Review of Canada Pension Plan Cost Recoveries – Review Engagement Report

Executive Summary

The Memorandum of Understanding (MoU) between Employment and Social Development Canada (ESDC), the Canada Pension Plan (CPP), and the Department of Finance Canada (the Department) on cost recoveries for the Department's support in the administration of the CPP requires a review to be conducted of the costs charged by the Department to the CPP for services provided to ESDC during the five-year term of the agreement.

In consultation with the Department's Financial Management Directorate (FMD), Corporate Services Branch (CSB), the Internal Audit Directorate (IAD) agreed to undertake the engagement. The Review of Canada Pension Plan Cost Recoveries was authorized as part of the Department's 2022-2024 Risk-based Audit Plan, which the Deputy Minister approved on June 29, 2022.

What we examined

The objective of this review engagement was to provide an independent auditor's opinion on the reasonableness of the Department's accounting mechanisms to represent the costs and reporting levels of service provided to the CPP.

Why it is important

Ensuring that the Department's accounting mechanisms accurately represent the costs and services provided to the CPP is crucial for transparency and trust. It affirms the responsible management of funds vital to the welfare of millions of Canadians and reinforces public confidence in the government's handling of the pension plan.

What we found

Based on our review, nothing has come to our attention that causes us to believe that either the Department's cost recovery amounts charged to the CPP, or the methods used to identify these charges were unreasonable. Furthermore, we found no indications that they failed to comply, in all material respects, with the applicable standards, legislation, Treasury Board related policies and directives, and the costing principles outlined in the Memorandum of Understanding (MoU).

However, the review team identified minor areas of improvement with respect to enhanced documentation to support salary costs charged and accounting of costs by sub-activities, as well as implementing a process to ensure consistency and completeness of costs charged across all branches providing services to the CPP. These process weaknesses do not currently expose the Department to any significant risk of non-compliance with relevant requirements. However, the review team's suggested recommendations would enhance recovery process controls and improve oversight.

Marie-Josée Yelle
Acting Chief Audit Executive

Background

• The Canada Pension Plan (CPP) is a social insurance program designed to provide financial assistance to CPP contributors and their families in case of retirement, disability and death. The CPP operates throughout all provinces and territories in Canada except for Québec, where the Québec Pension Plan provides similar benefits.
• The Minister of Employment and Social Development, along with other federal government departments, is responsible for the administration of Part II (Pensions and Supplementary Benefits) and the majority of Part III (Administration) of the CPP legislation. The federal Minister of Finance, with the provincial ministers of finance, is responsible for certain sections of Part III (Administration) of the CPP legislation.
• As part of its efforts to support a sound social policy framework, the Department of Finance Canada (the Department) carries out a range of responsibilities, including policy advice, regulatory review, and CPP rate-setting.
• The Memorandum of Understanding (MoU) established between the Employment and Social Development Canada (ESDC) and the Department seeks to ensure the efficient and effective use of the Department's capabilities in support of the CPP and that the administrative costs recovered by the Department from the CPP are appropriate and fair. The MoU clarifies the requirements for service levels, cost recovery, and reporting by the Department.
• During the fiscal years 2020-21 and 2021-22, the Department charged a total of $320,568 and $330,244, respectively, as administrative costs to the CPP Accounts. Of these, the Department's personnel costs were $307,735 and $330,023, respectively, and goods and services (G&S) costs were $12,833 and $221. The Department incurred three (3) G&S transactions during the period for consulting and publication services.
• For context, in the same two periods, ESDC charged a total of $558,534,913 and $578,124,209, respectively to administer the CPP program^{Footnote 1}.

Review Objective, Scope, Criteria, and Approach

Review Objective and Scope

Review Objective

The objective of this review engagement was to provide an independent auditor's opinion on the reasonableness of Department of Finance Canada's (the Department) accounting mechanisms to represent the costs and reporting levels of service provided to the Canada Pension Plan (CPP).

Review Scope

Pursuant to Section 9.0 of the Memorandum of Understanding (MoU), the review team examined whether the Department's:

• methods of allocating costs to the CPP were reasonable and in accordance with the costing principles outlined in the MoU; and
• costs charged to the CPP Accounts were incurred in the delivery of services for the CPP following the terms of the agreement.

Periods reviewed: Fiscal years ending March 31, 2021 and 2022.

The scope did not include an examination of Employment and Social Development Canada's (ESDC) activities beyond developing an understanding of ESDC's role in assessing the reasonableness of the cost allocation and costs recovered from the CPP.

Review Criteria

Criterion 1: The methods of allocating costs to the Canada Pension Plan (CPP) are reasonable and in accordance with the costing principles and methods outlined in the Memorandum of Understanding (MoU).

Criterion 2: The costs charged to the CPP Accounts were incurred in the delivery of services for the CPP in accordance with the terms of the agreement.

Review Approach

In conducting this review, we:

• reviewed relevant documentation such as legislation, policies and guidance, and administrative agreements;
• interviewed key personnel from:
  • Financial Management Directorate, Corporate Services Branch;
  • Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch;
  • Funds Management Division, Financial Sector Policy Branch;
  • Fiscal Policy Analysis Division, Fiscal Policy Branch;
  • Chief Financial Officer Branch, ESDC;
  • Income Security and Social Development Branch, ESDC; and
  • Internal Audit and Enterprise Risk Management Branch, ESDC
• identified key controls and developed process maps;
• verified supporting documentation for all three (3) G&S related transactions incurred during the period under review to assess compliance with relevant legislation, policies and guidance, and administrative agreements (see Appendix A for more information); and
• assessed staff's responsibilities and the related costs of staff assigned to CPP (see Appendix B for more information).

