0.64 percent for those turning 65 in calendar year 2011. The reduction factor will be further reduced annually to 0.625 percent for those turning 65 in calendar year 2012 and later. 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, a separate Retirement Compensation Arrangement (RCA) has been implemented to provide benefits that exceed the limits established in the Income Tax Act. Since this arrangement is covered by separate legislation, the net assets available for benefits and accrued pension benefits are not consolidated in these financial statements; however, condensed information is presented in Note 17. 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 25
results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles. (b) Future Changes in Accounting Policies In April 2010, the Accounting Standards Board of Canada (AcSB) issued Section 4600 Pension Plans to the CICA Handbook replacing the current Section 4100 Pension Plans. The provisions of Section 4600 apply to annual financial statements for fiscal years beginning on or after January 1, 2011. Under Section 4600, pension plans in Canada are to continue to present all investments at fair value and will be required to present a liability for accrued pension benefits on the statement of financial position. Underlying accounting policies related to the presentation of the fair value of the investment portfolio will be based on International Financial Reporting Standards (IFRS). Other accounting policies not related to investments or pension obligations will be applied on a basis consistent with IFRS to the extent that they do not conflict with the requirements of Section 4600.The Plan is currently evaluating the impact of incorporating the requirements of Section 4600 into its accounting policies for the fiscal year ending March 31, 2012. (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. In the case of the RCMP Pension Fund, the investments are held by PSP Investments and allocated to the Plan. Investments, investment-related assets and investment-related liabilities are recorded as of the trade date (the date upon which the substantial risks and rewards are transferred) and are carried 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. At trade date, the best evidence of fair value is the transaction price. At each subsequent reporting period-end, market prices are used to determine fair value where an active market exists (such as a recognized securities exchange), as they reflect actual and regularly occurring market transactions on an arm s length basis. If quoted market prices are not available, then fair values are estimated using present value or other valuation techniques, using inputs existing at the end of the reporting year that are derived from observable market data. Valuation techniques are generally applied to investments in the Private Equity, Real Estate, and Infrastructure asset classes (collectively Private Market Investments ) over-the-counter (OTC) derivatives as well as asset-backed term notes (ABTNs). 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. In certain cases, such assumptions are not supported by market observable data. 26
(d) Valuation of Capital Debt Financing PSP Investments short-term capital debt financing is recorded at cost plus accrued interest, which approximates fair value. The fair value of PSP Investments long-term capital debt financing is based on prices that are obtained from third-party pricing sources. It is measured using an interest rate curve with a spread consistent with PSP Investments credit quality. (e) Transaction Costs Transaction Costs are incremental costs directly attributable to the acquisition, due diligence, issue, or disposal of a financial asset or financial liability. Transaction Costs are expensed as incurred and recorded as a component of Investment Income. (f) Investment Management Fees Investment Management Fees are costs directly attributable to the external management of assets on behalf of PSP Investments. Investment Management Fees incurred for Private Market Investments 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. These amounts are recorded against Investment Income. Investment Management Fees are also incurred for certain public equity investments and these amounts are paid either directly by PSP Investments or offset against distributions received from pooled fund investments. In both cases, they are recorded against Investment Income. (g) Income Recognition The Investment Income is allocated proportionately based on the asset value held by the Plan. Investment Income is made up of Interest Income, dividends, realized gains (losses) on the disposal of investments and unrealized gains (losses) which reflect the change in unrealized appreciation (depreciation) of investments held at the end of the year. Interest Income is recognized as earned. Dividends are recognized on the ex-dividend date and are reflected as Dividend Income. Dividends paid on securities sold short are reflected as Dividend Expense. Other Income includes securities lending income (net of fees on securities borrowed) and Private Market Investments distributions from pooled funds, limited partnerships or from direct investments 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; 27
