PUBLIC SECTOR PENSION INVESTMENT BOARd 2010 AnnuAl

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20Public Sector PenSion inveStment board

2010 AnnuAl RepoRT

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PrIncIPal BuSIneSS OffIce1250 rené-lévesque Blvd. West, Suite 900montréal, Québec H3B 4W8

t. 514.937.2772f. 514.937.3155 [email protected]

Head OffIce440 laurier ave. West, Suite 200Ottawa, Ontario K1r 7X6

t. 613.782.3095f. 613.782.6864

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WWW.InveStPSP.ca

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1 Highlights FY 2010

2 Corporate Objectives FY 2010

3 Key Corporate Objectives FY 2011

4 Chair’s Report

7 President’s Report

10 Management’s Discussion of Fund Performance and Results

23 Risk Management

26 Internal Audit and Compliance

28 Governance

40 Compensation

49 Glossary

54 Management Team

55 Directors’ Biographies

58 Consolidated Financial Statements and Notes to the Financial Statements

APPENDIX Financial Statements and Notes to the

Financial Statements

Public Service Pension Plan Account

Canadian Forces Pension Plan Account

Royal Canadian Mounted Police Pension Plan Account

Reserve Force Pension Plan Account

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TABLE OF CONTENT

CORPORATEPROFILE

WHO WE ARE

AND WHAT WE DO

ThePublicSectorPension InvestmentBoard (“PSP Investments”) isaCanadiancrowncorporation

establishedtoinvesttheamountstransferredbythefederalgovernmentequaltotheproceedsofthe

netcontributionssinceApril 1, 2000,forthepensionplansofthePublicService,theCanadianForces

andtheRoyalCanadianMountedPolice,andsinceMarch1,2007,fortheReserveForcePensionPlan

(the “Plans”).

Itsstatutoryobjectivesaretomanagethefundsentrustedtoitinthebestinterestsofthecontributorsand

beneficiariesofthePlansandtomaximizeinvestmentreturnswithoutundueriskofloss,havingregard

tothefunding,policiesandrequirementsofthePlansandtheirabilitytomeettheirfinancial obligations.

NET ASSETS PER PENSION PLANAs at March 31, 2010 ($ millions)

PublicService 33,661 72.7%

CanadianForces 9,107 19.7%

RCMP 3,271 7.1%

ReserveForce 231 0.5%

NetAssets 46,270 100.0%

FINANCIAL HIGHLIGHTS

ASSET MIXAs at March 31, 2010 (percent)

CanadianEquity 29.2

Real-ReturnAssets 20.2

ForeignEquity 19.8

NominalFixedIncome 19.1

PrivateEquity 11.7

100.0

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• Consolidatednetassetsincrease37%to$46.3billion,anewhigh.

• Investmentincomeof$7.6billionrepresentsatotalportfolioreturnof21.5%.

• Purchaseofadditional$3.5billioninpublicequitiescontributestoarobusttotalfundreturn.

• PublicMarketsEquityportfoliosachievereturnsof20.1%to47.4%.

• PrivateEquityportfolioearnsinvestmentincomeof$1.2billionforareturnof28.8%.

• InfrastructureandRealEstateportfoliosgeneratepositiveresults.

• Assetsmanagedinternallyandthroughdirectandco-investmenttransactionsincreasefrom62%to67%oftotalassets.

PUBLIC SECTOR PENSION INVESTMENT BOARD — 1

HIGHLIGHTSFISCAL YEAR 2010

ANNUAL PERFORMANCEAs at March 31, 2010 (percent)

CHANGES IN NET ASSETS(CONSOLIDATED)As at March 31, 2010 ($ billions)

ReserveForcePlanAccount

RCMPPlanAccount

CanadianForcesPlanAccount

PublicServicePlanAccount

ANNUAL PERFORMANCEAs at March 31 (percent)

0

10

20

30

40

50

10090807060504

14

19

28

35

39

46

34

CHANGES IN NET ASSETS (CONSOLIDATED)As at March 31 ($ billions)

Reserve Force Plan Account

RCMP Plan Account

Canadian Forces Plan Account

Public Service Plan Account

26.1

7.9

19.1

-0.3

-22.

7

21.5

11.3

-30

-20

-10

0

10

20

30

10090807060504

ANNUAL PERFORMANCEAs at March 31 (percent)

0

10

20

30

40

50

10090807060504

14

19

28

35

39

46

34

CHANGES IN NET ASSETS (CONSOLIDATED)As at March 31 ($ billions)

Reserve Force Plan Account

RCMP Plan Account

Canadian Forces Plan Account

Public Service Plan Account

26.1

7.9

19.1

-0.3

-22.

7

21.5

11.3

-30

-20

-10

0

10

20

30

10090807060504

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CONTINUE IMPLEMENTING ACTIVEINVESTMENT MANAGEMENT PHILOSOPHY

Continue to achieve a high level of effectiveness in themanagementofPSPInvestments’directandco-investmentsbyexpandingrelationshipswithtop-performingbusinesspartners in Private Markets. Increase the proportionof internal active management in Public Markets andimplementValueOpportunityInvestingStrategy.

STATUS: ONGOING

Key accomplishments include:

• Expanded PSP Investments’ network of partners andcontactstoprovideincreasedaccesstoattractivedirectandco-investmentopportunities;

• Activeinvestorinfundsanddirectinvestments,providinginputandguidancewith regard to strategicdirection,seniorleadershipchangesanddebt restructuring;

• Increasedtheproportionofassetsmanagedinternallyandindirectandco-investmenttransactionsfrom62%to67%.

CORPORATE OBJECTIVESFISCAL YEAR 2010

REFINE POLICY PORTFOLIO ALIGNMENT

DefineaPolicyPortfolio,withinanasset-liabilityframework,takingintoaccounttheliabilitiesofthePlansandoptimizingthe Policy Portfolio structure. Develop asset-liabilitycapabilitiesandmodel.

STATUS: ONGOING


• Implemented asset-liability modeling capabilities thatenableamorethoroughunderstandingofthelinkbetweentheinvestmentstrategiesandthePlans’ liabilities;

• Refined modelling and analysis with regard to theattainmentoftargetedlong-termreturnsaswellastheexpectedvolatilityof returns,andtheir impacton thefundingstatusofthePlans;

• Collaboration with Treasury Board Secretariatand the Office of the Chief Actuary of Canada toimprove understanding of Plans’ liabilities andfundingrequirements.

2 — PUBLIC SECTOR PENSION INVESTMENT BOARD

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Corporate objectives for fiscal 2011 are a built on thefoundationof the previousyear’sachieved objectives.Theyaredirected toachievementofPSP Investments’long-termstrategy.

IMPLEMENTION OF THE INTERNAL ACTIVE MANAGEMENT STRATEGY

The level of direct investments and internal activemanagement will be increased. Access to direct andco-investmentstransactionswillbeenhancedthroughanexpansionofour internationalnetworkofpartnersandcontacts inkeymarkets. ImplementationofValueOpportunityInvestingStrategyinPublicMarketswillbecompleted.Thebusinessplanfortacticalassetallocationwillbedeveloped.

AUGMENTATION OF ENTERPRISE RISk MANAGEMENT

ImplementthenextstepsintherolloutoftheEnterpriseRiskManagementframework,measuredbyensuringacommonunderstandingacrosstheorganizationoftheenterprise risks towhichPSP Investments isexposed.Expand the breadth and depth of enterprise riskcoverage, measured by ensuring that emerging risksare appropriately identified, assessed, managed, andmonitoredthroughthedevelopmentofkeyriskmetricsandearlywarningindicators.

IMPLEMENT TALENT MANAGEMENT STRATEGY

Implement human resource development plans,measuredby increasedcapabilitiesandcompetenciesofhighpotentialemployees.Determineandimplementthenextstepsinbuildingacohesiveinternalcorporateculture, measured by a high level of employeeengagement across the organization. Implementcore process automation to maximize employeeeffectivenessandefficiency.

REFINE POLICY PORTFOLIO ALIGNMENT

Extend and deepen Plans’ liabilities structure inasset-liability framework analysis. Refine integrationof asset-liability conclusions into each Policy Portfolioannual review.

ENHANCE RISK MANAGEMENT

Continueimplementingacomprehensiveriskmanagementplan (investment, enterprise and operational risk mana-gement)toensuretimelyandongoingriskmonitoringandreporting.Enhanceriskanalysisandriskparametersbasedon experience from recent financial crisis and resultingchangestomarketriskpractices.

STATUS: ONGOING


• RealignedandenhancedtheRiskManagementGroupcapabilitiesbyconsolidatingvaluation,marketandcreditriskfunctionstoimprovefocusonthespecificriskprofileofPSPInvestments’assetclasses;

• Refined risk limits and formalized the attribution ofactive riskacrossassetclassesthroughastructuredriskbudgetprocess;

• Improved capabilities in sensitivity analysis and stresstestingtocomplementvalue-at-risk(VaR)measurementand provide a more comprehensive measure ofinvestmentrisk;

• Enhancedmonitoringandreportingofleverageactivities,treasuryactivitiesandliquidityrisk.

CORPORATE OBJECTIVES 2011FISCALYEAR

kEY CORPORATE OBJECTIVES


CHAIR'S REPORT

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PAUL CANTORChair

In last year’s annual report, we remInded staKeholders of the Importance of

remaInIng patIent and pragmatIc as we navIgated the worst fInancIal crIsIs sInce

the great depressIon, whIle worKIng to taKe maxImum advantage of psp Investments’

lIquIdIty. fIscal year 2010 demonstrated the wIsdom of thIs approach, whIch entaIls

adherIng to our long-term goals and objectIves.

Aswecanseefromthelatestresults,asubstantialportionoftheunrealizedlossesfromayearagohavebeenrecuperated,whichdemonstratesthesolidlong-termvalueofPSP Investments’assets.Thefiscal2010resultsalsoreflectinitiativestakentobenefitfromtheremarkableturnaroundofmarkets.

Newinvestmentopportunitieswillariseasglobalmarketscontinuetonormalize.Givenourexpectedannualcashinflowsofapproximately$4billion,PSP Investmentsisinafavourablepositiontoseizethoseopportunities.Butriskisthehandmaidenofopportunity,andwewillstillneedtograpplewiththeinevitablechallengesoffuturemarkets.

ForPSP Investments,keepingalong-termperspectivemeansremainingfaithfultotheorientationofahighlydiversifiedportfoliothatincludesasignificantportionofprivateequityandinflation-hedgingrealestateandinfrastructureassets.Suchinvestmentsincreasetheprobabilityofmeetingorexceedingthetargeted4.3%-above-inflationlevelofreturns,withoutanunwarrantedincreaseinriskandprovideforabettermatchwiththePlans’liabilities.

WearemindfulthatPSP Investments’legislatedmandateisto“maximizereturnswithoutundueriskofloss”.Theeventsoffiscalyear2009madeevidenttheneedtomoreclearlydefinethisnotionofundueriskwithourstakeholders.TheBoardhasbeenaddressingthisquestion,andwillbeproposingacomprehensiveframeworkinfiscalyear2011.Beyondthat,internally,oneoftheBoardofDirectors’on-goingprioritiesentailsworkingwithmanagementtofurtherenhanceriskmanagementpractices.Ouraimistousewhatwehavelearnedfromtherecentcrisistofurtherrefinebothourquantitativeandqualitativeparametersforevaluating,monitoringandmitigatingrisk.

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ExECUTIVE COMPENSATION

Duringfiscalyear2010,PSPInvestmentscompletedathoroughanalysisofitsoverallcompensationpracticesandproceduresandevaluatedtheircompliancewiththerecommendationsoftheG20WorkingGroupwhicharebasedontheFinancialStability Forum Principles for Sound Compensation Practices. This self assessment concluded that PSP Investments’compensationprogramsandpoliciesareconsistentwiththeG20Recommendations,andthatcompensationprogramsareeffectivelydesignedtoreducethepotentialforrewardingexcessiverisktaking.

Intheinterestofsoundgovernanceandimpartiality,theBoardandtheHumanResourcesCompensationCommitteealsomandatedDeloitte&ToucheLLPtoconductanindependentreviewofPSPInvestments’assessment.Deloitte&Touche LLPconfirmedPSPInvestments’levelofcompliancewiththeG20Recommendations.

10TH ANNIVERSARY

Thisyearmarksthe10thanniversaryofPSPInvestments’founding.BothBobBaldwinandIhavebeenprivilegedtositontheBoardsinceitsinceptiononMarch28,2000.Duringthattime,wehaveseenPSPInvestmentsgrowfromstart-uptoasolidorganizationwithassetsexceeding$46billion,morethan300employeesandinvestmentsoneverycontinentnorthofAntarctica.

PSPInvestmentscameintobeingatatimewhenthestructureandfinancingofpublicpensionprogramsinCanadawereundergoingsubstantivechanges.Traditionally,thePlanshadbeenfinancedbythegovernmentona“book reserve”basis,wherebyinterestwouldbecreditedtothereservesbasedonthecurrentyieldonthelong-termdebtofthesponsoringgovernment.Duringthe1990s,itbecameevidenttherewasaneedfornewfinancingarrangementsthatwouldensurethefinancialsustainabilityofthePlansoverthelongterminthefaceofanageingpopulationandincreasedpensionbenefitpayments.ThenewmodelthatemergedentailedbuildingupactualreservefundsandinvestingtheminaportfolioofassetsmanagedbyinvestmentprofessionalsreportingtoaBoardofDirectorswithrelevantexpertise.

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Thefirst10yearsofPSP Investmentswerechallengingtimesforinvestments.AccordingtoarecentWall Street Journalarticle,thefirstdecadeofthe21stcenturyturnedouttobetheworsteverforUSstocksbasedonrecordsgoingbacktothe1830s.Totalreturnsfortheperiod2000-2009amountedtonegative0.5%.Thatcomparedwithahighof18%inthe1950sandwasevenlowerthanthenegative0.2%returnforthe1930sDepressionera.Thus,itturnedouttobeademandingatimetolaunchanewfund.Nevertheless,wehavegrownintoarobust,highlydiversifiedfundthatwillrankamongthelargestpensioninvestmentmanagersinCanadaandinternationally.

ProvidingeffectiveoversightandcounseltoafundofPSP Investments’sizeandscoperequiresaBoardthatknowshowandwhentoact.Thiscallsforexpertiseinawiderangeofdisciplinesincludinginvestmentmanagement,corporatefinance,riskmanagement,humanresources,financeandaccounting,economics,publicaffairs,lawandactuarialscienceinordertofullycomprehendtheinherentrisksandresponsibilitiesentailedinthefulfillmentofourmandate.Inaddition,theDirectorsmusthavethewilltoactwhendecisivenessisneeded,asknowledgewithoutactionisfruitless.

AsPSP Investmentsbeginsitsseconddecadeofoperations,wearesatisfiedwiththecompositionoftheBoardandthequalityofgovernancewehaveachieved.However,theselectionprocessforDirectors,designedtoproduceaworld-classBoard,requireseveryone’sefforttokeepthemomentumofnominationsmovingforward.ThechallengetopromptlyfillBoardvacancieshastakenonaddedimportancegiventheincreasedworkloadsresultingfromtherecentdecisiontoreducethenumberofDirectorsfrom12to11.

TheBoardispleasedwiththeleadershipofourPresidentandChiefExecutiveOfficer,GordonJ.Fyfe,andtheteamhehasassembled.Webelievethattheexcellenceofthemanagementteam,coupledwiththesupportofahigh-calibreBoard,positionsustomeetourmandatebymaximizingreturnswithoutundueriskofloss.

ACKNOwLEdGEMENTS

I wish to express my gratitude to fellow members of our Board for contributing so much of their time and expertiseand for working diligently to make sure that PSP Investments fulfills its mandate. Special thanks are due to threeesteemedformercolleagueswhohavelefttheBoard,KeithG.Martell,AnilK.RastogiandWilliamA.Saundersonfortheiroutstandingcontributions.

IwouldalsoliketotakethisopportunitytowelcomenewBoardmembersLynnHaightandWilliamA.MacKinnon,bothofwhombringvaluableexpertiseandexperiencetothetable.Ms.Haightisafinancialexecutiveandbusinessadvisorwhohasheldseniorpositionswithseveralmajorfinancial institutions(Scotiabank,Manulife,Foresters).Mr.MacKinnonisacharteredaccountantwhospenthisentirecareerwithKPMGCanada,whereheservedaschiefexecutivefrom1999untiltheendof2008.Iwelcome,aswell,thereappointmentsofCherylBarker,AnthonyR.GageandMichaelP.Muellerforadditionalfour-yearterms.

Finally,onbehalfoftheBoard,IwishtothankGordonandhisteam,aswellasemployeesthroughoutPSP Investments,fortheirhardworkandcommitmentoverthecourseofanotherveryeventfulandchallengingyear.

PaulCantorChair

fIscal year 2010 demonstrated the resIlIence of psp Investments’ long-term Investment

strategy that began In fIscal year 2004. at the tIme, we IdentIfIed psp Investments’

strongest competItIve advantage to be long-term lIquIdIty provIded from the large

annual cash Inflows that wIll contInue beyond 2020.

ThepasttwoyearssawtheworstfinancialcrisissincetheGreatDepression,demonstratingtheriskofleverageandalackofliquidity.ManyinvestorsmissedthesharpreboundinassetpricesstartinginMarch2009,havingbeenforcedtosellhigh-qualityassetsatthemostdistressedtime.

ThiswasnotthecaseforPSPInvestments.Infact,duringfiscalyear2010asourassetsundermanagementgrew,wewereabletopurchaseanadditionnal$3.5billioninpublicequities(includingemergingmarketswherePSPhasarelativelylargeexposure)atattractiveprices.Overall,ourpublicequityportfoliosgeneratedaninvestmentreturnof37.9%,contributingtoastronginvestmentperformanceforfiscalyear2010.

WealsobenefitedfromthehighqualityofourPrivateMarketassets.Beinginapositiontoholdontoilliquidassetsthathadbeenwrittendowntodistressvaluationsasaresultoftheliquiditycrisisenabledustogeneratesignificantinvestmentreturns,asvaluesreturnedtofundamentals.Themostprobingexampleisthe 28.8%returnachievedinourPrivateEquityportfolioinfiscalyear 2010.

Finally,wewereabletorebalanceourportfolio,atorneartargetassetallocationasourconfidenceinthestrengthofthereboundinpublicequitiesgrew.

A STRONG PERFORMANCE

Forfiscalyear2010,PSPInvestmentsrecordedatotalportfolioreturnof21.5%,representing$7.6billion in investmentincome,areversalovertheinvestmentlossrecordedinfiscalyear2009andreflectingareturntofundamentalsfromthedistressedvaluationsresultingfromtheliquiditycrisis.Activemanagementadded$641millioninvaluetothefundduringthelatestfiscalyearasthetotalfundreturnexceededthePolicyBenchmarkreturnof19.8%.

Takingintoaccount$5.0billionofnetcontributionsfromthePlans,PSPInvestments’consolidatednetassetsincreasedby37%to$46.3billionasatMarch31,2010.Thattotalexceedsthepreviouspeakof$38.9billionrecordedattheendoffiscalyear2008.

PRESIDENT'SREPORT

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GORDON J. FYFEPresident and Chief Executive Officer

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MAINTAINING A LONG-TERM PERSPECTIVE

Whilewearepleasedwithourstrongperformanceinfiscalyear2010,onecannotfullyjudgetheeffectivenessofalong-terminvestmentstrategylikePSPInvestments’onthebasisofasingleyear’sresults—goodorbad.

PerhapsthebestmeasureofsuccessistolookbackatPSPInvestments’performancesincefiscalyear2004,whenwebeganimplementingourdiversificationandactivemanagementstrategy.Duringthisseven-yearperiod,wehaveachievedanet5.8%annualizedrealrateofreturn(i.e.aftersubtractingexpensesandinflation),exceedingthe4.3%realrateofreturnobjective.Thisinvestmentreturnwasachieveddespiteexperiencingtheworstdeteriorationoffinancialmarketssincethe1930sinfiscalyear2009.

Withtheprospectofpositivenetcashflowsofmorethan$4billionperyearinthenearfuture,andpositivenetcontributionsexpectedforthenexttwodecades,PSPInvestments’strategyremainssound.Moreover,atatimewhensomeassetclassesarestilldistressed,wearewellpositionedtocapitalizeoninvestmentopportunities.

THE NEEd TO TAKE MARKET RISK

Understandingandmanagingriskisthefoundationforourinvestmentdecisions.AccordingtothelatestactuarialvaluationreportspreparedbytheChiefActuaryofCanada,a4.3%long-termrealrateofreturnisrequiredtobeabletosustainthecurrentleveloffundingrequirementsandthecurrentlevelofpensionbenefitsoverthelongterm.ReachingthattargetnecessarilyimpliesthatPSPInvestmentsmusttakemarketrisk.Werewetoavoidriskalltogether,saybyinvestingonlyinreal-returngovernmentbonds,theexpectedrealreturnofsuchaportfoliowouldbeapproximately2.0%,wellbelowthe4.3%required.

Buildingastrategybasedonourcompetitiveadvantagesofsteadyinflowofcontributions,PSPInvestmentshasadoptedadiversifiedportfolioexpectedtobemoreefficientwithbetterreturnsforthesameoralowerlevelofmarketriskthanthatnecessarilyrequiredtoachievethe4.3%realrateofreturn.

PURSUING OUR 2012 STRATEGIC PLAN

Inkeepingwiththecorporateobjectivesidentifiedforfiscalyear2010,setoutinourVision2012strategicplan,wecontinuetoimplementPSPInvestments’activeinvestment-managementphilosophy.

Wehavebeen increasingtheproportionofourassetsunder internalactivemanagementandexpandingrelationshipswithtop-performingpartnerswhilebroadeningournetwork,lookingfordirectandco-investmentopportunities.Atthesametime,weareusingfewerexternalmanagersandinvestinginfewerfunds.Thebenefitsofbringingmoreinvestmentdecision-makinginsideincludebettercontrolintermsoftotal-fundrisk,investmentcostsavingsaswellasinfluenceovermajordecisions,resultinginabetteralignmentwiththePlans’contributors’objectives.

AsofMarch31,2010,assetsmanagedinternallyandthroughdirectandco-investmenttransactionstotalled67%ofassetsundermanagement,upfrom62%attheendofthepreviousyear.

TheadvantagesofthisapproachareincreasinglyevidentinourPrivateMarketsportfolios,whereinvestmentshavebeenperformingwellbothintermsoffundamentals,suchascashflowsandearnings,andimprovedmark-to-marketvaluations.

Anotherobjectiveinourstrategicplanistopursueinvestmentsinemergingeconomies.Newinvestmentopportunitiesarebeingsoughtinresource-richmarketsandinhigh-growthmarketswherestrongdomesticdemandoffersinsuranceagainstmarketshocks.

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TALENT dEVELOPMENT

Anon-goingprioritytosuccessfullyimplementour2012strategicplanhasbeentherecruitment,developmentandretentionofthetoptalentrequiredtoeffectivelymanagealargeandcomplexinvestmentfund.

As we round out the leadership team, PSP Investments’ pool of human resources has acquired the critical mass andcollectiveexpertisethatenableustoshiftourprimaryfocusfromrecruitmenttoprofessionaldevelopmentandsuccessionplanning.Accordingly,weareconductingtalentreviewswithmiddlemanagement,developingformalsuccessionplansandimplementingastructuredapproachtothedevelopmentofnewmanagers,whilecontinuingtorefineourhiringpractices.

10TH ANNIVERSARY

April2010markedthemilestone10thanniversaryofPSPInvestments’founding.Fromrelativelymodestbeginnings,withfouremployeesandassetsofapproximately$2.5billionattheendofitsfirstyear,PSPInvestmentshasevolvedintooneofCanada’slargestpensioninvestmentfunds.Netassetsreached$19.4billionafterfiveyearsand,asnotedabove,reachedanewhighof$46.3billionattheendofthelatestfiscalyear.Thenumberofemployeeshasgrowntojustover 300attheendoffiscalyear2010.

Initially,PSPInvestmentsinvestedexclusivelyinpubliclytradedstocksandbonds,primarilyinCanadaandtheUnitedStates.SignificantchangestothePolicyPortfoliohavesteadily ledtoincreaseddiversificationsince2004.ThisdiversificationstrategywillcontinueaswestrivetodeliveronourmandatetothegreatestpossibleextentandfulfillthepensionneedsofthemanythousandsofCanadianmenandwomenwhoworkinthePublicServiceandserveintheCanadianForces-RegularandReserveForce,andtheRoyalCanadianMountedPolice.

ACKNOwLEdGEMENTS

Inclosing,IwouldliketothankthemembersofourBoardofDirectorsfortheirunstintingsupport—inparticularourChair oftheBoard,PaulCantor,andBobBaldwin,whojoinedthePSPInvestmentsBoardatitsinceptioninMarch2000,andhavebeeninstrumentalinhelpingoverseeitsgrowthanddevelopmentoverthepastdecade.

Finally,Iwouldliketothankallouremployeesfortheirhardworkandcommitmentthroughoutfiscalyear2010.

GordonJ.FyfePresidentandChiefExecutiveOfficer

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MANAGEMENT'S DISCUSSION OF

FUND PERFORMANCEAND RESULTS

ECONOMIC OVERVIEw ANd BACKGROUNd

Following the worst recession of the post-war period and worst financial meltdown since the Great Depression, the

global economy began to pull itself back up on its feet during fiscal year 2010. The extraordinary efforts of the world’s

central banks – the US Federal Reserve in particular – and massive fiscal stimulus put in place by governments around

the globe served to revive economic activity. Similarly, the extreme level of risk aversion that gripped investors during

the worst of the crisis has subsided and financial markets have rebounded from the depressed levels recorded in

early calendar year 2009. Equities have posted significant gains, commodity prices have clawed their way back from last

year’s depths and corporate credit spreads have narrowed to levels that are typical at the end of a recession. The flight

to quality that sent bond yields sharply lower and pushed the US dollar higher against virtually all other major currencies

reversed course. At the same time, however, markets remain below their pre-crisis peaks and the downturn has left

numerous scars on the economic and financial landscape: policy interest rates remain at record lows, credit conditions

remain tight, labour market conditions have yet to truly turn the corner and enormous fiscal deficits have become the

norm. Significant doubts remain as to the ability of the developed economies – the United States in particular – to grow

in the absence of continued massive policy support. In turn, these factors have caused markets to remain nervous.

MAJOR ECONOMIES

Whiletheglobalrecessionappearstohaveendedinthethirdquarterofcalendaryear2009,therehasbeenasignificantdivergencebetweenthestrengthoftherecoveryinthedevelopedeconomiesandtheperformanceofemergingmarkets.Inmostdevelopedeconomies,thepaceofgrowth,whilerespectable,hasfallenfarshortofthegrowthspurtsnormallyexperiencedaftersuchalonganddeepdownturn.Therecoveryinemergingeconomieshasbeenmuchmoreforceful:forexample,asofDecember2009,emergingeconomyindustrialproductionhadalreadyrisen5%aboveitspre-crisispeak,while industrialproduction indevelopedeconomieswasstillnearly 15%below itspre-crisis level.TheemergingAsianeconomieshavebeenparticularlystrong,withChinaleadingtheway.

CANADA

AlthoughCanada’seconomycouldnotescapetheimpactoftherecessionintheU.S.,ithasmanagedtopullthroughthedownturninbettershapethanmostotherindustrializedeconomies.WhileCanadiangrossdomesticproduct(GDP)growthfellshortofUSgrowthinthesecondhalfofcalendaryear2009,looksaredeceiving–thedomesticsideoftheeconomydidnoticeablybetterthanwhatcouldbeinferredbytheheadlineGDPresult.ParticularlynotablewastheperformanceofCanada’shousingmarket,whichmanagedtorecoupallofthedeclineinsalesrecordedduringthedownturn.Jobgrowthalsoresumedinearlycalendaryear2010.ToCanada’sadvantageisthefactthatthecountry’sbankingsystemhascontinuedtofunctionnormallyandcredithascontinuedtoflow,instarkcontrasttothelingeringeffectsofthecreditcrisisintheUnited States.

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LiketheUSFederalReserve,theBankofCanadacutitsovernightlendingrateto0.25%inApril2009,whereitremainedatthiswriting.However,useoftheextraordinaryfacilitiesthattheBankputinplacetoensurethenormalfunctioningofcreditmarketsduringtheworstofthecrisishaswaned.GivenCanada’srelativelysolideconomicbackdrop,expectationsarethataBankofCanadaratehikewillcomewellbeforetheUSFederalReservemakessuchamove.Withstrongeconomicfundamentalsandrisingcommoditypriceskickinginaswell,theCanadiandollargainedapproximately24%againstitsUScounterpartduringfiscalyear2010.

UNITED STATES

ThelongestanddeepestUSrecessionofthepost-warperiodhascometoanend,withtheeconomypostingpositivegrowth rates inboth the thirdand fourthcalendarquartersof2009.However, theeconomycontinues to facestrongheadwinds,andasaresult,therecoverytodatehasappearedweakandhesitant.Notably,joblossescontinuedthroughouttheyear—bringingthecumulativejoblossduringthisdownturntoapost-warrecordof6.1%—andthelabourmarketonlyrecentlystartedshowingsignsofstabilizing.Theunemploymentratehasrisenclosetoapost-WorldWarIIhighandothermeasuresoflabourunderutilizationlookevenworse.Creditconditionshaveyettoimprove:householdandbusinesscreditcontinuedtocontractandbanklendingstandardscontinuedtotighten,albeitataslowerpace.Althoughhouseholdbalancesheetsimprovedasfinancialmarketsreboundedandhousepricesstabilized,themassivedestructionofwealthduringthecrisiscontinuedtoconstrainconsumerspending.Meanwhile,signsthatthehousingmarketwasstartingtoturnthecorner,whichemergedduringthefallandwintermonths,provedtobetentative.Atbest,themarkethashitbottom,withlittleforwardmomentum.

TheUSFederalReservekeptitsFedFundsRateatbetween0%and0.25%throughoutthefiscalyear,andhaspledgedtomaintainratesat“exceptionallylowlevels”foranextendedperiod.However,withfinancialmarketsnormalizing,theUSFederalReservehasbeengraduallywindingdownitsexceptionalliquiditymeasures.

EUROPE

TheEurozonehasalsobeenliftedbytherisingtideofglobaleconomicrecovery,buttheEuropeanrecoveryhasbeenrelativelyanemic,withGDPgrowthnearlyevaporatingascalendaryear2009drewtoaclose.WhiletheEurozone’slargesteconomieswereshowingsignsofrenewedmomentumintheearlypartofcalendaryear2010,thefocusofattentioninEuropewasshiftingtosovereigndebt,sparkedbyconcernsoverthestateofGreece’spublicfinances.TheglobalrecessionhasexposeddeepstrainswithintheEurozone,withperipheraleconomiessuchasGreece,Portugal,Spain,IrelandandItalyexperiencingseverepressureontheirpublicfinances.Althoughthesovereigndebtspreadsoftheperipheraleconomieshavestartedtosettledownafterwideningsharplyinearlycalendaryear2010,theEurohasdepreciatedsubstantiallyagainsttheUSdollar.TheEuropeanCentralBank(ECB)lowereditspolicyrateto1%inMay2009and,withinflationsubdued,therehasbeenlittleindicationthatitisconsideringraisingrates.UnliketheUSFederalReserve,theECBdidnotengageinlarge-scaleassetpurchases.However,ithasstartedtoparebackitsextraordinaryliquidityprovisionstothebanking sector.

JAPAN

TheJapaneseeconomywasamongthehardesthitbytheglobalcrisis,asexportscollapsedandindustrialproductiontumbled at a rate not previously seen in the post-war period. Both exports and industrial output have snapped backforcefully,thanksinparttothetowChinaprovidestotheAsia-Pacificregion.However,thedownturnexacerbatedJapan’sdeflationaryproblems,whichremainakeyconcernwithannualinflationclockinginatnegative2.5%duringtheclosingmonthsof calendaryear2009.

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EMERGING ECONOMIES

Incontrasttotheadvancedeconomies,thereboundinemergingAsiahasbeenanythingbutsluggish.Afterrecordingsignificant declines in production and exports, the major Asian economies recouped the bulk of their losses over thecourseoftheyear.China,inparticular,hasplayedapivotalroleinpullingtheregionforward.China’seconomyreboundedforcefullyinresponsetosharplyexpansionaryfiscalandmonetarypoliciesthatstimulateddomesticspendingandimports,althoughexportshavebeenmuchslowertocomeback.InflationconcernshaveledtheChineseauthoritiestobeginreininginthestimulus.

InLatinAmerica,althoughtheregionasawholehasturnedthecorner,therecoveryhasbeenuneven.EconomiesmostheavilyexposedtotheU.S.,likeMexico,haveonlyslowlybeenclawingtheirwayback.Others,likeBrazil,areexperiencingstrongerrecoveries,orlikeColumbia,managedtoavoidarecessionaltogether.

FINANCIAL MARkETS

Afterrecordingthesharpestdeclinesinalmost80yearsandhittingbottominearlyMarch2009,globalstockmarketsroaredbackduringfiscalyear2010.TheMorganStanleyCapitalInternational(MSCI)WorldIndex,whichrecordeda37.4%lossinfiscalyear2009,reboundedby46.3%infiscalyear2010.Emergingmarketsalsostagedastrongrally,withtheMSCIEmergingMarketIndexupby58.0%inlocalcurrencyterms.Itshouldbenoted,however,thatimpressiveasthesepercentagegainsare,theyoccurredfromverydepressedlevels.Consequently,almostallmajorindicesremainbelowtheirpre-crisispeaks—significantlysoinmanycases.

CANADIAN EqUITIES

Canadianequitiesfollowedglobalequitiesupward.However,justastheCanadianmarkettraileditsUScounterpartsomewhatduringthedownturn,itfellslightlyshortinoverallperformanceinlocalcurrencytermsduringtherally,registeringagainof42.2%overthecourseofthefiscalyear.Thestrongestgainswereinfinancials,asCanada’sbankingsectorprovedtoberemarkablyresilientduringthedownturn,partlyreflectingitsregulatoryframework.TheRealEstateIndexalsoregisteredaverystronggain.Bycontrast,gainsinconsumerstaplesandconsumerdiscretionarystockswereweaker.

US EqUITIES

TheUSequitymarketreboundedforcefullyfromthehitittookduringthecrisis,withtheS&P500recordingagainof49.8%inlocalcurrencytermsforfiscalyear2010.However,inCanadiandollarterms,thereturnwasmuchlower,only 20.8%,giventhestrongappreciationoftheCanadiancurrencyduringtheyear.Thesectorsthatfaredtheworstduringthedownturnfaredbestduringtherally.USfinancialstockscamebackparticularlystrongly,asdidconsumerdiscretionarystocksandothercyclicalsectorssuchasindustrialsandmaterials.

EMERGING MARkET EqUITIES

Asnotedabove,whileemergingmarketequitiesexperienceddramaticdeclinesduringthecrisis,someoftherecoverieshavebeenjustaseye-opening.TheMSCIEmergingMarketIndexregainedalmosttwo-thirdsofthenear60%lossincurredduringthecrisis,andwasupbyahefty58%infiscalyear2010.Brazilhasbeenamongthebest-performingmarketsandisalmostbacktoitspre-crisispeak,havingmorethandoubledinvaluefromthelowpointreachedlateincalendaryear 2008andgained72.0%duringfiscalyear2010.Incontrast,afterpostingstronggainsthroughtoAugust2009,theChineseequitymarkethasbeenstrugglingwiththeShanghaiCompositeIndexmanagingamoremodest32.9%gainforthelatestfiscalyear.

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BONDS

Whilefiscalyear2010wasnotagreatoneforgovernmentbonds,itwasnotadisastereither.Afterhittingalowof2.1%inDecember2009,US10-yearyieldsclimbedbackmorethan150basispoints(bps)asmarketsnormalized.Sincethesummerof2009,however,longer-termUSTreasuryyieldshaveessentiallybeentrackingsideways.Meanwhile,thefrontendofthecurvehasbeenwellanchored,giventheUSFederalReserve’spledgetokeepitspolicyrateunchangedforanextendedperiod,and,correspondingly,theyieldcurveisassteepasithaseverbeen.Mostothergovernmentbondmarketsrespondedtotheimprovedglobaleconomicbackdropinasimilarmanner,althoughtheU.S.andtheUnitedKingdomhavesufferedboutsofpressureduetomountingconcernsoverthesizeofgovernmentdeficits.Corporatebonds,however,didremarkablywell,giventhedramaticcontractionincorporateyieldspreadsovertheyear—Moody’sBAAspreadsdeclinedfromapeakofmorethan600bpsoverUSTreasuriestoaround250bpsbytheendofthefiscalyear.

Overall,bondreturnswerelacklustreatbest.Canadianbonds,asmeasuredbytheDEXUniverseIndex,returned5.1%duringthefiscalyear.However,giventheappreciationoftheCanadiandollar,worldgovernmentbondspostedasignificant14.7%negativereturninCanadiandollarterms.

REAL ESTATE

Realestatemarketscontinuedtostruggle,withtheUShousingmarketshowingonlytentativeandhaltingsignsofrecovery.HomesalesintheUnitedStatesappeartohavebottomedout,andpriceshavestabilized,butdelinquenciesandforeclosuresremainatahighlevel.Still,withtheworstnowintherear-viewmirror,theMSCIREITIndexmanagedtochalkupaverystronggainof107.3%,althoughithasrecoveredonlypartofitslosses.However,commercialrealestateremainsinthedoldrums,withlittleevidenceofrecovery.Whilehigher-qualitycommercialmortgage-backedsecurities(CMBS)spreadshavecomedown,theyremainabovehistoricalaverages,andspreadsonlower-ratedpaperremainverywide.

Canada’srealestatemarkethasfaredmuchbetterthanitsUScounterpart,withhomesalesrecoveringdramaticallyandpricesreturningtotheirpre-recessionlevels.

Similarly,whileCanada’scommercialrealestatemarkettookasubstantialhitfromtherecession,theworstappearstohavepassedwiththemarketslowlyshowingsignsofstabilizing.

COMMODITIES

Commodities,likeallothermarkets,werehithardduringthedownturnbuthavereboundedsignificantlyfromtheirlows,reflectingrisingglobaldemandandcontinuingstrongChineseimportsofbasiccommodities.TheCommodityResearchBureau(CRB)Indexisupmorethan35%fromitslow,andhasgained24.0%infiscalyear2010.Crudeoilprices,whichhadfallenaslowas$31perbarrelduringtheworstofthecrisis,havereboundedtomorethan$80.Mostbasemetalpriceshavepostedstronggains,andcopperinparticularhasclimbedbackclosetoitspre-crisispeak.Mostagriculturalcommodities,however,remaindepressed.

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INVESTMENT OBjECTIVES, INVESTMENT POLICY ANd THE POLICY PORTFOLIO

INVESTMENT OBJECTIVES

PSPInvestments’mandateisdescribedinSection4ofthePublic 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 Plans and the ability of those Plans to meet their financial obligations.

Basedonthesestatutoryobjectives,PSPInvestments’BoardofDirectorsestablishedthefollowinginvestmentobjectives:

• Absolute Return: achieve a return (net of expenses) at least equal to the actuarial rate of return used by the Chief Actuary of Canada.

• Relative Performance: achieve a target return exceeding the Policy Portfolio return and operating expenses.

INVESTMENT POLICY

In fiscal year 2010, PSP Investments implemented its asset-liability modeling capabilities, enabling a more thoroughunderstandingofthelinkagebetweenitsinvestmentpolicyandthePlans’liabilities.UnderstandingthislinkhelpsensurethatPSPInvestments’approachandresultsnotonlymeettheactuarialrateofreturn,butalsocontributetothelong-termsustainabilityofthePlansandtherelativestabilityoffundingrequirements.ThisinitiativereflectsPSPInvestments’desiretoimprovetheoverallalignmentofinterestsbetweenallstakeholders.

POLICY PORTFOLIO

AttheheartofPSPInvestments’approachisthePolicyPortfolio.

• PSP Investments developed its Policy Portfolio to achieve a return at least equal to the actuarial rate of return over the long term (i.e. a real return of 4.3% - after inflation).

Theactuarialrateisthelong-termrateofreturnusedbytheChiefActuaryofCanadainhislatestactuarialvaluationreportsofthePlans.Itistherateofreturnrequiredtomaintainfundingrequirementsandpensionbenefitsattheircurrentlevels.

Takingonmarketriskisrequiredtoachievethisrealrateofreturn.Arisk-freerealrateofreturncouldbeachievedwithCanadaRealReturnBonds(RRBs).However,basedonPSPInvestments’expectationsoflong-termmarketconditions,theexpectedrealrateofreturnresultingfromthisstrategywouldbeapproximatly2.0%,wellshortoftherequired4.3%.

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• In establishing its Policy Portfolio, PSP Investments also took into consideration the unique characteristics of the Plans’ liabilities and its contribution to funding risks.

