Provincial Judges’ Pension Plan financial statements 2022

Management’s responsibility for financial reporting

The financial statements of the Provincial Judges’ Pension Plan (“PJPP”) have been prepared by management, which is responsible for the integrity and fairness of the data presented. The accounting policies followed in the preparation of these financial statements are in accordance with Canadian accounting standards for pension plans. Of necessity, many amounts in the financial statements must be based on the best estimates and judgment of management with appropriate consideration as to materiality.

Systems of internal control and supporting procedures are maintained to provide assurance that transactions are authorized, assets are safeguarded against unauthorized use or disposition, and proper records are maintained. The system includes careful hiring and training of staff, the establishment of an organizational structure that provides for a well-defined division of responsibilities and the communication of policies and guidelines of business conduct throughout the PJPP.

The Provincial Judges Pension Board (the “PJPB”) is ultimately responsible for the financial statements of the PJPP. The PJPB reviews the financial statements in detail with management before such statements are approved. The PJPB meets with management and the Office of the Auditor General of Ontario to review the scope and timing of audits, to review their findings and suggestions for improvements in internal control, and to satisfy themselves that their responsibilities and those of management have been properly discharged.

The financial statements have been audited by the Office of the Auditor General of Ontario. The Auditor’s responsibility is to express an opinion on whether the financial statements are fairly presented in accordance with Canadian accounting standards for pension plans. The Independent Auditor’s Report outlines the scope of the Auditor’s examination and opinion.

Independent auditor’s report

To the Provincial Judges Pension Board and to the President of the Treasury Board

Opinion

I have audited the financial statements of the Provincial Judges’ Pension Plan (the Plan), which comprise the statements of financial position as at December 31, 2022, and the statements of changes in net assets available for benefits and the statements of changes in pension obligations for the 12 months then ended, and notes to the financial statements, including a summary of significant accounting policies (together, “the financial statements”).

In my opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Plan as at December 31, 2022, and the changes in its net assets available for benefits and the changes in its pension obligations for the 12 months then ended in accordance with Canadian accounting standards for pension plans.

Basis for opinion

I conducted my audit in accordance with Canadian generally accepted auditing standards. My responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Plan in accordance with the ethical requirements that are relevant to my audit of the financial statements in Canada, and I have fulfilled my other ethical responsibilities in accordance with these requirements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Responsibilities of management and those charged with governance for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for pension plans, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Plan’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Plan either intends to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Plan’s financial reporting process.

Auditor’s responsibilities for the audit of the financial statements

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, I exercise professional judgment and maintain professional skepticism throughout the audit. I also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Provincial Judges’ Pension Plan’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Provincial Judges’ Pension Plan to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

Statements of financial position

See accompanying notes

Approved on behalf of the Board:

Statements of changes in net assets available for benefits

See accompanying notes

Statements of changes in pension obligations

See accompanying notes

Notes to the financial statements December 31, 2022

Note 1:  Description of the Provincial Judges Pension Plan

On January 1, 2020, Ontario Regulation 290/13 (“Regulation”) was amended to split the Provincial Judges’ Pension Plan (“PJPP” or the “Plan”) into three different parts: a Registered Pension Plan Trust (“RPP”), a Retirement Compensation Arrangement Trust (“RCA”) and a Supplemental Pension Account (“SUPP”). The PJPP is included as an employee future benefit liability within the consolidated financial statements of the Province of Ontario (“Province” or “Plan Sponsor”). The RPP, RCA, and SUPP are not subject to the reporting requirements under the Ontario Pension Benefits Act and Regulations.

The Government of Ontario is the sponsor of all three parts of the Plan. The Provincial Judges Pension Board (“the Board”) is the administrator of the RPP and RCA for the purposes of the Income Tax Act (Canada) R.S.C. 1985 (“Income Tax Act”). The Board is also the trustee of both the trust for the RPP and the trust for the RCA with all powers afforded to the trustee by the respective trust agreements. The Board oversees the administration of the PJPP and, in accordance with applicable law, the pensions, survivor allowances and refunds.

The primary purpose of the Plan is to provide eligible judges with pension in the form of periodic payments following their retirement from full-time service as judges.

RPP

The RPP is registered for income tax purposes and provides for pension benefits up to the limit permitted under the Income Tax Act.