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 Investment transactions in foreign currencies are recorded at exchange rates prevailing on the transaction date. Investments denominated in foreign currencies and held at the end of the period are translated at exchange rates in effect at the period-end date. The resulting realized and unrealized gains and losses on foreign exchange are included in Investment Income. (k) Use of Estimates 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. 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 credited with interest as though net cash flows were invested quarterly in 20-year Government of Canada bonds issued at prescribed rates and held to maturity. For the year ended March 31, 2011, Interest Income credited to the Account was $802 million (2010 - $817 million). The RCMPSA requires that this Account record transactions such as contributions, benefits payments, interest and transfers that pertain to pre- April 1, 2000 service. The balance in the RCMP Superannuation Account at March 31, 2011 was $12,847 million (2010 - $12,596 million). Transactions pertaining to service since April 1, 2000 are recorded in the RCMP Pension Fund, which is also included in the accounts of Canada. An amount equal to contributions in excess of benefit payments and administrative costs is transferred regularly 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, 2011, the $13 million (2010 $13 million) balance in the RCMP Pension Fund Account represented amounts of net contributions in transit awaiting imminent transfer to PSP Investments. 28
4. Investments (a) Investment Portfolio The Investment Portfolio held through PSP Investments, before allocating the effect of derivative contracts and investment-related assets and liabilities to the asset classes to which they relate, was as follows as at March 31: ($ millions) 2011 2010 Asset Class Fair Value Cost Fair Value Cost World Equity Canadian Equity $1,001 $815 $731 $638 Foreign Equity US Large Cap Equity 275 251 151 145 Europe, Australasia and the Far East (EAFE) Large Cap Equity 219 228 146 168 Small Cap Developed World Equity 225 189 138 127 Emerging Markets Equity 200 169 178 159 Private Equity 387 340 369 397 Nominal Fixed Income Cash, Cash Equivalents and Other 1 311 322 326 336 World Government and Corporate Bonds 201 211 77 83 Canadian Fixed Income 480 458 497 484 Real Return Assets World Inflation-linked Bonds 211 217 24 25 Real Estate 469 455 433 436 Infrastructure 191 207 167 171 Absolute Return 136 96 171 159 Investments $4,306 $3,958 $3,408 $3,328 Investment-Related Assets Amounts Receivable from Pending 49 49 12 12 Interest Receivable 10 10 7 7 Dividends Receivable 4 4 4 4 Derivative-related Receivables 42 2 35 - Total Investment-Related Assets $ 105 $ 65 $ 58 $ 23 1 Includes floating rates notes with maturities greater than one year with a fair value of $89 million for the Plan (2010 - $99 million) 29
4. Investments (continued) (a) Investment Portfolio (continued) ($ millions) 2011 2010 Asset Class Fair Value Cost Fair Value Cost Investment-Related Liabilities Amounts Payable from Pending Trades (77) (77) (33) (33) Interest Payable (1) (1) (1) (1) Securities Sold Short (4) (3) (9) (9) Securities Sold under Repurchase Agreements (36) (36) - - Derivative-related Payables (14) (2) (29) - Capital Debt Financing (Note 8) Short-term (49) (49) (46) (46) Long-term (124) (121) (75) (71) Total Investment-Related Liabilities $ (305) $ (289) $ (193) $ (160) Net Investments $4,106 $3,734 $3,273 $3,191 (i) Canadian Equity and Foreign Equity Canadian Equity and Foreign Equity include direct and indirect investments in 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. Valuation Techniques Direct investments in Canadian and Foreign Equities are measured at fair value using quoted market prices, namely, the bid price. In the case of investments in pooled funds, fair value is measured by using unit values obtained from each of the funds administrators. Such unit values are derived from the fair value measurement of the underlying investments in each pooled fund. (ii) Private Equity, Real Estate and Infrastructure The Private Equity asset class is comprised of direct investments and co-investments in companies and fund investments. They include investments in private companies, mezzanine debt and distressed debt. The Real Estate asset class is comprised of direct investments in various private entities, properties and third-party debts, as well as fund investments in the real estate sector. Real Estate investments are classified into two portfolios (an equity portfolio and a debt portfolio). The equity portfolio is comprised of direct investments in properties, partnerships and companies operating in the office, retail, industrial, hospitality and residential sectors, as 30