Aportfoliocomposedofpublic,liquidassetclassescouldbeconstructedtoachievetheactuarialtarget.However,itwouldmissoutonopportunitiesaffordedbytheuniquecharacteristicsofthePlans’liabilities.Becauseoftheyoungnatureoftheliabilities,PSPInvestmentsisexpectedtoreceivepositivenetinflowsoverthenext20years.Thisexceptionalsituationrepresentsasignificantcompetitiveadvantageintermsofbeingabletoadoptaportfoliodiversifiedintoless-liquidassetclasses.Thisprovidesforcapturingilliquiditypremiumsofassetclassessuchasprivateequity.Italsoenablesdiversificationintoassetclassessuchasrealestateandinfrastructurethatareexpectedtoprovideabettermatchwiththeinflation-sensitivenatureofliabilities.Abettermatchwithliabilitycharacteristicscontributestoreducedfundingrisksovertime.

Asset-liability studies conducted on behalf of the Board of Directors indicate that the Policy Portfolio is expected toaddressfundingrisksbyprovidingreturnssufficientandadequatetocontributetothefinancialsustainabilityofthePlansandtherelativestabilityoffundingrequirements.Bydiversifyingbeyondpublic,liquidassetclasses,thePolicyPortfolioisexpectedtoprovide for:

• Betterlikelihoodofmeetingtheactuarialtargetrateofreturn-withgreaterthan60%probabilityoverthelongterm;

• ImprovedfundingpositionofthePlanswithsimilarleveloffundingrequirements.

Building on its competitive advantages, PSP Investments adopted a Policy Portfolio diversified beyond public, liquid asset classes, increasing the probability of achieving the actuarial target while offering a better match with liabilities, thus contributing to the long-term sustainability of the Plans and the relative stability of funding requirements.

POLICY PORTFOLIOAs at March 31, 2010 (percent)

World Equity 62

CanadianEquity 30

PrivateEquity 10

EmergingMarketsEquity 7

USLargeCapEquity 5

EAFELargeCapEquity 5

SmallCapDev.WorldEquity 5

Real Return Assets 23

RealEstate 10Infrastructure 8WorldInflation-LinkedBonds 5

Nominal Fixed Income 15

CanadianFixedIncome 8

WorldGovernmentBonds 5

Cash&CashEquivalents 2

TOTAL 100

ThePolicyPortfolioisreviewedatleastannuallytoreflectchanges,ifany,toPSPInvestments’long-termexpectationsofmarketconditions,changesinthePlans’liabilitystructureorotherfactorsaffectingthefundingofthepensionobligations.

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CHANGE IN NET ASSETS ANd FUNd PERFORMANCE

CHANGE IN NET ASSETS

ThenetassetsofPSPInvestmentsincreasedby$12.5billionduringfiscalyear2010,againof37%mainlyattributabletoastronginvestmentperformance.Netassetswere$46.3billionattheendoffiscalyear2010,upfrom$33.8billionattheendoffiscalyear2009.

PSPInvestmentsgeneratednetincomefromoperationsof$7.5billionduringtheyear,asignificantturnaroundoverthelossof$9.6billionreportedinfiscalyear2009.Thisreflectsaconsolidatedrateofreturnof21.5%infiscalyear2010,comparedtoarateofreturnofnegative22.7%infiscalyear2009.PSPInvestmentsreceived$5billionincontributionsduringfiscalyear2010.

PERFORMANCE MEASUREMENT AND EVALUATION

BasedontheStatementofInvestmentPolicies,StandardsandProcedures(SIP&P),PSPInvestmentsevaluatesitsinvestmentstrategies, as well as individual investment mandates, through performance measurement. The performance for eachrespectiveinvestmentstrategyandmandateiscomparedtoanappropriatebenchmark.

BENCHMARkS

AcombinedPolicyPortfolioBenchmark(“PolicyBenchmark”)isconstructedusingtheassetclassbenchmarksweightedbytheirallocations,asestablishedintheSIP&P.Thereturnforeachassetclassiscomparedtotherelevantbenchmarkreturn,whilePSPInvestments’overallreturniscomparedtothePolicyBenchmarkreturn.

CONSOLIDATED RETURNS

The21.5%rateofreturnrecordedbyPSPInvestmentsinfiscalyear2010exceededthePolicyBenchmarkrateofreturnby1.7%andadded$641millioninvalueoverandabovePolicyBenchmarkreturns.Forthepastfivefiscalyears,PSP Investmentsrecordedacompoundannualizedrateofreturnof4.4%,comparedtothePolicyBenchmarkrateofreturnof5.3%overthatsameperiod.

Therobustoverallperformanceforfiscalyear2010wasdrivenprimarilybystrongresultsinPublicMarketsequitiesandthePrivateEquityportfolio.Investmentreturnsfortheequityportfoliosrangedfrom20.1%fortheUSLargeCapEquityportfolioto47.4%fortheEmergingMarketsEquityportfolio.Alltheequityportfoliosgeneratedreturnsthatsignificantlyexceededtheirrespectiveresultsofthepreviousyear,reflectingthestrongperformanceofglobalstockmarketsasoutlinedonpage 10oftheEconomicOverview.TheoverallreturnwasalsoimpactedbyPSPInvestments’ForeignCurrencyHedgingPolicy,whichisintendedtomitigatesomeofitsforeigncurrencyexposureindevelopedmarkets.DuetothestrengtheningoftheCanadiandollaragainsttheUSdollarandtheEuroinfiscalyear2010,theCurrencyHedgingPolicypositivelyimpactedtheoverallrateofreturnby4.0%.

Theexcessreturnof1.7%(comparedtothePolicyBenchmark)achievedduringfiscalyear2010wasprimarilygeneratedbythePrivateEquityandInfrastructureassetclasses,aswellasbyabsolute-returnmandates.Majorcontributorstoexcessreturninabsolute-returnmandatesincludedexternallymanageddebtportfoliosthatbenefitedfromtheeffectofnarrowingcreditspreads.PSPInvestments’holdingsincollateralizeddebtobligationsandasset-backedtermnotes(referredtoasasset-backedcommercialpaperinlastyear’sannualreport)alsowerecontributorstothefiscal2010excessreturn.ForthefiscalyearendedMarch31,2010,investmentsincollateralizeddebtobligationsincreasedoverallreturnsby1.2%,asaresultof$393millionininvestmentincomegeneratedinthefiscalyear.Ourinvestmentinasset-backedtermnotesgeneratedinvestmentincomeof$260 millioninthefiscalyear,increasingtheoverallrateofreturnby0.9%.Tighteningcreditspreadsandgenerallyfavorablemarketconditions,comparedtothepreviousyear,weretheprimaryreasonsfortheincreaseinvalueoftheseinvestments.As wasmentionedinlastyear’sannualreport,thelossesrecordedinfiscalyear2009financialstatementsrelatedtotheseinvestmentswereprimarilytheresultofstressedmarketconditionsandnotrelatedtoanysignificantrealizedcreditlosses.

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PORTFOLIO AND BENCHMARk RETURNS

Fiscal Year 2010 5-year

Asset ClassPortfolio Returns %

Benchmark Returns %

Portfolio Returns %

Benchmark Returns %

World Equity

Canadian Equity 40.4 40.7 7.5 7.6

Foreign Equity

• US Large Cap Equity 20.1 20.8 -4.0 -1.6

• EAFE Large Cap Equity 24.5 24.5 0.3 0.2

• Small Cap Developed World Equity 29.2 33.5 -2.7 -0.3

• Emerging Markets Equity 47.4 46.0 11.6 11.7

Private Equity 28.8 13.5 -0.9 -6.7

Nominal Fixed Income

Cash & Cash Equivalents 0.7 0.3 2.9 2.9

World Government Bonds (3 years) -14.6 -14.7 2.3 1 2.3 1

Canadian Fixed Income 5.4 5.1 5.2 5.2

Real Return Assets

World Inflation-Linked Bonds -10.0 -9.9 2.0 2.2

Real Estate 0.6 7.4 6.5 7.3

Infrastructure (3.75 years) 7.2 3.7 6.2 1 3.4 1

Total Return 21.5 19.8 4.4 5.3

1 Theserespectiveassetclasseshaveexistedforlessthanfiveyears.Theirrespectivereturnspresentedaresinceinceptionreturns.

ReturnshavebeencalculatedinaccordancewiththeperformancecalculationmethodologyrecommendedbytheCFA Institute.

TheinternalrateofreturnmethodologyisusedtocalculatethereturnsfortheRealEstate,PrivateEquityandInfrastructureassetclasses.

PSPInvestmentshasidentifiedrelevantbenchmarkingforeachassetclass.Theasset-classbenchmarkreturnsareusedinevaluatingtherelativeperformanceofeachassetclass.

Thetotalportfolioreturn includestheperformance impactofasset-allocationandabsolute-returnstrategiesand iscalculatedgrossofdirectexpenses.HedginginvestmentreturnsarenettedagainstthereturnoftherespectivehedgedassetsforthePrivateMarketassetclasses,orincludedinTotalReturn,forthePublicMarkets.

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PUBLIC MARkETS

PublicMarketsiscomposedofCanadianEquity,ForeignEquity,NominalFixedIncomeandWorldInflation-Linkedbonds.

NetassetsinPublicMarketsequitiestotalled$22.7billionattheendoffiscalyear2010,anincreaseof$9.0billionfromthe $13.7billiontotalattheendoffiscalyear2009.

PublicMarketsequitiesearned$5.5 billionininvestmentincomeforareturnof37.9%infiscal year 2010.PSP Investmentsgraduallypurchased$3.5 billioninpublicequitiesoverthecourseoffiscal year 2010,asconfidenceinthereboundofglobalstockmarketsgrew.

Thefirstquarteroffiscalyear2010sawthebeginningofarobustrallyinstockmarketsaroundtheworld.Asaresult,allofPSPInvestments’publicequitiesportfoliosrecordedsignificantgains:CanadianEquitieswereup40.4%;theUSLargeCapEquityportfoliowasup20.1%;andtheEAFELargeCapEquityportfoliowasup24.5%—whiletheSmallCapDevelopedWorldEquityandEmergingMarketsEquityassetclassespostedinvestmentreturnsof29.2%and47.4%,respectively.

NetassetsinCanadianFixedIncome,WorldGovernmentBondsandWorldInflation-LinkedBondstotalled$9.1 billionattheendoffiscalyear 2010,upfrom$8.7billionattheendofthefiscalyear2009.Allfixedincomeportfoliosrecordedpositivereturnsinlocalcurrenciesfortheyear.TheperformanceoftheWorldGovernmentBondandWorldInflation-LinkedBondportfolioswerenegativelyimpactedbythestrengtheningoftheCanadiandollarinfiscalyear 2010againsttheUSdollarandtheEuro.Overall,PublicMarketsfixedincomeportfoliospostedaninvestmentreturnofnegative 3.9%infiscal year 2010.

External equity and fixed-income managers added $433 million of value. A major factor contributing to the increaseinrelativevaluewastheeffectofdecreasedcreditspreadsontheexternallymanageddebtportfolios.Externalequitymanagerssubtracted$36 millionofrelativevalue,whileexternalfixedincomeandotherabsolutereturnmarketstrategiesadded $469 million.Inaddition,internalactivemanagementadded$62 millionofvalue,generatedmainlyfrompositionsinmergerarbitrageandfixed-incomestrategies.

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PRIVATE EqUITY

NetassetsofthePrivateEquityportfoliototalled$5.4 billionattheendoffiscalyear2010,anincreaseof$1.2billionfrom$4.2billionattheendoffiscalyear2009.

PrivateEquitygenerated$1.2billionininvestmentincomeforarateofreturnof28.8%forfiscalyear2010,comparedtothePolicyBenchmarkreturnof13.5%.TherobustPrivateEquityperformanceforfiscalyear2010wasdrivenmainlybythedirectandco-investmentportfolio,whichgenerated$489millionininvestmentincomeduringthefiscalyear,aswellassignificantperformancefromaselectnumberofkeypartners.Onafive-yearbasis,PrivateEquityinvestmentsgeneratedanegative0.9%compoundannualizedreturn,comparedtothePolicyBenchmarknegativereturnof6.7%forthesameperiod.

The Private Equity portfolio has a long-term focus. Investments are held for an average of 5 to 10 years. The PrivateEquityportfolioisinvestedgloballyincollaborationwithstrategicpartnerswithwhomPSPInvestmentshasestablishedrelationships.PSPInvestmentscontinuestodiversifyitsPrivateEquityportfolio,withdirectandco-investmentsplayinganincreasinglyimportantrole.AsatMarch 31, 2010,directandco-investmentsaccountedfor27%ofassetsofthePrivateEquityPortfolio,upfrom21%attheendofthepreviousfiscal year.Directandco-investmentsamountedto$1.4billionattheendoffiscalyear2010.

Overall, thePrivateEquityPortfolio iswelldiversifiedboth fromageographicandsectorperspective.The increase inCanadianandtelecomassetsismainlyrelatedtothestrongperformanceofTelesat.

PRIVATE EqUITY– DIVERSIFICATION BY GEOGRAPHYAs at March 31, 2010 (percent)

UnitedStates 40.0

Europe 23.8

Canada 22.3

Asia 13.9

The majority of the Private Equity portfolio has NorthAmericanExposure.

PRIVATE EqUITY– DIVERSIFICATION BY SECTORAs at March 31, 2010 (percent)

ConsumerDiscretionary 27.9

Telecom 27.1

InformationTechnology 10.1

HealthCare 9.2

MaterialsandIndustrial 8.1

Financial 6.3

Other 11.3

ThemajorityofthePrivateEquityportfolioisinConsumerDiscretionaryandTelecom.

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REAL ESTATE

NetassetsoftheRealEstateportfoliototalled$5.1billionattheendoffiscalyear2010,anincreaseof$465millionfromthe$4.6billionattheendoffiscalyear2009.

RealEstateearned$28millionininvestmentincomeforareturnof0.6%infiscalyear2010,comparedtoaPolicyBenchmarkof7.4%.TheRealEstateportfoliomaintaineditsvalueduringtheyeardespiteanextremelyadversemarket.Thisislargelyattributable toastrategyof investinga largeportionof theportfolio in theCanadianmarket,whichhasshownmorestabilitythanothermarketsduringthisperiod,andtheadoptionofadefensiveassetmixoverthepastthreeyears,withasignificantportionoftheportfoliobeinginvestedinresidential,retirementandlong-term-carefacilities.Onafive-yearbasis,Real Estate investmentshavegenerateda6.5%compoundannualizedreturn,comparedtoaPolicyBenchmarkreturnof 7.3%forthesameperiod.

The year-over-year increase in net assets in Real Estate came mainly from new investments and the deleveraging ofthe portfolio.Duringfiscalyear2010,theRealEstateGroupcontinueditsinvestmentinitiativesinemergingmarketswithadditional investments in Brazil and South Africa and an initial investment in Colombia. To take advantage of marketdislocations,theRealEstateGroupmadeseveralinvestmentsinrealestatedebtinstrumentsintheUS,EuropeanandJapanesemarkets.TheRealEstateGroupalsotookadvantageofhistoricallylowinterestratestoplaceapproximately$260millionoflong-termmortgagefinancingondirectlyownedproperties.

AsatMarch31,2010,directandco-investmentsaccountedfor72%oftheassetsinRealEstate,upfrom71%attheendofthepreviousfiscalyear.

REAL ESTATE– DIVERSIFICATION BY GEOGRAPHYAs at March 31, 2010 (percent)

Canada 52.1

UnitedStates 26.9

Europe 12.9

LatinAmerica 6.3

Asia 1.2

Other 0.6

ThemajorityoftheRealEstateportfolioexposureisinNorthAmerica,mainlyinCanada.

REAL ESTATE– DIVERSIFICATION BY SECTORAs at March 31, 2010 (percent)

Retirement 24.8

Office 17.7

Residential 17.5

Long-TermCare 16.0

High-YieldDebt 7.1

Retail 6.6

Hotel 5.7

Industrial 1.7

Other 2.9

The majority of the Real Estate portfolio exposure is inresidential rental properties (Retirement, Residential,Long-TermCare).

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INFRASTRUCTURE

ThenetassetsoftheInfrastructureportfoliototalled$2.1billionattheendoffiscalyear2010,adecreaseof$373millionfromthe$2.5billionattheendoffiscalyear2009.Althoughtheimpactonperformanceismitigatedbyacurrencyhedgingpolicy,theyear-over-yeardecreaseinnetassetsinInfrastructureismainlyattributabletothestrengtheningoftheCanadiandollar.

Infrastructureearned$158millionininvestmentincomeforareturnof7.2%infiscalyear2010,comparedtothePolicyBenchmarkof3.7%.Asignificantportionoftheportfolioreturnwasgeneratedbycashdistributions(interestanddividends)andrealizationsfromdirectorco-investments.Againthisyear,theperformancewaslargelyattributabletodirectinvestments.Sinceinception(3.75years),Infrastructureinvestmentshavegenerateda6.2%compoundannualizedreturn,comparedtoaPolicyBenchmarkreturn3.4%forthesameperiod.

Infrastructureinvestmentsgenerallyofferpredictableandstablelong-termcashflows.Ownersofinfrastructureinvestmentshavebeenlessinclinedtosellinthecurrentenvironment,resultinginfewtransactionsinthesectorinfiscalyear2010.

Inspiteofvariablemarketconditions,thepastyear’sperformancehasreinforcedthecurrentstrategyofconcentratingondirectinvestments,mainlyintheenergy,utilitiesandtransportationsectors.Theinfrastructuregrouptypicallyholdsasignificantownershippositioninitsassets,inordertobeabletoinfluencestrategicdecision-making.Suchinvestmentsareintendedtobeheldforrelativelylongperiodsoftime,generallymorethaneightyears.

AsatMarch31,2010,directandco-investmentsaccountedfor78%oftheassetsoftheInfrastructurePortfolio,upfrom76%fromthepreviousfiscalyear.

INFRASTRUCTURE– DIVERSIFICATION BY GEOGRAPHYAs at March 31, 2010 (percent)

UnitedStates 31.8

Europe 18.9

UnitedKingdom 18.6

SouthAmerica 15.4

Canada 14.5

Australia 0.8

TheInfrastructureportfolioisdiversifiedmostlyacrosstheAmericasandEurope.

INFRASTRUCTURE– DIVERSIFICATION BY SECTORAs at March 31, 2010 (percent)

Oil&GasStorageandTransport 36.6

Oil&GasExplorationandProduction 17.6

ElectricTransmission 17.1

Transportation 15.0

WaterUtilities 12.5

Other 1.2

Energyinfrastructureandutilitiesconstitutemorethan65%oftheinfrastructureportfolio.

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OPERATING ExPENSES

PSPInvestments’operatingexpensesduringfiscalyear2010totaled$92million,comparedto$86millioninfiscalyear 2009.These costs amounted to 0.23% of average net assets, the same level as in fiscal year 2009. Although assets undermanagementincreasedby37%inthecurrentfiscalyear,operatingcostsinabsolutedollarshaveincreasedmarginallyatarateof7%comparedtofiscalyear2009.Thiscanbeattributedtoacost-controlinitiativeimplementedinthelatterpartoffiscalyear2009thatwasextendedtothefirsthalfofthecurrentfiscalyear.Thecost-controlinitiativewaslaunchedtorespondtothemarketcrisisthatledtoadeclineinassetsundermanagementinfiscalyear 2009.Inthecurrentfiscalyear,financialmarketscommencedtheirrecoveryfromthelowsexperiencedinfiscalyear 2009,resultingina$12.5-billionincreaseinassetsundermanagement,includingnetcontributions,attheendoffiscalyear 2010.Operatingcostsforfiscalyear 2011areexpectedtoincreaseasaresultoftheexpectedgrowthinassetsundermanagementandacontinuedshifttowardsinternallyactivelymanagedassetsinPublicMarketsaswellasanincreaseindirectinvestmentsinthePrivateMarketassetclasses.Thishastheeffectofincreasinginternaloperatingexpenses,duetoincreasesinheadcountandrelatedexpenses,butreducingexternalinvestmentmanagementfees.Operatingexpensesexcludeexternalinvestmentmanagementfeesandtransactioncosts,whichareappliedasareductiontoinvestmentincome.

Totalcostsasapercentageofaveragenetassetsundermanagementareaffectedbythesizeandcomplexityofinvestmentactivities.Sizeisthemostcriticalfactorthatimpactsafund’scoststructure,particularlyonapercentage-of-assetsbasis.Thelargeragivenfund,thehigheraretheeconomiesofscale.InvestmentactivitiesundertakenbyPSPInvestmentsareascomplexanddiversifiedasthoseoflargerfunds/plansbut,asyet,withoutthecriticalassetbaseoverwhichtospreadtherequisitecosts.Withassetsforecasttocontinueincreasingoverthenextfewyears,PSPInvestments’expenseratios(asapercentageofassets)areexpectedtocontinuetograduallydecrease.

PSPInvestmentsconductsanumberofbenchmarkingexercisestoensurethatitsoperatingexpensesarereasonableandcompetitivewhencomparedtoitspeers.

INTERNATIONAL FINANCIAL REPORTING STANdARdS (IFRS)

In February 2008, the Accounting Standards Board (AcSB) of Canada confirmed that Canadian Generally AcceptedAccountingPrinciples(GAAP)forpubliclyaccountableenterpriseswillconvergewithInternationalFinancialReportingStandards(IFRS)effectiveJanuary1,2011.Inresponsetothischange,PSPInvestmentshasdevelopedatransitionplanthatwouldallowittoprepareandpresentitsMarch 31, 2012consolidatedfinancialstatementsunderIFRS.

InanalyzingthevariousimpactsofitstransitiontoIFRS,PSPInvestmentsconcludedthattherequirementtoconsolidateitscontrolledinvestmentsrankedasoneofthemostsignificantofsuchimpacts.

InApril2010,theAcSBofCanadaissuedSection4600,“PensionPlans”oftheCanadianInstituteofCharteredAccountants(CICA)HandbookrequiringpensionplansinCanadatofollowthisstandardratherthanconverttoIFRSinthesamefashionasotherpubliclyaccountableenterprises.UnderSection4600,pensionplanswouldcontinuetoaccountforandreporttheirinvestmentsatfairvalueaswaspreviouslydoneunderSection 4100,“PensionPlans”oftheCICAHandbook.TheprovisionsofSection4600applytoannualfinancialstatementsrelatingtofiscalyearsbeginningonorafterJanuary1,2011.

Concurrent with the issuance of Section 4600, the AcSB of Canada issued an exposure draft that proposed a scopeexpansiontoincludeentities,suchasPSPInvestments,thatareseparatefrompensionplansandwhosesolepurposeistoholdandinvestassetsreceivedfromoneormorepensionplans,butdoesnotitselfhaveapensionobligation.Pursuanttotheexposuredraft,PSPInvestmentswouldbeexemptfromtheIFRSrequirementtoconsolidateitscontrolledinvestments.TheAcSBhasindicatedthatitanticipatesreachingadecisionconcerningtheexposuredraftinJune 2010.

ManagementiscurrentlymonitoringtheoutcomeofthisexposuredraftandevaluatingitsimpactonPSPInvestments’consolidatedfinancialstatementsaswellastheIFRStransitionplan.

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ENTERPRISE RISK MANAGEMENT

As the manager of public pension assets, PSP Investments is responsible for acting in the best interest of the contributors

and beneficiaries of the Plans and maximizing returns without undue risk of loss. PSP Investments acknowledges that

it must take risks to achieve its legislated mandate and that the management of the full spectrum of risks must be

integrated on an enterprise-wide basis.

Asaresult,PSPInvestmentshasestablishedanenterpriseriskmanagementframeworktoprovideastructureforidentifying,evaluatingandmanagingitsvariousfinancialandnon-financialrisks.TheframeworkisacorecomponentofPSPInvestments’EnterpriseRiskPolicy.The policyalsodefinesPSP Investments’ responsibilitiesrelatingto itsenterpriserisksfromtheperspectiveoftheBoardanditscommittees,themanagementcommittees,andtheinvestmentgroupsandsupportgroupswithinPSPInvestments.InadditiontotheEnterpriseRiskManagementPolicy,anInvestmentRiskManagementPolicyandanOperationalRiskManagementPolicyhavealsobeenputinplacetodealwiththespecificcharateristicsoftheserisks.

PSPInvestments’enterpriseriskmanagementframeworkisguidedbythefollowingprinciples:

• Promotearisk-awareculture;

• EstablishandimplementariskmanagementframeworkthatenablesPSPInvestmentstoidentify,assess,manage,andmonitorenterpriserisks;

• Integrateenterpriseriskmanagementintostrategicandfinancialobjectives;

• Operationalizesoundriskmanagementprocesses.

AllofPSPInvestments’riskpolicieswerereviewedandrefinedduringfiscalyear2010,basedonexperiencetodateandPSPInvestments’pushforcontinuousimprovement.

PSPInvestmentsfacessixprincipalenterpriserisksinherenttoitsactivitiesandenvironmentthathavebeencategorizedasfinancialandnon-financialrisks.

FINANCIAL RISkS

• Investmentrisk:theriskoflossinherentinachievinginvestmentobjectives,includingmarket,creditandcounterparty,concentration,liquidityandfinancing,andleveragerisks.PSPInvestments’mandateistomanageinvestmentrisksrecognizingtheircontributionstopensionrisks.However,PSPInvestmentsisnotdirectlyresponsibleformanagingpension risks.

RISk MANAGEMENT

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NON-FINANCIAL RISkS

• Stakeholder risk: the risk associated with PSP Investments’ particular status as a crown corporation and anyrelated legislation.

• Strategicrisk:theriskofnotachievingstrategicgoalsorbusinessobjectives.

• Operationalrisk:theriskofadirectorindirectlossresultingfrominadequateorfailedinternalprocesses,peopleorsystems,orfromexternalevents.

• Legalandregulatoryrisk:theriskassociatedwiththefailuretocomplywithorfailuretoadapttocurrentorchanginglegislation,regulationsorothermandatoryindustrypractices.

• Reputationrisk:theriskthatanactivityundertakenbyPSPInvestmentsoritsrepresentativesimpairsitsimageinthecommunityorlowerspublicopinionandstakeholderconfidenceinit,resultingintheinabilitytoachieveitsobjectives.

Legend: EnterpriseRisk

Infiscalyear2010,PSPInvestmentscontinuedtheimplementationofitsenterpriseriskmanagementframework,alignedwithitsthree-yearstrategicplan.Keyaccomplishmentsforthefiscalyearincludedthefollowing:

• RealignedandenhancedtheRiskManagementGroupcapabilitiesbyconsolidatingvaluation,marketandcreditriskfunctionstoimprovefocusonthespecificriskprofileofPSPInvestments’assetclasses;

• Refined risk limits and formalized the attribution of active risk across asset classes through a structured riskbudget process;

• Improvedcapabilitiesinsensitivityanalysisandstresstestingtocomplementvalue-at-risk(VaR)measurementandprovideamorecomprehensivemeasureofinvestmentrisk;

• Enhancedmonitoringandreportingofleverageactivities,treasuryactivitiesandliquidityrisk.

STAkEHOLDER RISk

OPERATIONAL RISk

STRATEGIC RISk

LEGAL AND REGULATORY RISk

Human Resources

Management Risk

Systems and Data

Management Risk

Business Disruption

Risk

Process and Information

Management Risk

Theft and Fraud

Risk

Model Risk

Valuation Risk

REPUTATION RISk

NON-FINANCIAL RISkS

INVESTMENT RISkS

Market Risk

Concentration Risk

Credit and Counterparty Risk

Liquidity and Financing Risk

Leverage Risk

FINANCIAL RISkS

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RISK MANAGEMENT GOVERNANCE

PSPInvestmentspromotesarisk-awarecultureinvolvingallemployees.Seniormanagementandemployeesarenotonlyactiveparticipantsinriskidentification,butalsoinriskevaluation,management,monitoringandreporting.

TheBoardofDirectorscontributestoriskoversightby:

• Establishingtheinvestmentobjectives,investmentpolicyandpolicyportfolio;

• ParticipatinginthedefinitionofPSPInvestments’riskphilosophy;

• KnowingtheextenttowhichPSPInvestments’managementhasestablishedeffectiveenterpriseriskmanagementwithintheorganization;

• Reviewingthecorporateriskprofileprovidedbymanagement;and

• BeingapprisedofthemostsignificantrisksandhowPSPInvestments’managementisrespondingtothem.

Inordertooverseeandmanagerisksrelatedtoitsinvestmentsandoperations,seniormanagementhascreatedvariouscommittees, including the Management Investment Committee, Management Operations Committee, Risk SteeringCommittee,theValuationCommittee,NewProductCommitteeandtheInformationTechnologyGovernanceCommittee.

INVESTMENT RISK MANAGEMENT

TheInvestmentRiskManagementPolicyhasbeenrevisedandisanintegralcomponentofPSPInvestments’riskmanagementprogramtosupportthemanagementofrisksincurredthroughthefund’sinvestmentprocesses.ThePolicyestablishesaninvestmentriskmanagementframework,withagoalofensuringthatinvestmentactivitiesrespecttheriskphilosophyofPSPInvestments.Theframeworkcoversthekeyelementsrequiredtoestablishacomprehensiveinvestmentriskmanagementprocess.Theseinclude:

• Riskmeasurement;

• Riskbudgeting;

• Risklimitsandcontrols;

• Risklimitescalationprotocols;and

• Riskreporting.

OPERATIONAL RISK MANAGEMENT

OperationalriskisoneofthekeyenterpriserisksthatPSPInvestmentsisexposedto.TheOperationalRiskManagementPolicycurrentlyinplacewithinPSPInvestmentsdefinestheguidingprinciplesandframesboundariestoprudentlyandproactivelymanagetherisksinherenttoPSPInvestments’ongoingoperations.

OperationalriskmanagementatPSPInvestmentsisstructuredaroundseventypesofrisk:

• Humanresourcesmanagement;

• Processandinformationmanagement;

• SystemsandDataManagement;

• Theftandfraud;

• Businessdisruption;

• Modelrisk;and

• Valuationrisk.

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INTERNAL AUDIT AND COMPLIANCE

INTERNAL AUdIT

Internal Audit is an independent objective assurance and consulting activity designed to add value and improve

PSP Investments’ operations. It helps to achieve PSP Investments’ objectives by using a systematic disciplined approach

to evaluate and improve the effectiveness of processes, systems, risk management, control and governance processes.

In order to ensure the independence required for Internal Audit to play its role effectively, the group reports functionally

to the Audit and Conflicts Committee of the Board of Directors, and administratively to the Executive Vice President,

Chief Operating Officer and Chief Financial Officer.

INTERNAL CONTROLS

TheinternalcontrolenvironmentisderivedfromtheCommitteeofSponsoringOrganizations(COSO)model.COSOdefinesinternalcontrolasaprocess,effectedbyanentity’sboardofdirectors,managementandpersonnel,designedtoprovidereasonableassuranceregardingtheachievementofobjectivesinthefollowingcategories:

• Effectivenessandefficiencyofoperations;

• Reliabilityoffinancialreporting;

• Compliancewithapplicablelawsandregulations.

Assistedbyexternallycontractedinternalauditors,PSPInvestmentsreviewsannuallyitscontrolenvironmentaswellaskeycontrolsinall departmentsasrequiredunderSection28oftheAct.

Thecontrolfunctionsarecarriedoutatvariouslevelsandinvariousdepartments:investmentandoperations’managers,financeandcontrol,riskmanagement,internalauditandcompliance.EachcontrolisdesignedtoensurethatPSP Investments’policiesandproceduresarerespectedandappliedconsistently.AllpoliciesareapprovedbytheBoardofDirectorsandaresupportedbyproceduresthatprovideaframeworkfortheirimplementation.

Infiscalyear2010,theGovernanceCommitteeoftheBoardofDirectorsundertooktoconductareviewofthepolicy-makingprocessatPSP Investmentstoensurethatcarefulconsiderationisgivenwhendraftingandrevisingpoliciestofindingtheappropriatemixofprinciplesandboundaries,consideringthescale,scopeandcomplexityofPSPInvestments’activitiesandorganizationalstructure.

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COMPLIANCE

PSPInvestmentsmustactwithintegrityandmaintainhighethicalstandardsatalltimes.TheobjectiveoftheComplianceDepartment,inconjunctionwiththeLegalDepartment,istoensurestringentcomplianceofPSP Investmentswithitspoliciesandproceduresaswellasrelevantlawsandstatutoryrequirements.Compliancewithitsinternalinvestmentpoliciesandprocedures,ismainlyachievedthroughdailymonitoringoftransactions.ProcessesarealsoinplacetomonitorcompliancewiththeCodeofConductforOfficers,EmployeesandOthers(the“Codeof Conduct”).

TheCodeofConductservesasaframeworkthatprovidesofficers,employeesandotherssubjecttotheCodeofConductwithafullunderstandingoftheorganization’scorporateprinciplesandvalueswiththeaimofassistingthemindeterminingappropriatebusinesspracticesandbehaviour.

TheCodeofConductincludesawhistle-blowingprovisiondesignedtoencourageofficers,employeesandotherstostepforwardandreportanyfinancialfraudorotherfraudulentandinappropriateactivities.Amongotherthings,theCodeofConductdealswithoverallhonestyandintegrity;personalandprofessionalconduct;compliancewiththeCodeofConductandthelaw;conflictofinterestprocedures;thereportingofpersonalinvestmenttransactions;gifts,hospitalityandotherbenefits;externalappointmentsoremploymentwithinanyorganizationorassociation;politicalactivities;anddealingswithpublicofficials.

TheAuditandConflictsCommitteeisresponsibleformonitoringtheapplicationoftheCodeofConduct.Managementreportsquarterlyoncompliancematters,includingcompliancewiththeCodeofConduct,totheAuditandConflictsCommittee.TheCodemaybeviewedonPSP Investments’websitewww.investpsp.caunder“Governance–Codeof Conduct”.

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GOVERNANCE

Effective governance is essential to safeguard the capital entrusted to PSP Investments and to ensure that appropriate

objectives are pursued and achieved, consistent with the fulfillment of the Corporation’s legislated mandate. This section

describes PSP Investments’ governance model, including PSP Investments’ mandate, the roles of the Board of Directors

and Board committees and key policies that guide the organization’s activities and behaviour.

LEGISLATEd MANdATE

EffectiveApril1,2000,thefederalgovernmentcreatedthreenewpensionfundaccounts—oneforeachofthePublic Service,theCanadianForcesandtheRoyalCanadianMountedPolice(RCMP)pensionplans.EmployerandemployeecontributionsinrespectofservicesinceApril1,2000foreachplan,arecreditedtothesepensionfundaccounts.Amountsequaltothenetbalancesoftheseaccounts(thatis,contributionsminusbenefitspaymentsforservicesinceApril1,2000,andplanadministrationexpenses)aretransferredtoseparateaccountsatPSP Investments,tobeinvestedinaccordancewiththeapprovedinvestmentpolicyandstrategy.

OnMarch1,2007,thefederalgovernmentestablishedtheReserveForcePensionPlan.Sincethatdate,anamountequaltothenetbalanceofthepensionfundaccountcreatedforthisplanistransferredtoPSP InvestmentspursuanttothetermsoftheestablishingregulationandwithinthemeaningofthePublic Sector Pension Investment Board Act(“theAct”).

Thegovernmentmanagesandadministersthesepensionplans.ThePresidentoftheTreasuryBoardisresponsibleforthePublicServicePlan,theMinisterofNationalDefencefortheCanadianForcesPlanandtheReserveForcePlan,andtheMinisterofPublicSafetyfortheRCMPPlan.

PSP Investments’mandateissetforthintheAct.Thismandateistwofold;itconsistsofmanagingfundstransferredfromthePublicService,theCanadianForces,theRCMPandtheReserveForcepensionplans(the“Plans”)inthebestinterestsofthecontributorsandbeneficiaries,andinvestingthefundswithaviewtoachievingamaximumrateofreturnwithoutundueriskofloss,havingregardtothefunding,policiesandrequirementsofthePlansandtheabilityofthosePlanstomeettheirfinancialobligations.

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ROLES ANd RESPONSIBILITIES OF THE BOARd OF dIRECTORSANd BOARd COMMITTEES

BOARD OF DIRECTORS

Inordertoensurethatlegislativeandregulatoryobjectivesaremet,theBoardofDirectorshasdefineditsroletoinclude,amongotherresponsibilities,thefollowing:

• Appointment and termination of the President and CEO;

• Annual review and approval of proposed amendments to the written Statement of Investment Policies, Standards and Procedures (SIP&P);

• Approval of strategies for achieving investment performance objectives and benchmarks against which to measure performance;

• Adoption of appropriate policies for the proper conduct and management of PSP Investments, including a Code of Conduct for Officers and Employees and Others, and a Code of Conduct for Directors;

• Ensuring that effective investment and operations risk policies are in place;

• Approval of human resources and compensation policies;

• Establishment of appropriate performance evaluation processes for the Board of Directors, the President and CEO and other members of senior management; and

• Approval of quarterly and annual financial statements for each underlying Pension Plan Account and for PSP Investments as a whole.

TheTermsofReferencedescribingtherolesandresponsibilitiesoftheBoardChairandtheBoardofDirectorsanditscommitteesmaybeviewedintheirentiretyonPSP Investments’websitewww.investpsp.caunder“Governance–Duties &Responsibilities”.Everythreeyears,agovernancereviewisconductedtoassesstheextenttowhichPSP Investments’TermsofReferencearebeingfulfilledand,basedontheexamination,agovernancereportissubmittedtotheGovernanceCommittee.ThepurposeofthisreportistoassisttheBoardofDirectorsinensuringthateachofthekeyfiduciarieshascarriedoutitsdutiesandresponsibilitiesassetoutinitsTermsofReference.Agovernancereviewwasconductedattheendoffiscalyear2010.ThereportproducedbyanindependentconsultantconcludedthattheTermsofReferenceareconsistentwiththerequirementsoftheActandformpartofaninternallyconsistentstructurereflectingbestpracticesfororganizationswithmandatesandstructuressimilartothoseofPSP Investments.

TheReportalsoconfirmedthattheBoardofDirectorsanditscommitteeshavedealtwithallmaterialmatterssetoutinitsTermsofReference.

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BOARD COMMITTEES

TheBoardofDirectorshasestablishedfourstandingcommitteestoassistinthefulfillmentofitsobligations.ASpecialCommitteewascreatedin2008toassessthelinkageofthePlans’pensionliabilities.TheSpecialCommitteewaswounduponFebruary9,2010,anditsformerresponsibilitiestransferredtotheGovernanceCommittee.

• Investment Committee

• Audit and Conflicts Committee

• Human Resources and Compensation Committee

• Governance Committee

• Special Committee (wound up on February 9, 2010)

INVESTMENT COMMITTEE

The InvestmentCommittee is responsible foroverseeingthe investmentmanagement functionofPSP Investments. Inparticular,theInvestmentCommitteeperformsthedutiesthatareassignedtoitbytheBoardofDirectorsincluding,amongothers,theapprovalofallinvestmentproposalsandrelatedborrowings,andtheexecutionofthedocumentationrelatedtosuchinvestmentsandborrowings,exceptifPSP Investments’DelegationofAuthorityprovidesotherwise.TheInvestmentCommitteeisalsoresponsibleforrecommendingtotheBoardofDirectorsawrittenStatementofInvestmentPolicies,StandardsandProcedures(SIP&P) foreachPlan,andforconductinganannual reviewof theSIP&Pand, ifnecessary,recommendingchanges.Finally,anothersignificantresponsibilityoftheInvestmentCommitteeentailsapprovaloftheengagementofexternalinvestmentmanagersempoweredwithdiscretionaryauthoritytoinvestPSP Investments’assets.

TheInvestmentCommitteeiscomprisedofallmembersoftheBoardofDirectorsandischairedbyMr.AnthonyR.Gage.

AUDIT AND CONFLICTS COMMITTEE

TheAuditandConflictsCommittee’sroleisgenerallytoreviewtheadequacyandeffectivenessofPSP Investments’systemofinternalcontrols.ThisincludesinternalcontrolsovertheaccountingandfinancialreportingsystemswithinPSP Investments,aswellasinternalinformationsystemcontrolsandsecurity.TheAuditandConflictsCommitteeisalsoinchargeofmonitoringtheapplicationoftheCodeofConductforOfficers,EmployeesandOthers.ManyofthedutiesoftheAuditandConflictsCommitteearelaidoutintheAct.Inadditiontothosementionedabove,thesedutiesinclude:

• Reviewing quarterly and annual financial statements of each underlying Pension Plan Account and of PSP Investments as a whole, recommending them to the Board for approval and discussing any letters to management regarding any significant concerns on the part of the joint auditors;

• Meeting with PSP Investments’ joint auditors to discuss PSP Investments’ annual financial statements and the auditors’ report; and

• Adopting and maintaining an appropriate whistle-blowing mechanism for reporting financial fraud or other fraudulent and inappropriate activities.

OnMarch31,2010,theAuditandConflictsCommitteewascomprisedofthefollowingDirectors1:

• William A. MacKinnon, Chair

• Jamie Baillie

• Cheryl Barker

• Lynn Haight

1 Mr.KeithMartellwastheChairoftheAuditandConflictsCommitteeuntilJanuary14,2010.Messrs.AnilRastogiandWilliamA.SaundersonweremembersoftheAudit andConflictsCommitteeupuntilApril 3,2009andJanuary14,2010,respectively.