RCA

The RCA pension plan provides supplementary pension benefits to members whose earnings result in a pension that exceeds the maximum pension permitted under the Income Tax Act for the RPP subject to maximums also under the Income Tax Act.

SUPP

The SUPP supplements the pensions of members whose salaries and benefits provided by the above two components are above the maximum prescribed by the Income Tax Act. The Ontario Minister of Finance (“Minister”) is the custodian of the SUPP. Any assets of the SUPP are held within the Consolidated Revenue Fund of the Province of Ontario. A right under this part of the PJPP to a supplemental pension or supplemental survivor allowance is only in respect of service on or after January 1, 1992.

Note 2: Administration of the plan

The Ontario Pension Board (“OPB”) has been jointly selected by the Minister and the Provincial Judges Pension Board to assist the Board in carrying out its responsibilities and assist the Government of Ontario in carrying out its pension administration responsibilities in respect of the Plan.

The Investment Management Corporation of Ontario Act, 2015 created the Investment Management Corporation of Ontario (“IMCO”), an entity providing investment management and select advisory services to participating organizations in Ontario’s broader public sector with the ownership of the investment assets remaining with the participants. The investment management agreement between IMCO and the Board for the management of the RPP and RCA assets was effective March 17, 2020. On March 26, 2020 IMCO began managing the RPP assets.

As of December 31, 2022 and 2021, no assets were held with IMCO for the RCA.

The Board retains responsibility for setting the investment strategy and target asset mix for the RPP’s and RCA’s investments.

Note 3:  Description of the plan

The following is a brief description of the Plan provided for general purposes only. For more complete information, reference should be made to the Regulation.

Funding policy

The RPP and RCA are contributory defined benefit pension plans covering eligible judges (members) of the Ontario Court of Justice. The RPP does not require matching contributions from the Province. The RCA requires the Province to contribute an amount at least equal to the RCA contributions from the members. The SUPP is funded by the Province as benefits payments fall due. The benefits and contribution rates are set, and may be amended, by the Plan Sponsor through an Order-in-Council.

Contributions

Each judge is required to contribute 7% of their salary into the RPP and RCA, by way of deduction from the judge’s salary, up to the earlier occurrence of either meeting their basic service requirement or attaining 70 years of age.

The Minister ensures that, in respect of each calendar year of service, the portion of each judge’s pension contributions that exceeds the dollar limit for pension plan contributions under the Income Tax Act is contributed to the RCA.

The amount to be contributed in a year is based on an actuarial valuation and subject to the limits set out in the Income Tax Act and its regulations.

Pension payments

A pension payment is available based on the age and the number of years of full-time service for which a member has credit upon ceasing to hold office and is based on the salary of a full-time judge of the highest judicial rank held by the member while in office. The member is entitled to these payments during their lifetime. These payments are sourced from the three components as follows:

RPP

An amount equal to 2% of the judge’s average salary, indexed in accordance with the federal Income Tax Regulations, for their final three years of service multiplied by the judge’s years of service up to the defined benefit limit or maximum benefit limit.

RCA

An amount equal to 2% of the judge’s average salary, indexed in accordance with the federal Income Tax Regulations, for their final three years of service multiplied by the judge’s years of service without regard to the defined benefit limit or maximum benefit limit, reduced by the RPP amount.

SUPP

An amount payable to the judge if the pension determined without regard to the defined benefit limit or maximum benefit limit is greater than the amount that is actually paid to the judge under the RPP and RCA plans.

Disability pension payments

A disability pension is available at age 65 for members with a minimum of five years of full-time service who are unable to serve in office due to injury or chronic illness. The annual amount of the pension is the amount that would be payable if the judge had continued in office on a full-time basis until the judge attained 75 years of age and if the pension were determined without regard to the defined benefit limit or maximum benefit limit, reduced by the amount that is actually payable to the judge under the RPP and RCA.

Survivor allowances

A survivor allowance equal to 60% of the qualifying judge’s pension payment is paid to the spouse during the spouse’s lifetime or to children who meet the age, custody, education, or disability criteria defined by the Regulation.

Death benefits

A death refund can be payable to the personal representative of a member where there is no further entitlement to a survivor allowance. The amount of the refund is equal to the member’s contributions to the Plan plus interest, less entitlements already paid out.

Termination payments

Upon ceasing to hold office for a reason other than death, participants not eligible to receive pension payments are entitled to receive a refund of their contributions to the Plan plus interest.

