Report on the Public Service Pension Plan for the Fiscal Year Ended March 31, 2016

Report on the Financial Statements

I have audited the accompanying financial statements of the public service pension plan, which comprise the statement of financial position as at 31 March 2016, and the statement of changes in net assets available for benefits and statement of changes in pension obligations for the year then ended, and a summary of significant accounting policies and other explanatory information.

Report on Other Legal and Regulatory Requirements

In my opinion, the transactions of the public service pension plan that have come to my notice during my audit of the financial statements have, in all significant respects, been in accordance with the Public Service Superannuation Act and regulations, the Public Sector Pension Investment Board Act and regulations and the by-laws of the Public Sector Pension Investment Board.

(A) General

The pension plan is a contributory defined benefit plan covering substantially all of the full-time and part-time employees of the Government of Canada (the Government), Public Service corporations as defined in the PSSA, and territorial governments. Membership in the pension plan is compulsory for all eligible employees.

The Government is the sole sponsor of the pension plan. The President of the Treasury Board is the Minister responsible for the PSSA. The Treasury Board of Canada Secretariat (the Secretariat) is responsible for the management of the pension plan while Public Services and Procurement Canada (PSPC) provides the day-to-day administration of the pension plan and maintains the books of accounts. The Office of the Chief Actuary (OCA), an independent unit within the Office of the Superintendent of Financial Institutions (OSFI) performs periodic actuarial valuations of the pension 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 pension plan were recorded in a Public Service Superannuation Account (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 since April 1, 2000, are now recorded in the Public Service Pension Fund (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 (PSPIB) and invested in capital markets. PSPIB 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 three main public sector pension plans (public service, Royal Canadian Mounted Police (RCMP) and Canadian Forces).

(B) Funding policy

The pension plan is funded from plan member and employer contributions, and investment earnings. For the fiscal year, public service employees who were members of the pension plan on or before December 31, 2012 (Group 1) contributed 8.15% (7.50% in 2015) for the first nine months; and 9.05% (8.15% in 2015) for the last three months of pensionable earnings up to the maximum covered by the Canada Pension Plan (CPP) or Québec Pension Plan (QPP); and 10.40% (9.80% in 2015) for the first nine months and 11.04% for the last three months (10.40% in 2015) of pensionable earnings above that maximum.

The contribution rates for public service employees joining the pension plan on or after January 1, 2013 (Group 2) was set at 7.05% (6.62% in 2015) for the first nine months and 7.86% (7.05% in 2015) for the last three months of pensionable earnings up to the maximum covered by the CPP and QPP, and 8.54% (7.89% in 2015) for the first nine months; and 9.39% (8.54% in 2015) for the last three months of pensionable earnings above that maximum. The Government’s contribution is made monthly to provide for the cost (net of 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 contribution rates are determined based on actuarial valuations, which are performed triennially.

The PSSA provides that all pension obligations arising from the pension plan be met by the Government. The PSSA requires that any actuarial deficit in the Pension Fund 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. PSSA also allows any surplus to be lowered by reducing Government and pension plan member contributions. In addition, if there is an amount considered to be non-permitted surplus (refer to PSSA section 44.4(5) for definition of non-permitted surplus) related to the Pension Fund, no further Government pension contributions are permitted while pension plan member contributions under the Pension Fund may be reduced and amounts from PSPIB may be transferred to the Government’s Consolidated Revenue Fund (CRF).

(C) Benefits

The pension plan provides pension benefits based on the number of years of pensionable service up 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 pension plan. The basic benefit formula is 2% per year of pensionable service multiplied by the average of the five consecutive years of highest paid service. To reflect the Income Tax Act restrictions on registered pension plan benefits, separate retirement compensation arrangements (RCAs) have been implemented to provide benefits that exceed the limits established in the Income Tax Act. Since the RCAs are covered by separate legislation, their account balances in the accounts of Canada are not consolidated in these financial statements; however, condensed information is presented in Note 22.

Pension benefits are coordinated with the CPP and QPP, and the resulting pension reduction factor for pension plan members reaching age 65, or earlier if totally and permanently disabled, has been lowered from a level of 0.7% for those turning age 65 in calendar year 2007 or earlier to 0.625% for those turning age 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.