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HUMAN RESOURCES AND COMPENSATION COMMITTEE

TheBoardofDirectorsstronglybelievesintheimportanceofthehumanresourcesfunctiontothesuccessofPSP Investments.Accordingly, the Human Resources and Compensation Committee assists the Board of Directors in ensuring that thenecessarypoliciesandproceduresareinplacetoefficientlyandeffectivelymanagePSP Investments’humanresourcesandtoofferallemployeesfairandcompetitivecompensationalignedwithperformance.Inthisspirit,theHumanResourcesandCompensationCommitteeisresponsiblefor:

• Making recommendations to the Board of Directors regarding PSP Investments’ human resources, training and compensation policies, and periodically reviewing such policies and recommending changes as necessary;

• Reviewing annually, on an aggregate basis, the total compensation of all employees of PSP Investments;

• Reviewing annually, the performance evaluations of the President and CEO and other Officers of PSP Investments and making recommendations to the Board on the remuneration of these individuals;

• Ensuring the compliance of PSP Investments’ human resources policies and practices with applicable legislation; and

• Reviewing PSP Investments’ succession planning and reporting to the Board of Directors on such planning.

OnMarch31,2010,theHumanResourcesandCompensationCommitteewascomprisedofthefollowingDirectors:

• Michael P. Mueller, Chair

• Bob Baldwin

• Léon Courville

• Anthony R. Gage

• Jean Lefebvre

GOVERNANCE COMMITTEE

TheGovernanceCommittee’sroleisgenerallytoassisttheBoardofDirectorsindevelopingandmonitoringPSP Investments’approachtoitsowngovernance.TheBoardofDirectorshasdesignatedtheGovernanceCommitteetomonitortheapplicationoftheCodeofConductforDirectors.AmongthemoresignificantoftheGovernanceCommittee’sdutiesarethefollowing:

• Monitoring and assessing the relationship between the Board of Directors and Management, defining the limits to Management’s responsibilities and ensuring that the Board of Directors functions independently of Management;

• Reviewing at least every two years, with the assistance and input of the President and CEO and the Board Chair of PSP Investments, the Terms of Reference for the Board of Directors and the committees of the Board of Directors, and recommending to the Board such amendments as may be necessary or advisable;

• Developing and recommending to the Board of Directors for its approval, the by-laws and governance-related policies; and

• Overseeing the implementation of procedures for assessing the effectiveness of the Board of Directors as a whole and for conducting a peer review.

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OnMarch31,2010,theGovernanceCommitteewascomprisedofthefollowingDirectors2:

• Bob Baldwin, Chair

• Jamie Baillie

• Cheryl Barker

• Léon Courville

ACCOUNTABILITY ANd REPORTING TO GOVERNMENT

PSP Investments’PresidentandCEOisappointedbyandreportstotheBoardofDirectors.Inturn,theBoardofDirectorsreportstoParliamentthroughthePresidentoftheTreasuryBoard,whoisresponsibleforPSP Investments’legislation.

ThePresidentoftheTreasuryBoardisalsorequiredtotablePSP Investments’annualreportinParliament.PSP InvestmentsisrequiredtoprovideitsannualreportaswellasquarterlyfinancialstatementstothePresidentoftheTreasuryBoard,theMinisterofNationalDefenceandtheMinisterofPublicSafety.

ThePresidentandCEOandtheBoardChairofPSP InvestmentsarerequiredtomeetonceayearwithAdvisoryCommitteesappointedtooverseethePlans.Since2009,PSP Investments isrequiredtoholdapublicmeetingonanannualbasis.PSP InvestmentsalsocommunicatesonanongoingbasiswiththeChiefActuaryofCanadaandwithTreasuryBoardofficers.

Pursuant to the Financial Administration Act (FAA), Deloitte & Touche LLP and the Auditor General of Canada serveas jointauditorsofPSP Investmentsandareresponsible,amongstotherduties,forconductingaSpecialExamination.PSP InvestmentsissubjecttoaSpecialExaminationheldatleastevery10years,asprovidedforintheFAA.AsrecommendedbytheBoardofDirectors,PSP Investments’jointauditorswillbeconductingaSpecialExaminationinfiscalyear2011todetermineifPSP Investments’financialandmanagementcontrols,informationsystemsandmanagementpracticesweremaintainedinamannerthatprovidesreasonableassurancethattheymettherequirementsofparagraph131(2)(aandc)oftheFAA.ThemostrecentSpecialExaminationinrespectofPSP Investmentswasconductedinfiscalyear2006.Theresults,whichwerepresentedinaSpecialExaminationReportdatedNovember15,2005,indicatedthattherewerenosignificantdeficienciesinPSP Investments’systemsandpractices.

dIRECTORS’ SELECTION

TheGovernorinCouncilappointsallmembersoftheBoardofDirectorsontherecommendationofthePresidentoftheTreasuryBoard.Qualifiedcandidates fordirectorshipareselectedandrecommendedto thePresidentof theTreasuryBoardbyaneight-memberNominatingCommitteeestablishedbythePresidentoftheTreasuryBoard.TheNominatingCommitteeoperatesseparatelyfromtheBoardofDirectorsandtheTreasuryBoard.PSP Investments’legislationdisqualifiesaspotentialDirectorsmembersoftheSenate,theHouseofCommonsandprovinciallegislatures,aswellasemployeesofPSP InvestmentsorthefederalgovernmentandthoseentitledtobenefitsfromthePlans.Directorsholdofficeduringgoodbehaviourforatermnotexceedingfouryears.OntheexpiryofthetermofanincumbentDirector,theincumbentcontinuesinofficeuntilheorsheisreappointedorasuccessorisappointed.

AllDirectorsofPSP Investmentsmusthaveanexcellentunderstandingoftheroleofadirectorandpossessageneralknowledgeofpensionsandabroadknowledgeofinvestmentmanagementanditsrelatedrisks.TheBoardofDirectorsplaysanactiveroleinguidingPSP Investments.Therefore,asubstantialtimecommitmentisexpectedofBoardmembers,particularlytheBoardChairandtheChairsofBoardcommittees,formeetings,travelandpreparationformeetings.

2 Mr.AnilRastogiwasamemberoftheGovernanceCommitteeupuntilApril3,2009.Mr.WilliamA.SaundersonwasamemberoftheGovernanceCommitteeupuntilJanuary14,2010.

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TheActprovidesthatPSP Investments’BoardofDirectors iscomprisedof 12members includingtheBoardChair.OnMarch 8, 2010, the President of the Treasury Board announced a reduction of 245 Governor in Council appointmentsacrosstheGovernmentofCanada.Furthertothisannouncement,changestotheActtoreducethecompositionoftheBoardofDirectorsfrom12to11 memberswerealsoannounced. Infiscalyear2010,twomemberswereappointedandthreeDirectorsleftPSP Investments’Board.OnJanuary14,2010theGovernorinCouncilappointedMs. Lynn HaightandMr. William A. MacKinnonasDirectorsofPSP Investmentsfortermsoffouryears.ThetermsofMessrs.Keith MartellandWilliamA.Saundersonexpiredonthesamedate.OnApril 3, 2009,Mr. Anil RastogiresignedasaDirectorofPSP Investments.Finally,duringthepastfiscalyear,thetermsofMs.CherylBarker,Messrs.Anthony R. GageandMichael P. Muellerwereextendedforanadditionalfouryears.OnMarch 31, 2010,10 boardpositionswereoccupiedandonevacantpositionwasintheprocessofbeingfilled.

TheCanadiansecuritiesregulatorsadoptedadefinitionof“independentdirector”applicabletopubliclylistedissuers.Inthecontext,“independentdirector”hasbeendefinedasanindividualwhohasnodirectorindirectmaterialrelationshipwiththeissueranda“materialrelationship”hasbeendefinedasarelationshipwhichcould,intheviewoftheissuersboardofdirectors,bereasonablyexpectedtointerferewiththeexerciseofanindividual’sindependentjudgement.AlthoughPSP Investments isnot subject to this regulation, based on theabove definition, allDirectors ofPSP Investments areconsideredindependent.

AshortbiographyofeachoftheDirectorsasofMarch31,2010canbefoundbeginningonpage55.

ASSESSMENT OF BOARd PERFORMANCE

TheregulationsadoptedundertheActrequiretheBoardofDirectorstosetoutintheannualreporttheproceduresinplacefortheassessmentofitsownperformance.Inaccordancewiththoserequirements,theGovernanceCommitteeimplementedaformalevaluationprocessdesignedtoencouragefrankandconfidentialdiscussionsbetweentheChairoftheBoardandindividualDirectors,aswellasbetweentheChairoftheBoardandthemanagementteamofPSP Investments.

Tofacilitatetheassessmentprocess,procedureshavebeenputinplacetoevaluatetheperformanceoftheChairoftheBoard,theChairsofBoardcommittees,individualBoardmembersandtheBoardasawhole.EveryDirectoraswellasthePresidentandCEOandcertainmembersofthemanagementteamparticipateintheevaluationprocess.TheChairoftheGovernanceCommitteepresents the resultsof theevaluation to theBoardofDirectors.TheensuingBoarddiscussion focusesonconcernsandopportunitiesforimprovement,whatisworkingproperlyandwhathasimprovedsinceprevious assessments.

COdE OF CONdUCT FOR dIRECTORS

TheCodeofConductforDirectorsisdesignedtoprovideaworkableprocessforidentifying,minimizingandresolvingpotential conflicts of interest. Derived from the Act and the Conflict of Interest Act, the Code of Conduct sets out indetailDirectors’statutoryandfiduciarydutiesrelatingtoconflictsofinterestandhelpsensurethatDirectorshaveafullunderstandingandappreciationofPSP Investments’principlesandvalues.Ultimately,theCodeofConductforDirectorsaimstoassistDirectorsindeterminingappropriatebusinesspracticesandbehaviour.

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TheCodeofConductforDirectors,amongotherthings:

• Requires Directors to give written notice to the Board of Directors of the nature and extent of their interest in a transaction or proposed transaction;

• Prohibits Directors from voting on a resolution or participating in a discussion in any circumstances if they have a conflict of interest;

• Requires the disclosure of any other business activity in which they participate which directly or indirectly affects PSP Investments’ activities or is in competition with PSP Investments’ activities; and

• Requires the Directors to confirm annually that they have not traded securities on the restricted list, except as permitted under the Code of Conduct for Directors.

TheGovernanceCommitteeisresponsibleformonitoringtheapplicationoftheCodeofConductforDirectors.TheCodeofConductforDirectorsmaybeviewedinitsentiretyonPSP Investments’websitewww.investpsp.caunder“Governance–CodeofConductforDirectors”.

dIRECTOR EdUCATION PROGRAM

TheActrequirestheNominatingCommitteetohaveregardtothedesirabilityofhavingontheBoardofDirectorsasufficientnumberofDirectorswithprovenfinancialabilityorrelevantworkexperiencesuchthatPSP Investmentswillbeabletoeffectivelyachieveitsobjectives.ThelegislationthencallsforDirectorswithrelevantexpertisetousetheirknowledgeorskillsinexercisingtheirduties.

ToenhanceDirectors’financial knowledgeandskills,PSP InvestmentscreatedaDirectorEducationProgram. Infiscalyear 2010, each Director was allocated an individual budget equal to 15% of the retainer and meeting fees he or sheearnedinfiscalyear2009,tobeusedprimarilytostrengthentheirunderstandingofinvestmentmanagement.Aswellasprovidingindividualcourses,conferencesandreadingmaterial,theDirectorEducationProgramstagesgrouptrainingsessionsthedaybeforeeachregularBoardofDirectors’meeting.Duringthesessions,distinguishedspeakersareinvitedtomakepresentationsonavarietyoftopicsthatcontributetotheindividualandcollectiveexpertiseofBoardmembers.

dIRECTORS’ COMPENSATION

TheapproachtodirectorremunerationadoptedbytheBoardofDirectorsreflectskeyrequirementsoftheAct.ThefirstrequirementisthattheBoardshouldincludeasufficientnumberofDirectorswithprovenfinancialabilityorrelevantworkexperiencesuchthatPSP Investmentswillbeabletoeffectivelyachieveitsobjectives.ThesecondrequirementisthatDirectors’compensationshouldbeset“havingregardtotheremunerationreceivedbypersonshavingsimilarresponsibilitiesandengagedinsimilaractivities”.

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TheBoardreviewsDirectors’compensationonceeverytwoyearsandconsidersanychangesthatmaybewarrantedbasedonareportandrecommendationsprovidedbytheGovernanceCommittee.Themostrecentreviewwasconductedinfiscalyear2009withtheassistanceofanindependentcompensationconsultant.

The following remuneration for Directors was approved by the Board of Directors in fiscal year 2009, and the Boardsubsequentlyagreedtherewouldbenoincreaseintheseamountsforfiscalyears2010and2011:

• AnnualretainerfortheBoardChair:$125,000;

• AnnualretainerforeachDirectorotherthantheBoardChair:$27,500;

• AttendancefeeforeachBoardmeeting:$1,500;

• Attendancefeeforeachcommitteemeeting:$1,250;

• AnnualretainerforeachChairofacommitteeoftheBoardofDirectors:$8,750;

• Additionalmeeting fee foreachDirectorwhoattendsameeting inperson if theDirector’sprimaryresidence isoutside QuébecorOntario,orinanycasewhereaBoardofDirectorsorcommitteemeetingisheldinalocationoutsideQuébecandrequiresaDirectortotravelmorethanthreehoursawayfromhisorherprimaryresidence:$1,500.

DirectorsofPSP Investmentsarenotentitledtoadditionalcompensationintheformofretirementbenefitsorshort-termorlong-termincentives.

TheBoardofDirectorsmeteighttimesduringfiscalyear2010anditscommitteesheld30meetings.ThistranslatedintototalremunerationforDirectorsof$736,032.Thetablesonthefollowingtwopagesillustrateandbreakdowntheabove-mentioned information.

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ATTENdANCE OF dIRECTORSBOARd ANd COMMITTEES – FISCAL YEAR 2010

Board of Directors

Audit and Conflicts

CommitteeGovernance Committee

Human Resources and Compensation

CommitteeInvestment Committee

Special Committee 4Regular Special Regular Special Regular Special Regular Special Regular

Number of meetings Fiscal Year 2010

7 1 6 1 5 2 6 1 7 2

Jamie Baillie 7/7 1/1 6/6 1/1 5/5 2/2 7/7

Bob Baldwin 7/7 1/1 5/5 2/2 6/6 1/1 7/7 1/2

Cheryl Barker 7/7 1/1 6/6 1/1 5/5 2/2 7/7

Paul Cantor 1 7/7 1/1 7/7

Léon Courville 7/7 1/1 5/5 2/2 6/6 1/1 7/7

Anthony R. Gage 7/7 1/1 6/6 1/1 7/7 2/2

Lynn Haight 2 1/1 – 2/2 – 2/2

Jean Lefebvre 6/7 1/1 5/6 1/1 6/7 2/2

William A. MacKinnon 3 0/1 – 1/2 – 2/2

Keith G. Martell 5 5/6 1/1 4/4 1/1 4/5

Michael P. Mueller 7/7 1/1 6/6 1/1 7/7 2/2

Anil K. Rastogi 5 1/1 – 1/1 – 1/1 1/1

William A. Saunderson 5 4/6 0/1 4/4 0/1 4/4 0/1 4/5

1 Mr.CantorisnotamemberoftheAuditandConflictsCommittee,theGovernanceCommittee,theHumanResourcesandCompensationCommitteeortheSpecialCommittee,butasBoardChairhemayattendallcommitteemeetings.

2 Ms.HaightwasappointedDirectorandamemberoftheInvestmentCommitteeonJanuary14,2010.ShewasappointedasamemberoftheAuditandConflictsCommitteeonFebruary 9, 2010.

3 Mr.MacKinnonwasappointedDirectorandamemberoftheInvestmentCommitteeonJanuary14,2010.HewasappointedasamemberandChairoftheAuditandConflictsCommittee,respectively,onFebruary9and10,2010.

4 TheSpecialCommitteewaswounduponFebruary9,2010.

5 Mr.RastogiresignedonApril3,2009.Messrs.MartellandSaunderson’stermsasDirectorsofPSP InvestmentsexpiredonJanuary14,2010.

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REMUNERATION OF dIRECTORSFISCAL YEAR 2010

Remuneration 1

NameAnnual

Retainer

Chair of a Committee/

Retainer

Boards/ Committees

Meeting FeesTravel Fees Total

Jamie Baillie $27,500 – $36,500 $10,500 $74,500

Bob Baldwin $27,500 $8,750 $37,750 – $74,000

Cheryl Barker $27,500 – $36,500 $9,000 $73,000

Paul Cantor $125,000

(Board Chair)

– – – $125,000

Léon Courville $27,500 – $36,500 – $64,000

Anthony R. Gage $27,500 $8,750 $29,500 $9,000 $74,750

Lynn Haight $5,882 – $6,500 – $12,382

Jean Lefebvre $27,500 $7,535 $25,500 – $60,535

William A. MacKinnon $5,882 $1,215 $3,750 – $10,847

Keith G. Martell 2 $21,694 $6,903 $18,500 $6,000 $53,097

Michael P. Mueller $27,500 $8,750 $29,500 – $65,750

Anil K. Rastogi 2 $227 – $5,250 – $5,477

William A. Saunderson 2 $21,694 – $21,000 – $42,694

1 TheDirectorsarealsoentitledtoreimbursementoftheirreasonabletravelandrelatedexpenseswhenapplicable.

2 Mr.RastogiresignedonApril3,2009.Messrs.MartellandSaunderson’stermsasDirectorsofPSP InvestmentshaveexpiredonJanuary14,2010.

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INVESTMENT GOVERNANCE OVERSIGHT

Inordertoensureadequategovernanceoversightofitsinvestments,PSP InvestmentshasadoptedaResponsibleInvestmentPolicyandProxyVotingGuidelines.PSP Investmentsalsoparticipatesincollaborativeinitiativeswithotherlike-mindedinstitutionalinvestors.

RESPONSIBLE INVESTMENT

PSP Investmentsrecognizesthatabroadrangeoffinancialandnon-financialconsiderationscanberelevantintermsofmakinginvestmentdecisions.Duringfiscalyear2010,PSP InvestmentsreviewedandamendeditsResponsibleInvestmentPolicy,whichembodiesPSP Investments’beliefthatresponsiblecorporatebehaviourwithrespecttoenvironmental,socialandgovernancefactorscangenerallyhaveapositiveinfluenceonlong-termfinancialperformance.Inanalyzingtherisksinherentinanyinvestment,PSP Investmentslookstoidentify,monitorandmitigateenvironmental,socialandgovernanceissuesthatare,orcouldbecome,materialtolong-termfinancialperformance.

Withtheassistanceofaserviceproviderandthroughcollaborativeinitiativeswithotherlike-mindedinstitutionalinvestors,PSP Investmentsisactivelyengagingissuerswithaviewtoimprovingtheirenvironmental,socialandgovernancepractices.

PSP Investments’ResponsibleInvestmentPolicymaybeviewedonPSP Investments’websitewww.investpsp.caunder“Investments–InvestmentPolicies–ResponsibleInvestmentPolicy”.

PROXY VOTING

TheProxyVotingGuidelines(the“Guidelines”)aredesignedtoensurethatsecuritiesbeneficiallyownedbyPSP Investmentswillbevotedinaccordancewithitsinvestmentpolicyandobjectives.TheGuidelinesstipulatethatPSP Investmentswillgivedueconsiderationtocorporategovernanceprincipleswhenassessingthemeritsofanissueandwillexerciseitsvotingrightswithaviewtomaximizingthevalueofitsshareholdings.

TheGuidelinesfocusonareasofcorporategovernancewithrespecttowhichPSP Investmentsmayberequestedtovotefromtimetotimeandtheprinciplesonwhichitwillrelyindeterminingaresponsetosuchrequests.Areasimportantintermsoftheirpotentialimpactonperformanceinclude:

• Independence and effectiveness of a company’s board of directors;

• Management and directors’ compensation, including equity compensation plans;

• Takeover protection;

• Shareholder rights; and

• Responsible investing.

Infiscalyear2010,PSP InvestmentsreviewedandamendedtheGuidelinestotakeintoconsiderationmarkettrends.

Toensuremoreactivemanagementofitsproxyvoting,PSP Investmentsisassistedbytwoserviceprovidersinvotingtheequitiesheldinaccountsmanagedinternallyaswellasthoseinsegregatedaccountsmanagedbyexternalmanagers.

TheGuidelinesmaybeviewedonPSP Investments’websitewww.investpsp.caunder“Investments–InvestmentPolicies–ProxyVotingGuidelines”.

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COLLABORATIVE INITIATIVES

In2006,PSP InvestmentsjoinedtheCanadianCoalitionforGoodGovernance.In2007,GordonJ.Fyfe,PSP Investments’PresidentandCEO,becameamemberoftheCoalition’sBoardofDirectors.

PSP InvestmentshasbeenasignatoryoftheCarbonDisclosureProjectsince2006.TheCarbonDisclosureProjectactsonbehalfof534institutionalinvestorsrepresenting$64trillioninassetsundermanagementtoencouragepubliccompaniestodisclosehowtheyaremanagingclimatechangerisksandopportunitiesthatmaybeaffectingtheirbusinesses.

Infiscalyear2010,PSP InvestmentsbecameasignatoryoftheCDPWaterDisclosureProject,whichwillenableinstitutionalinvestorstobetterunderstandthebusinessrisksandopportunitiesassociatedwithwaterscarcityandotherwater-relatedrisksbyincreasingtheavailabilityofhigh-qualityinformationonthisissue.

PSPInvestments’PrivateEquityGroupplayedanactiveroleintheimplementationoftheInstitutionalLimitedPartnersAssociation’sPrivateEquityPrinciples,abest-practicegovernanceundertakingthatwillguideinstitutionalinvestors’futureinvestmentsintheprivate-equitysector.

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COMPENSATION

PSP Investments’ Board of Directors oversees all aspects of compensation for employees of PSP Investments and

approves a total compensation package for PSP Investments’ officers, including an annual base salary as well as

short- and long-term incentives.

PSP Investments’CompensationPolicy isdesignedtoattractandretaintalentedemployees, rewardperformanceandreinforcebusinessstrategiesandpriorities.EmployeesareoftensolicitedbyotherorganizationsthatneedtofillpositionssimilartothoseatPSP Investments.TheBoardofDirectorsrecognizesthefundamentalvalueaddedbyamotivatedandcommittedteamandstronglybelievesthattherecruitmentandretentionofperformance-orientedemployeesiscriticaltoachievingPSP Investments’objectives.

Inordertoattractandretaintalentedemployees,theBoardofDirectorshasestablishedaCompensationPolicythataimstomaintaintotalcompensationatafairandcompetitive level.CompensationplansarealignedwithPSP Investments’strategicplanandintegratedwithbusinessperformancemeasurement.PSP Investments’CompensationPolicyprovidesbalancedperformance-basedcompensationandiseffectivelydesignedtorewardprudentrisktaking.Totalcompensationiscomprisedofbasesalary,short-termandlong-termincentives,benefits,pensionandotherremuneration.

In addition, the Employee Performance Management and Professional Development Planning process contributes toimprovingbusinessperformanceandemployeeengagement.

InordertoensurethatPSP Investmentsofferscompetitivecompensationtoitsemployees,managersandofficers,theircompensation is benchmarked with that of peers, a select group of Canadian organizations in the pension fund andinvestmentmanagementindustry,thefinancialservicesindustryandothersimilarindustriesappropriateforthepositionsbeingbenchmarked.Forfiscalyear2010,themaincomparatorgroupwascomprisedof:AlbertaInvestmentManagementCorporation,BritishColumbiaInvestmentManagementCorporation,Caisse de dépôt et placement du Québec,CanadaPensionPlanInvestmentBoard,HospitalsofOntarioPensionPlan,OntarioMunicipalEmployeesRetirementSystemandOntarioTeachers’PensionPlan,amongstothers.Theseorganizationswereselectedbasedonthreemaincriteria:thesizeofthepensionplans,theirbusinesssectorandtheirtalentpool.Datafromthesepeerorganizationsaregatheredperiodicallyandonanadhocbasisusingcompensationsurveyspublishedbywell-established,specializedcompensationconsultingfirms.

Toremaincompetitive,PSP Investmentsaimsforthefollowing:

1. Basesalariesatthemedianofthecomparatorgroup;

2. Incentivecompensationplanswithpotentialpayoutssuperiortothemedianofthecomparatorgroupforsuperiorperformance;and

3.Benefitsthatcomparefavourablytothecomparatorgroup.

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Attheexecutivelevel,compensationiscomprisedofbasesalaries(approximately30%),incentivecompensationplansattarget(approximately60%)andbenefits(approximately 10%).

Onanannualbasis,theBoardofDirectorsensuresthatPSP Investments’executivecompensationisconsistentwiththeorganization’sCompensationPolicy.Infiscalyear2010,theBoardofDirectorsretainedtheservicesofanindependentcompensationconsultingfirmtorecommendtheappropriateannualbasesalaryadjustmentsforfiscalyear2011andtheappropriatecompensationlevels,particularlywithrespecttoincentivecompensation.Thisfirmprovidednootherservicestotheorganizationinfiscalyear2010.

InearlyAprilof2009,theG20leaders,includingCanada,endorsedtheG20WorkingGroupReport(the“G20Report”)whichmakesanumberofrecommendationsforlargefinancialinstitutionswhicharedesignedtoenhancesoundregulationandstrengtheninternationalregulatorystandardsforfinancialinstitutionsandincreasetransparencyinglobalfinancialmarkets.TheG20Reportmakes25recommendations,threeofwhichrelatetocompensation(the“G20CompensationRecommendations”).ItisimportanttonotethattheG20Reportspecificallyaddressesfinancialinstitutionsanddoesnotapplydirectlytopensionfunds.WhilethereisnorequirementforPSPInvestmentstocomplywiththeG20CompensationRecommendations,PSPInvestmentscompletedathoroughanalysisofitscompensationprogramsinordertoassesstheiralignmentwiththeG20CompensationRecommendationswhicharebasedontheFinancialStabilityForumPrinciplesforSoundCompensationPractices(the“FSFPrinciples”).

Thisself-assessmentconcludedthatPSPInvestments’compensationprogramsandpracticeswereconsistentwiththeG20CompensationRecommendationsandFSFPrinciples.Inaddition,theHumanResourcesandCompensationCommitteeoftheBoardofDirectorsmandatedDeloitte&ToucheLLPtoindependentlyreviewManagement’sself-assessment.TheindependentconsultantconfirmedPSPInvestments’levelofcomplianceandconcurredasfollows:

• PSP Investments’ self-assessment concluded rightfully that its compensation programs and practices were aligned with the G20 Compensation Recommendations and FSF Principles.

• PSP Investments has established and implemented compensation programs and processes that are consistent with the organization’s long-term goals and risk management practices.

• The Board of Directors and the Human Resources and Compensation Committee play an active role in the design and operation of compensation programs; and have appropriate mechanisms for review and monitoring, independently of the management.

• Overall, PSP Investments has established processes and compensation programs that are effectively designed to reduce the potential for rewarding excessive risk taking.

BASE SALARY

Basesalaryreviewstakeplaceannuallyandanychangesareeffectivefromthebeginningofeachfiscalyear.Changestothebasesalarymayalsooccurduringtheyeartoreflectsignificantchanges inresponsibility,marketconditionsorexceptionalcircumstances.

Giventheprevailingfinancialandeconomiccontext,basesalariesforofficersandseniormanagerswerenotincreasedinfiscalyear2010.

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INCENTIVE PLANS

Theincentiveplansremainedunchangedinfiscalyear2010.

Inthecourseoffiscalyear2009,PSP Investmentsundertookadetailedreviewofincentiveplansofferedtobothofficersand employees to ensure that total compensation remained competitive with the comparator group and reflectedPSP Investments’principlesandobjectivesofattracting,retainingandmotivatingemployeestoachievesustainedhighperformance.Thisreviewwasconductedwiththesupportandadviceofanindependantcompensationconsulting firm.

Theincentiveplansarecomprisedofthefollowing:

• A Short-Term Incentive Plan (STIP), to recognize performance results for both the current year and the most recent four years;

• A Long-Term Incentive Plan (LTIP), based on four-year, forward-looking cycles with possible payouts after the fourth year to recognize long-term results; and

• A Restricted Fund Unit Plan (RFU), designed to align the interests of the participants with those of PSP Investments’ stakeholders and to help retain key employees.

SHORT-TERM INCENTIVE PLAN

DESCRIPTION OF THE PLAN

PSP Investments’Short-TermIncentivePlan(the“STIP”)wasestablishedinFebruary2009,witheffectfromApril1,2008.ItreplacedtheAnnualIncentivePlan,whichwaspreviouslyineffect.

TheSTIPisdesignedto:(i)rewardparticipantsfortheachievementofsuperiorandsustainedindividualcontributionsandforPSP Investments’overallperformance;(ii)helpattractandretainhigh-calibreemployees;and(iii)aligntheinterestsofparticipantswithPSP Investments’stakeholders.PSP Investments’permanentsalariedemployeesandanyotheremployeesdesignatedbythePresidentandCEOareeligibletoparticipateintheSTIP.

The STIP is a cash-based plan that pays an incentive award to participants, taking into account the achievement ofstrategicobjectivesandthe investmentperformanceof theassetsmanagedbyPSP Investments.Under theSTIP, thetargetincentive,basedonapercentageofbasesalary,ismeasuredontheachievementofindividualstrategicobjectivesaswellasoninvestmentperformance,whichmayincludeanycombinationof(i)thetotalfundinvestmentperformanceofPSP Investments;(ii)theinvestmentperformanceofaparticularassetclass;or(iii)theinvestmentperformanceofaportfolio.

Atthebeginningofeachfiscalyear,eachparticipantintheSTIPisadvisedofhisorhertargetshort-termincentiveaward.Theperformancemeasureschosenandtheweightinggiventoeachwilldependontheparticipant’spositionlevel.ForthefirstfouryearsofparticipationintheSTIP,participantswillgothroughatransitionperiodbuildinguptoarollingfour-yearperiodforcalculatingtheinvestmentperformance.Theinvestmentperformancemeasureiscalculatedonthecurrentyearinvestmentperformanceandonthemostrecentfour-yearperiodofparticipationintheSTIPbyanemployee.

TheHumanResourcesandCompensationCommitteereviewstheshort-termincentivecompensationpaymentprocesstobesatisfiedthatthepaymentsarecalculatedinaccordancewiththetermsoftheSTIP.Inaddition,theBoardofDirectorsapprovestheshort-termincentivecompensationpayabletoofficersofPSP Investments.

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FISCAL YEAR 2010 PERFORMANCE

Infiscalyear2010,thetotal fund investmentperformanceofPSP Investmentswasabovethe incentivethresholdand,therefore,payoutswereearnedforthatcomponentoftheSTIPforeligibleparticipantswithoneyearofparticipation.Thetotalfundperformanceforperiodsotherthanoneyear,includingthefour-yearperiod,wasbelowthresholdandgeneratednoincentivepaymentforeligibleparticipants.

The one-year investment performance of Infrastructure, Private Equity and Public Markets was well above thresholdwhileitwasbelowthresholdforRealEstate.Therefore,payoutswereearnedforeligibleparticipantsinassetclassesthatexceededincentivethresholds.ForPrivateEquity,payoutsreachedthemaximumlevelfortheoneandfour-yearinvestmentperformanceperiods.Theone-yearinvestmentperformanceresultedinmaximumpayoutsforInfrastructureandPublicMarkets.Thefour-yearassetclassperformancewasabovethresholdforInfrastructureandgeneratedpayoutsforeligibleparticipants.EligibleparticipantsinPublicMarketswhogeneratedafour-yearperformanceabovethresholdalsoearnedpayouts.Thefour-yearassetclassperformanceforRealEstatewasbelowthresholdandgeneratednoincentivepayment.

TheresultsofthestrategicobjectivescomponentoftheSTIPindicatethatobjectiveswereachievedand,therefore,generatedonanaggregatebasistherightforeligibleemployeestoreceiveanincentiveaward.

ThetotalincentiveamountearnedundertheSTIPwas$8.8millioninfiscalyear2010(293employees),$5.2millioninfiscalyear2009(277employees),and $6.1millioninfiscalyear2008(205employees).

Inaddition,theBoardofDirectorsuponrecommendationoftheHumanResourcesandCompensationCommittee,hasapprovedaspecialincentivepaymentequivalenttothetotalfundcomponentoftheSTIPattargetforPSPemployeeswithmorethanoneyearofparticipationintheplan.Asaresult,anamountof$2.3 millionwaspaidto234 employees.ThedecisionoftheBoardistorecognizethatPSPInvestments’stronginvestmentperformanceinfiscalyear 2010istheresultofasoundinvestmentstrategyadoptedoverthepastseveralyears.

LONG-TERM INCENTIVE PLAN

DESCRIPTION OF THE PLAN

ThePSP Investments’Long-TermIncentivePlan(the“LTIP”)wasestablishedinFebruary 2009,witheffectfromApril 1, 2008.SimilarlytotheSTIP,theLTIPisdesignedto:(i)rewardparticipantsfortheachievementofsuperiorandsustainedinvestmentperformancebyPSP Investments;(ii) attractandretainhigh-calibreemployees;and(iii)aligntheinterestsofparticipantswiththoseofPSP Investments’stakeholders.

TheLTIPisacash-basedplanthatpaysapercentageofbasesalarytoparticipantstakingsolelyintoaccounttheachievementofinvestmentperformanceontheassetsmanagedbyPSP Investments.Itrequiresabovethresholdperformanceforafour-yearperiodbeforeapayoutisearned.ItisprovidedtoPSP Investments’employeesineligiblemanagerialpositionsaswellastootheremployeeswhoarerecommendedbythePresidentandCEOandapprovedbytheHumanResourcesandCompensationCommitteeoftheBoardofDirectors.

Atthebeginningofeachfiscalyear,eachparticipantintheLTIPisadvisedofhisorhertargetincentiveamount.Thistargetincentiveamountisbasedonaforward-lookingfour-yearinvestmentperformance,whichmayincludeanycombinationof:(i)thetotalfundinvestmentperformanceofPSP Investmentsand(ii)theinvestmentperformanceofaparticularassetclass.Theperformancemeasureschosenandtheweightinggiventoeachdependontheparticipant’spositionlevel.

Theincentiveamountpayableisdeterminedattheendofthefour-yearperformanceperiodbasedontheamountbywhichthetotalfundactualvalueaddedandtheassetclassactualvalueaddedexceededtheincentivethresholds.Theincentiveamountcalculatedfortheparticipantisadjustedbasedonthetotalfundrateofreturnoverthefour-yearperformanceperiod.Thiswilleitherincreaseordecreasetheincentiveamountpayableresultingfromtheperformanceofthetotalfundreturnoverthefour-yearperiod.

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UntilMarch31,2008,long-termincentivecompensationawardsweregrantedundertheDeferredIncentivePlan,whichusedathree-yearpayoutcycle.InordertocompensateforthegapintheincentiveopportunitybetweentheDeferredIncentivePlan’spayoutcycleandthefour-yearpayoutcycleoftheLTIP,ashadowDeferredIncentivePlanhasbeenmaintainedforfiscalyear 2009.AwardsearnedundertheDeferredIncentivePlanforfiscalyear2009willbecalculatedattheendoffiscalyear2011forpayoutinfiscalyear2012.

TheHumanResourcesandCompensationCommitteereviewsthelong-termincentivecompensationgrantprocesstobesatisfiedthatthegrantsarecalculatedinaccordancewiththetermsoftheLTIP.Inaddition,theBoardofDirectorsapproveslong-termincentivegrantstoofficersofPSP Investments.

LONG-TERM INCENTIVE PAYMENTS

TherewerenopaymentsbasedontheLong-TermIncentivePlaninfiscalyear2010,becausetheinitialfour-yearcyclehadnotbeencompleted.ThefirstpotentialpaymentsontheLTIPwilloccurinfiscalyear2012.

DEFERRED INCENTIVE PAYMENTS

TheDeferredIncentivePlanamountspaidinfiscalyear2010wereamountsearnedinfiscalyear2008,withatwo-yeardeferral period. The Human Resources and Compensation Committee is satisfied that the payouts were calculated inaccordancewiththetermsoftheDeferredIncentivePlan.

ThetotalincentiveamountpaidundertheDeferredIncentivePlanwas$2.0millioninfiscalyear2010,$3.0millioninfiscalyear2009,and$2.6millioninfiscalyear2008.

RESTRICTEd FUNd UNIT PLAN

PSP Investments’RestrictedFundUnitPlan(the“RFU”)wasestablishedinFebruary2009,witheffectasofApril1,2009.Under theRFU,grantsof restricted fundunitscanbemadeto thePresidentandCEOand,uponrecommendationofthePresident & CEO,toemployeeswhoreportdirectlytothisposition.Discretionarygrantsmayalsobemadetootherparticipantsbasedonperformance-relatedconsiderations.TheHumanResourcesandCompensationCommitteeoftheBoardofDirectorsreviewsandapprovesthegrantsofrestrictedfundunits.Inaddition,theBoardofDirectorapprovesgrantstoofficersofPSPInvestments.

ThegrantsmadeundertheRFUwillvestoverathree-yearperiodfromtheeffectivedateofthegrant.Theannualamountpaidisadjustedbythetotalfundinvestmentperformancefortheperiodcoveredsincethegrant.

ThetotalincentiveamountpaidundertheRFUwas$0.4millioninfiscalyear2010.

GROUP INSURANCE BENEFITS

TheGroupInsurancePlanintroducedinthefallof2007providesthefollowinggroupinsurancebenefits:healthanddentalcare,long-termdisability,criticalillness,lifeinsurance,accidentaldeathanddismemberment,andanemployeeassistanceprogram.TheGroupInsurancePlanisintendedtoensureaproperbalancebetweenemployeeneedsandcompetitivenesswithourpeergroup.

OTHER REMUNERATION

PSP Investments’ executives are provided with a perquisites allowance to cover some expenses frequently offered toexecutives,suchasacarallowance,parkingfacilitiesandhealthandfitnessclubmemberships.Inaddition,PSP Investmentsoffersitsexecutivesahealth-and-lifestyleassessment.

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RETIREMENT PLANS

AllPSP Investments’employeesparticipateinthePublicSectorPensionInvestmentBoardPensionPlan(the“EmployeePensionPlan”)andalleligibleemployeesparticipateintheSupplementalEmployeeRetirementPlanofthePublicSectorPensionInvestmentBoard(the “SERP”).

TheEmployeePensionPlanprovidespartiallyindexedpensionbenefits,foreachyearofparticipation,whichareequalto2%oftheemployee’sbestaverageearnings,beingtheaverageofthebestthreeconsecutivecalendaryearsofbasesalaryearnings.

ThebenefitspayableundertheEmployeePensionPlanarelimitedbytheIncome Tax Act(Canada).TheSERPhasbeenestablishedforallemployees,asanunfundedarrangement,toprovidedefinedbenefitsinexcessoftheEmployeePensionPlan,wheresuchbenefitsaresolimited.

EmployeesparticipatingintheEmployeePensionPlanandtheSERPcontribute3.5%oftheirbasesalary,uptothemaximumcontributionallowableundertheIncome Tax Act(Canada).

RETIREMENT BENEFITS

Name

Number of Years

of Credited Service 1

Annual BenefitAccrued

Obligation at Start of Year

(Final Regulations)

2, 4Compensatory

Increase 5

Non-Compensatory

Increase 6

Accrued Obligation at Year End 2, 7

At YearEnd 2

At Age 65 2, 3

Gordon J. Fyfe 6.50 $62,600 $188,600 $501,400 $53,800 $140,100 $695,300

Derek Murphy 6.08 $37,700 $113,600 $311,200 $36,500 $86,100 $433,800

Jim Pittman 5.17 $21,600 $98,800 $132,300 $17,900 $51,700 $201,900

Neil Cunningham 2.42 $12,000 $80,100 $66,500 $34,100 $33,800 $134,400

Bruno Guilmette 4.42 $22,600 $129,500 $121,600 $20,200 $54,800 $196,600

1 NumberofcreditedyearsofserviceusedforboththeEmployeePensionPlanandtheSupplementalEmployeeRetirementPlan.

2 SumofbenefitsaccruedundertheEmployeePensionPlanandtheSupplementalEmployeeRetirementPlan.

3 Forthepurposeofcalculatingtheannualbenefitspayableatage65,thefinalaverageearningsarecalculatedasatMarch31,2010.

4 Accruedobligationusingadiscountrateof6.6%.TheobligationsarecalculatedasatMarch31,2009usingtheassumptionsandmethodsthatwereusedfortheaccountingdisclosuresasatDecember31,2008.

5 Includesservicecostatthebeginningoftheyear,theimpactofpaydifferentfromthatreflectedinlastyear’scalculation(differenceintheaccruedobligationbetweentheexpectedandtheactualsalary)andimpactofamendmentstothepensionplansifany.

6 Includeschangeinassumptions,non-pay-relatedexperience(whichincludestheinterestcostfortheyear,employeecontributionsmadeintheyearandbenefitpaymentmadeintheyear).

7 Accruedobligationusingadiscountrateof6.0%.TheobligationsarecalculatedasatMarch31,2010usingtheassumptionsandmethodsthatwereusedfortheaccountingdisclosuresasatDecember31,2009.