Escalation of benefits from the plan

Judges retired before June 1, 2007

The annual inflationary increase for judges who retired before June 1, 2007, is based on changes in the Average Weekly Earnings published by Statistics Canada and subject to a maximum of 7% in any one year and is effective on April 1st every year. In addition, the pensions are adjusted based on the salary increases of sitting judges as recommended by the Provincial Judges Remuneration Commission.

Judges retired on or after June 1, 2007

The annual inflationary increase for judges who were appointed before June 1, 2007, who retired on or after June 1, 2007, and elected to be paid under the plan provisions effective on that date is based on changes in the Consumer Price Index and is effective on January 1st every year. The same annual inflationary increase is applicable upon retirement for those judges appointed to office on or after June 1, 2007, with no available election.

Note 4:  Summary of significant accounting policies

Basis of presentation

The financial statements are prepared in accordance with Canadian accounting standards for pension plans.

In accordance with Section 4600, “Pension Plans”, of the CPA Canada Handbook – Accounting, Canadian Accounting Standards for Private Enterprises in Part II of the CPA Canada Handbook – Accounting have been chosen for accounting policies that do not relate to the investment portfolio or pension obligations to the extent that those standards do not conflict with the requirements of Section 4600.

On November 15, 2021, Ontario Regulation 769/21 amended the establishing Regulation of the Plan to change the fiscal year-end date of the Plan from March 31 to December 31. The first financial reporting period after the amendment was for the nine months ending December 31, 2021. The comparative amounts in these financial statements reflect the nine months ended December 31, 2021.

Certain amounts in the comparative financial statements have been reclassified to conform to the presentation of the 2022 financial statements, which separately discloses the indexation loss.

Use of estimates

The preparation of financial statements in conformity with Canadian accounting standards for pension plans requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts on the statements of changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates. The most significant estimate affecting the financial statements relates to the determination of pension obligations (see Note 13).

Investments

Cash

Cash is held directly by both IMCO (as part of the investment portfolio in a custodian account) and by OPB.

Valuation

Investments are stated at their fair values, including accrued income. Fair value is 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.

Fair value of financial instruments is determined as follows:

1. Cash and cash held at custodian is recorded at cost, which approximates fair value.
2. Short-term money market investments such as treasury bills are recorded at cost, with accrued interest or amortized discount or premium, which approximates fair value.

Investment income

Investment transactions are recorded on the trade date. Investment income includes interest income and realized and unrealized gains or losses. Interest is recognized on an accrual basis when earned. Realized gains or losses are recognized when OPB has transferred to the purchaser the significant risks and rewards of ownership of the investment, the purchaser has made a substantial commitment demonstrating its intent to honour its obligation, and the collection of any consideration is reasonably assured. Unrealized gains or losses are recognized when there is a change in the difference between the fair value and cost of the investment held.

Investment management expenses

Investment management fees, transaction costs and other investment-related fees are recognized on an accrual basis. Investment expenses are paid by their respective trusts.

Contributions

Contributions due at the year-end are recorded as a receivable. Transfers into the Plan, if any, are recorded after cash is received. Sponsor contributions to the Plan are made in accordance with the funding requirements as specified by the most recently filed actuarial funding valuation. The PJPP is not subject to Ontario’s Pension Benefits Act and, as such, there is no minimum required funding contribution by the Province.

Retirement pension benefits

Retirement pension payments, commuted value transfers, refunds to former members, and transfers to other pension plans are recorded when paid.

Operating expenses

Operating expenses are recognized on an accrual basis. Expenses applicable to the RPP and RCA are paid by their respective trusts. All expenses applicable to the SUPP are paid by the Province.

Income tax status

The RPP and RCA are registered pension plans, as defined by the Income Tax Act and, accordingly, are not subject to income taxes.

Pension obligation

Pension obligations are determined based on an actuarial valuation prepared by an independent firm of actuaries using an actuarial valuation report prepared for funding purposes. This valuation uses the projected benefit cost method pro-rated based on service and management’s best estimate of various economic and demographic assumptions. The year-end valuation of pension obligations is based on data extrapolated to the current financial statement year-end date.