Overall Opinion and Statement of Conformance

Overall Opinion

Sufficient and appropriate procedures were performed, and evidence was gathered to support the accuracy of the review conclusion. The findings and conclusion are based on a comparison of the conditions that existed as of the date of the review engagement against established criteria that were agreed upon with management.

The findings and conclusion only apply to the entities examined and to the scope and periods covered by the review engagement.

Statement of Conformance

The review was conducted in conformance with the International Standards for the Professional Practice of Internal Auditing, as supported by the results of the quality assurance and improvement program.

Summary of Findings

Key Findings – Criterion 1

Criterion 1: The methods of allocating costs to the Canada Pension Plan (CPP) are reasonable and in accordance with the costing principles and methods outlined in the Memorandum of Understanding (MoU).

Summary of Findings:

The review team found that the methods of allocating costs to the CPP were reasonable and in accordance with the costing principles outlined in the MoU. The Department of Finance Canada (the Department) generally processed the transactions in compliance with the Financial Administration Act (FAA) requirements, the Treasury Board's related policies and directives, and the Canadian generally accepted auditing standards.

The review team noted some opportunities for process improvements. The following table outlines findings, as well as recommendations for management's action:

Key Findings – Criterion 2

Criterion 2: The costs charged to the Canada Pension Plan (CPP) Accounts were incurred in the delivery of services for the CPP, in accordance with the terms of the agreement.

Summary of Findings:

Costs charged to the CPP Accounts in fiscal years 2020-21 and 2021-22 were incurred in the delivery of services for the CPP in accordance with the terms of the agreement.

Overall Conclusion

Based on our review, nothing has come to our attention that causes us to believe that either the Department of Finance Canada's (the Department) cost recovery amounts charged to the Canada Pension Plan (CPP), or the methods used to identify these charges were unreasonable. Furthermore, we found no indications that they failed to comply, in all material respects, with the applicable standards, legislation, Treasury Board related policies and directives, and the costing principles outlined in the Memorandum of Understanding (MoU).

However, the review team identified minor areas of improvement with respect to enhanced documentation to support salary costs charged and accounting of costs by sub-activities, as well as implementing a process to ensure consistency and completeness of costs charged across all branches providing services to the CPP.

These process weaknesses do not currently expose the Department to any significant risk of non-compliance with relevant requirements. However, the review team's suggested recommendations would enhance recovery process controls and improve oversight.

Management Response and Action Plans

Overall Management Response:

Management agrees with the findings of the Review of Canada Pension Plan Cost Recoveries. The identified leads will work to ensure the review recommendations are addressed through corrective actions, as described below.

Appendix A – Transaction Review Results

Appendix B – Approach Used to Assess Reasonableness of Cost of Staff

• For the fiscal years 2020-21 and 2021-22, the cost of staff charged by the Department of Finance Canada were $195,209 and $198,576, respectively, for the Federal-Provincial Relations and Social Policy Branch, and $112,527 and $131,447, respectively, for the Financial Sector Policy Branch.
• On a quarterly basis, each branch calculated the cost of staff by estimating the percentages of full-time equivalent (FTE) hours spent on Canada Pension Plan (CPP) related activities. This approach to calculate salary costs was in accordance with the costing principles under section 7.3 of the Memorandum of Understanding (MoU). The branches submitted the Director General approved cost schedules for each quarter to Financial Management Directorate, Corporate Services Branch for review. The quarterly invoice and cost schedules were then forwarded to Employment and Social Development Canada (ESDC) for cost recovery.
• To assess the reasonableness of cost of staff charged during the fiscal years 2020-21 and 2021-22, the review team:
  • obtained and reviewed the list of activities performed by each employee during the scope periods under review;
  • obtained and reviewed the quarterly cost schedules and invoices sent to ESDC for fiscal years 2015-16 to 2022-23;
  • identified and investigated all notable variances in cost of staff charged during the scope periods; and
  • conducted a comparative analysis with the average of cost of staff charged during different periods, and found that the salary costs charged were higher during identified busier periods (i.e. the periods the Department led the work on CPP enhancement^{Footnote 2}).

Appendix C – Risk Ranking Methodology

The risks assigned to the findings were based on the Internal Audit Directorate's own assessment of the risks. The following table defines the metrics used in assigning the risks:

Appendix D – Key Information Reviewed

Key Information Reviewed

The following is a non-exhaustive list of key information reviewed by the review team:

Legislation, policies and guidelines:

• Financial Administration Act (FAA)
• Treasury Board (TB) Policy on Financial Management (2017)
• TB Directive on Delegation of Spending and Financial Authorities (2017)
• TB Guide to Delegating and Applying Spending and Financial Authorities (2018)

Documents specific to Department of Finance Canada:

• Memorandum of Understanding (MoU) between Employment and Social Development Canada, the Canada Pension Plan and the Department of Finance (2020 – 2025)
• Financial Signing Authorities Guide (2022)
• Delegation of Financial Signing Authorities Instrument (2021)

Other Documents:

• MoU between the Canada Pension Plan and Employment and Social Development Canada (2021 – 2022)