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SUMMARY COMPENSATION TABLE

TotalcompensationpaidtoPSPInvestments’fivehighest-paidofficersinfiscalyear2010totalled$5,852,446,anincreaseof$794,661overthe$5,057,785 reportedinthe2009annualreport.TheincreaseismainlyduetothestrongperformancesofthePrivateEquityandInfrastructureassetclasseswhichtriggeredpaymentswellabovetargetundertheSTIP.

Compensationpaidduringthefiscalyear2010tofivehighest-paidofficersofPSPInvestmentsincludesthepaymentofamountsearnedoverthefour-yearperiodendedMarch31,2008undertheDeferredIncentivePlananddeferredfortwoyearsasaretentionmechanism.

NameFiscal Year

Base Salary

Short-term Incentive

Plan

Deferred Incentive

Plan 1Restricted Fund Units

Benefits and Other

CompensationPension and SERP Plans

Total Compensation

Gordon J. FyfePresident and Chief Executive Officer

2010

2009

2008

$485,000

$485,000

$466,000

$552,900

$189,122

$153,780

$37,280

$611,100

$546,163

$0

n/a

n/a

$35,768

$35,876

$32,062

$53,800

$98,500

$83,100

$1,164,748

$1,419,598

$1,281,105

Derek MurphyFirst Vice President,Private Equity Investments

2010

2009

2008

$314,000

$314,000

$300,000

$749,178

$117,762

$389,7732

$400,851

$336,105

$257,093

$17,117

n/a

n/a

$25,619

$25,668

$22,062

$36,500

$66,200

$58,100

$1,543,265

$859,735

$1,027,028

Jim PittmanVice President, Private Equity Investments

2010

2009

2008

$215,000

$214,942

$200,000

$505,609

$71,509

$131,478

$323,598

$199,682

$95,189

$30,285

n/a

n/a

$80,131

$16,104

$16,271

$17,900

$37,900

$20,700

$1,172,523

$540,137

$463,638

Neil CunninghamFirst Vice President,Real Estate Investments

2010

2009

2008

$260,000

$260,000

$240,365

$158,600

$180,760

$531,026

$555,153

$364,673

$314,612

$9,449

n/a

n/a

$25,710

$25,660

$19,562

$34,100

$49,200

$11,200

$1,043,012

$880,293

$1,116,765

Bruno GuilmetteFirst Vice President,Infrastructure Investments

2010

2009

2008

$263,000

$263,000

$250,000

$505,151

$310,941

$240,000

$0

$423,542

n/a

$14,337

n/a

n/a

$126,210

$24,748

$24,516

$20,200

$40,000

–

$928,898

$1,062,231

$514,516

Derek Watchorn 3

President and Chief ExecutiveOfficer of Revera Inc.

2009

2008

2007

$237,188

$569,250

$568,880

–

$390,648

$426,938

$435,031

$538,000

$199,552

n/a

n/a

n/a

$616,4034

$25,295

$34,261

$10,071

$10,000

$9,500

$1,298,693

$1,533,193

$1,239,131

Notes

1 Amountspaidinfiscalyear2010wereearnedinfiscalyear2008.

2 Theawardwasrecalculatedinfiscalyear2009usingarevisedbenchmarkresultforfiscalyear2008.

3 Mr.WatchornisnotanemployeeofPSPInvestments,butwasemployedbyReveraInc.,awholly-ownedsubsidiaryofPSPInvestmentsuntilMay30,2009.His compensationisbasedonacontractwithReveraInc.ReveraInc.’sfinancialyearendsonDecember 31.

4 AmountincludesaninstallmentpaidasofJune1,2009inaccordancewithMr.Watchorn’sseveranceagreement.

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LONG-TERM INCENTIVE PLAN AwARdS GRANTEd FOR FISCAL YEAR 2010

Thefollowingtableshowstherangeoffuturepotentialpayouts.PaymentswillbebasedonPSPInvestments’totalfundperformanceandassetclassperformance.

NameAward Type

Fiscal 2010Grant

Vesting Period

Estimated Future Payouts 1

Threshold 2 Target Maximum

Gordon J. Fyfe LTIP

RFU

$485,000

$0

4 years

–

$0

n/a

$485,000

–

$2,425,000

–

Derek Murphy LTIP

RFU

$282,600

$42,390

4 years

3 years

$0

n/a

$282,600

$42,390

$1,413,000

$42,390

Jim Pittman LTIP

RFU

$150,500

$75,000

4 years

3 years

$0

n/a

$150,500

$75,000

$752,500

$75,000

Neil Cunningham LTIP

RFU

$234,000

$23,400

4 years

3 years

$0

n/a

$234,000

$23,400

$1,170,000

$23,400

Bruno Guilmette LTIP

RFU

$236,700

$35,505

4 years

3 years

$0

n/a

$236,700

$35,505

$1,183,500

$35,505

1 ActualpayoutswillbeadjustedupwardsordownwardsbyPSPInvestments’compoundrateofreturnovertheperformancevestingperiods.

2 Thresholdreferstotheminimumamountpayableforacertainlevelofperformance,belowwhichlevelnoawardispayable.

LONG-TERM INCENTIVE PLAN AwARdS ACCUMULATEd VALUE

Thetotalaccumulatedvalue1asatMarch31,2010ofalllong-termincentiveawardsgrantedbutnotyetvestedorpaidtoPSPInvestments’fivehighest-paidofficersisshowninthefollowingtable.

Name Plan

Awards paying out at the end of fiscal year

Total2011 2012 2013

Gordon J. Fyfe DIP

LTIP

RFU

$0

n/a

$0

n/a

$0

$0

n/a

$947,236

–

$0

$947,236

$0

Derek Murphy DIP

LTIP

RFU

$46,502

n/a

$17,117

n/a

$301,207

$17,117

n/a

$801,884

–

$46,502

$1,103,091

$34,322

Jim Pittman DIP

LTIP

RFU

$39,620

n/a

$30,285

n/a

$256,655

$30,205

n/a

$506,915

–

$39,620

$763,570

$60,726

Neil Cunningham DIP

LTIP

RFU

$200,556

n/a

$9,449

n/a

$0

$9,449

n/a

$228,509

–

$200,556

$228,509

$18,898

Bruno Guilmette DIP

LTIP

RFU

$377,809

n/a

$14,337

n/a

$247,935

$14,337

n/a

$627,660

–

$377,809

$875,595

$28,674

1 LTIPs’accumulatedvaluesareestimatedbyusingactualtotalfundandassetclassperformanceforthoseyearswhereperformanceisknownandamultiplierofone(1.0x)forfutureyears.DIPs’andRFUs’accumulatedvaluesreflectPSPInvestments’totalfundrateofreturnforfiscalyear2010butnoreturnsforfutureyears.

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POST-EMPLOYMENT POLICIES

AllseniorexecutiveofficersofPSPInvestmentshaveacontractualagreement.

ThePresidentandCEO’sseverancepayisequivalenttotwotimeshisannualbasesalary,plustwotimestheaverageannualamountearnedundertheshort-termandlong-termincentiveplansforthethree-yearperiodpriortothetermination.

FortheFirstVicePresidents,theseverancepayissetat12monthsofbasesalaryandtargetSTIPaward,plusonemonthofsalaryandtargetSTIPaward(one-twelfthofthefull-yeartargetSTIPaward)foreveryyearofservice,uptoamaximumof18months.Insuredbenefitssuchashealth,dentalandlifeinsurancearecontinuedduringtheseveranceperiod.

Thenexttableshowsthepotentialpaymentsthatwouldbemadeupontermination(withoutcause)forthefivehighest-paidofficersatPSPInvestments.

Name Years of service 1 Severance 2 Resignation Retirement 3

Gordon J. Fyfe 6.58 years $2,746,910 $0 n/a

Derek Murphy 6.0 years $894,900 $0 n/a

Jim Pittman 4 5.17 years n/a n/a n/a

Neil Cunningham 5.79 years $699,833 $0 n/a

Bruno Guilmette 4.33 years $666,267 $0 n/a

1 AssumesanotionalterminationasatMarch31,2010.

2 Excludesincentivecompensationamountspayableforthecurrentyear,whichareincludedintheSummaryCompensationTable.

3 Noneofthefive-highestpaidofficersforfiscalyear2010areeligibleforretirement.

4 ThereisnocontractualagreementforMr.JimPittman.

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A

ACTThePublic Sector Pension Investment Board ActisthelegislationthatgovernsPSP Investments.

ACTIVE INVESTMENT MANAGEMENTTheapplicationofmanagerskillsinselectinginvestments,withthegoalofearninghigherreturnsthanthegeneralmarket.

ACTIVE RISkThe probability of investment losses from active investmentmanagementrelativetoabenchmark.

ANNUAL REPORTA publication that includes the audited financial statementsof an organization as well as management’s discussion andanalysisof itsfinancialresultsandoperations.PSP Investments’annual report must be issued within 90 days of its March 31 year-endandtabledbythePresidentoftheTreasuryBoardintheHouseofCommonsandtheSenate.

ANNUALIZED RATE OF RETURNArateofreturnexpressedoveroneyear,althoughtheactualratesofreturnbeingannualizedareforperiodslongerorshorterthanoneyear.

ASSET-BACkED COMMERCIAL PAPER (ABCP)Short-termcorporatesecurities,typicallywithamaturityoflessthanoneyear,issuedbyabankorotherconduit,whicharebackedbyassetssuchasrealestate,autoloansorothercommercialassets.

ASSET-BACkED TERM NOTES (ABTN)Long-termnotescreatedthroughthesecuritizationofapoolofassetssuchasrealestate,autoloansorothercommercialassets.

ASSET MIXTheproportionofassetsinvestedincash,fixedincomesecurities,equities and other asset classes. Asset mix should reflect aninvestor’sinvestmentgoalsandrisktolerance.

ASSET MIX POLICYPolicysettingtheguidelinesforthemanagementoftheassetmixneededtoachieveanexpectedlevelofinvestmentreturns.Pensionfundssettheirassetmixpolicytoensurethatinvestmentreturnsplusplanmembercontributionsaresufficienttopayallcurrentandfuturepensionbenefits.Inmakingourinvestmentdecisions,wetakeintoconsiderationthefinancialobligationsofthepensionplansforwhichPSP Investmentsinvestsmoney.

B

BASIS POINT OR BPSOne-hundredth of a percentage point. The difference between5.25%and5.50%is25basispoints.

BENCHMARkAstandardagainstwhichratesofreturncanbemeasured,suchasstockandbondmarketindicesdevelopedbystockexchangesandinvestmentdealers.

BRICBRIC or BRICs are terms used in economics to refer to thecombinationofBrazil,Russia,India,andChina.

C

CAPITALIZATION RATE (CAP RATE)Thenetoperatingincomeproducedbyarealestateassetdividedbyitsmarketvalue.Capitalizationrateisanindirectmeasureofhowfastaninvestmentwillpayforitselfandistypicallyusedtocomparerealestatepropertyvalues.

CASH EqUIVALENTSShort-term,highlyliquidsecurities(e.g.commercialpaper,treasurybills,demandnotes)withatermtomaturityoflessthanoneyearfromthedateof issue.These investmentsarerelativelyeasytoconvertintocash.

CFA INSTITUTECFA Institute (CFA®) is an international, non-profit organizationofmorethan96,000 investmentpractitionersandeducators inover 133 countries and territories. The investment performancestandardsoftheCFAInstitutedetailmethodologyandguidelinesthatpromoteuniformityinreportinginvestment performance.

COLLATERALIZED DEBT OBLIGATIONSA type of asset-backed security that is constructed from aportfolio of fixed income assets. Collateralized debt obligationsareusuallydividedintoseveraltrancheswithdifferentrisklevelsandcorrespondinginterestpayments.Anylossesareappliedfirsttothemorejuniortranches(lowestriskrating),beforemovingupinseniority.

COST VALUE (OR BOOk VALUE)Thepurchaseprice,ororiginalcost,ofaninvestment.

COUNTERPARTY RISkTherisktoeachpartyofacontractthatthecounterpartywillnotliveupto itscontractualobligations.

CREDIT RISkRiskoflossresultingfromthefailureofaborrowerorcounterpartytohonouritsfinancialorcontractualobligations.

CUSTODIANAnindependentorganizationentrustedwithholdinginvestmentson behalf of the owner. The custodian maintains the financialrecordsfortheinvestmentsandmayperformotherservicesfortheowneraswell.

GLOSSARY

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d

DERIVATIVE FINANCIAL INSTRUMENTS (DERIVATIVES)Financialcontractsthatderivetheirvaluefromanunderlyingassetor index, such as an interest rate or foreign currency exchangerate. For example, a derivative contract based on the S&P 500Indexof largeUSstocksfluctuates invaluewith the index,butinvolvesbuyingonecontractratherthaneachstockintheindex.Derivativescanbelessexpensiveandeasiertoacquirethantheunderlyingassets.Theycanbeusedtomanagerisk,reducecostand enhance returns. Some common derivatives are forwards,futures,swapsandoptions.

DISCOUNT RATETheinterestrateusedindeterminingthepresentvalueoffuturecashflows.

DIVERSIFICATIONAstrategytospreadinvestmentriskamongdifferentassetclasses(stocksandbonds),amongdifferenttypesofassets(publicandprivate equities, real estate, infrastructure), among securities(differentstocks),amongeconomicsectors(financialservicesandnaturalresources)andamongdifferentcountries.

E

EqUITIES (OR STOCkS)Financial instruments that represent an ownership interest in acorporation, as well as a claim to proportionate shares of thatcorporation’sassetsandearnings.

F

FAIR VALUEAnestimateoftheamountofconsiderationthatwouldbeagreedupon in an arm’s length transaction between knowledgeable,willingpartieswhoareundernocompulsiontoact.

FISCAL YEARAcompany’saccountingorfinancialreportingyear.PSP Investments’fiscalyearcommencesApril 1andendsMarch 31.

FIXED INCOME SECURITIESSecurities,suchasbonds,mortgages,debenturesandpreferredsharesthatgenerateapredictablestreamofinterestbypayingafixedrateofreturnuntilaspecificdate,maturityor redemption.

FOREIGN CURRENCY RISkTheriskthataninvestment’svaluewillbeaffectedbychangesinexchangerates.Internationalinvestmentscauseinvestorstofacetheriskofcurrencyfluctuations.

FUNDING REqUIREMENTSTotalcontributions(employersandemployee)requiredtofundthefinancialobligationsofthePlans.

G

GENERAL PARTNERThe managing partner in a Limited Partnership. The GeneralPartner receives a management fee and a percentage of theLimitedPartnership’sprofits,andactsastheintermediarybetweeninvestorswithcapitalandbusinessesseekingcapitaltogrow.

I

INDEXAbroad-basedmeasurementofageneralmarkettrend.Calledanindexbecauseitisdesignedtoreflectnotonlypricechanges,butvaluechangesaswell.

INDEX FUNDAn investment fund that closely replicates the return of amarket index.

INFLATION-LINkEDThathasabehaviourhighlycorrelatedwithinflation.

INFRASTRUCTURELong-termcapitalfacilitiessuchashighways,utilities,airportsandpipelinesofferingessentialservicestothecommunity.Investmentsininfrastructureassetsareattractiveduetothelowvolatilityofreturnsanddesirablerevenuecharacteristicssuchaspredictabilityandsensitivitytoinflation.

INTEREST RATE RISkTheriskthataninvestment’svaluewillchangeduetofluctuationsininterestrates.Long-termfixedincomesecurities,suchasbondsandpreferredstock,subjecttheirownerstothegreatestamountofinterestraterisk.Short-termsecurities,suchasTreasurybills,areinfluencedmuchlessbyinterestratemovements.

INTERNAL RATE OF RETURN (IRR)Thediscountrateatwhichthenetpresentvalueofaninvestmentequalszero.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)IFRSisthecollectionoffinancialreportingstandardsdevelopedby the International Accounting Standards Board (IASB), anindependent, international standard-setting organization. TheCanadianAccountingStandardsBoard(AcSB)isadoptingIFRSforallPubliclyAccountableEnterprises(PAEs)effectiveJanuary 1, 2011.These changes are part of a worldwide shift to IFRS; they areintendedtofacilitateglobalcapitalflowsandbringgreaterclarityandconsistencytofinancialreportingintheglobalmarketplace.

INVESTMENT MANAGEMENT FEEAnannualfeepaidtoaninvestmentmanagerforitsservices.Thefeecanbebasedonthelevelofassetsundermanagement,orontheperformanceoftheportfolio.

GLOSSARY

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L

LETTER OF CREDITAdocumentacorporationobtainsfromitsfinancialinstitutionthatguaranteespaymenttoathirdparty.

LEVERAGETheuseofvariousfinancialinstrumentsorborrowedcapital,suchasloans,toincreasethepotentialreturnofaninvestment.

LIMITED PARTNERAninvestorinaLimitedPartnership(i.e.,privateequityfund).

LIMITED PARTNERSHIPThelegalstructureusedbymostventureandprivateequityfunds.CreatedpursuanttoaLimitedPartnershipAgreemententeredintobetweenaGeneralPartnerandoneormoreLimitedPartners,alimitedpartnershipisusuallyafixed-lifeinvestmentvehicle.ThepartnershipismanagedbytheGeneralPartnerusingpolicylaiddownintheLimitedPartnershipAgreement.Thisagreementalsocoversterms,fees,structuresandotheritemsagreedonbetweentheLimitedPartnersandtheGeneralPartner.TheLimitedPartnersreceiveincome,capitalgainsandtaxbenefits.

LIqUIDITY RISkLiquidityriskistheriskoffinanciallossasaresultofaninstitution’sinabilitytomeetday-to-dayfinancialobligationsastheycomedue,orthe liquidationofanasset inadversemarketconditions.Themainsourcesofliquidityriskaretreasurymovements,renewalofcorporateborrowingsandcontingencycollateralcalls.

M

MARkET RISkMarketriskistheriskoflossduetochangesinthelevel,volatilityand correlation of equity prices, the term structure of interestrates,aswellascurrencyandcommodityspotandforwardprices.

MARk-TO-MARkETAmeasure of the fair value of investments ata specified pointin time. Mark-to-market adjustments aim to provide a realisticappraisalofacompany’scurrentfinancialsituation.

MASTER NETTING AGREEMENT/ARRANGEMENTAn agreement/arrangement that allows an entity undertakingmultiplefinancialinstrumenttransactionswithasinglecounterpartytomakeasinglenetsettlementofallfinancialinstrumentscoveredby the agreement in the event ofdefault on, or termination of,any contract.

MEZZANINE DEBT FINANCINGTheuseofsubordinateddebttogetherwithequitytofinanceacompany.Investorsinsubordinatedinstrumentsstandbehindthosewith senior instruments such as bonds. To enhance investmentreturns,thesubordinatedinstrumentmayhavestockconversionfeaturessuchasrights,warrantsoroptions.

MSCI EAFE INDEXA stock index created by Morgan Stanley Capital International(MSCI)tomeasurethereturnsofinvestmentsinEurope,AustraliaandtheFarEast. Itcontainsstocks from21 countries, includingJapan,Australia,HongKong,NewZealand,Singapore,theUKandtheEurozonecountries.

N

NET PRESENT VALUE (NPV)Thepresentvalueofaninvestment’sfuturenetcashflowslesstheinitialinvestment.

NOTIONAL AMOUNTSTheprincipalused tocalculate interestandotherpaymentsonderivativecontracts.

O

OPTIONAderivativecontractthatgrantstheownertheright,butnottheobligation,eithertobuyorsellaspecifiedquantityofanassetatafixedpriceonorbeforeaspecificdate.

P

PASSIVE INVESTMENT MANAGEMENTAstrategydesignedtoreplicateamarketindexreturn.

PENSION FUND ACCOUNTCreatedeffectiveApril 1, 2000bythefederalgovernmenttoreceivetheemployerandemployeenetcontributions in respectof thepensionplanstoprovideforliabilitiesforservicesinceApril 1, 2000.Therearefourpensionfundaccounts,oneforeachofthePublicServicePensionPlan,theCanadianForcesPensionPlanandtheRoyalCanadianMountedPolice(RCMP)PensionPlan.Apensionfund account was also set up effective March 1, 2007, for theReserveForcePensionPlan.

PENSION PLAN ACCOUNT (OR PLAN ACCOUNT)Separate accounts established by PSP Investments for each ofthepension fundaccounts to receive fromthegovernment thepensionfundaccount’sproceedsofthenetcontributionsaswellastheallocationofitsinvestmentsandtheresultsofitsoperations.Therearefourpensionplanaccounts,oneforeachpensionfund.Thecombinedresultsofthefourpensionplanaccountsarereferredtoasthe“ConsolidatedPlanAccount”.

PENSION PLANS (OR PLANS)The pension plans of the federal Public Service, the CanadianForces,theRoyalCanadianMountedPoliceandtheReserve Force.

PLAN LIABILITIESPlanliabilitiesrepresentthefinancialobligationsofapensionplanrelativetothebenefitsearnedbytheplanparticipants.Theliabilitiescorrespondtothevaluecalculatedbythepensionactuaryofallaccruedbenefitsasofthedateofvaluationpayableinthefuture.

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POLICY PORTFOLIOTheassetmix,setbytheBoardofDirectors,identifyinghowthefundsmanagedshouldbeallocatedbetweendifferentassetclasses(example:cash,fixedincomesecurities,equities,realestate,etc.).

PORTFOLIOA group of investments, such as equities and bonds andpossibly financial instruments such as derivatives, grouped forinvestment purposes.

PRIVATE EqUITYOwnershipinterestinassetsthatdonottradeonpublicexchangesoroverthecounter,orinterestsinapublicly-tradedsecuritywithrestrictionsonliquidity.

PUBLIC MARkET SECURITIESInvestments in interest-bearing and equity securities traded onrecognizedpublicexchangesworldwide.

R

RETURN (OR RATE OF RETURN)The percentage of change in asset value in a particular period,consisting of income (such as interest, dividends or rent), plusrealizedandunrealizedcapitalgainsorcapitallosses.

RISkTheprobabilityofinvestmentlosses,eitherinabsolutetermsorversusabenchmark.

RISk-ADJUSTED RETURNAmeasureof investmentreturnadjustedtoreflecttheriskthatwasassumedtoproducethatreturn.

S

SECURITIES LENDINGSecurities lending is the temporary loanofa security fromoneinvestortoanother.Loanedsecuritiesaregenerallycollateralized,reducingthelender’screditexposuretotheborrower.Exceptfortherighttovoteproxies,thelenderretainsentitlementtoallthebenefitsofowningtheoriginalsecurities,includingthereceiptofdividendsandinterest.Additionally,thelenderreceivesafeefortheuseofthesecuritiesandcanreinvestthecollateral.Thelender,however,bearsthemarketriskoftheloanedsecurities.Thisisduetotheborrowerbeingobligatedtoultimatelyreturntheoriginalsecurities,not theoriginalmarketvalueof the securitiesat thetimetheloanwasmade.

SHORT SELLINGThesellingofasecuritythatthesellerdoesnotownatthetimeofsale.Thesellerwillborrowthesecurity inorder tocompletethedelivery.Short-sellersassumethattheywillbeabletobuythesecurityforlessthanthepriceatwhichtheysoldshort.

S&P/TSX EqUITY INDEXThemostdiversifiedCanadianmarketindex,representingalmost90%ofthecapitalizationofCanadian-basedcompanieslistedontheTSX,excludingincometrusts.AcommitteeoftheTorontoStockExchangeandStandardandPoor’sselectscompaniesforinclusionintheS&P/TSXEquityIndex.

STANDARD AND POOR’S 500 COMPOSITE INDEX (S&P 500 TOTAL RETURN INDEX)AUSindexconsistingof500stockschosenformarketsize,liquidityandindustrygrouprepresentation.Itisamarket-value-weightedindex (stock price times number of shares outstanding), witheachstock’sweightintheIndexproportionatetoitsmarketvalue.TheStandardandPoor’scompanyselectsstocksforinclusioninthe Index.

STATEMENT OF INVESTMENT POLICIES, STANDARDS AND PROCEDURES (SIP&P)AwritteninvestmentpolicyapprovedbyPSP Investments’BoardofDirectors,andreviewedatleastannually,relatingtoeachPensionPlan.This isa requirementunderparagraph7(2)(a)of theAct.It addresses matters such as categories of investments; use ofderivativeproducts;assetdiversificationandexpectedinvestmentreturns;managementofcredit,marketandotherfinancialrisks;liquidityofinvestments;lendingofcashandsecurities;evaluationofinvestmentsthatarenotregularlytradedonapublicexchange;and theexerciseofanyvoting rights thatPSP Investmentshasthroughitsinvestments.

STRUCTURED INVESTMENT VEHICLEAstructuredinvestmentvehicle(SIV)isafundthatborrowsmoneybyissuingshort-termsecuritiesatlowinterestandthenlendsthatmoneybybuyinglong-termsecuritiesathigherinterest,makingaprofitforinvestorsfromthedifference.

SUBPRIME MORTGAGEAtypeofmortgageloanthatisnormallymadetoborrowerswithlowcreditquality;asaresult,lendinginstitutions often charge ahigher rate of interest on subprime mortgages to compensatethemselvesforcarryingmorerisk.

SWAPSFinancialderivatives inwhichtwocounterpartiesexchangeonestreamofcashflowsforanotherstream.Swapscanbeusedtohedgeriskortospeculateonmarketoutcomes.Forexample,inaninterest-rateswaponepartycouldagreetopayafixedinterestrateandreceiveanadjustableratefromanotherparty.Therearemanyothertypesofswaps,includingcurrencyswaps,debt-equityswapsandcredit-defaultswaps.

GLOSSARY

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T

TIME-WEIGHTED RATE OF RETURNAreturncalculationmethodologythateliminatesthe impactofcashflowsinto(oroutof)aportfolio.Thismethodologyrecognizesthefactthatmanagershavenocontroloverthesizeandtimingofcashflows.

V

VALUE-AT-RISk (VaR)Amethodusedtomeasuremarketrisk.VaRisthemaximumlossnotexceededwithinagivenprobability(definedasthe“confidencelevel”),overagivenperiodoftime.

VOLATILITYGenerally refers to variability (in frequency and magnitude) ofreturnsaroundanaverageorreferencepointoveraperiodoftime.

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MANAGEMENT TEAMGORdON j. FYFEPresident and Chief Executive Officer

jOHN VALENTINIExecutive Vice President, Chief Operating Officer and Chief Financial Officer

GUY ARCHAMBAULTFirst Vice President, Human Resources

NEIL CUNNINGHAMFirst Vice President, Real Estate Investments

dANIEL GARANTFirst Vice President, Public Market Investments

BRUNO GUILMETTEFirst Vice President, Infrastructure Investments

dEREK MURPHYFirst Vice President, Private Equity

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PAUL CANTORChair, PSP Investments Senior Advisor, Bennett Jones LLP

MEMBER:Investment Committee

BoardmembersinceMarch28,2000

Mr.CantorisSeniorAdvisoratBennettJonesLLP.HeisalsoChairoftheYorkUniversityBoardofGovernorsandsitsontheBoardsofINGBankofCanadaandofIntactFinancialCorporation.Mr.CantorpreviouslyservedasChair&CEOofNationalTrustCompany;President&CEOofConfederationLife;President,InvestmentBank,CanadianImperialBankofCommerce(CIBC);andManagingPartnerofRussellReynoldsAssociatesCanada.Aswell,hehasheldBoardappointmentsatCIBC,NationalTrustCompany,Torstar,E-LFinancialandHeesInternationalBancorp.Mr.CantorwasthefoundingExecutiveDirectoroftheWorldBank/GovernmentofCanada-sponsoredInternationalLeadershipCentreforFinancialSectorSupervisionatYorkUniversity.HebeganhiscareerattheGovernmentofCanada’sDepartmentofFinanceandsubsequentlyworkedatPolysarLimited,afederalcrowncorporation.

Mr.CantorisaformerChairoftheCanadianBankersAssociation’sTaxationCommitteeandactedasChairoftheICDCommissionontheGovernanceofExecutiveCompensation.HealsoservedontheFederalReserveBankofNewYork’sInternationalCapitalMarketsCommittee; on Revenue Canada Taxation’s Advisory Committee; and on the OntarioPremier’sCouncilonEconomicRenewal.

Mr.CantorholdsaBAfromtheUniversityofAlberta,anLLBfromtheUniversityofTorontoandisaFellowoftheInstituteofCanadianBankers(Ryerson University).

jAMIE BAILLIEPresident and Chief Executive Officer Credit Union Atlantic

MEMBER:Audit and Conflicts Committee / Governance Committee / Investment Committee /


Mr.BailliewasappointedPresident&CEOofCreditUnionAtlanticin2005.HeisalsoamemberoftheEquifaxCanada, Inc.AdvisoryBoard.Previously,Mr.BaillieservedforthreeyearsasChiefofStaff,OfficeofthePremierofNovaScotia,andwasaPartnerwiththeexecutivesearchfirmRobertsonSurrette.Forthepastfouryears,Mr.BailliehasbeennamedoneofAtlanticCanada’sTop50CEOsbyAtlantic Businessmagazine.Anactivecommunityvolunteer, he isamemberof theBoardsofDalhousieUniversityand theHalifaxInternationalAirportAuthority,andpast-chairoftheBoardofNeptuneTheatre.Mr. Baillie holds a B.Comm. from Dalhousie University, a Chartered Accountant (CA)designation,andisagraduateoftheCanadianSecurities Institute.

BOB BALdwINConsultant

MEMBER:Governance Committee – Chair / Human Resources and Compensation Committee / Investment Committee / Special Committee*


Mr.BaldwinisanOttawa-basedconsultantwhospecializesinpensions,ageingsocietyandlabour-marketissues.Previously,hewasDirectorofSocialandEconomicPolicyattheCanadian LabourCongress (CLC) and was theCLC’s pension specialist from 1977to 2005. Mr. Baldwin is a member of the Committee on Professional Conduct of theCanadian Institute of Actuaries; he chairs the Board of Trustees of the Canada WideIndustrial Pension Plan; and advises the Trade Union Advisory Committee to theOrganisationforEconomicCo-OperationandDevelopment(OECD)onpensionissues.A SeniorAssociatewith InformetricaLimited,Mr.Baldwin isalsoanAdjunctResearchProfessoratCarletonUniversityandaPolicyAssociateoftheCaledonInstituteofSocialPolicy.HeholdsaMastersDegreeinPoliticalSciencefromtheUniversityofWestern Ontario.

DIRECTORS’

BIOGRAPHIES

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CHERYL BARKERCorporate Director

MEMBER:Audit and Conflicts Committee / Governance Committee / Investment Committee

BoardmembersinceDecember 18, 2006

Ms.BarkerisamemberoftheBoardofDirectorsandChairoftheAuditCommitteeofCanadaMediaFundandalsoservesasatrusteeandChairoftheAuditCommitteeofLanesborough REIT. She was President of Manitoba Telecom Services Inc. (MTS)from 2004untilherretirementinFebruary 2006.Ms.Barker’scareeratMTSspanned19 years,duringwhichsheservedinavarietyofkeypositions,includingPresidentandCOOofMTSCommunicationsInc.;Chair,PresidentandCEOofBellIntrignaInc.;andCFOandTreasurerofMTS.ACharteredAccountant(CA),Ms.BarkerholdsaB.Sc.aswellasaCertificateinEducationfromtheUniversityof Manitoba.

LÉON COURVILLECorporate Director

MEMBER:Governance Committee / Human Resources and Compensation Committee / Investment Committee


Mr.Courvillehasdevotedhisentirecareertothesciencesofmanagementandfinance,servingfirstasaprofessorandresearcheratuniversitiesinCanadaandtheUnitedStatesbeforebeingappointedPresidentoftheNationalBankofCanada.Heisenjoyinganactive“retirement”asacorporatedirectorandproprietoroftheDomaineLesBromevineyard,whichhefoundedin1999.Mr.CourvilleisamemberoftheBoardsofDirectorsofNavCanada,theInstitut de Tourisme et d’Hôtellerie du QuébecandtheInstitut Économique de Montréal.HisresearchandpublicationshavegarneredawardsandbursariesinCanadaandabroad,includingtheCoopers&LybrandAwardforhisworkentitledThe Storm - Navigating the New Economy.Mr.CourvilleholdsaPh.D.inEconomicsfromCarnegie-Mellon University.

ANTHONY R. GAGECorporate Director

MEMBER:Human Resources and Compensation Committee / Investment Committee – Chair / Special Committee*

BoardmembersinceJune27,2006

Mr.GagesitsontheBoardofGovernorsoftheUniversityofVictoria,isaDirectorofSkyInvestmentCounselandHeadoftheManagementCommitteeofJEAPensionSystemSolutions. He is a former Chair of the Board of Phillips, Hager & North InvestmentManagement.HiscareeratPhillips,Hager&North,whereheservedasPresidentandCEOfrom1994to1999,spannedmorethan20years.Previously,Mr.GagewasAssistantVice-President and Director of Confed Investment Counseling, the pension fundmanagement arm of Confederation Life. Mr. Gage holds a BA (Economics) from theUniversityofVictoriaandanMBA(Finance)fromtheUniversityofBritishColumbia.Heis a Chartered Financial Analyst (CFA) and an accredited Chartered Director(McMaster University).

LYNN HAIGHTCorporate Director

MEMBER:Audit and Conflicts Committee / Investment Committee

BoardmembersinceJanuary14,2010

Ms.HaightretiredasChiefOperatingOfficerandChiefFinancialOfficeroftheForestersinsuranceorganization.ShepreviouslyservedasVicePresident,USFixedAnnuities,andChiefAccountantofManulifeFinancial. Acorporatedirectorandconsultant,Ms.HaightisaTrusteeandChairoftheAuditCommitteeoftheOntarioArtsCouncil.ShealsositsontheBoardsof theWorldBank’sConsortiumof InternationalAgriculturalResearchCentres,GreenShieldCanadaandSomervilleCollege,OxfordUniversity. ShehasservedasChairofForestersHoldingsEurope,ChairoftheWorldAgroforestryCentreinNairobi,Kenya,andChairof theSectoralAdvisoryGroup forbusinessservices to the federalMinisterofTrade. Ms.HaightholdsanMAHonoursfromOxford.SheisaFellowoftheCanadianInstituteofCharteredAccountants,aFellowoftheCanadianAssociationofManagementConsultantsandaCertifiedCorporate Director.

DIRECTORS’

BIOGRAPHIES

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jEAN LEFEBVRECorporate Director

MEMBER:Human Resources and Compensation Committee / Investment Committee /Special Committee* - Chair

BoardmembersinceAugust25,2003

Mr.Lefebvreisanindependentasset-managementconsultant.From1998to2001,heservedasSeniorVice-PresidentofTALGlobalAssetManagement.Previously,Mr.Lefebvreworked as a pension and asset-management consultant with William M. Mercer andTomenson-Alexander.HebeganhiscareerattheDominionLifeInsuranceCompanyasactuarialassistant,andlaterheldthepositionofChiefActuaryatAEternaLifeandatWestmountLife,wherehewasalsoChiefAdministrativeOfficerandamemberoftheBoardofDirectors.Formanyyears,healsowasa lecturer inactuarialscienceat theUniversité de Montréal .Mr.LefebvreholdsaBAandaB.Sc.fromtheUniversité de Montréal.HeisaFellowoftheSocietyofActuariesandoftheCanadianInstituteof Actuaries.

wILLIAM A. MACKINNONCorporate Director

MEMBER:Audit and Conflicts Committee – Chair since February 9, 2010 / Investment Committee

BoardmembersinceJanuary14,2010

Mr.MackinnonisamemberoftheBoardsofDirectorsofTelus,PioneerPetroleumandNovadaqTechnologies.Veryactiveinprofessionalandcommunitycircles,heservesasChairoftheBoardofDirectorsoftheTorontoBoardof Trade,Vice-ChairoftheBoardoftheInstituteofCharteredAccountantsofCanada,Vice-ChairofTheTorontoEastGeneralHospitalBoard,andasamemberoftheBoardofoftheC.D.HoweFoundationandCo-Chairof itsTaxPolicyCommittee.He isalsoamemberof theBoardsof theTorontoCommunityFoundationandRoyThomsonHalland,in2008,servedasChairofCampaignfortheTorontoUnitedWay.Mr.MackinnonjoinedKPMG Canadain1968,becameaPartnerin1977andwasthefirm’sChiefExecutiveOfficerfrom1999untilhisretirementattheendof2008.HealsoservedontheKPMGInternationalBoardofDirectors.Mr.MackinnonholdsaB.Comm.fromtheUniversityofManitoba.HeobtainedhisCharteredAccountant(CA)designationin1971andbecameaFCAin 1994.

MICHAEL P. MUELLERCorporate Director

MEMBER:Human Resources and Compensation Committee – Chair / Investment Committee / Special Committee*

BoardmembersinceDecember 18, 2006

Mr.MuellerisChairmanoftheBoardoftheScarboroughHospital,andamemberoftheBoardsofAIMTherapeutics,BiovestCorp.I,Budco,AnnidisCorp,andtheScarboroughHospitalFoundation.HealsoservesasastrategicadvisortoanumberofCanadian,USandEuropeancompanies.From2003to2005,hewasPresidentandCEOofMDSCapitalCorporation.Mr.MuellerpreviouslyheldaseriesofseniorexecutivepositionsatTD Bank,includingViceChairmanandGlobalHeadofInvestmentandCorporateBanking.HeisaformermemberoftheBoardsofDirectorsofTMBioScience,theKatimavikFoundation,MDSCapitalandCanadianMedicalDiscoveriesFundsIandII.Mr.MuellerholdsaB.Sc.fromtheUniversityofWesternOntarioandanMBAfromYork University.

*TheSpecialCommitteewaswounduponFebruary9,2010.

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FINANCIAL STATEMENTS AND NOTES TO ThE FINANCIAL STATEMENTS

Table of ConTenTs

ManageMenT’s ResponsibiliTy foR finanCial RepoRTing 59

invesTMenT CeRTifiCaTe 60

publiC seCToR pension invesTMenT boaRd

Auditors’ Report 61

Consolidated Balance Sheet 62

Consolidated Statement of Net Income (Loss) from Operations and Comprehensive Income 63

Consolidated Statement of Changes in Net Assets 63

Notes to the Consolidated Financial Statements 64-87

appendix

publiC seRviCe pension plan aCCounT

Canadian foRCes pension plan aCCounT

Royal Canadian MounTed poliCe pension plan aCCounT

ReseRve foRCe pension plan aCCounT

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Theconsolidatedfinancial statementsof the PublicSectorPension InvestmentBoard (“PSP Investments”)aswell as the financialstatements of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Forces Pension PlanAccounts (“thefinancial statements”)havebeenpreparedbymanagementandapprovedby theBoardofDirectors.ThefinancialstatementshavebeenpreparedinaccordancewithCanadiangenerallyacceptedaccountingprinciples.Managementisresponsibleforthecontentsofthefinancialstatementsandthefinancialinformationcontainedintheannualreport.

PSP Investments maintains records and systems of internal control and supporting procedures to provide reasonable assurancethat PSPInvestments’assetsaresafeguardedandcontrolled,andthattransactionsareinaccordancewiththeapplicableprovisionsofPartXof theFinancial Administration Actand,asappropriate, thePublic Sector Pension Investment Board Act (“theAct”), theaccompanyingregulations,theby-laws,andtheStatementofInvestmentPolicies,StandardsandProcedures(“theSIP&P”).

Inthisregard,investmentsofPSPInvestmentsheldduringtheyearendedMarch 31, 2010wereinaccordancewiththeActandthe SIP&P.

The Audit and Conflicts Committee assists the Board of Directors in discharging its responsibility to approve the annual financialstatements.TheCommitteemeetsregularlywithbothmanagementandtheexternalauditorstodiscussthescopeandfindingsofauditsandotherworkthattheexternalauditorsmayberequestedtoperformfromtimetotime,toreviewfinancialinformation,andtodiscusstheadequacyofinternalcontrols.TheCommitteereviewstheannualfinancialstatementsandrecommendsthemtotheBoardofDirectorsforapproval.

PSP Investments’ external “joint” auditors, the Office of the Auditor General of Canada and Deloitte & Touche LLP (“the ExternalAuditors”),haveconductedanindependentexaminationofthefinancialstatementsinaccordancewithCanadiangenerallyacceptedauditingstandards,performingsuchtestsandotherproceduresastheyconsidernecessarytoexpressanopinionintheirAuditors’Report.TheExternalAuditorshavefullandunrestrictedaccesstomanagementandtheAuditandConflictsCommitteetodiscussfindingsrelatedtotheintegrityofPSPInvestments’financialreportingandtheadequacyofinternalcontrolsystems.

GordonJ.Fyfe JohnValentiniPresidentand ExecutiveVicePresident,ChiefExecutiveOfficer ChiefOperatingOfficerandChiefFinancialOfficerMay10,2010 May10,2010

MANAgEMENT’S RESPONSIBILITy FOR FINANCIAL REPORTINg

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INVESTMENT CERTIFICATE

ThePublic Sector Pension Investment Board Act(“theAct”)requiresthatacertificatebesignedbyadirectoronbehalfoftheBoardofDirectors,statingthattheinvestmentsofthePublicSectorPensionInvestmentBoard(“PSPInvestments”)heldduringthefinancialyearwereinaccordancewiththeActandPSPInvestments’investmentpolicies,standardsandprocedures.Accordingly,theInvestmentCertificatefollows:

“The investments of PSP Investments held during the year ended March 31, 2010, were in accordance with the Act and PSP Investments’ Statement of Investment Policies, Standards and Procedures”.