(A) Basis of presentation

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

These financial statements are prepared in Canadian dollars, the plan’s functional currency, in accordance with the accounting policies stated below, which are based on Canadian accounting standards for pension plans in Part IV of the Chartered Professional Accountants (CPA) Canada Handbook (Section 4600). Section 4600 provides specific accounting guidance on investments and pension obligations. For accounting policies that do not relate to either investments or pension obligations, the plan complies with International Financial Reporting Standards (IFRS) in Part I of the CPA Canada Handbook. To the extent that IFRS in Part I are inconsistent with Section 4600, Section 4600 takes precedence. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian accounting standards for pension plans.

PSPIB is a Crown corporation whose statutory objectives are to manage the funds transferred to it for investment. The PSPIB forms part of the pension plan reporting entity. PSPIB’s subsidiaries, other than those that solely provide PSPIB with services that relate to its investment activities, are not consolidated since PSPIB activities qualify as those undertaken by an investment entity as defined under IFRS 10, Consolidated Financial Statements. PSPIB’s investments in subsidiaries are measured at fair value through profit or loss (FVTPL) in accordance with IFRS 9, Financial Instruments, including those that are formed by PSPIB and that qualify as investment entities (investment entity subsidiaries). PSPIB’s investments in associates, joint ventures and financial assets and financial liabilities are measured at FVTPL in accordance with IAS 28, Investments in Associates and Joint Ventures and IFRS 9.

The financial statements for the year ended March 31, 2016were authorized for issue by the signatories on January 13, 2017.

(B) Interests in other entities

Management, through the activities of PSPIB, assesses control, joint control and significant influence with respect to the investees disclosed in Note 6 as follows:

(I) Control and significant influence

It is determined that PSPIB has control over an investee when it is exposed, or has rights, to variable returns from its investment in an entity and has the ability to affect those returns through its power over the investee.

In certain cases, PSPIB does not have control over an investee but has the power to participate in the financial and operating policy decisions of the investee. In such cases, PSPIB determines that it has significant influence over the investee.

In the context of control or significant influence, power over an investee is obtained through voting rights conveyed by PSPIB’s ownership interest, other contractual arrangements, or a combination thereof.

(II) Joint control

It is determined that PSPIB is party to a joint venture arrangement when it has joint control over an investee and has rights to the net assets of the investee. Joint control is established through a contractual arrangement which requires the unanimous consent of the parties sharing control for the activities that significantly affect the returns of the arrangement.

Generally, decision making regarding such activities is governed through voting rights conveyed by the ownership interest of each party. In certain cases, it is governed solely through contractual arrangements or in conjunction with the ownership interest of each party.

(C) Financial instruments

(D) Determination of fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

At initial recognition, PSPIB evaluates the facts and circumstances related to a transaction to confirm that the transaction price represents the fair value of an asset or a liability. At each subsequent reporting date, 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 value is estimated using valuation techniques based on inputs existing at the end of the reporting period that are derived from observable market data.

Valuation techniques are generally applied to investments in real estate, private equity, infrastructure and natural resources, over-the-counter (OTC) derivatives and certain fixed income securities. 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.

The determination of fair value of all financial assets and financial liabilities is described in Note 5.

(E) Foreign currency translation

Foreign currency transactions during the period, including purchases and sales of securities, income and expenses are translated at the rate of exchange prevailing on the date of the transaction.

Financial assets and financial liabilities that are denominated in foreign currencies are translated at the functional currency rate of exchange prevailing at the end of the reporting period.

Foreign currency transaction gains or losses on all financial instruments are included in investment income (loss).

(F) Securities lending and securities borrowing and related collateral

PSPIB participates in securities lending and borrowing programs whereby it lends and borrows securities in order to enhance portfolio returns. Lending and borrowing transactions including related collateral under such programs do not transfer the risks or rewards of ownership of the securities to the counterparty. Consequently, PSPIB does not derecognize securities lent or recognize securities borrowed.

The securities lending and borrowing programs require collateral in cash, high-quality debt instruments or securities. Collateral transactions are conducted under terms that are usual and customary in standards securities lending and borrowing programs. PSPIB and its counterparties are authorized to sell, repledge or otherwise use collateral held. The same securities or equivalent securities must be returned to the counterparty at the end of the contract, unless an event of default occurs.

(G) Securities sold under repurchase agreements and related collateral

PSPIB is party to repurchase and reverse repurchase agreements. Such agreements involve the sale of securities by one counterparty with a simultaneous agreement to repurchase such securities at a specified price and at a specified future date.