Note 5: Investments

The RPP’s investments managed by IMCO consist of the following:

Investment asset mix

The investment management agreement between IMCO and the Provincial Judges Pension Board dated, and effective March 17, 2020, includes a schedule of permitted investments and restrictions to be in place until a Statement of Investment Policies and Procedures has been approved.

Permitted investments include treasury bills issued by the Federal Government of Canada, Canadian provincial treasury bills and promissory notes, and debt issued by agencies guaranteed by the Federal Government of Canada.

Additionally, the following specific investment restrictions apply:

• Fund weighted average maturity limit: 180 days
• Individual security maximum term to maturity: less than 365 days
• Maximum allocation to single agency guaranteed by the Federal Government: 20% of assets at market value
• Minimum allocation to Federal Government of Canada treasury bills: 40% of assets at market value

Fair value hierarchy

Canadian accounting standards for pension plans require disclosure of a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the financial statement date. The three levels are defined as follows:

Level 1: Fair value is based on quoted market prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include equity securities traded in an active exchange market.

Level 2: Fair value is based on observable inputs other than Level 1 prices, such as quoted market prices for similar (but not identical) assets or liabilities in active markets, quoted market prices for identical assets or liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes mutual and pooled funds; hedge funds; Government of Canada, provincial and other government bonds; Canadian corporate bonds; and certain derivative contracts.

Level 3: Fair value is based on non-observable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This category generally includes investments in real estate properties, infrastructure and private equity, and securities that have liquidity restrictions.

All investments held as of December 31, 2022 and 2021, are Level 2 investments. There were no transfers between levels during the period ended December 31, 2022 or 2021.

Note 6: Refundable tax asset

Contributions made to the RCA, as well as investment income and net capital gains earned within the RCA, net of distributions, are taxed at a 50% rate under the Income Tax Act. New contributions are taxable at the time the contribution is made. Investment returns earned within the RCA component are assessed as at December 31 each year. The remitted tax amounts are held by the Canada Revenue Agency as a non-interest-bearing deposit. These tax amounts are refundable when distributions are made from the RCA component of the Plan to the beneficiaries of the retirement compensation arrangement.

Note 7: Investment income

Investment income is made up of the following:

Note 8: Pension administration expenses

The following is a summary of the expenses incurred by the Plan related to services provided by Ontario Pension Board.

Note 9: Investment management expenses

The following is a summary of the expenses incurred by the Plan related to services provided by IMCO. The RPP pays its share of IMCO’s expenses on a cost recovery basis. These costs are funded through cash held in custody with CIBC Mellon.

Note 10: Risk management

The Plan is subject to financial risks as a result of its investing activities that could impact its cash flows, income, and assets available to meet benefit obligations. These risks include market risk (including interest rate risk, foreign currency risk and other price risk), credit risk, liquidity risk. These risks have not changed from the prior year.

The Board has delegated the investment of substantially all of the Plan assets to IMCO, which may further sub-delegate to other investment managers and service providers. IMCO must act in accordance with any written directions of the Board as well as all applicable IMCO policies. In investing the assets of the Plan, IMCO must comply with the investment management agreement, IMCO’s internal policies and all relevant laws and regulations.

Market risk

Market risk is the risk that the fair value or future cash flows of an investment will fluctuate because of changes in market factors. Market risk is comprised of the following:

1. Interest rate risk – Interest rate risk refers to the effect on the fair value of the Plan’s assets and liabilities due to fluctuations in market interest rates. The value of the Plan’s investments is affected by changes in nominal and real interest rates. Pension liabilities are exposed to fluctuations in long-term interest rates and inflation.
2. Foreign currency risk – Foreign currency exposure arises from the Plan holding foreign currency denominated investments and entering into contracts that provide exposure to currencies other than the Canadian dollar. Fluctuations in the value of the Canadian dollar against these foreign currencies can have an impact on the fair value of investments. As at December 31, 2022 and 2021, the RPP’s investments and cash are all in Canadian dollars and therefore not exposed to foreign currency risk.
3. Other price risk – Other price risk is the risk that the fair value of an investment will fluctuate because of changes in market prices other than those arising from foreign currency or interest rate risk, whether those changes are caused by factors specific to the individual investment or factors affecting all securities traded in the market. As at December 31, 2022 and 2021, the RPP’s investments are all in Government of Canada treasury bills and therefore have little exposure to other price risk.