PaulCantorChairpersonMay10,2010

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audiToRs’ RepoRT

TothePresidentoftheTreasuryBoard

WehaveauditedtheConsolidatedBalanceSheetofthePublicSectorPensionInvestmentBoard(PSP Investments)asatMarch 31, 2010,andtheConsolidatedStatementsofNetIncome(loss)fromOperationsandComprehensiveIncomeandofChangesinNetAssetsfortheyearthenended.ThesefinancialstatementsaretheresponsibilityofPSPInvestments’management.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.

WeconductedourauditinaccordancewithCanadiangenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformanaudittoobtainreasonableassurancewhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.

Inouropinion,theseconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofPSPInvestmentsasatMarch 31,2010,andtheresultsofitsoperationsandchangesinitsnetassetsfortheyearthenendedinaccordancewithCanadiangenerallyacceptedaccountingprinciples.AsrequiredbytheFinancial Administration Act,wereportthat,inouropinion,theseprincipleshavebeenappliedonabasisconsistentwiththatoftheprecedingyear.

Further,inouropinion,thetransactionsofPSPInvestmentsandofitswholly-ownedsubsidiariesthathavecometoournoticeduringourauditoftheconsolidatedfinancialstatementshave,inallsignificantrespects,beeninaccordancewiththeapplicableprovisionsofPartXoftheFinancial Administration Actandregulations,thePublic Sector Pension Investment Board Actandregulationsandthe

by-lawsofPSPInvestmentsanditswholly-ownedsubsidiaries.

1CharteredaccountantauditorpermitNo.18527 SheilaFraser,FCA AuditorGeneralofCanada

Montreal,Canada Ottawa,CanadaMay10,2010 May10,2010

PUBLIC SECTOR PENSION INVESTMENT BOARD

CONSOLIDATED



ConsolidaTed balanCe sHeeT

As at March 31

($ millions) 2010 2009

ASSETS

Investments(Note 3(a)) $ 48,359 $ 38,259Investment-relatedassets(Note 3(a)) 627 741Cash 2 1Otherassets 47 40

TOTALASSETS $ 49,035 $ 39,041

LIABILITIES

Investment-relatedliabilities(Note 3(a)) $ 2,709 $ 5,203Accountspayableandotherliabilities 56 61

TOTALLIABILITIES $ 2,765 $ 5,264

NETASSETS $ 46,270 $ 33,777

Sharecapital(Note 5) $ – $ –PublicServicePensionPlanAccount 33,661 24,496CanadianForcesPensionPlanAccount 9,107 6,750RoyalCanadianMountedPolicePensionPlanAccount 3,271 2,416ReserveForcePensionPlanAccount 231 115

NETASSETS $ 46,270 $ 33,777

Commitments(Note 13)

Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.

OnbehalfoftheBoardofDirectors:

PaulCantor WilliamA.MacKinnonChairoftheBoard ChairoftheAuditandConflictsCommittee



ConsolidaTed sTaTeMenT of neT inCoMe (loss) fRoM opeRaTions and CoMpReHensive inCoMe

For the year ended March 31

($ millions) 2010 2009

INVESTMENTINCOME(LOSS)(Note 7) $ 7,605 $ (9,493)

OpErATINgExpENSES(Note 8) $ 92 $ 86

NETINCOME(LOSS)FrOMOpErATIONSANDCOMprEHENSIVEINCOME(Note 9) $ 7,513 $ (9,579)


ConsolidaTed sTaTeMenT of CHanges in neT asseTs


($ millions) 2010 2009

NETASSETS,BEgINNINgOFYEAr $ 33,777 $ 38,925

Fundtransfers(Note 6) 4,980 4,431Netincome(loss)fromoperationsandcomprehensiveincome 7,513 (9,579)

Increase(decrease)innetassetsfortheyear 12,493 (5,148)

NETASSETS,ENDOFYEAr $ 46,270 $ 33,777



noTes To THe ConsolidaTed finanCial sTaTeMenTs

For the year ended March 31, 2010


ORgANIZATION

ThePublicSectorPensionInvestmentBoard(PSP Investments)isacrowncorporationestablishedunderthePublic Sector Pension Investment Board Act (“theAct”)withamandate to invest thenet contributions of the Public Service, Canadian Forces, RoyalCanadian Mounted Police and Reserve Force pension plans infinancialmarkets.

The Public Service, Canadian Forces and Royal CanadianMountedPolicePensionFundswereestablishedbyamendmentsto the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act (“the Superannuation Acts”), to receivecontributionsandmakebenefitpaymentsinrespectofmemberservice after April 1, 2000. The Reserve Force Pension Fundwas established by an amendment to the Canadian Forces Superannuation Act to receive contributions and make benefitpaymentsinrespectofmemberserviceafterMarch 1, 2007.Thenetcontributionsaretransferred,byeachPensionFund,totheirrespectivePSP InvestmentsPlanAccountforinvestment.

PSP Investments is responsible for managing amounts that aretransferred to it in the best interests of the beneficiaries andcontributorsundertheSuperannuation Acts.Theamountsaretobeinvestedwithaviewofachievingamaximumrateofreturn,withoutundueriskof loss,withregardstothefunding,policiesand requirements of the pension plans established under theSuperannuation Acts.

1. SUMMARy OF SIgNIFICANT ACCOUNTINg POLICIES

BASIS OF PRESENTATION

These consolidated financial statements present the financialpositionandoperationsofPSP Investmentsanditswholly-ownedsubsidiaries as they pertain to the investment of the netcontributionstransferredtoitfromthePublicService,CanadianForces, Royal Canadian Mounted Police and Reserve ForcePensionFunds (“thePension Funds”).Accordingly, theydonotreflectalloftheassetsorthedetailsofthepensioncontributions,paymentsandliabilitiesofallthePensionFunds.Theconsolidatedfinancial statements have been prepared in accordance withCanadiangenerallyacceptedaccountingprinciples(GAAP)andthe requirements of the Act. PSP Investments qualifies as an

InvestmentCompanyandthereforereportsitsinvestmentsatfairvalue, in accordance with Accounting Guideline 18, “InvestmentCompanies” (AcG-18). All changes in fair value are included ininvestmentincome(loss)asnetunrealizedgains(losses).

Comparative figures have been reclassified to conform to thecurrentyear’spresentation.

PLAN ACCOUNTS

PSP Investments maintains records of each Pension Fund’s netcontributions,aswellastheallocationofitsinvestmentsandtheresultsof itsoperations toeachof theplanaccounts.SeparatefinancialstatementsforeachPlanaccounthavebeenprepared.

VALUATION OF INVESTMENTS

Investments, investment-related assets and investment-relatedliabilities are recorded as of the trade date (the date uponwhich the substantial risks and rewards are transferred) andarestatedat fairvalue.Fairvalue isanestimateof theamountofconsideration thatwouldbeagreedupon inanarm’s lengthtransaction between knowledgeable, willing parties who areundernocompulsiontoact.

Marketpricesorratesareusedtodeterminefairvaluewhereanactivemarketexists(suchasarecognizedsecuritiesexchange),as it is the best evidence of the fair value of an investment. Ifquotedmarketpricesorratesarenotavailable,thenfairvaluesareestimatedusingpresentvalueorothervaluationtechniques,usinginputsexistingattheendofthereportingperiodthatarederivedfromobservablemarketdata.

Valuation techniques are generally applied to investments inthe 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).Thevaluesderivedfromapplyingthesetechniquesareimpactedbythechoiceofvaluationmodelandtheunderlyingassumptionsmade concerning factors such as the amounts and timing offuture cash flows, discount rates, volatility and credit risk. Incertain cases, such assumptions are not supported by marketobservabledata.

The valuation methods of each asset class are described inNotes 3(a)and(b).





1. SUMMARy OF SIgNIFICANT ACCOUNTINg POLICIES (continued)

VALUATION OF CAPITAL DEBT FINANCINg

PSP Investments’ short-term capital debt financing is recordedatcostplusaccruedinterest,whichapproximatesfairvalue.Thefair value of PSP Investments’ long-term capital debt financingis based on prices that are obtained from third-party pricingsources.ItismeasuredusinganinterestratecurvewithaspreadconsistentwithPSP Investments’creditquality.

TRANSACTION COSTS

Transaction costs are incremental costs directly attributable totheacquisition,duediligence,issue,ordisposalofafinancialassetor financial liability. Transaction costs are expensed as incurredandrecordedasacomponentofinvestmentincome(loss).

INVESTMENT MANAgEMENT FEES

Investment management fees are costs directly attributableto the external management of assets on behalf ofPSP Investments. Investment management fees incurred forPrivateMarketInvestmentsarepaid,asdeterminedbythefundmanager, either by the investment directly, through capitalcontributionsbyPSP Investmentsoroffsetagainstdistributionsreceived from the investment (Note 3 (a) (ii)). These amountsare recorded against investment income (loss). Investmentmanagement fees are also incurred for certain public equityinvestments and these amounts are paid, either directly byPSP Investments or offset against distributions received frompooledfundinvestments.Inbothcases,theyarerecordedagainstinvestmentincome(loss)(Note 7).

INCOME RECOgNITION

Investmentincome(loss)ismadeupofinterestincome,dividends,realized gains (losses) on the disposal of investments andunrealizedgains(losses)whichreflect thechange inunrealizedappreciation (depreciation) of investments held at the end oftheyear.Interestincomeisrecognizedasearned.Dividendsarerecognizedontheex-dividenddateandarereflectedasdividendincome. Dividends paid on securities sold short are reflectedas dividend expense. Additionally, other income includes therelated distributions from pooled funds, limited partnershipsas well as from direct and co-investments, all from PrivateMarket Investments.

TRANSLATION OF FOREIgN CURRENCIES

Investment transactions in foreign currencies are recorded atexchange rates prevailing on the transaction date. Investmentsdenominatedinforeigncurrenciesandheldattheendoftheyearare translatedatexchange rates ineffectat theyear-enddate.The resulting realized and unrealized gains (losses) on foreignexchangeareincludedininvestmentincome(loss).

FUND TRANSFERS

AmountsreceivedfromeachPensionFundarerecordedintheirrespectiveplanaccount.

INCOME TAxES

PSP Investmentsandthemajorityofitssubsidiariesareexemptfrom Part I tax under paragraph 149(1)(d) of the Income Tax Act (Canada).

USE OF ESTIMATES

In preparing these consolidated financial statements,management must make certain estimates and assumptionswhich can affect the reported values of assets and liabilities,principally the valuation of Private Market Investments, ABTNs,derivatives, related income and expenses and note disclosures.Althoughestimatesandassumptionsreflectmanagement’sbestjudgement,actualresultsmaydifferfromtheseestimates.





2. ChANgES IN ACCOUNTINg POLICIES

AMENDMENT TO ACCOUNTINg STANDARD

In June 2009, the Canadian Institute of Chartered Accountants(CICA) amended Section 3862 “Financial Instruments –Disclosures”oftheCICAHandbook.ThisamendmentiseffectiveforannualfinancialstatementsrelatingtofiscalyearsendingafterSeptember30,2009.

The amendment enhances disclosures about fair valuemeasurementsoffinancialinstrumentsaswellastheliquidityriskofderivativefinancialliabilities.

Theprincipaldisclosuresintroducedbythisamendmentrequirefinancial instruments measured at fair value to be categorizedintooneofthreefairvaluehierarchylevels.Suchcategorizationisbasedonthesignificanceoftheinputsusedinmeasuringsuchvalueaswellasdisclosureofmovementsbetween levelsofthefairvaluehierarchy.

Additionaldisclosuresforliquidityriskcallforamaturityanalysisfor derivative financial liabilities based on the way in which anentitymanagesitsliquidityrisk.

PSP Investments adopted the provisions of such amendmentsforitsMarch 31, 2010consolidatedfinancialstatements.RequireddisclosuresaremadeinNote 3(c)andNote 4(c).

FUTURE ChANgES IN ACCOUNTINg POLICIES AND DISCLOSURES

In February 2008, the Accounting Standards Board of Canada(AcSB)confirmedthatCanadianGAAPforpubliclyaccountableenterprises will converge with International Financial ReportingStandards (IFRS) effective January 1, 2011. In response to thischange, PSP Investments has put in place a transition planthat would allow it to prepare and present its March 31, 2012consolidatedfinancialstatementsunderIFRS.

In analyzing the various impacts of its transition to IFRS,PSP Investmentsconcludedthattherequirementtoconsolidateitscontrolledinvestmentsrankedasoneofthemostsignificantofsuchimpacts.

InApril2010,theAcSBissuedSection 4600“PensionPlans”oftheCICAHandbookrequiringpensionplansinCanadatofollowthisstandardratherthanconverttoIFRSinthesamefashionasotherpublicly accountable enterprises. Under Section 4600, pensionplanswouldcontinuetoaccountforandreporttheirinvestmentsatfairvalueaswaspreviouslydoneunderSection 4100“PensionPlans” of the CICA Handbook. The provisions of Section 4600apply to annual financial statements relating to fiscal yearsbeginningonorafterJanuary 1, 2011.

Concurrentwiththe issuanceofSection 4600,theAcSBissuedan exposure draft that proposed a scope expansion to includeentities,suchasPSP Investments,thatareseparatefrompensionplansandwhosesolepurposeistoholdandinvestassetsreceivedfromoneormorepensionplans,butdoesnotitselfhaveapensionobligation. Pursuant to the exposure draft, PSP Investmentswould be exempt from the IFRS requirement to consolidate itscontrolledinvestments.TheAcSBhasindicatedthatitanticipatesreachingadecisionconcerningtheexposuredraftinJune2010.

ManagementiscurrentlymonitoringtheoutcomeofthisexposuredraftandevaluatingitsimpactonPSP Investments’consolidatedfinancialstatementsaswellastheIFRStransitionplan.





3. INVESTMENTS

(A) INVESTMENT PORTFOLIO

Theinvestmentportfolio,beforeallocatingtheeffectofderivativecontractsandinvestment-relatedassetsandliabilitiestotheassetclassestowhichtheyrelate,asatMarch31,isasfollows:

($ millions) 2010 2009

AssetClass Fair Value Cost Fair Value Cost

WorldEquity CanadianEquity $ 10,353 $ 9,115 $ 6,327 $ 7,671 ForeignEquity: USLargeCapEquity 2,136 2,060 716 985 EAFELargeCapEquity 2,066 2,374 1,161 1,847 SmallCapDevelopedWorldEquity 1,955 1,816 730 990 EmergingMarketsEquity 2,522 2,255 1,461 1,838 PrivateEquity 5,251 5,615 4,257 4,985NominalFixedIncome Cash,CashEquivalentsandOther1 4,630 4,764 3,069 3,326 WorldGovernmentBonds 1,096 1,170 759 675 CanadianFixedIncome 7,097 6,909 7,145 7,185realreturnAssets WorldInflation-LinkedBonds 337 353 196 198 RealEstate 6,141 6,180 7,105 6,425 Infrastructure 2,361 2,423 2,711 2,335Absolutereturn 2,414 2,243 2,622 2,732

INVESTMENTS $ 48,359 $ 47,277 $ 38,259 $ 41,192

Investment-relatedAssets Amountsreceivablefrompendingtrades $ 149 $ 149 $ 256 $ 256 Derivative-relatedreceivables 478 6 485 65

TotalInvestment-relatedAssets $ 627 $ 155 $ 741 $ 321

Investment-relatedLiabilities Amountspayablefrompendingtrades $ (458) $ (458) $ (506) $ (506) Securitiessoldshort (114) (131) (354) (442) Derivative-relatedpayables (415) (3) (1,710) (98) Capitaldebtfinancing: Short-term (649) (649) (1,579) (1,579) Long-term (1,073) (1,024) (1,054) (1,024)

TotalInvestment-relatedLiabilities $ (2,709) $ (2,265) $ (5,203) $ (3,649)

NETINVESTMENTS $ 46,277 $ 45,167 $ 33,797 $ 37,864

1 Includesfloatingratenoteswithmaturitiesgreaterthanoneyearwithafairvalueof$1,397 million(2009–$18 million).





3. INVESTMENTS (continued)

(A) INVESTMENT PORTFOLIO (continued)

(i) Canadian Equity and Foreign Equity

Canadian Equity and Foreign Equity include direct and indirectinvestments in common shares, American depository receipts,globaldepositoryreceipts,participationnotes,preferredshares,income trust units, exchange traded funds, and securitiesconvertibleintocommonsharesofpubliclylistedissuers.

Valuation Techniques

DirectinvestmentsinCanadianandForeignEquitiesaremeasuredatfairvalueusingquotedmarketprices,namely,thebidprice.Inthecaseofinvestmentsinpooledfunds,fairvalueismeasuredbyusingunitvaluesobtainedfromeachofthefunds’administrators.Suchunitvaluesarederivedfromthefairvaluemeasurementoftheunderlyinginvestmentsineachpooledfund.

(ii) Private Equity, Real Estate and Infrastructure

ThePrivateEquityassetclassiscomprisedofdirectinvestmentsin companies and fund investments. They include investmentsinprivatecompanies,mezzaninedebtanddistresseddebt.ThePrivateEquityassetclass isaccounted fornetofall third-partyfinancings.AsatMarch 31, 2010,thetotalamountofthird-partyfinancing included in the Private Equity asset class contractedby direct investments controlled by PSP Investments is nil(2009 – nil).

TheRealEstateassetclassiscomprisedofdirectinvestmentsincompanies,inproperties,third-partydebtsandfundinvestmentsin the real estate sector. Real Estate investments are classifiedintotwoportfolios(anequityportfolioandadebtportfolio).Theequityportfolioiscomprisedofdirectinvestmentsinpropertiesand companies in the office, retail, industrial, hospitality andresidential sectors, as well as private funds and publicly tradedsecurities invested in real estate assets. The debt portfolio iscomprisedof third-party loanssuchas juniorandseniordebts,construction loans, bridge loans, income-participating loans,mezzanine loans and other structured investments (collectively“Real Estate Debt”) where significant portions of the value areattributed to the underlying real estate assets. The Real Estateassetclassisaccountedfornetofallthird-partyfinancings.AsatMarch 31, 2010,thetotalamountofthird-partyfinancingincludedin the Real Estate asset class contracted by direct investmentscontrolled by PSP Investments is approximately $2,150 million(2009–approximately$2,100 million).

TheInfrastructureassetclassiscomprisedofdirectinvestmentsincompaniesandfundinvestments.Theyincludeinvestmentsincompaniesengagedinthemanagement,ownershiporoperationofassetsinpower,regulatedbusinesses,transportation,telecomorsocialinfrastructure.TheInfrastructureassetclassisaccountedfornetofallthird-partyfinancings.AsatMarch 31, 2010,thetotalamount of third-party financing included in the Infrastructureasset class contracted by direct investments controlled byPSP Investments is approximately $100 million (2009 –approximately$150 million).

Investmentmanagementfees,asdisclosedinNote 1,areincurredfor Private Market Investments and generally vary between0.1% and 2.1% of the total invested and/or committed amount.Investmentmanagementfeesof$152 millionfortheyearendedMarch 31, 2010 (2009 – $160 million) were recorded againstinvestmentincome(loss).


The fair value of Private Market Investments held directly byPSP Investmentsisdeterminedatleastannually,usingacceptableindustry valuation methods. For each investment, the relevantmethodologyisappliedconsistentlyovertime.

FordirectPrivateMarketsInvestmentsaswellasinvestmentsinRealEstateDebt,managementuses the servicesof third-partyappraisers to determine the fair value. In selecting appraisers,management ensures their independence and that valuationmethods used are consistent with professional appraisalstandards.SuchstandardsincludetheInternational Private Equity and Venture Capital Valuation Guidelines,theCanadian Uniform Standards of Professional Appraisal Practice and the Uniform Standards of Professional Appraisal PracticeintheUnitedStatesof America. In validating the work performed by appraisers,managementensuresthattheassumptionsusedcorrespondtofinancialinformationandforecastsoftheunderlyinginvestment.

For direct investments in Private Equity and Infrastructure,valuationmethodsused includediscountedcashflowsanalysis,earningsmultiples,pricesofrecentcomparabletransactionsandpubliclytradedcomparables.Assumptionsusedinsuchvaluationsinclude discount rates and projected cash flows, which are notfullysupportedbypricesfrommarketobservabletransactions.







(ii) Private Equity, Real Estate and Infrastructure (continued)

Valuation Techniques (continued)

For direct investments in Real Estate, valuation methods usedinclude discounted cash flows as well as recent comparabletransactions. Assumptions used in such valuations includecapitalization rates, projected cash flows and/or net operatingincome, which are not fully supported by prices from marketobservabletransactions.

The fair value of Real Estate Debt is determined using either ayield-based or collateral-based valuation technique. The yield-based valuation technique involves discounting expectedfuture cash flows that incorporate assumptions with respect tointerest ratesoffered forsimilar loans toborrowerswithsimilarcredit ratings.Thecollateral-basedvaluation technique involvesassessingtherecoverablevalueofthecollateralinquestion,netofdisposalfees.

InthecaseofPrivateEquity,RealEstateandInfrastructurefundinvestments,thefairvalueisgenerallydeterminedbasedontheauditedfairvaluesreportedbythefund’sgeneralpartnerusingacceptableindustryvaluationmethods.

(iii) Nominal Fixed Income and World Inflation-Linked Bonds

NominalFixedIncomeincludesCash,CashEquivalentsandOther,Canadian Fixed Income and World Government Bonds. CashEquivalents include short-term instruments having a maximumtermtomaturityofoneyear.FloatingratenotesareincludedinCash, Cash Equivalents and Other, provided the final maturitydate does not exceed three years and the coupons reset morethan once per year. Bonds reported as Nominal Fixed Incomeinclude Canadian government bonds, Canadian provincial andterritorialbonds,Canadianmunicipalbondsandcorporatebonds,aswellas international sovereignbonds.World Inflation-LinkedBondsreportedasRealReturnAssetsarefixedincomesecuritiesthatearninflationadjustedreturns.

PSP InvestmentsholdsABTNsreportedasCanadianFixedIncomeintheinvestmentportfolio.TheABTNswerereceivedinexchangeforthird-partyornon-banksponsoredasset-backedcommercialpaper(ABCP)thatsufferedaliquiditydisruptioninmid-August2007andweresubsequentlyrestructuredinJanuary2009.TheABTNshadanoriginalfacevalueof$1,962 million.Duringtheyearended March 31, 2010, PSP Investments received $67 million ofprincipalrepaymentsontheABTNs.

PSPCapitalInc.,awholly-ownedsubsidiaryofPSP Investments,has provided funding facilities of a maximum amount of$969 milliontosupportpotentialmargincallsontheABTNs.AsatMarch 31, 2010,themarginfundingfacilitieshadnotbeendrawnupon. As part of the exchange of the non-bank ABCP for theABTNs,itwasagreedtoincludeintheagreementamoratoriumwhichpreventscollateralcalls foraperiodof18monthsendingJuly 21, 2010.

Management’sbestestimateofthefairvalueofPSP Investments’ABTNs as at March 31, 2010 is equal to $1,185 million (2009 –$1,039 million). TheABTNs’ fair valuehasbeen reduced by theimpact of the funding facilities amounting to $65 million onMarch 31, 2010(2009–$94 million).PSP Investmentsrecordedanincreaseof$213 millioninthefairvalueoftheABTNsduringtheyearendedMarch 31, 2010(decreaseof$483 millionduringtheyearendedMarch 31, 2009).


CashEquivalentsarerecordedatcostplusaccruedinterest,whichapproximatefairvalue.

Fairvaluesofbondsandfloatingratenotesarebasedonpricesobtainedfromthird-partypricingsources.Theyaredeterminedusing either an appropriate interest rate curve with a spreadassociatedwiththecreditqualityoftheissuerorothergenerallyacceptedpricingmethodologies.

ABTNsaremeasuredat fairvalueusingcomparablenoteswithsimilar credit quality and terms as a proxy, while taking intoconsideration the impactof the funding facilities.Thevaluationmodel used includes certain assumptions that are not fullysupportedbymarketobservabledata.Suchassumptionsincludeinterestratespreads,assumedcreditrating(rangingfromBBtoAAA–),expectedreturns,anaveragematurityofsevenyearsaswellasliquidityestimates.







(iv) Absolute Return

InadditiontothedifferentassetclassesoutlinedintheStatementof Investment Policies, Standards and Procedures (SIP&P),PSP Investmentsemploysanumberofabsolutereturnstrategiesthroughunitsofexternallymanagedpooledfunds.


Thefairvalueofinvestmentsinpooledfundsismeasuredbyusingtheunitvaluesobtainedfromeachofthefunds’administrators.Suchunitvaluesarederivedfromthefairvaluemeasurementoftheunderlyinginvestmentsineachpooledfund.

(v) Amounts Receivable and Payable from Pending Trades

Amountsreceivablefrompendingtradesconsistofproceedsonsales of investments, excluding derivative financial instruments,whichhavebeentradedbutremainunsettledattheendofthereportingperiod.

Amounts payable from pending trades consist of the costof purchases of investments, excluding derivative financialinstruments,whichhavebeentradedbutremainunsettledattheendofthereportingperiod.


Thefairvalueofamountsreceivableandpayablefrompendingtradesreflectsthevalueatwhichtheirunderlyingoriginalsaleorpurchasetransactionswereundertaken.

(vi) Securities Sold Short

Securities sold short reflect PSP Investments’ commitment topurchasing securities pursuant to short selling transactions. Insuch transactions, PSP Investments sells securities it does notownwithacommitmenttopurchasingsimilarsecuritiesonthemarkettocoveritsposition.


Usingaskpricesasinputs,thefairvalueofsecuritiessoldshortismeasuredusingthesamemethodasthesimilarlongpositionspresented under Nominal Fixed Income, World Inflation-LinkedBonds,CanadianEquityandForeignEquity.

(B) DERIVATIVE FINANCIAL INSTRUMENTS

Derivativefinancialinstrumentsarefinancialcontracts,thevalueof which is derived from changes in underlying assets, interestor exchange rates. PSP Investments uses derivative financialinstruments to increase returns or to replicate investmentssynthetically. Derivatives are also used to reduce the riskassociatedwithexistinginvestments.

PSP Investmentsusesthefollowingtypesofderivativefinancialinstrumentsasdescribedbelow:

(i) Swaps

Swaps are transactions whereby two counterparties exchangecash flow streams with each other based on predeterminedconditionsthatincludeanotionalamountandaterm.Swapsareusedtoincreasereturnsortoadjustexposuresofcertainassetswithoutdirectlypurchasingorsellingtheunderlyingassets.

(ii) Futures

Futures are standardized contracts to take or make delivery ofanasset(buyorsell)ataspecifictimeinthefutureforaspecificpricethathasbeenagreedupontoday.Futuresareusedtoadjustexposures to specified assets without directly purchasing orsellingtheunderlyingassets.

(iii) Forwards

Forwards are contracts involving the sale by one party andthe purchase by another party of a predefined amount of anunderlying instrument, at a predefined price and a predefineddate in the future. Forwards are used for yield enhancementpurposesortomanageexposurestocurrenciesandinterestrates.






(B) DERIVATIVE FINANCIAL INSTRUMENTS (continued)

(iv) Options

Optionsaretheright,butnottheobligation,tobuyorsellagivenamount of an underlying security, index, or commodity, at anagreed-uponpricestipulatedinadvance,eitheratadetermineddateoratanytimebeforethepredefinedmaturitydate.

(v) Warrants and Rights

Warrantsareoptionsonanunderlyingassetwhichisintheformofatransferablesecurityandwhichcanbelistedonanexchange.

Rightsaresecuritiesgivingshareholdersentitlementtopurchasenew shares issued by a corporation at a predetermined price(normally less than the current market price) in proportion tothenumberofsharesalreadyowned.Rightsareissuedonlyforashortperiodoftime,afterwhichtheyexpire.

(vi) Collateralized Debt Obligations

Collateralizeddebtobligationsareatypeofasset-backedsecuritythat is constructed from a portfolio of credit-related assets.Collateralized debt obligations are usually divided into severaltranches with different credit risk levels and correspondinginterestpayments.Anylossesareappliedfirsttothemorejuniortranches(lowestriskrating)beforemovingupinseniority.


Alllistedderivativefinancialinstrumentsarerecordedatfairvalueusingquotedmarketpriceswiththebidpriceforlongpositionsand the ask price for short positions. Except for collateralizeddebt obligations, OTC derivatives are valued using appropriatevaluationtechniques,suchasdiscountedcashflowsusingcurrentmarket yields. The assumptions used include the statisticalbehaviour of the underlying instruments and the ability of themodeltocorrelatewithobservedmarkettransactions.Formanypricing models there is no material subjectivity because themethodologiesemployeddonotnecessitatesignificantjudgmentandthepricinginputsareobservedfromactivelyquotedmarkets.Additionally, the pricing models used are widely accepted andusedbyothermarketparticipants.

The fair value of collateralized debt obligations are determinedbasedonvaluationtechniques thatusesignificantassumptionsthat are not all directly market observable. Such assumptionsinclude default correlation data and recovery rate which areestimated by management. The instruments are then valuedby discounting the expected cash flows using an appropriatediscountfactor.







Notionalvaluesofderivativefinancial instrumentsarenotrecordedasassetsorliabilitiesastheyrepresentthefaceamountofthecontract.Notionalvaluesdonotrepresentthepotentialgainor lossassociatedwiththemarketorcredit riskofsuchtransactionsdisclosedbelow,withtheexceptionofcreditderivatives1.Rather,theyserveasthebasisuponwhichthecashflowsandthefairvalueofthecontractsaredetermined.

ThefollowingtablesummarizesthederivativesportfolioasatMarch31:

($ millions) 2010 2009

Notional Value

Fair Value Notional Value

Fair Value

INVESTMENTS Assets Liabilities Net

EquityandCommodityDerivatives Futures $ 113 $ – $ – $ – $ 628 $ – TotalReturnSwaps 3,524 116 (1) 115 2,909 106 VarianceSwaps – – – – 107 6 Warrants 1 1 – 1 1 1 Options: Listed-written 5 – – – – –CurrencyDerivatives Forwards 10,183 310 (28) 282 20,620 (171) Options: OTC-purchased 654 4 – 4 619 7 OTC-written 171 – (1) (1) 156 (2)InterestrateDerivatives Bondforwards 206 – (2) (2) 349 – Futures 522 – – – – – InterestRateSwaps 3,904 24 (38) (14) 3,933 (4) TotalReturnSwaps 2,811 19 (14) 5 3,525 55 Swaptions – – – – 2,506 – Options: Listed-purchased 425 – – – – – Listed-written 1,165 – – – 2,494 – OTC-written – – – – 1,500 –CreditDerivatives1: Purchased 28 1 – 1 64 52 Sold 744 3 (331) (328) 1,632 (1,275)

Total $ 24,456 $ 478 $ (415) $ 63 $ 41,043 $ (1,225)

1 Creditderivativesincludecollateralizeddebtobligationsandacreditdefaultswap.PSP Investments,throughsoldcreditderivatives,indirectlyguaranteestheunderlyingreferenceobligations.Themaximumpotentialexposureisthenotionalamountofthesoldcreditderivativesasshowninthetableabove.







Thetermtomaturitybasedonnotionalvalueforthederivatives,asatMarch31,isasfollows:

($ millions) 2010 2009

Lessthan3months $ 9,200 $ 24,3923to12months 11,267 11,874Over1year 3,989 4,777

Total $ 24,456 $ 41,043

(C) FAIR VALUE MEASUREMENT

Financial instruments are classified according to the followinghierarchybasedonthesignificantinputsusedinmeasuringtheirfairvalue.

Level1:Valuationisbasedonquotedpricesinactivemarketsforidenticalassetsorliabilities.

Level 2: Valuation is based on quoted market prices for similarinstruments in active markets or quoted prices for identicalor similar instruments in markets that are not active. Level 2also includes model-based valuation techniques for which allsignificantassumptionsareobservableinthemarket.

Level3:Valuationisbasedonmodel-basedtechniquesforwhichsignificant assumptions are not observable in the market. Theyreflectmanagement’sassessmentoftheassumptionsthatmarketparticipantswoulduseinpricingthefinancialinstruments.






(C) FAIR VALUE MEASUREMENT (continued)

Thefollowingtableshowsthefairvalueoffinancialinstruments,asatMarch 31, 2010,basedonthemethodsdescribedabove:

($ millions) Level 1 Level 2 Level 3 No Level Total Fair Value

WorldEquity CanadianEquity&ForeignEquity $ 17,625 $ 1,407 $ – $ – $ 19,032 PrivateEquity – – 5,251 – 5,251NominalFixedIncome 135 11,403 1,285 – 12,823realreturnAssets WorldInflation-LinkedBonds – 337 – – 337 RealEstate – – 6,141 – 6,141 Infrastructure – – 2,361 – 2,361Absolutereturn – 1,239 1,175 – 2,414

INVESTMENTS $ 17,760 $ 14,386 $ 16,213 $ – $ 48,359

Investment-relatedAssets Amountsreceivablefrompendingtrades1 $ – $ – $ – $ 149 $ 149 Derivative-relatedreceivables – 473 5 – 478

TotalInvestment-relatedAssets $ – $ 473 $ 5 $ 149 $ 627

Investment-relatedLiabilities Amountspayablefrompendingtrades1 $ – $ – $ – $ (458) $ (458) Securitiessoldshort (114) – – – (114) Derivative-relatedpayables – (89) (326) – (415) Capitaldebtfinancing: Short-term – (649) – – (649) Long-term – (1,073) – – (1,073)

TotalInvestment-relatedLiabilities $ (114) $ (1,811) $ (326) $ (458) $ (2,709)

NETINVESTMENTS $ 17,646 $ 13,048 $ 15,892 $ (309) $ 46,277

1 Nofairvaluehierarchyclassificationisrequiredfortheseitems.

Theclassificationoffinancialinstrumentsinthelevelsofthehierarchyisestablishedatthetimeoftheinitialvaluationoftheinstrumentandreviewedoneachsubsequentreportingperiod-end.

TherehavebeennosignificanttransfersbetweenLevel1andLevel2duringthecurrentfiscalyear.







Level 3 Reconciliation

ThefollowingtableshowsareconciliationofallmovementsinthefairvalueoffinancialinstrumentscategorizedwithinLevel 3fortheyearendedMarch31:

2010

($ millions)

World Equity


real return Assets

Absolute return

Derivative- related receivables/payables (net)

Total

OpeningBalance $ 4,257 $ 1,127 $ 9,817 $ 682 $ (1,212) $ 14,671

Purchases 1,525 – 1,270 269 1 3,065

Sales/Settlements (954) (67) (1,442) (8) – (2,471)

Totalgains(losses)1 423 225 (1,143) 232 890 627

TransfersintooroutofLevel3 – – – – – –

ClosingBalance $ 5,251 $ 1,285 $ 8,502 $ 1,175 $ (321) $ 15,892

Totalgains(losses),fortheyearendedMarch31,includedininvestmentincome(loss)arepresentedasfollows:

2010

($ millions)

World Equity


real return Assets

Absolute return

Derivative- related receivables/payables (net)

Total

Totalrealizedgains(losses) $ 43 $ 16 $ 28 $ – $ (1) $ 86

Totalunrealizedgains(losses) $ 380 $ 209 $ (1,171) $ 232 $ 891 $ 541

Totalgains(losses)1 $ 423 $ 225 $ (1,143) $ 232 $ 890 $ 627

1 IncludedinNote7(a).

Level 3 Sensitivity Analysis

InthecourseofmeasuringfairvalueoffinancialinstrumentsclassifiedasLevel 3,valuationtechniquesusedincorporateassumptionsthat are based on non-observable data. Significant assumptions used for each asset class are described in Notes 3 (a) and (b).Althoughsuchassumptionsreflectmanagement’sbestjudgment,theuseofreasonablypossiblealternativeassumptionscouldyielddifferentfairvaluemeasuresrepresenting,ataminimum,a3%increase/decreaseinthefairvalueoffinancialinstrumentscategorizedasLevel 3.ThisexcludesPrivateMarketfundinvestmentsaswellasRealEstateDebt,whereasensitivityanalysisisnotpossiblegiventheunderlyingassumptionsusedarenotavailabletoPSP Investments.InthecaseofPrivateMarketfundinvestments,thefairvalueisdeterminedbasedontheauditedfinancialstatementsofthefund’sgeneralpartnerasindicatedinNote 3(a).WithrespecttoRealEstateDebt,thefairvalueisobtainedfromthird-partyappraisersasdescribedinNote 3(a).






(D) INVESTMENT ASSET MIx

TheSIP&Psetsoutthelong-termtargetweightsoftheassetsthatshallbeinvestedforthefourPlanAccounts.InvestmentsareclassifiedbyassetmixcategoryassetoutintheSIP&Pbasedontheeconomicintentoftheinvestmentstrategiesoftheunderlying assets.

Thenetinvestments,asatMarch31,areasfollows:

($ millions) 2010 2009

FairValue

policy portfolio Long-Term Target FairValue

Policy Portfolio Long-Term Target

WorldEquity CanadianEquity $ 13,547 29.2% 30.0% $ 8,815 26.1% 30.0% ForeignEquity: USLargeCapEquity 2,111 4.6 5.0 926 2.7 5.0 EAFELargeCapEquity 2,043 4.4 5.0 1,043 3.1 5.0 SmallCapDevelopedWorldEquity 1,977 4.3 5.0 781 2.3 5.0 EmergingMarketsEquity 2,987 6.5 7.0 2,122 6.3 7.0 PrivateEquity 5,426 11.7 10.0 4,191 12.4 10.0NominalFixedIncome Cash&CashEquivalents1 1,892 4.1 2.0 73 0.2 2.0 WorldGovernmentBonds 2,128 4.6 5.0 2,105 6.2 5.0 CanadianFixedIncome 4,830 10.4 8.0 4,253 12.6 8.0realreturnAssets WorldInflation-LinkedBonds 2,145 4.6 5.0 2,389 7.1 5.0 RealEstate 5,118 11.1 10.0 4,653 13.8 10.0 Infrastructure 2,073 4.5 8.0 2,446 7.2 8.0

NETINVESTMENTS $ 46,277 100.0% 100.0% $ 33,797 100.0% 100.0%

1 Includesamountsrelatedtoabsolutereturnandrealestatedebtstrategies.






(E) SECURITIES LENDINg & BORROwINg PROgRAMS

PSP Investmentsparticipatesinsecuritieslendingandborrowingprograms whereby it lends and borrows securities in order toenhanceportfolioreturns.

Thesecuritieslendingandborrowingprogramsrequirecollateralin cash, high-quality debt instruments or securities. Collateraltransactions are conducted under terms that are usual andcustomaryinstandardsecuritieslendingandborrowingprograms.In the absence of an event of default, the same securities orequivalent securities must be returned to the counterparty attheendofthecontract.PSP Investmentsdoesnotrepledgeanycollateralheld.

ThefollowingtableillustratesthefairvaluesofPSP Investments’securities and collateral associated with the lending andborrowingprogramsasatMarch31:

($ millions) 2010 2009

SecuritiesLending Securitieslent $ 4,005 $ 2,701 Collateralcontractuallyreceivable1 4,179 2,827

SecuritiesBorrowing

Securitiesborrowed 113 355

Collateralcontractuallypayable2 119 363

1 Theminimumfairvalueofcollateral required isequal to 102%of the fairvalueof thesecuritieslent.

2Theminimumfairvalueofcollateral required isequalto 100%ofthefairvalueofthesecuritiesborrowed.

4. INVESTMENT RISK MANAgEMENT

RiskManagementisacentralpartofPSP Investments’strategicmanagement.ItisacontinuousprocesswherebyPSP Investmentsmethodicallyaddressestherisksrelatedtoitsvariousinvestmentactivities with the goal of achieving a maximum rate of returnwithout undue risk of loss and a sustained benefit within eachactivityandacrossthetotalportfolio.

Ariskgovernancestructurethat includesrequiredreportingonrisktoalllevelsintheorganizationalsoensuresthatappropriateobjectivesarepursuedandachievedinlinewiththefulfillmentofPSP Investments’legislatedmandate.TheBoardofDirectorsanditscommitteesoverseevariousissuesrelatedtoriskandreceiveassurancefromseniormanagementandanindependentinternalauditorreportingdirectlytotheAuditandConflictsCommittee.

The use of financial instruments exposes PSP Investments tocreditandliquidityrisksaswellasmarketrisksincludingforeignexchange and interest rate risks. These risks are managed inaccordance with the Investment Risk Management Handbook,which is an integral part of PSP Investments’ risk controlsystem. The Investment Risk Management Handbook containsan Investment Risk Management Policy which supplementsthe SIP&P (Policy Portfolio). The Policy Portfolio determines adiversificationstrategytomitigateriskwherebyPSP Investmentsinvests in a diversified portfolio of investments based onestablished criteria. Additionally, the objective of these policiesistoprovideaframeworkforthemanagementofcredit,liquidityandmarket risks.Derivativefinancial instruments, tradedeitheronexchangesorOTC,areoneofthevehiclesusedtomitigatetheimpactofmarketrisk.