well as private funds 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, other structured finance products as well as real estate debt funds (collectively Real Estate Debt ) where significant portions of the value are attributed to the underlying real estate assets. The Real Estate asset class is accounted for net of all third-party financings. As at March 31, 2011, the total amount of third-party financing included in the Real Estate asset class contracted by direct investments controlled by PSP Investments for the Plan Account was $150 million (2010 $151 million). The Infrastructure asset class is comprised of direct investments and co-investments in various private entities and fund investments. They include investments in companies engaged in the management, ownership or operation of assets in power, transportation and other regulated businesses. The infrastructure asset class is accounted for net of all third-party financings. As at March 31, 2011, the total amount of third-party financing included in the infrastructure asset class contracted for direct investments controlled by PSP Investments for the Plan was approximately $4 million (2010 - $6 million). Valuation Techniques The fair value of Private Market Investments is determined at least annually using acceptable industry valuation methods. During the year, the fair value is reviewed and adjusted, as appropriate, to reflect the impact of any significant market or investmentspecific events or circumstances. For each investment, the relevant methodology is applied consistently over time as appropriate in the prevailing circumstances. In cases where the services of third-party appraisers are used, PSP Investments management ensures their independence and that valuation methods used are consistent with professional appraisal standards. Such standards include the International Private Equity and Venture Capital Valuation Guidelines, the Canadian Uniform Standards of Professional Appraisal Practice and the Uniform Standards of Professional Appraisal Practice in the United States of America. In validating the work performed by appraisers, PSP Investments management ensures that the assumptions used correspond to financial information and forecasts of the underlying investment. For direct investments in Private Equity and direct investments and co-investments in Infrastructure, valuation methods used include discounted cash flows analysis, earnings multiples, prices of recent comparable transactions and publicly traded comparables. Assumptions used in such valuations include discount rates and projected cash flows, which are not fully supported by prices from market observable transactions. For direct investments in Real Estate, valuation methods used include discounted cash flows, prices of recent comparable transactions and the direct capitalization approach. Assumptions used in such valuations include capitalization rates, projected cash flows and/or net operating income, which are not fully supported by prices from market observable transactions. 31
The fair value of Real Estate Debt is determined using either a yield-based or collateralbased valuation technique. The yield-based valuation technique involves discounting expected future cash flows that incorporate assumptions with respect to interest rates offered for similar loans to borrowers with similar credit ratings. The collateral-based valuation technique involves assessing the recoverable value of the collateral in question, net of disposal fees. In the case of Private Equity, Real Estate, Infrastructure fund investments as well as Private Equity co-investments, the annual fair value is generally determined based on the audited fair values reported by the fund s general partner using acceptable industry valuation methods. (iii) Nominal Fixed Income and World Inflation-Linked Bonds Nominal Fixed Income includes Cash, Cash Equivalents and Other, World Government and Corporate Bonds and Canadian Fixed Income. Cash Equivalents include the shortterm instruments having a maximum term to maturity of one year. Floating rate notes are included in Cash, Cash Equivalents and Other, provided the final maturity date does not exceed three years and the coupons reset more than once per year. World Government & Corporate Bonds and Canadian Fixed Income include Government bonds, Provincial and Territorial bonds, Municipal bonds and Corporate bonds. World Inflation-Linked Bonds reported as Real Return Assets are fixed income securities that earn inflation adjusted returns. PSP Investments holds ABTNs reported as Canadian Fixed Income in the Investment Portfolio. The ABTNs were received in exchange for third-party or non-bank sponsored asset-backed commercial paper (ABCP) that suffered a liquidity disruption in mid-august 2007 and were subsequently restructured in January 2009. The ABTNs had an original face value of $1,962 million, of which $141 million has been allocated to the Plan. 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 ABTNs, of which $69 million was allocated to the Plan. As at March 31, 2011, the margin funding facilities had not been drawn upon since inception. The agreement to exchange the non-bank ABCP for ABTNs included a moratorium preventing collateral calls for an 18- month period that ended on July 16, 2010. PSP Investments management s best estimate of the fair value of ABTNs allocated to the Plan as at March 31, 2011 was equal to $87 million (2010 $84 million). This amount was net of principal repayments and corresponding gains, together amounting to $3 million for the year ended March 31, 2011 (for the year ended March 31, 2010 $10 million). PSP Investments recorded an increase of $4 million in the fair value of the ABTNs allocated to the Plan Account during the year ended March 31, 2011 (increase of $14 million during the year ended March 31, 2010). The fair value of the ABTNs allocated to the Plan Account was reduced by the impact of the funding facilities amounting to $4 million as at March 31, 2011 (2010 $5 million). 32