Securities sold or purchased under the repurchase and reverse repurchase agreements respectively, including related collateral, are not derecognized or recognized as all risks and rewards of ownership related to such securities are not transferred. As such, in the case where PSPIB is the counterparty selling securities under such agreements, all income (loss) related to such securities continues to be reported in investment income (loss), as detailed in Note 15, and obligations to repurchase the securities sold are accounted for as investment-related liabilities.

The difference between the fair value of the securities sold and the repurchase price is recorded as interest expense. In the case where PSPIB is the counterparty purchasing securities under such agreements, no income (loss) related to such securities is recognized and obligations to resell the securities are accounted for as investment-related receivables. The difference between the fair value of the securities purchased and resale price is recorded in investment income (loss).

Transactions under repurchase agreements and reverse repurchase agreements involve pledging collateral consisting of cash or securities deemed acceptable by the counterparties. Collateral transactions are conducted under terms that are usual and customary in standard repurchase arrangements. Such terms require the relevant counterparty to pledge additional collateral based on the changes in the fair value of the existing collateral pledged as well as the related securities sold or purchased. The counterparties are authorized to sell, repledge or otherwise use collateral held. The securities pledged as collateral must be returned to the relevant counterparty at the end of the contract, unless an event of default occurs.

(H) Offsetting of financial instruments

Financial assets and financial liabilities are offset with the net amount reported in the Statement of Financial Position only if PSPIB has a current enforceable right to offset the recognized amounts and the intent to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

(I) Pension obligations

The present value of accrued pension benefits is calculated by using the projected benefit method prorated on service, based on management’s best estimate assumptions.

(J) Investment income

The investment income (loss) has been allocated proportionately by PSPIB based on the asset value held by the pension plan and is detailed in Note 15.

Investment income (loss) is made up of interest, dividends, gains (losses) on the disposal of investments as well as gains (losses) which reflect the change in unrealized appreciation (depreciation) of investments held at the end of the reporting period. Interest is recognized, on a consistent basis, using prescribed rates until maturity. Dividends are recognized when the right to receive them has been obtained, generally on the ex-dividend date.

(K) 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.

(L) Benefits earned, benefits paid, and refunds and transfers

Benefits earned are accrued as pensionable service accumulates. Benefits paid are recognized as a reduction of pension obligations, and of net assets available for benefits when the payments are made.

Benefit payments, refunds to former members and transfer payments to other plans are recorded in the period in which they are paid.

(M) Investment-related expenses

Investment-related expenses are made up of interest expense, as described in Note 5 (A) (VI), transaction costs, external investment management fees and other (net).

Transaction costs are incremental costs directly attributable to the acquisition, due diligence, issue, or disposal of a financial asset or financial liability, and they are expensed as incurred.

External investment management fees are directly attributable to the external management of assets on behalf of PSPIB. These fees are paid directly by PSPIB and comprise base fees accrued as a percentage of the fair value of the assets managed externally and performance fees accrued as a function of various performance indicators. This excludes amounts not paid directly by PSPIB for certain pooled fund investments classified under alternative investments and for investments in private markets and other fixed income securities as outlined in Note 19.

(N) Significant accounting judgments, estimates and assumptions

In preparing the financial statements, management makes certain judgments, estimates and assumptions which can affect the amounts reported therein. Significant judgments include those related to the determination of the investment entity status as described in Note 2 (A).

Management also makes estimates and assumptions in the measurement, risk assessment and related disclosures surrounding investments in private markets, certain fixed income securities and the pension obligations. The main assumptions made regarding measurement of financial instruments are outlined in Note 5 , those regarding the assessment of risk are outlined in Note 7, and those regarding actuarial assumptions used in determining the pension obligations as described in Note 13.

Although estimates and assumptions reflect management’s best judgment, actual results may differ from such estimates due to the uncertainties involved in using them.

(A) Current accounting standards adopted before the effective date

In 2014, the International Accounting Standards Board (IASB) completed its project to replace IAS 39 Financial Instruments: Recognition and Measurement with IFRS 9: Financial Instruments. The Standard includes requirements for recognition, derecognition, classification and measurement of financial assets and liabilities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018with early application permitted. IFRS 9 was initially adopted for the year ended March 31, 2015. Significant accounting policies in connection with IFRS 9 are described in Notes 2 (C) and 5.