(A) MARKET RISK

Marketriskistheriskthatthevalueofaninvestmentwillfluctuateasaresultofchangesinmarketprices,whetherthosechangesarecausedbyfactorsspecifictotheindividualinvestment,volatilityinshareandcommodityprices,interestrate,foreignexchangeorotherfactorsaffectingsimilarsecuritiestradedinthemarket.





4. INVESTMENT RISK MANAgEMENT (continued)

(A) MARKET RISK (continued)

Market risk is measured using the method known as Value-at-Risk(VaR).VaRisthemaximumlossnotexceededwithagivenprobabilitydefinedas theconfidence level,overagivenperiodof time. PSP Investments has chosen a yearly 95% confidencelevel to measure and report VaR. PSP Investments uses aHistoricalVaRmodelincorporatingthreeyearsofmonthlymarketreturnswhicharescaledtoatwelve-monthholdingperiod.RiskManagement is responsible for implementing and maintaininga VaR measurement methodology for all asset classes and allfinancialriskfactors.

HistoricalVaRisstatisticallyvalidundernormalmarketconditionsand does not specifically consider losses from severe marketevents.TheHistoricalVaRmodelalsoassumesthatthefuturewillbehaveinasimilarpatterntothepast.Iffuturemarketconditionsdiffer significantly from those of the past, potential losses maydiffer from those originally estimated. The VaR is an estimateofasinglevalueinadistributionofpotential lossesthatcanbeexperienced. As a result, it is not an estimate of the maximumpotentialloss.

The goal of actively managing the portfolio is to outperformthe policy portfolio benchmarks while maintaining the activerisk under 400 basis points (bps). Relative VaR, as a result, isthe maximum amount of loss of total investments, with 95%confidencelevel,relativetothepolicyportfoliobenchmarkoveratwelve-monthperiod.

The following table shows the total Relative VaR and thediversification effect as at March 31 based on the economicintentoftheinvestmentstrategiesoftheunderlyingassets.ThediversificationeffectcapturestheeffectofholdingdifferenttypesofassetswhichmayreactdifferentlyinvarioustypesofsituationsandthushavingtheeffectofreducingoverallRelativeVaR.

ActiveriskTaken

(RelativeVaR–$ millions) 2010 2009

WorldEquity $ 688 $ 788RealReturnAssets 868 1,065AbsoluteReturn 411 1,160

TotalRelativeVaR(Undiversified) 1,967 3,013

DiversificationEffect (984) (1,660)

TotalrelativeVar $ 983 $ 1,353

Risk Management monitors the absolute risk of the PolicyPortfolio on a quarterly basis to ensure no undue loss may beexperiencedbyPSP Investments.

Generally,changesinVaRbetweenreportingperiodsareduetochanges in the levelofexposure,volatilitiesand/orcorrelationsamong asset classes. Although VaR is a widely accepted riskmeasure, it must be complemented by other risk measures.PSP Investments therefore uses stress testing and scenarioanalysistoexaminetheimpactonfinancialresultsofabnormallylarge movements in risk factors. Stress testing and scenarioanalysis are used to test a portfolio’s sensitivity to various riskfactors and key model assumptions. These methods also usehistoricallystressedperiods toevaluatehowacurrentportfoliowould fare under such circumstances. Stress testing is alsodeployed to assess new product behaviour. Stress testing andscenarioanalysisareutilizedasacomplement to theHistoricalVaR measure in order to provide greater insight on the size ofpotentiallossesthatmaybeexperienced.PSP Investmentsusesthe expected shortfall and tail analysis measures to determinethis.ExpectedshortfallisdefinedastheconditionalexpectationbeyondtheVaRlevel.ItismeasuredbyaveragingalldatapointsshowingalossgreaterthanVaRmeasuredatagivenconfidencelevel. By increasing the confidence level of the VaR measurefrom95%to99%,PSP Investments isabletoassessthesizeofthe potential loss that would be exceeded one year out of 100(instead of one year out of 20). Therefore, there is a greaterprobability for larger losses, at the 99% confidence level, inextrememarketconditions.RiskManagementpresentsa stresstestingandscenarioanalysisreporttoseniormanagementonaquarterlybasis.







(i) Interest Rate Risk

InterestrateriskreferstotheriskthatfluctuationsininterestrateswilldirectlyaffectthefairvalueofPSP Investments’netassetvalues.Themostsignificantexposuretointerestrateriskisrelatedtotheinvestmentinbonds,ABTNsandRealEstateDebt.

The terms to maturity of the investments, before allocating the effect of derivative contracts and investment-related assets andliabilities,asatMarch31,areasfollows:

Terms to Maturity

($ millions) Less than 1 Year

1 to 5 Years

5 to 10 Years

Over 10 Years

2010 Total

2009 Total

GovernmentofCanadabonds $ 185 $ 1,630 $ 343 $ 375 $ 2,533 $ 3,055ProvincialandTerritorialbonds 182 577 308 531 1,598 1,480Municipalbonds 4 22 50 8 84 84Corporatebonds 257 608 450 382 1,697 1,487ABTNs – 45 – 1,140 1,185 1,039

TotalCanadianFixedIncome $ 628 $ 2,882 $ 1,151 $ 2,436 $ 7,097 $ 7,145

TotalWorldgovernmentBonds $ 8 $ 474 $ 329 $ 285 $ 1,096 $ 759

TotalWorldInflation-LinkedBonds $ – $ 81 $ 78 $ 178 $ 337 $ 196

realEstateDebt1 $ 275 $ 175 $ – $ 33 $ 483 $ 752

grandTotal $ 911 $ 3,612 $ 1,558 $ 2,932 $ 9,013 $ 8,852

1 RealEstateDebtisacomponentoftheRealEstateassetclassdisclosedinNote3(a).

ThetermstomaturityofPSP Investments’capitaldebtfinancingaredisclosedinNote 10.

Absolute return strategies, as described in Note 3, and derivative contracts are also subject to interest rate risk exposures. TheseexposuresarereflectedintheVaRcalculationdescribedinNote 4(a).

Additionally,theexposuretointerestrateriskforshort-terminstrumentsandamountsreceivablefrompendingtradeswouldnotbesignificantduetotheirshort-termnature.







(ii) Foreign Currency Risk

PSP Investmentsanditssubsidiariesareexposedtocurrencyriskthroughholdingsofsecurities,unitsinpooledfundsandunitsinlimitedpartnershipsofnon-Canadianassets.FluctuationsintherelativevalueoftheCanadiandollaragainsttheseforeigncurrenciescanresultinapositiveoranegativeeffectonthefairvalueoftheinvestments.Tomitigatethisrisk,PSP Investmentsmaytake,throughforeignforwardcontracts,positionsinforeigncurrencies.PSP Investments’policyistohedge50%ofitsforeigncurrencyinvestmentsexcludingEmergingMarketsEquity.

Theunderlyingnetforeigncurrencyexposures,afterallocatingtheeffectofderivativecontractsandinvestment-relatedassetsandliabilitiesforbothmonetaryandnon-monetaryitems,asatMarch31,areasfollows:

2010 2009

Currency Fair Value % of Total Fair Value % of Total

(inmillionsofCanadian$)

USDollar $ 6,276 51.2% $ 4,624 52.9%Euro 1,815 14.8 2,066 23.6BritishPound 778 6.4 519 5.9BrazilianReal 669 5.5 65 0.7HongKongDollar 506 4.1 300 3.4JapaneseYen 429 3.5 389 4.5KoreanWon 351 2.9 166 1.9NewTaiwanDollar 200 1.6 174 2.0SouthAfricanRand 157 1.3 93 1.1AustralianDollar 151 1.2 165 1.9IndianRupee 150 1.2 85 1.0TurkishLira 109 0.9 60 0.7Others 658 5.4 40 0.4

Total $ 12,249 100.0% $ 8,746 100.0%

PSP Investmentsanditssubsidiariesalsohavecommitments,denominatedinforeigncurrenciesof$4,981 million($4,081 millionUS,€580 million,£1 millionand312 millionSouthAfricanRands(ZAR))whicharenotincludedintheforeigncurrencyexposuretable.






(B) CREDIT RISK

PSP Investmentsisexposedtocreditrisk,thatis,theriskthattheissuerofadebtsecurityoracounterpartytoaderivativecontractisunabletomeetitsfinancialobligations.

Credit risk encompasses the risk of a deterioration of credit-worthiness and the respective concentration risk. Credit riskmonitoringentailsanevaluationofthecreditqualityofeachissuertowhichPSP Investmentsisexposed.Toperformthisevaluation,PSP Investmentsreliesonfourrecognizedcreditratingagencies.A minimum of two credit ratings are used to classify eachsecurity;securitiesratedbyonlyoneagencyareclassifiedas“notrated”. If the agencies disagree as to a security’s credit quality,PSP Investmentsusesthelowestoftheavailableratings.

To monitor the evolution of credit risk, PSP Investmentsperiodically produces a concentration report by credit ratingof all credit-sensitive financial securities with the exception ofsecuritiesheldinpooledfundsorforPrivateMarketInvestments.

PSP Investments’concentrationofcreditriskbycreditrating,asatMarch31,isasfollows:

2010 2009

Investmentgrade(AAAtoBBB–) 89.9% 88.7%Belowinvestmentgrade(BB+andbelow) – –Notrated: Ratedbyasinglecreditratingagency 8.5 8.5 Notratedbycreditratingagencies 1.6 2.8

Total 100.0% 100.0%

ThebreakdownofcreditconcentrationriskforPSP Investmentsdoes not include investments in distressed debt included inpooled funds in the amount of approximately $2 billion as atMarch 31, 2010 (2009 − $2 billion). Such investments typicallyinclude debt securities of issuers close to default, and theinvestmentinsuchsecuritiesarequasi-equityinnature.

As at March 31, 2010, PSP Investments also has a net notionalexposure of $614 million to collateralized debt obligations,of which approximately 64% of the dollar exposure is rated“Investment grade”, as well as funding facilities of a maximumamountof$969 milliontosupportpotentialmargincallsontheABTNs(Note 3(a)(iii)).

As at March 31, 2010, PSP Investments’ maximum exposureto credit risk, excluding collateral held and the investmentsin distressed debt and collateralized debt obligationsdescribed above, amounts to approximately $13 billion(2009−approximately$11billion).

(i) Counterparty Risk

Counterparty risk represents the credit risk from current andpotential exposure related to transactions involving derivativecontracts. Inordertominimizederivativecontractcounterpartyrisk, PSP Investments deals only with counterparties with aminimumcreditratingof“A−”asatthetradedate,asprovidedbyarecognizedcreditratingagency.PSP Investmentsmonitorsthecreditratingsofcounterpartiesonadailybasisandhastheabilitytoterminatealltradeswithcounterpartieswhohavetheircreditrating downgraded below “A−” subsequent to the trade date.PSP Investmentsalsousescreditmitigationtechniquessuchasmaster-nettingarrangementsandcollateraltransfersthroughtheuseofCreditSupportAnnexes(CSA).

PSP Investments’policyalsorequirestheuseoftheInternationalSwaps and Derivative Association (ISDA) Master Agreementwithallcounterparties toderivativecontracts.The ISDAMasterAgreement provides the contractual framework within whichdealing activities across a full range of OTC products areconducted andcontractuallybindsbothparties toapplyclose-out netting across all outstanding transactions covered by anagreement if either party defaults or other pre-determinedevents occur.






(B) CREDIT RISK (continued)

(i) Counterparty Risk (continued)

Additionally, the CSA to the ISDA Master Agreement enablesPSP InvestmentstorealizeanycollateralplacedwithitintheeventofthefailureofthecounterpartyandrequiresPSP Investmentsto contribute further collateral when requested. The CSA alsoregulatestheexchangeofcollateralwhenthecreditexposuretoacounterpartyexceedsapredeterminedthreshold.

PSP Investmentsdepositedorpledgedsecuritieswithafairvalueof$209 millionascollateralwithvariousfinancialinstitutionsasat March 31, 2010 (2009 – $1,036 million) while securities witha fairvalueof$179 million (2009–$106 million)were receivedfrom other counterparties as collateral. PSP Investments doesnotrepledgeanycollateralheld.Allcollateraldeposited,pledgedandreceivedwereheldwithcounterpartieswhohadaminimumcreditratingof“A–”asatMarch 31, 2010.

RiskManagementisresponsibleforcounterpartyriskmonitoringand mitigation as well as maintaining a comprehensive,disciplined, and enterprise-wide process for tracking andmanagingcounterpartyrisk.Assuch,RiskManagementmeasurescounterparty risk on an ongoing basis, evaluates and tracksthe creditworthiness of current counterparties and mitigatescounterpartyriskthroughcollateralmanagement.

(C) LIqUIDITy RISK

Liquidity risk corresponds to PSP Investments’ ability to meetitsfinancialobligationswhentheycomeduewithsufficientandreadilyavailablecashresources.PSP Investments’cashpositionis monitored on a daily basis. In general, investments in cash,cashequivalents,floatingratenotes,debtandpublicequitiesareexpectedtobehighlyliquidastheywillbeinvestedinsecuritiesthat are actively traded. Risk Management utilizes appropriatemeasuresandcontrolstomonitorliquidityriskinordertoensurethat there is sufficient liquidity to meet financial obligations asthey come due. A liquidity report taking into considerationfutureforecastedcashflowsispreparedandpresentedtoseniormanagement on a weekly basis. This ensures that sufficientcash reserves are available to meet forecasted cash outflows.Additionally, sufficient sources of liquidity are maintained fordeploymentincaseofmarketdisruption.

PSP Investments has the ability to raise additional capitalthroughtheuseofitscapitaldebtprogram.ThisprogramallowsPSP Investments to issue short-term promissory notes andmedium-termnotes.Note 10providesadditionalinformationontheusageofthecapitaldebtprogram.

The terms to maturity of the notional amount of derivatives,includingrelatedpayableamounts,aredisclosedinNote 3(b).






(C) LIqUIDITy RISK (continued)

Financial Liabilities

Thefollowingtablespresentthefairvalueofnon-derivative-relatedfinancialliabilitiesaswellasderivative-relatedfinancialassetsandliabilities,aggregatedaccordingtotheirmaturitiesasatMarch 31, 2010.

Liabilitiesarepresentedintheearliestperiodinwhichthecounterpartycanrequestpayment.

($ millions) Less than 3 Months

3 to 12 Months

Over 1 Year Total

Non-derivative-relatedfinancialliabilities Amountspayablefrompendingtrades $ (458) $ – $ – $ (458) Securitiessoldshort (114) – – (114) Capitaldebtfinancing (624) (25) (1,073) (1,722) Accountspayableandotherliabilities (40) – (16) (56)

Total $ (1,236) $ (25) $ (1,089) $ (2,350)

($ millions) Less than 3 Months

3 to 12 Months

Over 1 Year Total

Derivative-relatedfinancialassetsandliabilities Derivative-relatedassets $ 176 $ 280 $ 22 $ 478 Derivative-relatedliabilities (33) (19) (363) (415)

Total $ 143 $ 261 $ (341) $ 63





5. ShARE CAPITAL

Sharecapitalconsistsof10shareshavingaparvalueof$10thatareissuedtotheMinister,thePresidentoftheTreasuryBoard,tobeheldonbehalfofHerMajestyinrightofCanada.

6. FUND TRANSFERS

PSP Investments received fund transfers of $4,980 million forthe year ended March 31, 2010 (2009 − $4,431 million) fromthePensionFunds.Thetransfersreceivedarecomprisedofthenet employer and employee contributions to their respectivepension plans in respect of member service after April 1, 2000for the Public Service, Canadian Forces and Royal CanadianMountedPolicePensionFunds.Thetransfers receivedfromtheReserveForcePensionFundarecomprisedofthenetemployerandemployeecontributions in respectofmemberserviceafterMarch 1, 2007.

Thebreakdownofthefundtransfers,fortheyearendedMarch 31,isasfollows:

($ millions) 2010 2009

PublicServicePensionFund $ 3,707 $ 3,179

CanadianForcesPensionFund 866 853

RoyalCanadianMountedPolicePensionFund 323 314

ReserveForcePensionFund 84 85

Total $ 4,980 $ 4,431

7. INVESTMENT INCOME (LOSS)

(A) INVESTMENT INCOME (LOSS)

Investment income (loss), for the year ended March 31, isasfollows:

($ millions) 2010 2009

Interestincome $ 409 $ 468Dividendincome 408 435Otherincome 204 239Securitylendingincome(net)1

10 7Dividendexpense (22) (26)Interestexpense(Note 10) (53) (67)Transactioncosts (21) (37)Externalinvestment

managementfees2 (33) (53)

902 966

Netrealizedgains(losses)3 1,526 (6,202)

Netunrealizedgains(losses) 5,177 (4,257)

InvestmentIncome(Loss) $ 7,605 $ (9,493)

1 Includesfeesonsecuritiesborrowed.

2These are amounts incurred for public market investments that are paid directly byPSP Investments (Note 1). This excludes amounts incurred for Private MarketInvestments, disclosed in Note 3 (a) (ii), and certain public market pooled fundinvestments in the amount of $11 million for the year ended March 31, 2010 (2009 –$6 million)thatarenotpaiddirectlybyPSP Investments.

3Includesforeigncurrencygains(losses)of$621 millionfortheyearendedMarch 31, 2010(2009–$(606) million).





7. INVESTMENT INCOME (LOSS) (continued)

(B) INVESTMENT INCOME (LOSS) By ASSET MIx

Investment income (loss) by asset mix based on the economicintent of the investment strategies of the underlying assets asoutlinedintheSIP&P,fortheyearendedMarch31,afterallocatingnetrealizedandunrealizedgains(losses)oninvestmentstotheassetclassestowhichtheyrelate,isasfollows:

($ millions) 2010 2009

WorldEquity CanadianEquity $ 3,690 $ (3,598) ForeignEquity: USLargeCapEquity 247 (449) EAFELargeCapEquity 251 (593) SmallCapDeveloped

WorldEquity 282 (492) EmergingMarketsEquity 1,013 (985) PrivateEquity 1,211 (1,591)NominalFixedIncome Cash&CashEquivalents 45 35 WorldGovernmentBonds (345) 478 CanadianFixedIncome 195 195realreturnAssets WorldInflation-LinkedBonds (253) 164 RealEstate 28 (782) Infrastructure 158 112Absolutereturn1 1,083 (1,987)

InvestmentIncome(Loss) $ 7,605 $ (9,493)

1 Includesamountsrelatedtorealestatedebtstrategies.

8. OPERATINg ExPENSES

Operatingexpensesconsistof thefollowingfor theyearendedMarch31:

($thousands) 2010 2009

Salariesandbenefits $ 53,434 $ 48,287Professionalandconsultingfees 9,289 9,993Officesuppliesandequipment 11,215 8,780Otheroperatingexpenses 4,201 7,986Depreciationoffixedassets 7,093 4,657Occupancycosts 4,323 3,614Custodialfees 1,556 1,253Remunerationearned

byDirectors 794 911

TravelandrelatedexpensesforDirectors 316 383

Communicationexpenses 175 93

Total $ 92,396 $ 85,957

Professionalandconsultingfeespaidoraccruedtotheexternalauditors include audit fees of $470,000 (2009 – $469,000),audit-relatedfeesof$145,000 (2009 –$144,000)andnon-auditfees of $258,000 (2009 – $137,000). Audit fees of $470,000(2009 – $571,000) and non-audit fees of $157,000 (2009 –$268,000) were paid and accrued to the externally contractedinternalauditorsofPSP Investments.





9. ALLOCATION OF NET INCOME (LOSS) FROM OPERATIONS AND COMPREhENSIVE INCOME

Thenetincome(loss)fromoperationsandcomprehensiveincomeofPSP Investmentsisallocatedtoeachplanaccountasfollows:


Theinvestmentincome(loss)isallocatedproportionatelybasedupontheassetvalueheldbyeachplanaccount.

(B) ExPENSES

TheActrequiresthatthecostsofoperationofPSP Investmentsbechargedtotheplansforwhichitprovidesinvestmentservices.Undersection 4(3)oftheAct,thePresidentoftheTreasuryBoardshalldeterminetowhichplanaccountthesecostswillbecharged,in consultation with the Minister of National Defence and theMinisterofPublicSafety.Anallocationpolicyhasbeendevelopedwhichallocatesthedirectcostsofinvestmentactivities,suchasexternalinvestmentmanagementfeesandcustodialfees,toeachplanaccount,basedupontheassetvalueofeachplanaccountatthetimetheexpensewasincurred.

All other operating expenses, excluding the direct cost ofinvestment activities listed above, for the year ended March 31,havebeenallocated inproportion to theannualamountofnetassetsineachPlanAccountasfollows:

2010 2009

PublicServicePensionPlanAccount 72.5% 72.6%

CanadianForcesPensionPlanAccount 20.0 20.1

RoyalCanadianMountedPolicePensionPlanAccount 7.2 7.2

ReserveForcePensionPlanAccount 0.3 0.1

Total 100.0% 100.0%

ExpensesarepaidbyPSP InvestmentsbywayofadvancesfromthePublicServicePensionPlanAccount,whicharereimbursedbytheotherplanaccountsonaquarterlybasis.

10. CAPITAL DEBT FINANCINg

AsofMarch 31, 2010,PSPCapital Inc.has$649 million(2009–$1,579 million)ofshort-termpromissorynotesoutstandingwithmaturitydatesbetween14and120daysofissuance.Thesenotesare included in Note 3 (a) as a short-term investment-relatedliability.AsatMarch 31, 2010,PSPCapitalInc.has$1billion(2009–$1 billion)ofmedium-termnotesissuedandoutstanding.Thesemedium-termnotesbearinterestof4.57%perannumandhaveamaturitydateofDecember9,2013.Thesemedium-termnotesareincludedinNote 3(a)asalong-terminvestment-relatedliability.AsatMarch 31, 2010,thefairvalueofthesemedium-termnotesis$1,073 million(2009–$1,054 million).Themaximumauthorizedby the Board of Directors for both the short-term promissorynotes and medium-term notes is $2 billion. The capital raised,primarily used to finance investments in the Real Estate andInfrastructure asset classes, is unconditionally and irrevocablyguaranteed by PSP Investments and is in accordance with theapprovedPSP Investments’corporatepolicyforleverage.

Interestexpense,fortheyearendedMarch31,isasfollows:

($thousands) 2010 2009

Short-termpromissorynotes $ 7,424 $ 56,591Medium-termnotes 45,700 10,017

Total $ 53,124 $ 66,608

The operating expenses incurred by PSP Capital Inc. wereallocatedtoeachPlanaccountasdescribedinNote 9(b).





11. CAPITAL MANAgEMENT

As an investment company, PSP Investments objectives inmanagingitscapitalare:

– Toinvestfundtransfers,outlinedinNote 6,inthebestinterestsofthebeneficiariesandcontributorsundertheSuperannuation Acts.Thefundsreceivedareinvestedwithaviewofachievinga maximum rate of return, without undue risk of loss, withregards to the funding, policies and requirements of thepensionplansestablishedundertheSuperannuation Acts.ThefundsarealsoinvestedinaccordancewiththeInvestmentRiskManagementpolicieswhichareoutlinedinNote 4.

– Tomaintainanappropriatecreditratingtoachieveaccesstothecapitalmarketsatthelowestcostofcapital.ThroughPSPCapital Inc., and its leverage policies, PSP Investments hasthe ability to raise capital by issuing short-term promissorynotesandmedium-termnotes.Note 10providesinformationon the capital debt financing and Note 4 (c) providesinformationonPSP Investments’ liquidity.Additionally,asatMarch 31, 2010,PSP Investmentshasanoperatinglineofcreditof$10 million(2009–$10 million).AsatMarch 31, 2010,noamountshavebeenwithdrawn(2009–nil).

ThecapitalstructureofPSP Investmentsconsistsoffundtransfersand capital debt financing. PSP Investments has no externallyimposedrestrictionsoncapital.

12. gUARANTEES AND INDEMNITy

PSP Investments provides indemnification to its Directors, itsOfficers and to certain PSP Investments representatives whoare asked to serve on boards of directors (or like bodies) orinvestmentadvisoryboards (or likebodies)ofentities inwhichPSP Investmentsoritswholly-ownedsubsidiarieshavemadeaninvestment or have a financial interest. As a result, but subjecttotheAct,PSP Investmentsmayberequiredtoindemnifytheserepresentatives for costs incurred, such as claims, actions orlitigations inconnectionwiththeexerciseoftheirduties,unlessthe liability of such a representative relates to a failure to acthonestly and in good faith. To date, PSP Investments has notreceivedanyclaimsnormadeanypaymentforsuchindemnity.

As part of investment transactions, PSP Investments andits subsidiaries guaranteed letter of credit facilities totalling$10 million as at March 31, 2010 (2009 – $15 million). Thebeneficiariesoftheseletterofcreditfacilitieshavetheabilitytodraw against these facilities to the extent that the contractualobligations,asdefinedintherelatedagreements,arenotmet.

AsatMarch 31, 2010,PSP Investmentsagreed toguarantee,aspart of an investment transaction, a non-revolving term loan.In the event of a default, PSP Investments would assume theobligationupto$403 million(2009–$403 million)plusinterestandotherrelatedcosts.

PSP Investmentsalsounconditionallyandirrevocablyguaranteesall credit facilities, short-term promissory notes and medium-termnotesissuedbyPSPCapitalInc.

13. COMMITMENTS

PSP Investments and its subsidiaries have committed to enterintoinvestmenttransactions,whichwillbefundedoverthenextseveralyearsinaccordancewithagreedtermsandconditions.AsatMarch31,theoutstandingcommitmentsareasfollows:

($ millions) 2010 2009

PrivateEquity $ 3,155 $ 4,629RealEstate 1,394 1,795Infrastructure 428 576Publicmarkets 327 578

Total $ 5,304 $ 7,578

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20Public Sector PenSion inveStment board

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t. 613.782.3095f. 613.782.6864

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FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS

PUBLIC SERVICE PENSION PLAN ACCOUNT

CANADIAN FORCES PENSION PLAN ACCOUNT

ROYAL CANADIAN MOUNTED POLICE PENSION PLAN ACCOUNT

RESERVE FORCE PENSION PLAN ACCOUNT

PUBLIC SECTOR PENSION INVESTMENT BOARD2010 ANNUAL REPORT — APPENDIX

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TABLE OF CONTENTS

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING 1

INVESTMENT CERTIFICATE 2


Auditors’ Report 3Balance Sheet 4Statement of Net Income (Loss) from Operations and Comprehensive Income 5Statement of Changes in Net Assets 5Notes to the Financial Statements 6-29







FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS

PUBLIC SECTOR PENSION INVESTMENT BOARD — i

MANAGEMENT’S RESPONSIBILITYFOR FINANCIAL REPORTING

The consolidated financial statements of the Public Sector Pension Investment Board (“PSP Investments”) as well as the financialstatements of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Forces Pension PlanAccounts (“the financial statements”) have been prepared by management and approved by the Board of Directors. The financialstatements have been prepared in accordance with Canadian generally accepted accounting principles. Management isresponsible for the contents of the financial statements and the financial information contained in the annual report.

PSP Investments maintains records and systems of internal control and supporting procedures to provide reasonable assurancethat PSP Investments’ assets are safeguarded and controlled, and that transactions are in accordance with the applicableprovisions of Part X of the Financial Administration Act and, as appropriate, the Public Sector Pension Investment Board Act(“the Act”), the accompanying regulations, the by-laws, and the Statement of Investment Policies, Standards and Procedures(“the SIP&P”).

In this regard, investments of PSP Investments held during the year ended March 31, 2010 were in accordance with the Act andthe SIP&P.

The Audit and Conflicts Committee assists the Board of Directors in discharging its responsibility to approve the annual financialstatements. The Committee meets regularly with both management and the external auditors to discuss the scope and findingsof audits and other work that the external auditors may be requested to perform from time to time, to review financialinformation, and to discuss the adequacy of internal controls. The Committee reviews the annual financial statements andrecommends them to the Board of Directors for approval.

PSP Investments’ external “joint” auditors, the Office of the Auditor General of Canada and Deloitte & Touche LLP (“the ExternalAuditors”), have conducted an independent examination of the financial statements in accordance with Canadian generallyaccepted auditing standards, performing such tests and other procedures as they consider necessary to express an opinion intheir Auditors’ Report. The External Auditors have full and unrestricted access to management and the Audit and ConflictsCommittee to discuss findings related to the integrity of PSP Investments’ financial reporting and the adequacy of internalcontrol systems.

Gordon J. FyfePresident andChief Executive OfficerMay 10, 2010

John ValentiniExecutive Vice President,Chief Operating Officer and Chief Financial OfficerMay 10, 2010


INVESTMENT CERTIFICATE

The Public Sector Pension Investment Board Act (“the Act”) requires that a certificate be signed by a director on behalf of theBoard of Directors, stating that the investments of the Public Sector Pension Investment Board (“PSP Investments”) held duringthe financial year were in accordance with the Act and PSP Investments’ investment policies, standards and procedures.Accordingly, the Investment Certificate follows:

“The investments of PSP Investments held during the year ended March 31, 2010, were in accordance with the Act and PSPInvestments’ Statement of Investment Policies, Standards and Procedures”.

Paul CantorChairpersonMay 10, 2010



AUDITORS’ REPORT

To the President of the Treasury Board

We have audited the Balance Sheet of the Public Sector Pension Investment Board – Public Service Pension Plan Account (thePublic Service Pension Plan Account) as at March 31, 2010, and the Statements of Net Income (Loss) from Operations andComprehensive Income and of Changes in Net Assets for the year then ended. These financial statements are the responsibilityof the Public Sector Pension Investment Board’s (PSP Investments) management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made by management, as well as evaluating theoverall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Public Service PensionPlan Account as at March 31, 2010, and the results of its operations and changes in its net assets for the year then ended inaccordance with Canadian generally accepted accounting principles. As required by the Financial Administration Act, we reportthat, in our opinion, these principles have been applied on a basis consistent with that of the preceding year.

Further, in our opinion, the transactions of the Public Service Pension Plan Account that have come to our notice during ouraudit of the financial statements have, in all significant respects, been in accordance with the applicable provisions of Part X ofthe Financial Administration Act and regulations, the Public Sector Pension Investment Board Act and regulations and theby-laws of PSP Investments and its wholly-owned subsidiaries.

1

1 Chartered accountant auditor permit No. 18527 Sheila Fraser, FCAAuditor General of Canada

Montreal, Canada Ottawa, CanadaMay 10, 2010 May 10, 2010




BALANCE SHEET

As at March 31

($ millions) 2010 2009

ASSETSInvestments (Note 3 (a)) $ 35,174 $ 27,741Investment-related assets (Note 3 (a)) 455 537Other assets 32 26Due from the Canadian Forces Pension Plan Account 6 6Due from the Royal Canadian Mounted Police Pension Plan Account 2 2

TOTAL ASSETS $ 35,669 $ 28,312

LIABILITIESInvestment-related liabilities (Note 3 (a)) $ 1,970 $ 3,773Accounts payable and other liabilities 38 43

TOTAL LIABILITIES $ 2,008 $ 3,816

NET ASSETS $ 33,661 $ 24,496

Accumulated net income from operations and comprehensive income $ 5,642 $ 184Accumulated fund transfers 28,019 24,312

NET ASSETS $ 33,661 $ 24,496

Commitments (Note 11)

The accompanying notes are an integral part of the financial statements.

On behalf of the board of Directors:

Paul Cantor William A. MacKinnonChair of the Board Chair of the Audit and Conflicts Committee


STATEMENT OF NET INCOME (LOSS) FROM OPERATIONS AND COMPREHENSIVE INCOME


($ millions) 2010 2009

INVESTMENT INCOME (LOSS) (Note 6) $ 5,525 $ (6,884)

OPERATING EXPENSES (Note 7) $ 67 $ 63

NET INCOME (LOSS) FROM OPERATIONS AND COMPREHENSIVE INCOME $ 5,458 $ (6,947)


STATEMENT OF CHANGES IN NET ASSETS


($ millions) 2010 2009

NET ASSETS, BEGINNING OF YEAR $ 24,496 $ 28,264

Fund transfers (Note 5) 3,707 3,179Net income (loss) from operations and comprehensive income 5,458 (6,947)

Increase (decrease) in net assets for the year 9,165 (3,768)

NET ASSETS, END OF YEAR $ 33,661 $ 24,496




NOTES TO THE FINANCIAL STATEMENTS


ORGANIZATION

The Public Sector Pension Investment Board (PSPInvestments) is a crown corporation established under thePublic Sector Pension Investment Board Act (“the Act”) with amandate to invest the net contributions of the Public Service,Canadian Forces, Royal Canadian Mounted Police and ReserveForce pension plans in financial markets.

The Public Service Pension Fund was established byamendments to the Public Service Superannuation Act, to receivecontributions and make benefit payments in respect of memberservice after April 1, 2000. The net contributions are transferred,by the Public Service Pension Fund, to PSP Investments – PublicService Pension Plan Account for investment. PSP Investmentsmaintains records of the pension fund’s net contributions, as wellas the allocation of its investments and the results of itsoperations in the plan account.

PSP Investments is responsible for managing amounts that aretransferred to it in the best interests of the beneficiaries andcontributors under the Public Service Superannuation Act. Theamounts are to be invested with a view of achieving amaximum rate of return, without undue risk of loss, withregards to the funding, policies and requirements of the PublicService Superannuation Act.

1. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES


These financial statements present the financial position andoperations of PSP Investments and its wholly-ownedsubsidiaries as they pertain to the investment of the netcontributions transferred to it from the Public Service PensionFund in respect of member service after April 1, 2000.Accordingly, they do not reflect all of the assets or the detailsof the pension contributions, payments and liabilities of thePublic Service Pension Fund. The financial statements havebeen prepared in accordance with Canadian generallyaccepted accounting principles (GAAP) and the requirements

of the Act. PSP Investments qualifies as an InvestmentCompany and therefore reports its investments at fair value, inaccordance with Accounting Guideline 18, “InvestmentCompanies” (AcG-18). All changes in fair value are included ininvestment income (loss) as net unrealized gains (losses).

Comparative figures have been reclassified to conform to thecurrent year’s presentation.


Investments, investment-related assets and investment-relatedliabilities are recorded as of the trade date (the date uponwhich the substantial risks and rewards are transferred) andare stated at fair value. Fair value is an estimate of the amountof consideration that would be agreed upon in an arm’s lengthtransaction between knowledgeable, willing parties who areunder no compulsion to act.

Market prices or rates are used to determine fair value where anactive market exists (such as a recognized securitiesexchange), as it is the best evidence of the fair value of aninvestment. If quoted market prices or rates are not available,then fair values are estimated using present value or othervaluation techniques, using inputs existing at the end of thereporting period that are derived from observable market data.

Valuation techniques are generally applied to investments inthe 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 techniquesare impacted by the choice of valuation model and theunderlying assumptions made concerning factors such as theamounts and timing of future cash flows, discount rates,volatility and credit risk. In certain cases, such assumptions arenot supported by market observable data.

The valuation methods of each asset class are described inNotes 3 (a) and (b).





1. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES (continued)

VALUATION OF CAPITAL DEBT FINANCING

PSP Investments’ short-term capital debt financing is recordedat cost plus accrued interest, which approximates fair value.The fair value of PSP Investments’ long-term capital debtfinancing is based on prices that are obtained from third-partypricing sources. It is measured using an interest rate curvewith a spread consistent with PSP Investments’ credit quality.

TRANSACTION COSTS

Transaction costs are incremental costs directly attributable tothe acquisition, due diligence, issue, or disposal of a financialasset or financial liability. Transaction costs are expensed asincurred and recorded as a component of investmentincome (loss).

INVESTMENT MANAGEMENT FEES

Investment management fees are costs directly attributableto the external management of assets on behalf ofPSP Investments. Investment management fees incurred forPrivate Market Investments are paid, as determined by the fundmanager, either by the investment directly, through capitalcontributions by PSP Investments or offset against distributionsreceived from the investment (Note 3 (a) (ii)). These amountsare recorded against investment income (loss). Investmentmanagement fees are also incurred for certain public equityinvestments and these amounts are paid, either directly byPSP Investments or offset against distributions received frompooled fund investments. In both cases, they are recordedagainst investment income (loss) (Note 6).

INCOME RECOGNITION

The investment income (loss) has been allocatedproportionately based on the asset value held by the PublicService Pension Plan Account (“the Plan”).

Investment income (loss) is made up of interest income,dividends, realized gains (losses) on the disposal of investmentsand unrealized gains (losses) which reflect the change inunrealized appreciation (depreciation) of investments held atthe end of the year. Interest income is recognized as earned.Dividends are recognized on the ex-dividend date and arereflected as dividend income. Dividends paid on securities soldshort are reflected as dividend expense. Additionally, otherincome includes the related distributions from pooled funds,limited partnerships as well as from direct and co-investments,all from Private Market Investments.

TRANSLATION OF FOREIGN CURRENCIES

Investment transactions in foreign currencies are recorded atexchange rates prevailing on the transaction date. Investmentsdenominated in foreign currencies and held at the end of theyear are translated at exchange rates in effect at the year-enddate. The resulting realized and unrealized gains (losses) onforeign exchange are included in investment income (loss).

FUND TRANSFERS

Amounts received from each Pension Fund are recorded intheir respective plan account.

INCOME TAXES

PSP Investments and the majority of its subsidiaries areexempt from Part I tax under paragraph 149(1)(d) of theIncome Tax Act (Canada).

USE OF ESTIMATES

In preparing these financial statements, management mustmake certain estimates and assumptions which can affect thereported values of assets and liabilities, principally thevaluation of Private Market Investments, ABTNs, derivatives,related income and expenses and note disclosures. Althoughestimates and assumptions reflect management’s bestjudgement, actual results may differ from these estimates.





2. CHANGES IN ACCOUNTING POLICIES

AMENDMENT TO ACCOUNTING STANDARD

In June 2009, the Canadian Institute of Chartered Accountants(CICA) amended Section 3862 “Financial Instruments –Disclosures” of the CICA Handbook. This amendment iseffective for annual financial statements relating to fiscal yearsending after September 30, 2009.

The amendment enhances disclosures about fair valuemeasurements of financial instruments as well as the liquidityrisk of derivative financial liabilities.

The principal disclosures introduced by this amendmentrequire financial instruments measured at fair value to becategorized into one of three fair value hierarchy levels. Suchcategorization is based on the significance of the inputs usedin measuring such value as well as disclosure of movementsbetween levels of the fair value hierarchy.

Additional disclosures for liquidity risk call for a maturityanalysis for derivative financial liabilities based on the way inwhich an entity manages its liquidity risk.

PSP Investments adopted the provisions of such amendmentsfor its March 31, 2010 financial statements. Requireddisclosures are made in Note 3 (c) and Note 4 (c).

FUTURE CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

In February 2008, the Accounting Standards Board of Canada(AcSB) confirmed that Canadian GAAP for publiclyaccountable enterprises will converge with InternationalFinancial Reporting Standards (IFRS) effective January 1, 2011.In response to this change, PSP Investments has put in place atransition plan that would allow it to prepare and present itsMarch 31, 2012 financial statements under IFRS.

In analyzing the various impacts of its transition to IFRS,PSP Investments concluded that the requirement toconsolidate its controlled investments ranked as one of themost significant of such impacts.

In April 2010, the AcSB issued Section 4600 “Pension Plans” ofthe CICA Handbook requiring pension plans in Canada tofollow this standard rather than convert to IFRS in the samefashion as other publicly accountable enterprises. UnderSection 4600, pension plans would continue to account forand report their investments at fair value as was previouslydone under Section 4100 “Pension Plans” of the CICAHandbook. The provisions of Section 4600 apply to annualfinancial statements relating to fiscal years beginning on orafter January 1, 2011.

Concurrent with the issuance of Section 4600, the AcSBissued an exposure draft that proposed a scope expansion toinclude entities, such as PSP Investments, that are separatefrom pension plans and whose sole purpose is to hold andinvest assets received from one or more pension plans, butdoes not itself have a pension obligation. Pursuant to theexposure draft, PSP Investments would be exempt from theIFRS requirement to consolidate its controlled investments.The AcSB has indicated that it anticipates reaching a decisionconcerning the exposure draft in June 2010.

Management is currently monitoring the outcome of thisexposure draft and evaluating its impact on PSP Investments’financial statements as well as the IFRS transition plan.