Credit risk

The Plan is exposed to credit risk through the risk of loss arising from an issuer defaulting on its obligations, or the risk of a market decline resulting from the issuer's deterioration in credit quality. As at December 31, 2022 and 2021, the Plan's greatest credit exposure is with the Government of Canada in the form of treasury bills.

Liquidity risk

Liquidity risk is the risk that the Plan has insufficient cash flows to meet its pension obligations and operating expenses as they become due. The typical cash requirements of the Plan are in the form of monthly retirement benefit payments as well as periodic termination and other benefit payments and expenses. As at December 31, 2022 and 2021 the Plan’s investments are held in Government of Canada treasury bills which are highly liquid.

Note 11: Collateral

As of December 31, 2022 and 2021, the RPP had no collateral pledged or received and no security lending agreements.

Note 12: Commitments and guarantees

As of December 31, 2022 and 2021, the Plan had no commitments or guarantees.

Note 13: Pension obligation

Funding valuation

An actuarial valuation was prepared for the RPP as at January 1, 2020 by Aon, the Plan’s appointed actuary, for the primary purpose of establishing contribution requirements in accordance with the Income Tax Act. The valuation was prepared in accordance with Ontario Regulation 290/13. The valuation was prepared based on data as at March 31, 2019 with liabilities and current service cost calculated as of March 31, 2019 and extrapolated to January 1, 2020. The next actuarial valuation will be performed no later than December 31, 2023.

The valuation determined the maximum eligible contribution to the RPP under the Income Tax Act. The RPP is not subject to the provisions of the Pension Benefits Act. As such, there is no minimum required contribution to the RPP. The valuation was prepared using the projected unit credit cost method. For the initial valuation, the liabilities were determined using a discount rate equal to the Ontario Financing Authority’s 20-year borrowing rate as at March 31, 2019. As at January 1, 2020, the liability associated with the RPP was $426,891,000.

Significant assumptions used in the RPP’s actuarial funding valuation were as follows:

Financial statement valuation

For the purposes of these financial statements, Aon, the Plan’s actuary, used the member data as at December 31, 2021 on the basis of the accounting methodology required by the CPA Canada Handbook – Accounting, Section 4600 and extrapolated those liabilities using current service cost and actual benefit payments to December 31, 2022. The obligations were determined using the projected unit credit prorated on service method. The total RPP, RCA, and SUPP pension obligations under this method for pension benefits payable under the Plan was $1,395,060,000 (December 31, 2021 – $1,471,706,000). This obligation is allocated and presented for each component of the Plan in the statements of financial position.

The indexation loss is due to actual inflation in 2023 being greater than the prior year actuarial assumption. Net experience losses in the RPP for 2022 are primarily due to losses from the Income Tax Act maximum pension increase being greater than expected. Net experience losses in the RCA and SUPP are primarily due to losses from actual salary increases being greater than expected.

The net impact of change in assumptions is the effect of losses from an increase of 0.20% in the underlying inflation rate offset by gains from an increase of 1.20% in the discount rate.

Significant assumptions used in the financial statement valuation for the Plan are shown below. The discount rate has been set based on the average of the 20-year and 30-year Ontario Financing Authority borrowing rate for December 2022. The inflation rate has been determined based on the difference in yields between long-term Government of Canada nominal and real return bonds for December 2022.

Note 14: Related party transactions

The Government of Ontario is the sponsor of the Plan.

As the Plan administrator, the Board is assisted by OPB in carrying out its responsibilities. OPB administers payroll and benefits for Plan members and assists the Government of Ontario in carrying out its responsibilities in respect of the SUPP. OPB provides these services on a cost recovery basis. The SUPP administration expenses are fully paid by the Province (Note 8).

IMCO manages the RPP’s investment assets. The PJPP pays its share of IMCO’s operating expenditures on a cost recovery basis (Note 9). Custodial fees are paid by IMCO on the PJPP’s behalf.

Note 15: Capital management

The Plan defines its capital as the funding surpluses or deficits determined periodically through the funding valuations prepared by the independent actuary. The actuary’s funding valuation is used to measure the long-term health of the Plan. The Plan Sponsor determines the level of funding payments. Any resulting deficit is guaranteed by the Plan Sponsor. There have been no changes in what the Plan considers to be its capital and there have been no significant changes to the Plan’s capital management objectives, policies, and processes during the 12 months ended December 31, 2022.