(B) Future changes in accounting standards

A number of new standards, amendments and interpretations have been issued by the IASB, but are not yet effective. The following relates to one or more of the pension plan’s significant accounting policies or disclosures:

(A) Classes of financial assets and financial liabilities

Financial assets and financial liabilities are aggregated in the following table, in classes that reflect their respective exposure as well as investment sectors. Their fair values as at March 31 were as follows ($ millions):

(B) Derivative-related assets and liabilities

Derivative financial instruments are financial contracts that are settled at a future date. The value of such instruments is derived from changes in the value of the underlying assets, interest or exchange rates. Derivative financial instruments do not, typically, require an initial net investment. In certain cases, they require an initial net investment that is less than what would be required to hold the underlying position directly. Derivative financial instruments can be listed or traded OTC. OTC instruments consist of those that are bilaterally negotiated and settled, and those that are cleared (OTC-cleared) by a central clearing party (CCP).

PSPIB uses derivative financial instruments to enhance returns or to replicate investments synthetically. Derivatives are also used to reduce the risk associated with existing investments.

PSPIB uses the following types of derivative financial instruments:

(I) Swaps

Swaps are transactions whereby two counterparties exchange cash flow streams with each other based on predetermined conditions that include a notional amount and a term. Swaps are used to increase returns or to adjust exposures of certain assets without directly purchasing or selling the underlying assets.

(II) Futures

Futures are standardized contracts to take or make delivery of an asset (buy or sell) at a predefined price and predefined future date. Futures are used to adjust exposures to specified assets without directly purchasing or selling the underlying assets.

(III) Forwards

Forwards are contracts involving the sale by one party and the purchase by another party of a predefined amount of an underlying instrument, at a predefined price and at a predefined date in the future. Forwards are used to adjust exposures to specified assets without directly purchasing or selling the underlying assets.

(IV) Options

Options are the right, but not the obligation, to buy or sell a given amount of an underlying security, index, or commodity at an agreed-upon price stipulated in advance, either at a determined date or at any time before the predefined maturity date.

(V) Warrants and rights

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

Rights are securities giving shareholders entitlement to purchase new shares issued by a corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire.

(VI) Collateralized debt obligations

Collateralized debt obligations are a type of asset-backed security that is constructed from a portfolio of credit-related assets. Collateralized debt obligations are usually divided into several tranches with different credit risk levels and corresponding interest payments. Any losses are applied first to the more junior tranches (lowest risk rating) before moving up in seniority.

(VII) Determination of fair value of derivative financial instruments

Listed derivative financial instruments are recorded at fair value using quoted market prices that are based on the most representative price within the bid-ask spread. OTC-cleared derivatives are recorded at fair value using prices obtained from the CCP. OTC derivatives are valued using appropriate valuation techniques such as discounted cash flows. These techniques use significant inputs that are observable in the market such as current market yields.

(VIII) Notional values and fair values of derivative-related assets and liabilities

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

The following table summarizes the derivatives portfolio as at March 31 ($ millions):

Total derivative-related assets and liabilities as at March 31 are comprised of ($ millions):

The term to maturity based on the notional value for the derivatives was as follows as at March 31 ($ millions):

(C) Fair value hierarchy

(D) Collateral pledged and received

PSPIB is party to agreements that involve pledging and holding collateral, as outlined in Notes 2 (F), 2 (G) and 7 (B) (I). The following table illustrates the fair values of the pension plan’s allocated collateral, as well as the securities under the lending and borrowing programs and the securities under the repurchase agreements as at March 31 ($ millions):

(A) Subsidiaries, joint ventures and associates

As an investment entity, PSPIB does not consolidate its subsidiaries other than those that solely provide it with services that relate to its investment activities. PSPIB measures its investments in its subsidiaries, joint ventures and associates at FVTPL as described in Note 2 (A).

In the normal course of business, investments in private markets are commonly held through investment entity subsidiaries formed by PSPIB. As at March 31, 2016, 102 investment entity subsidiaries were incorporated in North America, 19 in Europe, 10 in Oceania, 4 in Central and South America, and 1 in Africa (92 in North America, 14 in Europe, 10 in Oceania, 4 in Central and South America, and 1 in Africa as at March 31, 2015).

In addition, PSPIB controlled 73 investees directly or through its investment entity subsidiaries as at March 31, 2016 (68 investees as at March 31, 2015).