3. INVESTMENTS


The investment portfolio, before allocating the effect of derivative contracts and investment-related assets and liabilities to theasset classes to which they relate, as at March 31, is as follows:

($ millions) 2010 2009

Asset Class Fair Value Cost Fair Value Cost

World EquityCanadian Equity $ 7,530 $ 6,635 $ 4,587 $ 5,566Foreign Equity:

US Large Cap Equity 1,554 1,499 519 715EAFE Large Cap Equity 1,503 1,727 842 1,340Small Cap Developed World Equity 1,422 1,322 530 718Emerging Markets Equity 1,834 1,640 1,059 1,333

Private Equity 3,819 4,082 3,086 3,614Nominal Fixed Income

Cash, Cash Equivalents and Other 1 3,368 3,465 2,226 2,412World Government Bonds 797 850 550 489Canadian Fixed Income 5,162 5,026 5,181 5,211

Real Return AssetsWorld Inflation-Linked Bonds 245 257 142 144Real Estate 4,467 4,494 5,152 4,656Infrastructure 1,717 1,763 1,966 1,693

Absolute Return 1,756 1,630 1,901 1,982

INVESTMENTS $ 35,174 $ 34,390 $ 27,741 $ 29,873

Investment-Related AssetsAmounts receivable from pending trades $ 108 $ 108 $ 186 $ 186Derivative-related receivables 347 4 351 47

Total Investment-Related Assets $ 455 $ 112 $ 537 $ 233

Investment-Related LiabilitiesAmounts payable from pending trades $ (333) $ (333) $ (367) $ (367)Securities sold short (82) (95) (257) (321)Derivative-related payables (302) (3) (1,240) (71)Capital debt financing:

Short-term (472) (472) (1,145) (1,145)Long-term (781) (744) (764) (742)

Total Investment-Related Liabilities $ (1,970) $ (1,647) $ (3,773) $ (2,646)

NET INVESTMENTS $ 33,659 $ 32,855 $ 24,505 $ 27,460

1 Includes floating rate notes with maturities greater than one year with a fair value of $1,016 million for the Plan (2009 – $13 million).








Canadian Equity and Foreign Equity include direct and indirectinvestments in common shares, American depository receipts,global depository receipts, participation notes, preferred shares,income trust units, exchange traded funds, and securitiesconvertible into common shares of publicly listed issuers.


Direct investments in Canadian and Foreign Equities aremeasured at fair value using quoted market prices, namely, thebid price. In the case of investments in pooled funds, fair valueis measured by using unit values obtained from each of thefunds’ administrators. Such unit values are derived from thefair value measurement of the underlying investments in eachpooled fund.


The Private Equity asset class is comprised of directinvestments in companies and fund investments. They includeinvestments in private companies, mezzanine debt anddistressed debt. The Private Equity asset class is accounted fornet of all third-party financings. As at March 31, 2010, the totalamount of third-party financing included in the Private Equityasset class contracted by direct investments controlled byPSP Investments for the Plan is nil (2009 – nil).

The Real Estate asset class is comprised of direct investments incompanies, in properties, third-party debts and fundinvestments in the real estate sector. Real Estate investmentsare classified into two portfolios (an equity portfolio and a debtportfolio). The equity portfolio is comprised of directinvestments in properties and companies in the office, retail,industrial, hospitality and residential sectors, as well as privatefunds and publicly traded securities invested in real estateassets. The debt portfolio is comprised of third-party loans suchas junior and senior debts, construction loans, bridge loans,income-participating loans, mezzanine loans and otherstructured investments (collectively “Real Estate Debt”) wheresignificant portions of the value are attributed to the underlying

real estate assets. The Real Estate asset class is accounted fornet of all third-party financings. As at March 31, 2010, the totalamount of third-party financing included in the Real Estateasset class contracted by direct investments controlled byPSP Investments for the Plan is approximately $1,550 million(2009 – approximately $1,540 million).

The Infrastructure asset class is comprised of directinvestments in companies and fund investments. They includeinvestments in companies engaged in the management,ownership or operation of assets in power, regulatedbusinesses, transportation, telecom or social infrastructure.The Infrastructure asset class is accounted for net of all third-party financings. As at March 31, 2010, the total amountof third-party financing included in the Infrastructure assetclass contracted by direct investments controlled byPSP Investments for the Plan is approximately $70 million(2009 – approximately $100 million).

Investment management fees, as disclosed in Note 1, areincurred for Private Market Investments and generally varybetween 0.1% and 2.1% of the total invested and/or committedamount. Investment management fees of $111 million for theyear ended March 31, 2010 (2009 – $116 million) were recordedagainst investment income (loss).


The fair value of Private Market Investments held directly byPSP Investments is determined at least annually, usingacceptable industry valuation methods. For each investment,the relevant methodology is applied consistently over time.

For direct Private Markets Investments as well as investmentsin Real Estate Debt, management uses the services of third-party appraisers to determine the fair value. In selectingappraisers, management ensures their independence and thatvaluation methods used are consistent with professionalappraisal standards. Such standards include the InternationalPrivate Equity and Venture Capital Valuation Guidelines, theCanadian Uniform Standards of Professional Appraisal Practiceand the Uniform Standards of Professional Appraisal Practicein the United States of America. In validating the workperformed by appraisers, management ensures that theassumptions used correspond to financial information andforecasts of the underlying investment.









For direct investments in Private Equity and Infrastructure,valuation methods used include discounted cash flowsanalysis, earnings multiples, prices of recent comparabletransactions and publicly traded comparables. Assumptionsused in such valuations include discount rates and projectedcash flows, which are not fully supported by prices frommarket observable transactions.

For direct investments in Real Estate, valuation methods usedinclude discounted cash flows as well as recent comparabletransactions. Assumptions used in such valuations includecapitalization rates, projected cash flows and/or net operatingincome, which are not fully supported by prices from marketobservable transactions.

The fair value of Real Estate Debt is determined using either ayield-based or collateral-based valuation technique. The yield-based valuation technique involves discounting expectedfuture cash flows that incorporate assumptions with respect tointerest rates offered for similar loans to borrowers with similarcredit ratings. The collateral-based valuation techniqueinvolves assessing the recoverable value of the collateral inquestion, net of disposal fees.

In the case of Private Equity, Real Estate and Infrastructurefund investments, the fair value is generally determined basedon the audited fair values reported by the fund’s generalpartner using acceptable industry valuation methods.


Nominal Fixed Income includes Cash, Cash Equivalents andOther, Canadian Fixed Income and World Government Bonds.Cash Equivalents include short-term instruments having amaximum term to maturity of one year. Floating rate notes areincluded in Cash, Cash Equivalents and Other, provided the finalmaturity date does not exceed three years and the couponsreset more than once per year. Bonds reported as Nominal FixedIncome include Canadian government bonds, Canadianprovincial and territorial bonds, Canadian municipal bonds and

corporate bonds, as well as international sovereign bonds.World Inflation-Linked Bonds reported as Real Return Assetsare fixed income securities that earn inflation adjusted returns.

PSP Investments holds ABTNs reported as Canadian FixedIncome in the investment portfolio. The ABTNs were receivedin exchange for third-party or non-bank sponsored asset-backed commercial paper (ABCP) that suffered a liquiditydisruption in mid-August 2007 and were subsequentlyrestructured in January 2009. The ABTNs had an original facevalue of $1,962 million, of which $1,422 million has beenallocated to the Plan. During the year ended March 31, 2010,PSP Investments received $67 million of principal repaymentson the ABTNs. During the year ended March 31, 2010, principalrepayments on the ABTNs of $49 million has been allocated tothe 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, ofwhich $705 million was allocated to the Plan. As atMarch 31, 2010, the margin funding facilities had not beendrawn upon. As part of the exchange of the non-bank ABCP forthe ABTNs, it was agreed to include in the agreement amoratorium which prevents collateral calls for a period of18 months ending July 21, 2010.

Management’s best estimate of the fair value ofPSP Investments’ ABTNs allocated to the Plan as atMarch 31, 2010 is equal to $862 million (2009 – $755 million).The fair value of the ABTNs allocated to the Plan has beenreduced by the impact of the funding facilities amounting to$47 million on March 31, 2010 (2009 – $68 million).PSP Investments recorded an increase of $156 million in thefair value of the ABTNs allocated to the Plan during the yearended March 31, 2010 (decrease of $350 million during theyear ended March 31, 2009).


Cash Equivalents are recorded at cost plus accrued interest,which approximate fair value.

Fair values of bonds and floating rate notes are based onprices obtained from third-party pricing sources. They aredetermined using either an appropriate interest rate curvewith a spread associated with the credit quality of the issuer orother generally accepted pricing methodologies.







(iii) Nominal Fixed Income and World Inflation-LinkedBonds (continued)


ABTNs are measured at fair value using comparable noteswith similar credit quality and terms as a proxy, while takinginto consideration the impact of the funding facilities. Thevaluation model used includes certain assumptions that arenot fully supported by market observable data. Suchassumptions include interest rate spreads, assumed creditrating (ranging from BB to AAA–), expected returns, anaverage maturity of seven years as well as liquidity estimates.


In addition to the different asset classes outlined in theStatement of Investment Policies, Standards and Procedures(SIP&P), PSP Investments employs a number of absolute returnstrategies through units of externally managed pooled funds.


The fair value of investments in pooled funds is measured byusing the unit values obtained from each of the funds’administrators. Such unit values are derived from the fair valuemeasurement of the underlying investments in each pooled fund.


Amounts receivable from pending trades consist of proceedson sales of investments, excluding derivative financialinstruments, which have been traded but remain unsettled atthe end of the reporting period.

Amounts payable from pending trades consist of the cost ofpurchases of investments, excluding derivative financialinstruments, which have been traded but remain unsettled atthe end of the reporting period.


The fair value of amounts receivable and payable frompending trades reflects the value at which their underlyingoriginal sale or purchase transactions were undertaken.


Securities sold short reflect PSP Investments’ commitment topurchasing securities pursuant to short selling transactions. Insuch transactions, PSP Investments sells securities it does notown with a commitment to purchasing similar securities on themarket to cover its position.


Using ask prices as inputs, the fair value of securities sold shortis measured using the same method as the similar longpositions presented under Nominal Fixed Income, WorldInflation-Linked Bonds, Canadian Equity and Foreign Equity.


Derivative financial instruments are financial contracts, thevalue of which is derived from changes in underlying assets,interest or exchange rates. PSP Investments uses derivativefinancial instruments to increase returns or to replicateinvestments synthetically. Derivatives are also used to reducethe risk associated with existing investments.

PSP Investments uses the following types of derivativefinancial instruments as described below:

(i) Swaps

Swaps are transactions whereby two counterparties exchangecash flow streams with each other based on predeterminedconditions that include a notional amount and a term. Swaps areused to increase returns or to adjust exposures of certain assetswithout directly purchasing or selling the underlying assets.







(ii) Futures

Futures are standardized contracts to take or make delivery ofan asset (buy or sell) at a specific time in the future for aspecific price that has been agreed upon today. Futures areused to adjust exposures to specified assets without directlypurchasing or selling the underlying assets.

(iii) Forwards

Forwards are contracts involving the sale by one party andthe purchase by another party of a predefined amount ofan underlying instrument, at a predefined price and apredefined date in the future. Forwards are used for yieldenhancement purposes or to manage exposures to currenciesand interest rates.

(iv) Options

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


Warrants are options on an underlying asset which is in the formof a transferable security and which can be listed on an exchange.

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


Collateralized debt obligations are a type of asset-backedsecurity that is constructed from a portfolio of credit-relatedassets. Collateralized debt obligations are usually divided intoseveral tranches with different credit risk levels andcorresponding interest payments. Any losses are applied firstto the more junior tranches (lowest risk rating) before movingup in seniority.


All listed derivative financial instruments are recorded at fairvalue using quoted market prices with the bid price for longpositions and the ask price for short positions. Except forcollateralized debt obligations, OTC derivatives are valuedusing appropriate valuation techniques, such as discountedcash flows using current market yields. The assumptions usedinclude the statistical behaviour of the underlying instrumentsand the ability of the model to correlate with observed markettransactions. For many pricing models there is no materialsubjectivity because the methodologies employed do notnecessitate significant judgment and the pricing inputs areobserved from actively quoted markets. Additionally, thepricing models used are widely accepted and used by othermarket participants.

The fair value of collateralized debt obligations are determinedbased on valuation techniques that use significant assumptionsthat are not all directly market observable. Such assumptionsinclude default correlation data and recovery rate which areestimated by management. The instruments are then valued bydiscounting the expected cash flows using an appropriatediscount factor.







Notional values of derivative financial instruments are not recorded as assets or liabilities as they represent the face amount ofthe contract. Notional values do not represent the potential gain or loss associated with the market or credit risk of suchtransactions disclosed below, with the exception of credit derivatives 1. Rather, they serve as the basis upon which the cash flowsand the fair value of the contracts are determined.

The following table summarizes the derivatives portfolio as at March 31:

($ millions) 2010 2009

NotionalValue

Fair Value NotionalValue

FairValueINVESTMENTS Assets Liabilities Net

Equity and Commodity DerivativesFutures $ 82 $ – $ – $ – $ 455 $ –Total Return Swaps 2,563 84 (1) 83 2,109 77Variance Swaps – – – – 78 5Warrants and Rights 1 1 – 1 1 1Options: Listed-written 4 – – – – –

Currency DerivativesForwards 7,407 225 (20) 205 14,951 (126)Options: OTC-purchased 476 3 – 3 449 5

OTC-written 124 – (1) (1) 113 (1)Interest Rate Derivatives

Bond Forwards 149 – (1) (1) 253 –Futures 379 – – – – –Interest Rate Swaps 2,840 17 (28) (11) 2,852 (3)Total Return Swaps 2,045 14 (10) 4 2,556 40Swaptions – – – – 1,817 –Options: Listed-purchased 309 – – – – –

Listed-written 847 – – – 1,807 –OTC-written – – – – 1,088 –

Credit Derivatives 1 :Purchased 20 1 – 1 46 38Sold 541 2 (241) (239) 1,183 (925)

Total $ 17,787 $ 347 $ (302) $ 45 $ 29,758 $ (889)

1 Credit derivatives include collateralized debt obligations and a credit default swap. PSP Investments, through sold credit derivatives, indirectly guarantees the underlying referenceobligations. The maximum potential exposure is the notional amount of the sold credit derivatives as shown in the table above.







The term to maturity based on notional value for thederivatives, as at March 31, is as follows:

($ millions) 2010 2009

Less than 3 months $ 6,691 $ 17,6863 to 12 months 8,195 8,608Over 1 year 2,901 3,464

Total $ 17,787 $ 29,758


Financial instruments are classified according to the followinghierarchy based on the significant inputs used in measuringtheir fair value.

Level 1: Valuation is based on quoted prices in active marketsfor identical assets or liabilities.

Level 2: Valuation is based on quoted market prices for similarinstruments in active markets or quoted prices for identical orsimilar instruments in markets that are not active. Level 2 alsoincludes model-based valuation techniques for which allsignificant assumptions are observable in the market.

Level 3: Valuation is based on model-based techniquesfor which significant assumptions are not observable in themarket. They reflect management’s assessment of theassumptions that market participants would use in pricingthe financial instruments.







The following table shows the fair value of financial instruments, as at March 31, 2010 based on the methods described above:

($ millions) Level 1 Level 2 Level 3 No LevelTotal

Fair Value

World EquityCanadian Equity & Foreign Equity $ 12,820 $ 1,023 $ – $ – $ 13,843Private Equity – – 3,819 – 3,819

Nominal Fixed Income 98 8,294 935 – 9,327Real Return Assets

World Inflation-Linked Bonds – 245 – – 245Real Estate – – 4,467 – 4,467Infrastructure – – 1,717 – 1,717

Absolute Return – 901 855 – 1,756

INVESTMENTS $ 12,918 $ 10,463 $ 11,793 $ – $ 35,174

Investment-Related AssetsAmounts receivable from pending trades 1 $ – $ – $ – $ 108 $ 108Derivative-related receivables – 343 4 – 347

Total Investment-Related Assets $ – $ 343 $ 4 $ 108 $ 455

Investment-Related LiabilitiesAmounts payable from pending trades 1 $ – $ – $ – $ (333) $ (333)Securities sold short (82) – – – (82)Derivative-related payables – (65) (237) – (302)Capital debt financing:

Short-term – (472) – – (472)Long-term – (781) – – (781)

Total Investment-Related Liabilities $ (82) $ (1,318) $ (237) $ (333) $ (1,970)

NET INVESTMENTS $ 12,836 $ 9,488 $ 11,560 $ (225) $ 33,659

1 No fair value hierarchy classification is required for these items.

The classification of financial instruments in the levels of the hierarchy is established at the time of the initial valuation of theinstrument and reviewed on each subsequent reporting period-end.

There have been no significant transfers between Level 1 and Level 2 during the current fiscal year.









The following table shows a reconciliation of all movements in the fair value of financial instruments categorized within Level 3for the year ended March 31:

2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related

receivables/payables

(net)

Total

Opening Balance $ 3,086 $ 817 $ 7,118 $ 495 $ (878) $ 10,638Purchases 1,139 – 939 203 1 2,282Sales/Settlements (716) (49) (1,071) (6) – (1,842)Total gains (losses) 1 310 167 (802) 163 644 482Transfers into or out of Level 3 – – – – – –

Closing Balance $ 3,819 $ 935 $ 6,184 $ 855 $ (233) $ 11,560

Total gains (losses), for the year ended March 31, included in investment income (loss) are presented as follows:

2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Total realized gains (losses) $ 33 $ 11 $ 21 $ – $ (1) $ 64

Total unrealized gains (losses) $ 277 $ 156 $ (823) $ 163 $ 645 $ 418

Total gains (losses) 1 $ 310 $ 167 $ (802) $ 163 $ 644 $ 482

1 Included in Note 6 (a).


In the course of measuring fair value of financial instruments classified as Level 3, valuation techniques used incorporate assumptionsthat are based on non-observable data. Significant assumptions used for each asset class are described in Notes 3 (a) and (b).Although such assumptions reflect management’s best judgment, the use of reasonably possible alternative assumptions could yielddifferent fair value measures representing, at a minimum, a 3% increase/decrease in the fair value of financial instruments categorizedas Level 3. This excludes Private Market fund investments as well as Real Estate Debt, where a sensitivity analysis is not possible giventhe underlying assumptions used are not available to PSP Investments. In the case of Private Market fund investments, the fair value isdetermined based on the audited financial statements of the fund’s general partner as indicated in Note 3 (a). With respect to RealEstate Debt, the fair value is obtained from third-party appraisers as described in Note 3 (a).





(D) INVESTMENT ASSET MIX

The SIP&P sets out the long-term target weights of the assets that shall be invested for the four Plan Accounts. Investments areclassified by asset mix category as set out in the SIP&P based on the economic intent of the investment strategies of theunderlying assets.

The net investments, as at March 31, are as follows:

2010 2009

($ millions) Fair Value

PolicyPortfolio

Long-TermTarget Fair Value

PolicyPortfolio

Long-TermTarget

World EquityCanadian Equity $ 9,853 29.2% 30.0% $ 6,391 26.1% 30.0%Foreign Equity:

US Large Cap Equity 1,536 4.6 5.0 672 2.7 5.0EAFE Large Cap Equity 1,486 4.4 5.0 756 3.1 5.0Small Cap Developed World Equity 1,438 4.3 5.0 566 2.3 5.0Emerging Markets Equity 2,173 6.5 7.0 1,539 6.3 7.0

Private Equity 3,946 11.7 10.0 3,039 12.4 10.0Nominal Fixed Income

Cash & Cash Equivalents 1 1,376 4.1 2.0 53 0.2 2.0World Government Bonds 1,548 4.6 5.0 1,526 6.2 5.0Canadian Fixed Income 3,513 10.4 8.0 3,084 12.6 8.0

Real Return AssetsWorld Inflation-Linked Bonds 1,560 4.6 5.0 1,732 7.1 5.0Real Estate 3,722 11.1 10.0 3,374 13.8 10.0Infrastructure 1,508 4.5 8.0 1,773 7.2 8.0

NET INVESTMENTS $ 33,659 100.0% 100.0% $ 24,505 100.0% 100.0%

1 Includes amounts related to absolute return and real estate debt strategies.






(E) SECURITIES LENDING & BORROWING PROGRAMS

PSP Investments participates in securities lending andborrowing programs whereby it lends and borrows securitiesin order to enhance portfolio returns.

The securities lending and borrowing programs requirecollateral in cash, high-quality debt instruments or securities.Collateral transactions are conducted under terms that areusual and customary in standard securities lending andborrowing programs. In the absence of an event of default, thesame securities or equivalent securities must be returned tothe counterparty at the end of the contract. PSP Investmentsdoes not repledge any collateral held.

The following table illustrates the fair values of the Plan’sallocated securities and collateral associated with the lendingand borrowing programs as at March 31:

($ millions) 2010 2009

Securities LendingSecurities lent $ 2,913 $ 1,958Collateral contractually receivable 1 3,039 2,050

Securities BorrowingSecurities borrowed 82 257Collateral contractually payable 2 87 263

1 The minimum fair value of collateral required is equal to 102% of the fair value of thesecurities lent.

2 The minimum fair value of collateral required is equal to 100% of the fair value of thesecurities borrowed.

4. INVESTMENT RISK MANAGEMENT

Risk Management is a central part of PSP Investments’strategic management. It is a continuous process wherebyPSP Investments methodically addresses the risks related to itsvarious investment activities with the goal of achieving amaximum rate of return without undue risk of loss and asustained benefit within each activity and across the totalportfolio.

A risk governance structure that includes required reportingon risk to all levels in the organization also ensures thatappropriate objectives are pursued and achieved in line withthe fulfillment of PSP Investments’ legislated mandate. TheBoard of Directors and its committees oversee various issuesrelated to risk and receive assurance from senior managementand an independent internal auditor reporting directly to theAudit and Conflicts Committee.

The use of financial instruments exposes PSP Investments tocredit and liquidity risks as well as market risks includingforeign exchange and interest rate risks. These risks aremanaged in accordance with the Investment Risk ManagementHandbook, which is an integral part of PSP Investments’ riskcontrol system. The Investment Risk Management Handbookcontains an Investment Risk Management Policy whichsupplements the SIP&P (Policy Portfolio). The Policy Portfoliodetermines a diversification strategy to mitigate risk wherebyPSP Investments invests in a diversified portfolio ofinvestments based on established criteria. Additionally, theobjective of these policies is to provide a framework for themanagement of credit, liquidity and market risks. Derivativefinancial instruments, traded either on exchanges or OTC, areone of the vehicles used to mitigate the impact of market risk.

(A) MARKET RISK

Market risk is the risk that the value of an investment willfluctuate as a result of changes in market prices, whetherthose changes are caused by factors specific to the individualinvestment, volatility in share and commodity prices, interestrate, foreign exchange or other factors affecting similarsecurities traded in the market.





4. INVESTMENT RISK MANAGEMENT (continued)


Market risk is measured using the method known asValue-at-Risk (VaR). VaR is the maximum loss not exceededwith a given probability defined as the confidence level, over agiven period of time. PSP Investments has chosen a yearly95% confidence level to measure and report VaR. PSPInvestments uses a Historical VaR model incorporating threeyears of monthly market returns which are scaled to a twelve-month holding period. Risk Management is responsible forimplementing and maintaining a VaR measurementmethodology for all asset classes and all financial risk factors.

Historical VaR is statistically valid under normal marketconditions and does not specifically consider losses fromsevere market events. The Historical VaR model also assumesthat the future will behave in a similar pattern to the past. Iffuture market conditions differ significantly from those of thepast, potential losses may differ from those originallyestimated. The VaR is an estimate of a single value in adistribution of potential losses that can be experienced. As aresult, it is not an estimate of the maximum potential loss.

The goal of actively managing the portfolio is to outperformthe policy portfolio benchmarks while maintaining the activerisk under 400 basis points (bps). Relative VaR, as a result, isthe maximum amount of loss of total investments, with 95%confidence level, relative to the policy portfolio benchmarkover a twelve-month period.

The following table shows the total Relative VaR allocated tothe Plan and the diversification effect as at March 31 based onthe economic intent of the investment strategies of theunderlying assets. The diversification effect captures the effectof holding different types of assets which may react differentlyin various types of situations and thus having the effect ofreducing overall Relative VaR.

Active Risk Taken

(Relative VaR – $ millions) 2010 2009

World Equity $ 500 $ 571Real Return Assets 631 772Absolute Return 299 841

Total Relative VaR (Undiversified) 1,430 2,184

Diversification Effect (716) (1,203)

Total Relative VaR $ 714 $ 981

Risk Management monitors the absolute risk of the PolicyPortfolio on a quarterly basis to ensure no undue loss may beexperienced by PSP Investments.

Generally, changes in VaR between reporting periods are dueto changes in the level of exposure, volatilities and/orcorrelations among asset classes. Although VaR is a widelyaccepted risk measure, it must be complemented by other riskmeasures. PSP Investments therefore uses stress testing andscenario analysis to examine the impact on financial results ofabnormally large movements in risk factors. Stress testing andscenario analysis are used to test a portfolio’s sensitivity tovarious risk factors and key model assumptions. Thesemethods also use historically stressed periods to evaluate howa current portfolio would fare under such circumstances.Stress testing is also deployed to assess new productbehaviour. Stress testing and scenario analysis are utilized as acomplement to the Historical VaR measure in order to providegreater insight on the size of potential losses that may beexperienced. PSP Investments uses the expected shortfall andtail analysis measures to determine this. Expected shortfall isdefined as the conditional expectation beyond the VaR level. Itis measured by averaging all data points showing a lossgreater than VaR measured at a given confidence level. Byincreasing the confidence level of the VaR measure from 95%to 99%, PSP Investments is able to assess the size of thepotential loss that would be exceeded one year out of 100(instead of one year out of 20). Therefore, there is a greaterprobability for larger losses, at the 99% confidence level, inextreme market conditions. Risk Management presents astress testing and scenario analysis report to seniormanagement on a quarterly basis.








Interest rate risk refers to the risk that fluctuations in interest rates will directly affect the fair value of the Plan’s net asset values.The most significant exposure to interest rate risk is related to the investment in bonds, ABTNs and Real Estate Debt.

The terms to maturity of the investments, before allocating the effect of derivative contracts and investment-related assets andliabilities, as at March 31, are as follows:

Terms to Maturity

($ millions)Less than

1 Year1 to 5Years

5 to 10Years

Over 10Years

2010Total

2009Total

Government of Canada bonds $ 135 $ 1,186 $ 249 $ 273 $ 1,843 $ 2,215Provincial and Territorial bonds 132 420 224 386 1,162 1,073Municipal bonds 3 16 36 6 61 61Corporate bonds 187 442 327 278 1,234 1,077ABTNs – 33 – 829 862 755

Total Canadian Fixed Income $ 457 $ 2,097 $ 836 $ 1,772 $ 5,162 $ 5,181

Total World Government Bonds $ 5 $ 345 $ 239 $ 208 $ 797 $ 550

Total World Inflation-Linked Bonds $ – $ 59 $ 57 $ 129 $ 245 $ 142

Real Estate Debt 1 $ 200 $ 127 $ – $ 25 $ 352 $ 545

Grand Total $ 662 $ 2,628 $ 1,132 $ 2,134 $ 6,556 $ 6,418

1 Real Estate Debt is a component of the Real Estate asset class disclosed in Note 3 (a).

The terms to maturity of PSP Investments’ capital debt financing are disclosed in Note 8.

Absolute return strategies, as described in Note 3, and derivative contracts are also subject to interest rate risk exposures. Theseexposures are reflected in the VaR calculation described in Note 4 (a).

Additionally, the exposure to interest rate risk for short-term instruments and amounts receivable from pending trades would notbe significant due to their short-term nature.








PSP Investments and its subsidiaries are exposed to currency risk through holdings of securities, units in pooled funds and unitsin limited partnerships of non-Canadian assets. Fluctuations in the relative value of the Canadian dollar against these foreigncurrencies can result in a positive or a negative effect on the fair value of the investments. To mitigate this risk, PSP Investmentsmay take, through foreign forward contracts, positions in foreign currencies. PSP Investments’ policy is to hedge 50% of itsforeign currency investments excluding Emerging Markets Equity.

The underlying net foreign currency exposures for the Plan, after allocating the effect of derivative contracts and investment-related assets and liabilities for both monetary and non-monetary items, as at March 31, are as follows:

2010 2009

Currency Fair Value % of Total Fair Value % of Total(in millions of Canadian $)

US Dollar $ 4,565 51.2% $ 3,353 52.9%Euro 1,321 14.8 1,498 23.6British Pound 566 6.4 376 5.9Brazilian Real 487 5.5 47 0.7Hong Kong Dollar 368 4.1 217 3.4Japanese Yen 312 3.5 282 4.5Korean Won 255 2.9 120 1.9New Taiwan Dollar 145 1.6 126 2.0South African Rand 114 1.3 67 1.1Australian Dollar 110 1.2 120 1.9Indian Rupee 109 1.2 62 1.0Turkish Lira 79 0.9 44 0.7Others 478 5.4 29 0.4

Total $ 8,909 100.0% $ 6,341 100.0%

PSP Investments and its subsidiaries also have commitments, denominated in foreign currencies of $3,623 million($2,968 million US, €422 million, £1 million and 227 million South African Rands (ZAR)) for the Plan which are not included in theforeign currency exposure table.






(B) CREDIT RISK

PSP Investments is exposed to credit risk, that is, the risk thatthe issuer of a debt security or a counterparty to a derivativecontract is unable to meet its financial obligations.

Credit risk encompasses the risk of a deterioration ofcreditworthiness and the respective concentration risk. Creditrisk monitoring entails an evaluation of the credit quality ofeach issuer to which PSP Investments is exposed. To performthis evaluation, PSP Investments relies on four recognizedcredit rating agencies. A minimum of two credit ratings areused to classify each security; securities rated by only oneagency are classified as “not rated”. If the agencies disagree asto a security’s credit quality, PSP Investments uses the lowestof the available ratings.

To monitor the evolution of credit risk, PSP Investmentsperiodically produces a concentration report by credit ratingof all credit-sensitive financial securities with the exception ofsecurities held in pooled funds or for Private MarketInvestments.

PSP Investments’ concentration of credit risk by credit ratingfor the Plan, as at March 31, is as follows:

2010 2009

Investment grade (AAA to BBB–) 89.9% 88.7%Below investment grade (BB+ and below) – –Not rated:

Rated by a single credit rating agency 8.5 8.5Not rated by credit rating agencies 1.6 2.8

Total 100.0% 100.0%

The breakdown of credit concentration risk for the Plan doesnot include investments in distressed debt included in pooledfunds in the amount of approximately $1.5 billion as atMarch 31, 2010 (2009 – $1.5 billion). Such investments typicallyinclude debt securities of issuers close to default, and theinvestment in such securities are quasi-equity in nature.

As at March 31, 2010, the Plan also has a net notional exposureof $447 million to collateralized debt obligations, of whichapproximately 64% of the dollar exposure is rated “Investmentgrade”, as well as funding facilities of a maximum amount of$705 million to support potential margin calls on the ABTNs(Note 3 (a) (iii)).

As at March 31, 2010, the Plan’s maximum exposure to creditrisk, excluding collateral held and the investments in distresseddebt and collateralized debt obligations described above,amounts to approximately $9.4 billion (2009 – approximately$8 billion).


Counterparty risk represents the credit risk from currentand potential exposure related to transactions involvingderivative contracts. In order to minimize derivative contractcounterparty risk, PSP Investments deals only withcounterparties with a minimum credit rating of “A–” as at thetrade date, as provided by a recognized credit rating agency.PSP Investments monitors the credit ratings of counterpartieson a daily basis and has the ability to terminate all trades withcounterparties who have their credit rating downgraded below“A–” subsequent to the trade date. PSP Investments also usescredit mitigation techniques such as master-nettingarrangements and collateral transfers through the use ofCredit Support Annexes (CSA).

PSP Investments’ policy also requires the use of theInternational Swaps and Derivative Association (ISDA) MasterAgreement with all counterparties to derivative contracts. TheISDA Master Agreement provides the contractual frameworkwithin which dealing activities across a full range of OTCproducts are conducted and contractually binds both partiesto apply close-out netting across all outstanding transactionscovered by an agreement if either party defaults or otherpre-determined events occur.








Additionally, the CSA to the ISDA Master Agreement enablesPSP Investments to realize any collateral placed with it in theevent of the failure of the counterparty and requiresPSP Investments to contribute further collateral whenrequested. The CSA also regulates the exchange of collateralwhen the credit exposure to a counterparty exceeds apredetermined threshold.

On behalf of the Plan, PSP Investments deposited or pledgedsecurities with a fair value of $152 million as collateral withvarious financial institutions as at March 31, 2010 (2009 –$751 million) while securities with a fair value of $130 million(2009 – $77 million) were received from other counterpartiesas collateral. PSP Investments does not repledge any collateralheld. All collateral deposited, pledged and received were heldwith counterparties who had a minimum credit rating of “A–”as at March 31, 2010.

Risk Management is responsible for counterparty riskmonitoring and mitigation as well as maintaining acomprehensive, disciplined, and enterprise-wide process fortracking and managing counterparty risk. As such, RiskManagement measures counterparty risk on an ongoing basis,evaluates and tracks the creditworthiness of currentcounterparties and mitigates counterparty risk throughcollateral management.

(C) LIQUIDITY RISK

Liquidity risk corresponds to PSP Investments’ ability to meetits financial obligations when they come due with sufficientand readily available cash resources. PSP Investments’ cashposition is monitored on a daily basis. In general, investmentsin cash, cash equivalents, floating rate notes, debt and publicequities are expected to be highly liquid as they will beinvested in securities that are actively traded. RiskManagement utilizes appropriate measures and controls tomonitor liquidity risk in order to ensure that there is sufficientliquidity to meet financial obligations as they come due. Aliquidity report taking into consideration future forecastedcash flows is prepared and presented to senior managementon a weekly basis. This ensures that sufficient cash reservesare available to meet forecasted cash outflows. Additionally,sufficient sources of liquidity are maintained for deployment incase of market disruption.

PSP Investments has the ability to raise additional capitalthrough the use of its capital debt program. This programallows PSP Investments to issue short-term promissory notesand medium-term notes. Note 8 provides additionalinformation on the usage of the capital debt program.

The terms to maturity of the notional amount of derivatives,including related payable amounts, are disclosed in Note 3 (b).






(C) LIQUIDITY RISK (continued)


The following tables present the fair value of non-derivative-related financial liabilities as well as derivative-related financialassets and liabilities, aggregated according to their maturities as at March 31, 2010.

Liabilities are presented in the earliest period in which the counterparty can request payment.

($ millions)Less than3 Months

3 to 12Months

Over1 Year Total

Non-derivative-related financial liabilitiesAmounts payable from pending trades $ (333) $ – $ – $ (333)Securities sold short (82) – – (82)Capital debt financing (454) (18) (781) (1,253)Accounts payable and other liabilities (30) – (8) (38)

Total $ (899) $ (18) $ (789) $ (1,706)


3 to 12Months

Over1 Year Total

Derivative-related financial assets and liabilitiesDerivative-related assets $ 128 $ 203 $ 16 $ 347Derivative-related liabilities (24) (14) (264) (302)

Total $ 104 $ 189 $ (248) $ 45





5. FUND TRANSFERS

PSP Investments received fund transfers of $3,707 million forthe year ended March 31, 2010 (2009 – $3,179 million) from thePublic Service Pension Fund. The transfers received arecomprised of the net employer and employee contributions tothe Public Service pension plan in respect of member serviceafter April 1, 2000.



Investment income (loss), for the year ended March 31, is asfollows:

($ millions) 2010 2009

Interest income $ 297 $ 339Dividend income 296 316Other income 148 173Security lending income (net) 1 7 5Dividend expense (16) (19)Interest expense (Note 8) (39) (48)Transaction costs (15) (26)External investment management fees 2 (24) (38)

654 702Net realized gains (losses) 3 1,110 (4,499)Net unrealized gains (losses) 3,761 (3,087)

Investment Income (Loss) $ 5,525 $ (6,884)

1 Includes fees on securities borrowed.2 These are amounts incurred for public market investments that are paid directly byPSP Investments (Note 1). This excludes amounts incurred for Private MarketInvestments, disclosed in Note 3 (a) (ii), and certain public market pooled fundinvestments in the amount of $8 million for the year ended March 31, 2010 (2009 –$4 million) that are not paid directly by PSP Investments.

3 Includes foreign currency gains (losses) of $451 million for the year endedMarch 31, 2010 (2009 – $(439) million).

(B) INVESTMENT INCOME (LOSS) BY ASSET MIX

Investment income (loss) by asset mix based on the economicintent of the investment strategies of the underlying assets asoutlined in the SIP&P, for the year ended March 31, afterallocating net realized and unrealized gains (losses) oninvestments to the asset classes to which they relate, isas follows:

($ millions) 2010 2009

World EquityCanadian Equity $ 2,680 $ (2,610)Foreign Equity:

US Large Cap Equity 179 (326)EAFE Large Cap Equity 183 (430)Small Cap Developed World Equity 205 (357)Emerging Markets Equity 736 (715)

Private Equity 880 (1,153)Nominal Fixed Income

Cash & Cash Equivalents 33 25World Government Bonds (250) 347Canadian Fixed Income 142 142

Real Return AssetsWorld Inflation-Linked Bonds (184) 119Real Estate 20 (566)Infrastructure 115 81

Absolute Return 1 786 (1,441)


1 Includes amounts related to real estate debt strategies.





7. EXPENSES

(A) ALLOCATION OF EXPENSES

The Act requires that the costs of operation ofPSP Investments be charged to the plans for which it providesinvestment services. Under section 4(3) of the Act, thePresident of the Treasury Board shall determine to which planaccount these costs will be charged, in consultation with theMinister of National Defence and the Minister of Public Safety.An allocation policy has been developed which allocates thedirect costs of investment activities, such as externalinvestment management fees and custodial fees, to each planaccount, based upon the asset value of each plan account atthe time the expense was incurred.

All other operating expenses, excluding the direct cost ofinvestment activities listed above, for the year endedMarch 31, have been allocated in proportion to the annualamount of net assets in each Plan Account as follows:

2010 2009

Public Service Pension Plan Account 72.5% 72.6%Canadian Forces Pension Plan Account 20.0 20.1Royal Canadian Mounted Police Pension

Plan Account 7.2 7.2Reserve Force Pension Plan Account 0.3 0.1

Total 100.0% 100.0%

Expenses are paid by PSP Investments by way of advancesfrom the Public Service Pension Plan Account, which arereimbursed by the other plan accounts on a quarterly basis.

(B) OPERATING EXPENSES

Operating expenses allocated to this Plan account, for the yearended March 31, consist of the following:

($ thousands) 2010 2009

Salaries and benefits $ 38,745 $ 35,055Professional and consulting fees 6,735 7,255Office supplies and equipment 8,135 6,374Other operating expenses 3,046 5,797Depreciation of fixed assets 5,143 3,381Occupancy costs 3,135 2,624Custodial fees 1,129 910Remuneration earned by Directors 575 661Travel and related expenses for

Directors 127 278Communication expenses 229 68

Total $ 66,999 $ 62,403





8. CAPITAL DEBT FINANCING

As of March 31, 2010, PSP Capital Inc. has $649 million (2009 –$1,579 million) of short-term promissory notes outstandingwith maturity dates between 14 and 120 days of issuance, ofwhich $472 million (2009 – $1,145 million) has been allocatedto the Public Service Pension Plan Account and included inNote 3 (a) as a short-term investment-related liability. As atMarch 31, 2010, PSP Capital Inc. has $1 billion (2009 – $1 billion)of medium-term notes issued and outstanding, of which$725 million (2009 – $725 million) has been allocated to thePublic Service Pension Plan Account. These medium-termnotes bear interest of 4.57% per annum and have a maturitydate of December 9, 2013. These medium-term notes areincluded in Note 3 (a) as a long-term investment-relatedliability. As at March 31, 2010, the fair value of these medium-term notes is $1,073 million (2009 – $1,054 million), of which$781 million (2009 – $764 million) has been allocated to thePublic Service Pension Plan Account. The maximumauthorized by the Board of Directors for both the short-termpromissory notes and medium-term notes is $2 billion.The capital raised, primarily used to finance investments in theReal Estate and Infrastructure asset classes, is unconditionallyand irrevocably guaranteed by PSP Investments and is inaccordance with the approved PSP Investments’ corporatepolicy for leverage.

The operating expenses incurred by PSP Capital Inc. wereallocated to each Plan account as described in Note 7 (a).

Interest expense, for the year ended March 31, is as follows:

($ thousands) 2010 2009

Short-term promissory notes $ 5,393 $ 41,051Medium-term notes 33,214 7,263

Total $ 38,607 $ 48,314

9.CAPITAL MANAGEMENT

As an investment company, PSP Investments objectives inmanaging its capital are:

– To invest fund transfers, outlined in Note 5, in the bestinterests of the beneficiaries and contributors under theSuperannuation Acts. The funds received are invested with aview of achieving a maximum rate of return, without unduerisk of loss, with regards to the funding, policies andrequirements of the pension plans established under theSuperannuation Acts. The funds are also invested inaccordance with the Investment Risk Management policieswhich are outlined in Note 4.

– To maintain an appropriate credit rating to achieve accessto the capital markets at the lowest cost of capital. ThroughPSP Capital Inc., and its leverage policies, PSP Investmentshas the ability to raise capital by issuing short-term promissory notes and medium-term notes. Note 8provides information on the capital debt financing andNote 4 (c) provides information on PSP Investments’liquidity. Additionally, as at March 31, 2010, PSP Investmentshas an operating line of credit of $10 million (2009 –$10 million). As at March 31, 2010, no amounts have beenwithdrawn (2009 – nil).