The following tables present, the most significant investees held directly or indirectly by PSPIB where it has control, joint control or significant influence.

In addition to the above, PSPIB controls and consolidates wholly owned subsidiaries that solely provide it with services that relate to its investment activities. Such services consist of investment management and financing of private market investments within the context of PSPIB’s capital market debt program described in Note 10.

(B) Structured entities

PSPIB holds interests in partnerships and funds mainly in the context of its investments in private markets. Given their nature, such entities commonly have the characteristics of a structured entity as defined by IFRS. These entities are held as investments and do not expose PSPIB to additional risks or returns compared to interests held in non‐structured entities.

Information regarding structured entities is included, as applicable, within disclosures of investment risk management under Note 7, guarantees and indemnities under Note 23 and commitments under Note 24.

(A) Market risk

Market risk is the risk that the value of an investment will fluctuate as a result of an adverse financial outcome due to changes in the factors that drive the value, such as changes in market prices, changes caused by factors specific to the individual investment, volatility in share and commodity prices, interest rate, foreign exchange or other factors affecting similar securities traded in the market.

Market risk management focuses on the following two key components:

Policy portfolio

The Policy Portfolio (long-term asset mix), as defined in the SIP&P, determines a diversification strategy to mitigate risk whereby PSPIB invests in a diversified portfolio expected to achieve a return at least equal to the Actuarial Rate of Return (ARR); defined as the rate of return assumption used by the Chief Actuary of Canada in the latest actuarial valuation report of the pension plan. In the absence of other factors affecting the funding of the pension plan or changes to pension benefits under the pension plan, the ARR is the rate of return required to maintain funding requirements and pension benefits at their current levels.

Active management

Active management is defined as the sum of investment strategies that deviate from the approved Policy Portfolio. It is designed to supplement the returns of the Policy Portfolio within an active risk budget.

The risks associated with these components are the Policy Portfolio market risk and the active risk. The Policy Portfolio market risk represents the investment risk arising from the exposure to approved asset classes in the approved weightings. In establishing its Policy Portfolio, PSPIB also takes into consideration the impact of the Policy Portfolio market risk on funding risk. Funding risk is the risk that the assets under management will be insufficient to meet the relevant pension liabilities of the pension plan, which may require the contributions to the pension plan to be increased. The Policy Portfolio is reviewed by PSPIB at least annually as part of the review of the SIP&P, and this review includes changes, if any, to PSPIB’s long-term expectations of market conditions and other factors that may affect the funding level of the pension plan.

Active risk refers to all market risk arising from active management activities. It is managed in accordance with the IRM Policy.

(B) Credit risk

PSPIB is exposed to credit risk, which is the risk of non-performance of a debtor on whom PSPIB relies to fulfill contractual or financial obligations. That is, the risk that the issuer of a debt security or that the counterparty to a derivative contract, to a securities lending and borrowing transaction or to securities sold under repurchase agreements, is unable to meet its financial obligations.

Credit risk encompasses the risk of a deterioration of creditworthiness and the relevant concentration risk. Credit risk monitoring entails an evaluation of the credit quality of each issuer and counterparty that transacts with PSPIB. To perform this evaluation, PSPIB relies on four recognized credit rating agencies. A minimum of two credit ratings are used to classify each security. Except for ABTNs, securities rated by only one agency are classified as “not rated.” If the agencies disagree as to a security’s credit quality, PSPIB uses the lowest of the available ratings.

As at March 31, 2016, the pension plan’s maximum exposure to credit risk amounted to approximately $26 billion (approximately $23 billion as at March 31, 2015). This amount excludes investments in distressed debt in the amount of approximately $2.0 billion as at March 31, 2016 (approximately $1.8 billion as at March 31, 2015). The maximum exposure to credit risk also excludes collateralized debt obligations, collateral held as disclosed in Notes 5 (B) and 5 (D) respectively, and the impact of guarantees and indemnities disclosed in Note 23.

As at March 31, 2016, the pension plan had no exposure to collateralized debt obligations ($46 million of net notional exposure to various tranches of collateralized debt obligations, of which approximately 45% of the underlying dollar exposure was rated “Investment Grade” as at March 31, 2015). Additionally, PSPIB had funding facilities, as described in Note 23, to support potential margin calls on the ABTNs.

To monitor the evolution of credit risk, PSPIB periodically produces a concentration report by credit rating of all credit-sensitive financial securities with the exception of securities held in pooled funds or for private market investments.

PSPIB’s concentration of credit risk by credit rating, excluding the items described above and any other credit enhancement, for the pension plan was as follows as at March 31:

(C) Liquidity risk

Liquidity risk corresponds to the risk that PSPIB will not be able to meet its financial obligations on a timely basis, with sufficient and readily available cash resources. PSPIB’s cash position is monitored on a daily basis. In general, investments in cash, money market securities, floating rate notes, bonds and public equities are expected to be highly liquid as they will be invested in securities that are actively traded. PSPIB utilizes appropriate measures and controls to monitor liquidity risk in order to ensure that there is sufficient liquidity to meet financial obligations as they come due. A liquidity report taking into consideration future forecasted cash flows is prepared and presented to senior management on a weekly basis. This ensures that sufficient cash reserves are available to meet forecasted cash outflows. Additionally, sufficient sources of liquidity are maintained for deployment in case of market disruption.

PSPIB has the ability to raise additional capital through the use of its capital market debt program. This program allows PSPIB to issue short-term promissory notes and medium-term notes. Note 10 provides additional information on the usage of the capital market debt program.

The terms to maturity of the notional amount of derivatives are disclosed in Note 5 (B).

(D) Offsetting

PSPIB is subject to ISDA Master Agreements in relation to its OTC derivative financial instruments as described in Note 7 (B) (I). Such agreements contain close‐out netting provisions applicable only in the case of default. In certain cases, such agreements also allow for offsetting. In cases where the conditions for offsetting were met, financial instruments have been presented net in the Statement of Financial Position. Securities repurchase and reverse repurchase agreements, described in Notes 2 (G) and 5 (D) are subject to similar arrangements although they are not offset.

The following tables present the financial assets and liabilities described above ($ millions):

(A) Present value of pension obligations

An actuarial valuation for accounting purposes is performed as at March 31 of each fiscal year by the OCA to measure and report the pension obligations, and to attribute the costs of the benefits to the period using the projected benefit method prorated on service. The actuarial valuation is based on the most recent triennial actuarial valuation for funding purposes in regards to demographic assumptions other than the percentage increase in population growth. The other assumptions underlying the valuation are based on management’s best estimates of expected long-term experience and short-term forecasts. The assumptions include estimates of future inflation, interest rates, return on investments, general wage increases, workforce composition, retirement rates and mortality rates.

The discount rates used to measure the present value of the accrued pension benefits, as well as the costs of benefits earned and the interest expense for the pension plan are as follows:

• for funded pension benefits, the streamed expected rates of return on invested funds
• for unfunded pension benefits , the streamed weighted average of Government of Canada long-term bond rates

The streamed weighted average of Government of Canada long-term bond rates is a calculated 20-year weighted moving average of Government of Canada long-term bond rates projected over time. The streamed rates take into account historical Government of Canada long-term bond rates and, over time, reflect expected Government of Canada long-term bond rates.

The principal actuarial assumptions used in measuring the accrued benefit obligations as at March 31, as well as the future benefit and interest expenses for the year were as follows:

For the year ended March 31, 2016, the pension plan recorded net losses related to changes in actuarial assumptions and due to experience gains in the amount of $2.2 billion (net losses of $6.8 billion in 2015).

(B) Pension plan curtailment

In 2015, former employees of Atomic Energy of Canada Limited (CANDU Reactor Division) ceased to be employed in the public service and became employed by SNC-Lavalin Group Inc. The impact of this curtailment was a one-time past service cost of $48 million.

(A) Funded pension benefits

The pension plan is financed from employee and employer contributions, as well as investment earnings. Funded pension benefits relate to post-March 2000 service that falls within the Income Tax Act limits, as an amount equal to contributions less benefit payments and other charges is invested in capital markets through the PSPIB. Funded pension benefits also include pre-2000 service purchased since April 1, 2000.

(B) Unfunded pension benefits

Unfunded pension benefits related to pre-April 2000 service are tracked in the pension plan superannuation account as no separate market invested funds are maintained for this account (see Note 21). Employee and employer contributions for unfunded pension benefits are part of the CRF.

(A) Benefit payments

The value of benefit payments for funded benefits, for the years ended March 31, are as follows ($ millions):

(B) Refunds and transfers

The value of refunds and transfers for funded benefits, for the years ended March 31, are as follows ($ millions):