The capital structure of PSP Investments consists of fundtransfers and capital debt financing. PSP Investments has noexternally imposed restrictions on capital.

28 —PUBLIC SECTOR PENSION INVESTMENT BOARD




10. GUARANTEES AND INDEMNITY

PSP Investments provides indemnification to its Directors, itsOfficers and to certain PSP Investments representatives whoare asked to serve on boards of directors (or like bodies) orinvestment advisory boards (or like bodies) of entities in whichPSP Investments or its wholly-owned subsidiaries have madean investment or have a financial interest. As a result, butsubject to the Act, PSP Investments may be required toindemnify these representatives for costs incurred, such asclaims, actions or litigations in connection with the exercise oftheir duties, unless the liability of such a representative relatesto a failure to act honestly and in good faith. To date, PSPInvestments has not received any claims nor made anypayment for such indemnity.

As part of investment transactions, PSP Investments and itssubsidiaries guaranteed letter of credit facilities. Thebeneficiaries of these letter of credit facilities have the abilityto draw against these facilities to the extent that thecontractual obligations, as defined in the related agreements,are not met. As at March 31, 2010, the maximum exposure ofthe Plan was $7 million (2009 – $11 million).

As at March 31, 2010, PSP Investments agreed to guarantee, aspart of an investment transaction, a non-revolving term loan.In the event of a default, the Plan would assume the obligationup to $292 million (2009 – $292 million) plus interest andother related costs.

PSP Investments also unconditionally and irrevocablyguarantees all credit facilities, short-term promissory notesand medium-term notes issued by PSP Capital Inc.

11. COMMITMENTS

PSP Investments and its subsidiaries have committed to enterinto investment transactions, which will be funded over thenext several years in accordance with agreed terms andconditions. As at March 31, the portion of PSP Investments’commitments that would be assumed by the Plan is as follows:

($ millions) 2010 2009

Private Equity $ 2,295 $ 3,356Real Estate 1,014 1,301Infrastructure 311 418Public markets 238 419

Total $ 3,858 $ 5,494


CANADIAN FORCES PENSIONPLAN ACCOUNT

AUDITORS’ REPORT

To the Minister of National Defence

We have audited the Balance Sheet of the Public Sector Pension Investment Board – Canadian Forces Pension Plan Account (theCanadian Forces Pension Plan Account) as at March 31, 2010, and the Statements of Net Income (Loss) from Operations andComprehensive Income and of Changes in Net Assets for the year then ended. These financial statements are the responsibilityof the Public Sector Pension Investment Board’s (PSP Investments) management. Our responsibility is to express an opinion onthese financial statements based on our audit.


In our opinion, these financial statements present fairly, in all material respects, the financial position of the Canadian ForcesPension Plan Account as at March 31, 2010, and the results of its operations and changes in its net assets for the year then endedin accordance with Canadian generally accepted accounting principles. As required by the Financial Administration Act, wereport that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year.

Further, in our opinion, the transactions of the Canadian Forces Pension Plan Account that have come to our notice during ouraudit of the financial statements have, in all significant respects, been in accordance with the applicable provisions of Part X ofthe Financial Administration Act and regulations, the Public Sector Pension Investment Board Act and regulations and theby-laws of PSP Investments and its wholly-owned subsidiaries.

1






BALANCE SHEET

As at March 31

($ millions) 2010 2009

ASSETSInvestments (Note 3 (a)) $ 9,523 $ 7,650Investment-related assets (Note 3 (a)) 123 148Other assets 9 7

TOTAL ASSETS $ 9,655 $ 7,805

LIABILITIESInvestment-related liabilities (Note 3 (a)) $ 533 $ 1,040Accounts payable and other liabilities 9 9Due to the Public Service Pension Plan Account 6 6

TOTAL LIABILITIES $ 548 $ 1,055

NET ASSETS $ 9,107 $ 6,750

Accumulated net income from operations and comprehensive income $ 1,587 $ 96Accumulated fund transfers 7,520 6,654

NET ASSETS $ 9,107 $ 6,750









($ millions) 2010 2009







($ millions) 2010 2009


Fund transfers (Note 5) 866 853Net income (loss) from operations and comprehensive income 1,491 (1,922)

Increase (decrease) in net assets for the year 2,357 (1,069)






ORGANIZATION

The Public Sector Pension Investment Board (PSP Investments)is a crown corporation established under the Public SectorPension Investment Board Act (“the Act”) with a mandate toinvest the net contributions of the Public Service, CanadianForces, Royal Canadian Mounted Police and Reserve Forcepension plans in financial markets.

The Canadian Forces Pension Fund was established byamendments to the Canadian Forces Superannuation Act, toreceive contributions and make benefit payments in respect ofmember service after April 1, 2000. The net contributions aretransferred, by the Canadian Forces Pension Fund, toPSP Investments – Canadian Forces Pension Plan Account forinvestment. PSP Investments maintains records of the pensionfund’s net contributions, as well as the allocation of itsinvestments and the results of its operations in the planaccount.

PSP Investments is responsible for managing amounts that aretransferred to it in the best interests of the beneficiaries andcontributors under the Canadian Forces Superannuation Act.The amounts are to be invested with a view of achieving amaximum rate of return, without undue risk of loss, withregards to the funding, policies and requirements of theCanadian Forces Superannuation Act.



These financial statements present the financial position andoperations of PSP Investments and its wholly-ownedsubsidiaries as they pertain to the investment of the netcontributions transferred to it from the Canadian ForcesPension Fund in respect of member service after April 1, 2000.Accordingly, they do not reflect all of the assets or the detailsof the pension contributions, payments and liabilities of theCanadian Forces Pension Fund. The financial statements havebeen prepared in accordance with Canadian generallyaccepted accounting principles (GAAP) and the requirements





Market prices or rates are used to determine fair value wherean active market exists (such as a recognized securitiesexchange), as it is the best evidence of the fair value of aninvestment. If quoted market prices or rates are not available,then fair values are estimated using present value or othervaluation techniques, using inputs existing at the end of thereporting period that are derived from observable marketdata.










TRANSACTION COSTS

Transaction costs are incremental costs directly attributable tothe acquisition, due diligence, issue, or disposal of a financialasset or financial liability. Transaction costs are expensed asincurred and recorded as a component of investment income(loss).


Investment management fees are costs directly attributableto the external management of assets on behalf ofPSP Investments. Investment management fees incurred forPrivate Market Investments are paid, as determined by thefund manager, either by the investment directly, throughcapital contributions by PSP Investments or offset againstdistributions received from the investment (Note 3 (a) (ii)).These amounts are recorded against investment income(loss). Investment management fees are also incurred forcertain public equity investments and these amounts are paid,either directly by PSP Investments or offset againstdistributions received from pooled fund investments. In bothcases, they are recorded against investment income (loss)(Note 6).

INCOME RECOGNITION

The investment income (loss) has been allocatedproportionately based on the asset value held by the CanadianForces Pension Plan Account (“the Plan”).

Investment income (loss) is made up of interest income,dividends, realized gains (losses) on the disposal ofinvestments and unrealized gains (losses) which reflect thechange in unrealized appreciation (depreciation) ofinvestments held at the end of the year. Interest income isrecognized as earned. Dividends are recognized on theex-dividend date and are reflected as dividend income.Dividends paid on securities sold short are reflected asdividend expense. Additionally, other income includes therelated distributions from pooled funds, limited partnerships aswell as from direct and co-investments, all from Private MarketInvestments.



FUND TRANSFERS


INCOME TAXES


USE OF ESTIMATES






2. CHANGES IN ACCOUNTING POLICIES (continued)

















3. INVESTMENTS



($ millions) 2010 2009



US Large Cap Equity 420 406 143 197EAFE Large Cap Equity 407 468 232 369Small Cap Developed World Equity 385 358 146 199Emerging Markets Equity 497 444 292 368

Private Equity 1,034 1,108 852 996Nominal Fixed Income

Cash, Cash Equivalents and Other 1 912 938 613 665World Government Bonds 216 230 152 134Canadian Fixed Income 1,398 1,360 1,429 1,436

Real Return AssetsWorld Inflation-Linked Bonds 66 69 39 39Real Estate 1,209 1,214 1,421 1,284Infrastructure 465 477 542 467

Absolute Return 475 448 524 549

INVESTMENTS $ 9,523 $ 9,314 $ 7,650 $ 8,237

Investment-Related AssetsAmounts receivable from pending trades $ 29 $ 29 $ 51 $ 51Derivative-related receivables 94 2 97 13


Investment-Related LiabilitiesAmounts payable from pending trades $ (90) $ (90) $ (101) $ (101)Securities sold short (22) (26) (71) (89)Derivative-related payables (82) – (342) (19)Capital debt financing:

Short-term (128) (128) (316) (316)Long-term (211) (202) (210) (205)

Total Investment-Related Liabilities $ (533) $ (446) $ (1,040) $ (730)

NET INVESTMENTS $ 9,113 $ 8,899 $ 6,758 $ 7,571

1 Includes floating rate notes with maturities greater than one year with a fair value of $275 million for the Plan (2009 – $4 million).








Canadian Equity and Foreign Equity include direct andindirect investments in common shares, American depositoryreceipts, global depository receipts, participation notes,preferred shares, income trust units, exchange traded funds,and securities convertible into common shares of publiclylisted issuers.





The Real Estate asset class is comprised of direct investmentsin companies, in properties, third-party debts and fundinvestments in the real estate sector. Real Estate investmentsare classified into two portfolios (an equity portfolio and adebt portfolio). The equity portfolio is comprised of directinvestments in properties and companies in the office, retail,industrial, hospitality and residential sectors, as well as privatefunds and publicly traded securities invested in real estateassets. The debt portfolio is comprised of third-party loanssuch as junior and senior debts, construction loans, bridgeloans, income-participating loans, mezzanine loans and otherstructured investments (collectively “Real Estate Debt”) wheresignificant portions of the value are attributed to the

underlying real estate assets. The Real Estate asset class isaccounted for net of all third-party financings. As atMarch 31, 2010, the total amount of third-party financingincluded in the Real Estate asset class contracted bydirect investments controlled by PSP Investments for thePlan is approximately $450 million (2009 – approximately$410 million).

The Infrastructure asset class is comprised of directinvestments in companies and fund investments. They includeinvestments in companies engaged in the management,ownership or operation of assets in power, regulatedbusinesses, transportation, telecom or social infrastructure.The Infrastructure asset class is accounted for net of all third-party financings. As at March 31, 2010, the total amountof third-party financing included in the Infrastructure assetclass contracted by direct investments controlled byPSP Investments for the Plan is approximately $20 million(2009 – approximately $40 million).


















Nominal Fixed Income includes Cash, Cash Equivalents andOther, Canadian Fixed Income and World Government Bonds.Cash Equivalents include short-term instruments having amaximum term to maturity of one year. Floating rate notes areincluded in Cash, Cash Equivalents and Other, provided thefinal maturity date does not exceed three years and thecoupons reset more than once per year. Bonds reported asNominal Fixed Income include Canadian government bonds,Canadian provincial and territorial bonds, Canadian municipalbonds and corporate bonds, as well as international sovereign

bonds. World Inflation-Linked Bonds reported as Real ReturnAssets are fixed income securities that earn inflation adjustedreturns.

PSP Investments holds ABTNs reported as Canadian FixedIncome in the investment portfolio. The ABTNs were receivedin exchange for third-party or non-bank sponsored asset-backed commercial paper (ABCP) that suffered a liquiditydisruption in mid-August 2007 and were subsequentlyrestructured in January 2009. The ABTNs had an original facevalue of $1,962 million, of which $393 million has beenallocated to the Plan. During the year ended March 31, 2010,PSP Investments received $67 million of principal repaymentson the ABTNs. During the year ended March 31, 2010, principalrepayments on the ABTNs of $13 million has been allocated tothe 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, ofwhich $191 million was allocated to the Plan. As atMarch 31, 2010, the margin funding facilities had not beendrawn upon. As part of the exchange of the non-bank ABCP forthe ABTNs, it was agreed to include in the agreement amoratorium which prevents collateral calls for a period of18 months ending July 21, 2010.

Management’s best estimate of the fair value ofPSP Investments’ ABTNs allocated to the Plan as atMarch 31, 2010 is equal to $233 million (2009 – $207 million).The fair value of the ABTNs allocated to the Plan has beenreduced by the impact of the funding facilities amounting to$13 million on March 31, 2010 (2009 – $19 million).PSP Investments recorded an increase of $39 million in the fairvalue of the ABTNs allocated to the Plan during the yearended March 31, 2010 (decrease of $98 million during the yearended March 31, 2009).














In addition to the different asset classes outlined in theStatement of Investment Policies, Standards and Procedures(SIP&P), PSP Investments employs a number of absolutereturn strategies through units of externally managedpooled funds.


The fair value of investments in pooled funds is measured byusing the unit values obtained from each of the funds’administrators. Such unit values are derived from the fairvalue measurement of the underlying investments in eachpooled fund.













(i) Swaps

Swaps are transactions whereby two counterparties exchangecash flow streams with each other based on predeterminedconditions that include a notional amount and a term. Swapsare used to increase returns or to adjust exposures ofcertain assets without directly purchasing or selling theunderlying assets.







(ii) Futures


(iii) Forwards

Forwards are contracts involving the sale by one party and thepurchase by another party of a predefined amount of anunderlying instrument, at a predefined price and a predefineddate in the future. Forwards are used for yield enhancementpurposes or to manage exposures to currencies and interestrates.

(iv) Options

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


Warrants are options on an underlying asset which is in theform of a transferable security and which can be listed on anexchange.






The fair value of collateralized debt obligations are determinedbased on valuation techniques that use significantassumptions that are not all directly market observable. Suchassumptions include default correlation data and recovery ratewhich are estimated by management. The instruments arethen valued by discounting the expected cash flows using anappropriate discount factor.









($ millions) 2010 2009

NotionalValue



Equity and Commodity DerivativesFutures $ 22 $ – $ – $ – $ 126 $ –Total Return Swaps 694 23 – 23 582 21Variance Swaps – – – – 21 1Warrants and Rights – – – – – –Options: Listed-written 1 – – – – –

Currency DerivativesForwards 2,005 60 (6) 54 4,123 (33)Options: OTC-purchased 129 1 – 1 124 1

OTC-written 34 – – – 31 (1)Interest Rate Derivatives

Bond Forwards 41 – (1) (1) 70 –Futures 103 – – – – –Interest Rate Swaps 769 5 (7) (2) 786 (1)Total Return Swaps 554 4 (3) 1 705 11Swaptions – – – – 501 –Options: Listed-purchased 84 – – – – –

Listed-written 230 – – – 499 –OTC-written – – – – 300 –

Credit Derivatives 1 :Purchased 6 – – – 13 10Sold 146 1 (65) (64) 326 (254)

Total $ 4,818 $ 94 $ (82) $ 12 $ 8,207 $ (245)









($ millions) 2010 2009

Less than 3 months $ 1,813 $ 4,8773 to 12 months 2,219 2,375Over 1 year 786 955

Total $ 4,818 $ 8,207





Level 3: Valuation is based on model-based techniques forwhich significant assumptions are not observable in themarket. They reflect management’s assessment of theassumptions that market participants would use in pricing thefinancial instruments.









Fair Value

World EquityCanadian Equity & Foreign Equity $ 3,471 $ 277 $ – $ – $ 3,748Private Equity – – 1,034 – 1,034

Nominal Fixed Income 27 2,246 253 – 2,526Real Return Assets

World Inflation-Linked Bonds – 66 – – 66Real Estate – – 1,209 – 1,209Infrastructure – – 465 – 465

Absolute Return – 244 231 – 475

INVESTMENTS $ 3,498 $ 2,833 $ 3,192 $ – $ 9,523

Investment-Related AssetsAmounts receivable from pending trades 1 $ – $ – $ – $ 29 $ 29Derivative-related receivables – 93 1 – 94

Total Investment-Related Assets $ – $ 93 $ 1 $ 29 $ 123



Total Investment-Related Liabilities $ (22) $ (357) $ (64) $ (90) $ (533)

NET INVESTMENTS $ 3,476 $ 2,569 $ 3,129 $ (61) $ 9,113












2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Opening Balance $ 852 $ 225 $ 1,963 $ 136 $ (242) $ 2,934Purchases 268 – 225 44 – 537Sales/Settlements (165) (12) (251) (2) – (430)Total gains (losses) 1 79 40 (263) 53 179 88Transfers into or out of Level 3 – – – – – –

Closing Balance $ 1,034 $ 253 $ 1,674 $ 231 $ (63) $ 3,129


2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Total realized gains (losses) $ 7 $ 4 $ 5 $ – $ – $ 16





In the course of measuring fair value of financial instruments classified as Level 3, valuation techniques used incorporateassumptions that are based on non-observable data. Significant assumptions used for each asset class are described inNotes 3 (a) and (b). Although such assumptions reflect management’s best judgment, the use of reasonably possible alternativeassumptions could yield different fair value measures representing, at a minimum, a 3% increase/decrease in the fair value offinancial instruments categorized as Level 3. This excludes private market fund investments as well as Real Estate Debt, where asensitivity analysis is not possible given the underlying assumptions used are not available to PSP Investments. In the case ofPrivate Market fund investments, the fair value is determined based on the audited financial statements of the fund’s generalpartner as indicated in Note 3 (a). With respect to Real Estate Debt, the fair value is obtained from third-party appraisers asdescribed in Note 3 (a).









2010 2009


PolicyPortfolio


PolicyPortfolio

Long-TermTarget


US Large Cap Equity 416 4.6 5.0 185 2.7 5.0EAFE Large Cap Equity 402 4.4 5.0 208 3.1 5.0Small Cap Developed World Equity 389 4.3 5.0 156 2.3 5.0Emerging Markets Equity 588 6.5 7.0 424 6.3 7.0

Private Equity 1,069 11.7 10.0 838 12.4 10.0Nominal Fixed Income

Cash & Cash Equivalents 1 373 4.1 2.0 15 0.2 2.0World Government Bonds 419 4.6 5.0 421 6.2 5.0Canadian Fixed Income 951 10.4 8.0 850 12.6 8.0

Real Return AssetsWorld Inflation-Linked Bonds 422 4.6 5.0 478 7.1 5.0Real Estate 1,008 11.1 10.0 930 13.8 10.0Infrastructure 408 4.5 8.0 490 7.2 8.0

NET INVESTMENTS $ 9,113 100.0% 100.0% $ 6,758 100.0% 100.0%











($ millions) 2010 2009

Securities LendingSecurities lent $ 789 $ 540Collateral contractually receivable 1 823 565




4.INVESTMENT RISK MANAGEMENT




(A) MARKET RISK






4.INVESTMENT RISK MANAGEMENT (continued)


Market risk is measured using the method known asValue-at-Risk (VaR). VaR is the maximum loss not exceededwith a given probability defined as the confidence level, over agiven period of time. PSP Investments has chosen a yearly95% confidence level to measure and report VaR.PSP Investments uses a Historical VaR model incorporatingthree years of monthly market returns which are scaled to atwelve-month holding period. Risk Management is responsiblefor implementing and maintaining a VaR measurementmethodology for all asset classes and all financial risk factors.




Active Risk Taken



Total Relative VaR (Undiversified) 387 603

Diversification Effect (194) (332)













Terms to Maturity


1 Year1 to 5Years

5 to 10Years

Over 10Years

2010Total

2009Total

Government of Canada bonds $ 36 $ 321 $ 68 $ 74 $ 499 $ 611Provincial and Territorial bonds 36 113 61 104 314 296Municipal bonds 1 4 10 2 17 17Corporate bonds 51 120 89 75 335 298ABTNs – 9 – 224 233 207

Total Canadian Fixed Income $ 124 $ 567 $ 228 $ 479 $ 1,398 $ 1,429



Real Estate Debt 1 $ 54 $ 35 $ – $ 6 $ 95 $ 151

Grand Total $ 180 $ 711 $ 308 $ 576 $ 1,775 $ 1,771














2010 2009


US Dollar $ 1,236 51.2% $ 924 52.9%Euro 357 14.8 413 23.6British Pound 153 6.4 104 5.9Brazilian Real 132 5.5 13 0.7Hong Kong Dollar 100 4.1 60 3.4Japanese Yen 85 3.5 78 4.5Korean Won 69 2.9 33 1.9New Taiwan Dollar 39 1.6 35 2.0South African Rand 31 1.3 19 1.1Australian Dollar 30 1.2 33 1.9Indian Rupee 29 1.2 17 1.0Turkish Lira 21 0.9 12 0.7Others 130 5.4 8 0.4

Total $ 2,412 100.0% $ 1,749 100.0%

PSP Investments and its subsidiaries also have commitments, denominated in foreign currencies of $981 million ($804 million US,€114 million and 61 million South African Rands (ZAR)) for the Plan which are not included in the foreign currency exposure table.






(B) CREDIT RISK





2010 2009



Total 100.0% 100.0%

The breakdown of credit concentration risk for the Plan doesnot include investments in distressed debt included in pooledfunds in the amount of approximately $0.4 billion as atMarch 31, 2010 (2009 – $0.4 billion). Such investmentstypically include debt securities of issuers close to default, andthe investment in such securities are quasi-equity in nature.


As at March 31, 2010, the Plan’s maximum exposure to creditrisk, excluding collateral held and the investments in distresseddebt and collateralized debt obligations described above,amounts to approximately $2.6 billion (2009 – approximately$2.2 billion).


Counterparty risk represents the credit risk from current andpotential exposure related to transactions involving derivativecontracts. In order to minimize derivative contractcounterparty risk, PSP Investments deals only withcounterparties with a minimum credit rating of “A–” as at thetrade date, as provided by a recognized credit rating agency.PSP Investments monitors the credit ratings of counterpartieson a daily basis and has the ability to terminate all trades withcounterparties who have their credit rating downgraded below“A–” subsequent to the trade date. PSP Investments also usescredit mitigation techniques such as master-nettingarrangements and collateral transfers through the use ofCredit Support Annexes (CSA).









Additionally, the CSA to the ISDA Master Agreement enablesPSP Investments to realize any collateral placed with it inthe event of the failure of the counterparty and requiresPSP Investments to contribute further collateral whenrequested. The CSA also regulates the exchange of collateralwhen the credit exposure to a counterparty exceeds apredetermined threshold.

On behalf of the Plan, PSP Investments deposited or pledgedsecurities with a fair value of $41 million as collateral withvarious financial institutions as at March 31, 2010 (2009 –$207 million) while securities with a fair value of $35 million(2009 – $21 million) were received from other counterpartiesas collateral. PSP Investments does not repledge any collateralheld. All collateral deposited, pledged and received were heldwith counterparties who had a minimum credit rating of “A–”as at March 31, 2010.


(C) LIQUIDITY RISK














3 to 12Months

Over1 Year Total

Non-derivative-related financial liabilitiesAmounts payable from pending trades $ (90) $ – $ – $ (90)Securities sold short (22) – – (22)Capital debt financing (123) (5) (211) (339)Accounts payable and other liabilities (7) – (2) (9)

Total $ (242) $ (5) $ (213) $ (460)


3 to 12Months

Over 1Year Total


Total $ 28 $ 51 $ (67) $ 12





5. FUND TRANSFERS

PSP Investments received fund transfers of $866 million forthe year ended March 31, 2010 (2009 – $853 million) from theCanadian Forces Pension Fund. The transfers received arecomprised of the net employer and employee contributions tothe Canadian Forces pension plan in respect of memberservice after April 1, 2000.




($ millions) 2010 2009


179 194Net realized gains (losses) 3 302 (1,245)Net unrealized gains (losses) 1,028 (854)





Investment income (loss) by asset mix based on the economicintent of the investment strategies of the underlying assetsas outlined in the SIP&P, for the year ended March 31,after allocating net realized and unrealized gains (losses)on investments to the asset classes to which they relate, isas follows:

($ millions) 2010 2009

World EquityCanadian Equity $ 733 $ (723)Foreign Equity:


Private Equity 239 (318)Nominal Fixed Income



Absolute Return 1 216 (398)







7. EXPENSES



All other operating expenses, excluding the direct cost ofinvestment activities listed above, for the year ended March 31,have been allocated in proportion to the annual amount of netassets in each Plan Account as follows:

2010 2009



Total 100.0% 100.0%




($ thousands) 2010 2009

Salaries and benefits $ 10,681 $ 9,706Professional and consulting fees 1,857 2,008Office supplies and equipment 2,240 1,765Other operating expenses 840 1,605Depreciation of fixed assets 1,418 936Occupancy costs 864 726Custodial fees 311 252Remuneration earned by Directors 158 183Travel and related expenses for


Total $ 18,467 $ 17,277






As of March 31, 2010, PSP Capital Inc. has $649 million (2009 –$1,579 million) of short-term promissory notes outstandingwith maturity dates between 14 and 120 days of issuance, ofwhich $128 million (2009 – $316 million) has been allocated tothe Canadian Forces Pension Plan Account and included inNote 3 (a) as a short-term investment-related liability. As atMarch 31, 2010, PSP Capital Inc. has $1 billion (2009 – $1 billion)of medium-term notes issued and outstanding, of which$200 million (2009 – $200 million) has been allocated to theCanadian Forces Pension Plan Account. These medium-termnotes bear interest of 4.57% per annum and have a maturitydate of December 9, 2013. These medium-term notes areincluded in Note 3 (a) as a long-term investment-relatedliability. As at March 31, 2010, the fair value of these medium-term notes is $1,073 million (2009 – $1,054 million), of which$211 million (2009 – $210 million) has been allocated to theCanadian Forces Pension Plan Account. The maximumauthorized by the Board of Directors for both the short-termpromissory notes and medium-term notes is $2 billion.The capital raised, primarily used to finance investments in theReal Estate and Infrastructure asset classes, is unconditionallyand irrevocably guaranteed by PSP Investments and is inaccordance with the approved PSP Investments’ corporatepolicy for leverage.



($ thousands) 2010 2009

Short-term promissory notes $ 1,473 $ 11,351Medium-term notes 9,045 2,003

Total $ 10,518 $ 13,354

9. CAPITAL MANAGEMENT


– To invest fund transfers, outlined in Note 5, in the bestinterests of the beneficiaries and contributors under theSuperannuation Acts. The funds received are invested witha view of achieving a maximum rate of return, withoutundue risk of loss, with regards to the funding, policies andrequirements of the pension plans established under theSuperannuation Acts. The funds are also invested inaccordance with the Investment Risk Management policieswhich are outlined in Note 4.

– To maintain an appropriate credit rating to achieve accessto the capital markets at the lowest cost of capital. ThroughPSP Capital Inc., and its leverage policies, PSP Investmentshas the ability to raise capital by issuing short-term promissory notes and medium-term notes. Note 8provides information on the capital debt financing andNote 4 (c) provides information on PSP Investments’liquidity. Additionally, as at March 31, 2010, PSP Investmentshas an operating line of credit of $10 million (2009 –$10 million). As at March 31, 2010, no amounts have beenwithdrawn (2009 – nil).









As at March 31, 2010, PSP Investments agreed to guarantee, aspart of an investment transaction, a non-revolving term loan.In the event of a default, the Plan would assume the obligationup to $81 million (2009 – $81 million) plus interest and otherrelated costs.


11. COMMITMENTS


($ millions) 2010 2009

Private Equity $ 621 $ 926Real Estate 274 359Infrastructure 85 115Public markets 65 116

Total $ 1,045 $ 1,516


ROYAL CANADIAN MOUNTED POLICEPENSION PLAN ACCOUNT

AUDITORS’ REPORT

To the Minister of Public Safety

We have audited the Balance Sheet of the Public Sector Pension Investment Board – Royal Canadian Mounted Police PensionPlan Account (the Royal Canadian Mounted Police Pension Plan Account) as at March 31, 2010, and the Statements of NetIncome (Loss) from Operations and Comprehensive Income and of Changes in Net Assets for the year then ended. Thesefinancial statements are the responsibility of the Public Sector Pension Investment Board’s (PSP Investments) management. Ourresponsibility is to express an opinion on these financial statements based on our audit.


In our opinion, these financial statements present fairly, in all material respects, the financial position of the Royal CanadianMounted Police Pension Plan Account as at March 31, 2010, and the results of its operations and changes in its net assets for theyear then ended in accordance with Canadian generally accepted accounting principles. As required by the FinancialAdministration Act, we report that, in our opinion, these principles have been applied on a basis consistent with that of thepreceding year.

Further, in our opinion, the transactions of the Royal Canadian Mounted Police Pension Plan Account that have come to ournotice during our audit of the financial statements have, in all significant respects, been in accordance with the applicableprovisions of Part X of the Financial Administration Act and regulations, the Public Sector Pension Investment Board Act andregulations and the by-laws of PSP Investments and its wholly-owned subsidiaries.

1





BALANCE SHEET

As at March 31

($ millions) 2010 2009

ASSETSInvestments (Note 3 (a)) $ 3,420 $ 2,738Investment-related assets (Note 3 (a)) 46 53Other assets 3 2

TOTAL ASSETS $ 3,469 $ 2,793

LIABILITIESInvestment-related liabilities (Note 3 (a)) $ 193 $ 372Accounts payable and other liabilities 3 3Due to the Public Service Pension Plan Account 2 2

TOTAL LIABILITIES $ 198 $ 377

NET ASSETS $ 3,271 $ 2,416

Accumulated net income from operations and comprehensive income $ 568 $ 36Accumulated fund transfers 2,703 2,380

NET ASSETS $ 3,271 $ 2,416









($ millions) 2010 2009

INVESTMENT INCOME (LOSS) (Note 6) $ 539 $ (679)


NET INCOME (LOSS) FROM OPERATIONS AND COMPREHENSIVE INCOME $ 532 $ (685)




($ millions) 2010 2009


Fund transfers (Note 5) 323 314Net income (loss) from operations and comprehensive income 532 (685)

Increase (decrease) in net assets for the year 855 (371)







ORGANIZATION

The Public Sector Pension Investment Board(PSP Investments) is a crown corporation established underthe Public Sector Pension Investment Board Act (“the Act”)with a mandate to invest the net contributions of the PublicService, Canadian Forces, Royal Canadian Mounted Police andReserve Force pension plans in financial markets.

The Royal Canadian Mounted Police Pension Fund wasestablished by amendments to the Royal Canadian MountedPolice Superannuation Act, to receive contributions and makebenefit payments in respect of member service afterApril 1, 2000. The net contributions are transferred, by the RoyalCanadian Mounted Police Pension Fund, to PSP Investments –Royal Canadian Mounted Police Pension Plan Account forinvestment. PSP Investments maintains records of the pensionfund’s net contributions, as well as the allocation of itsinvestments and the results of its operations in the plan account.

PSP Investments is responsible for managing amounts that aretransferred to it in the best interests of the beneficiaries andcontributors under the Royal Canadian Mounted PoliceSuperannuation Act. The amounts are to be invested with aview of achieving a maximum rate of return, without unduerisk of loss, with regards to the funding, policies andrequirements of the Royal Canadian Mounted PoliceSuperannuation Act.



These financial statements present the financial position andoperations of PSP Investments and its wholly-ownedsubsidiaries as they pertain to the investment of the netcontributions transferred to it from the Royal CanadianMounted Police Pension Fund in respect of member serviceafter April 1, 2000. Accordingly, they do not reflect all of theassets or the details of the pension contributions, paymentsand liabilities of the Royal Canadian Mounted Police PensionFund. The financial statements have been prepared inaccordance with Canadian generally accepted accountingprinciples (GAAP) and the requirements of the Act.

PSP Investments qualifies as an Investment Company andtherefore reports its investments at fair value, in accordancewith Accounting Guideline 18, “Investment Companies” (AcG-18). All changes in fair value are included in investment income(loss) as net unrealized gains (losses).




Market prices or rates are used to determine fair value where anactive market exists (such as a recognized securities exchange),as it is the best evidence of the fair value of an investment. Ifquoted market prices or rates are not available, then fair valuesare estimated using present value or other valuation techniques,using inputs existing at the end of the reporting period that arederived from observable market data.










TRANSACTION COSTS




INCOME RECOGNITION

The investment income (loss) has been allocatedproportionately based on the asset value held by the RoyalCanadian Mounted Police Pension Plan Account (“the Plan”).




FUND TRANSFERS


INCOME TAXES


USE OF ESTIMATES












PSP Investments adopted the provisions of such amendments forits March 31, 2010 financial statements. Required disclosures aremade in Note 3 (c) and Note 4 (c).




In April 2010, the AcSB issued Section 4600 “Pension Plans” ofthe CICA Handbook requiring pension plans in Canada to followthis standard rather than convert to IFRS in the same fashion asother publicly accountable enterprises. Under Section 4600,pension plans would continue to account for and report theirinvestments at fair value as was previously done underSection 4100 “Pension Plans” of the CICA Handbook. Theprovisions of Section 4600 apply to annual financial statementsrelating to fiscal years beginning on or after January 1, 2011.







3. INVESTMENTS



($ millions) 2010 2009


World EquityCanadian Equity $ 732 $ 639 $ 453 $ 543Foreign Equity:

US Large Cap Equity 151 145 52 70EAFE Large Cap Equity 146 168 83 132Small Cap Developed World Equity 138 127 52 70Emerging Markets Equity 178 160 105 132

Private Equity 372 399 304 358Nominal Fixed Income

Cash, Cash Equivalents and Other 1 327 337 220 238World Government Bonds 78 84 54 50Canadian Fixed Income 502 489 511 514

Real Return AssetsWorld Inflation-Linked Bonds 24 25 14 15Real Estate 434 437 508 461Infrastructure 167 171 194 167

Absolute Return 171 159 188 194

INVESTMENTS $ 3,420 $ 3,340 $ 2,738 $ 2,944

Investment-Related AssetsAmounts receivable from pending trades $ 11 $ 11 $ 18 $ 18Derivative-related receivables 35 – 35 5


Investment-Related LiabilitiesAmounts payable from pending trades $ (33) $ (33) $ (36) $ (36)Securities sold short (9) (9) (25) (31)Derivative-related payables (29) – (122) (8)Capital debt financing:

Short-term (46) (46) (113) (113)Long-term (76) (72) (76) (74)

Total Investment-Related Liabilities $ (193) $ (160) $ (372) $ (262)

NET INVESTMENTS $ 3,273 $ 3,191 $ 2,419 $ 2,705

1 Includes floating rate notes with maturities greater than one year with a fair value of $99 million for the Plan (2009 – $1 million).













The Real Estate asset class is comprised of direct investmentsin companies, in properties, third-party debts and fundinvestments in the real estate sector. Real Estate investmentsare classified into two portfolios (an equity portfolio and adebt portfolio). The equity portfolio is comprised of directinvestments in properties and companies in the office, retail,industrial, hospitality and residential sectors, as well as privatefunds and publicly traded securities invested in real estateassets. The debt portfolio is comprised of third-party loanssuch as junior and senior debts, construction loans, bridgeloans, income-participating loans, mezzanine loans and otherstructured investments (collectively “Real Estate Debt”) wheresignificant portions of the value are attributed to the

underlying real estate assets. The Real Estate asset class isaccounted for net of all third-party financings. As atMarch 31, 2010, the total amount of third-party financingincluded in the Real Estate asset class contracted by directinvestments controlled by PSP Investments for the Plan isapproximately $150 million (2009 – approximately $150 million).

The Infrastructure asset class is comprised of direct investmentsin companies and fund investments. They include investments incompanies engaged in the management, ownership or operationof assets in power, regulated businesses, transportation, telecomor social infrastructure. The Infrastructure asset class isaccounted for net of all third-party financings. As atMarch 31, 2010, the total amount of third-party financing includedin the Infrastructure asset class contracted by direct investmentscontrolled by PSP Investments for the Plan is approximately$10 million (2009 – approximately $10 million).


















Nominal Fixed Income includes Cash, Cash Equivalents andOther, Canadian Fixed Income and World Government Bonds.Cash Equivalents include short-term instruments having amaximum term to maturity of one year. Floating rate notes areincluded in Cash, Cash Equivalents and Other, provided thefinal maturity date does not exceed three years and thecoupons reset more than once per year. Bonds reported asNominal Fixed Income include Canadian government bonds,

Canadian provincial and territorial bonds, Canadian municipalbonds and corporate bonds, as well as international sovereignbonds. World Inflation-Linked Bonds reported as Real ReturnAssets are fixed income securities that earn inflation adjustedreturns.

PSP Investments holds ABTNs reported as Canadian FixedIncome in the investment portfolio. The ABTNs were received inexchange for third-party or non-bank sponsored asset-backedcommercial paper (ABCP) that suffered a liquidity disruption inmid-August 2007 and were subsequently restructured in January2009. The ABTNs had an original face value of $1,962 million, ofwhich $141 million has been allocated to the Plan. During the yearended March 31, 2010, PSP Investments received $67 million ofprincipal repayments on the ABTNs. During the year endedMarch 31, 2010, principal repayments on the ABTNs of $5 millionhas 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 atMarch 31, 2010, the margin funding facilities had not beendrawn upon. As part of the exchange of the non-bank ABCPfor the ABTNs, it was agreed to include in the agreement amoratorium which prevents collateral calls for a period of18 months ending July 21, 2010.

Management’s best estimate of the fair value of PSP Investments’ABTNs allocated to the Plan as at March 31, 2010 is equal to$84 million (2009 – $74 million). The fair value of the ABTNsallocated to the Plan has been reduced by the impact of thefunding facilities amounting to $5 million on March 31, 2010(2009 – $7 million). PSP Investments recorded an increase of$15 million in the fair value of the ABTNs allocated to the Planduring the year ended March 31, 2010 (decrease of $34 millionduring the year ended March 31, 2009).














In addition to the different asset classes outlined in theStatement of Investment Policies, Standards and Procedures(SIP&P), PSP Investments employs a number of absolutereturn strategies through units of externally managed pooledfunds.















(i) Swaps








(ii) Futures


(iii) Forwards


(iv) Options

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

















($ millions) 2010 2009

NotionalValue



Equity and Commodity DerivativesFutures $ 8 $ – $ – $ – $ 45 $ –Total Return Swaps 249 9 – 9 208 8Variance Swaps – – – – 8 –Warrants and Rights – – – – – –Options: Listed-written – – – – – –

Currency DerivativesForwards 720 23 (2) 21 1,476 (12)Options: OTC-purchased 46 – – – 44 1

OTC-written 12 – – – 11 –Interest Rate Derivatives

Bond Forwards 15 – – – 25 –Futures 37 – – – – –Interest Rate Swaps 276 2 (3) (1) 282 –Total Return Swaps 199 1 (1) – 252 4Swaptions – – – – 179 –Options: Listed-purchased 30 – – – – –

Listed-written 82 – – – 179 –OTC-written – – – – 107 –

Credit Derivatives 1 :Purchased 2 – – – 5 4Sold 53 – (23) (23) 117 (92)

Total $ 1,729 $ 35 $ (29) $ 6 $ 2,938 $ (87)









($ millions) 2010 2009

Less than 3 months $ 650 $ 1,7463 to 12 months 797 850Over 1 year 282 342

Total $ 1,729 $ 2,938





Level 3: Valuation is based on model-based techniques forwhich significant assumptions are not observable in themarket. They reflect management’s assessment of theassumptions that market participants would use in pricingthe financial instruments.









Fair Value

World EquityCanadian Equity & Foreign Equity $ 1,245 $ 100 $ – $ – $ 1,345Private Equity – – 372 – 372

Nominal Fixed Income 9 807 91 – 907Real Return Assets

World Inflation-Linked Bonds – 24 – – 24Real Estate – – 434 – 434Infrastructure – – 167 – 167

Absolute Return – 88 83 – 171

INVESTMENTS $ 1,254 $ 1,019 $ 1,147 $ – $ 3,420

Investment-Related AssetsAmounts receivable from pending trades 1 $ – $ – $ – $ 11 $ 11Derivative-related receivables – 35 – – 35

Total Investment-Related Assets $ – $ 35 $ – $ 11 $ 46



Total Investment-Related Liabilities $ (9) $ (128) $ (23) $ (33) $ (193)

NET INVESTMENTS $ 1,245 $ 926 $ 1,124 $ (22) $ 3,273












2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Opening Balance $ 304 $ 81 $ 702 $ 49 $ (87) $ 1,049Purchases 95 – 84 16 – 195Sales/Settlements (58) (4) (95) – – (157)Total gains (losses) 1 31 14 (90) 18 64 37Transfers into or out of Level 3 – – – – – –

Closing Balance $ 372 $ 91 $ 601 $ 83 $ (23) $ 1,124


2010

($ millions)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Total realized gains (losses) $ 3 $ 1 $ 2 $ – $ – $ 6













2010 2009


PolicyPortfolio


PolicyPortfolio

Long-TermTarget

World EquityCanadian Equity $ 958 29.2% 30.0% $ 631 26.1% 30.0%Foreign Equity:

US Large Cap Equity 149 4.6 5.0 66 2.7 5.0EAFE Large Cap Equity 145 4.4 5.0 75 3.1 5.0Small Cap Developed World Equity 140 4.3 5.0 56 2.3 5.0Emerging Markets Equity 211 6.5 7.0 152 6.3 7.0

Private Equity 384 11.7 10.0 300 12.4 10.0Nominal Fixed Income

Cash & Cash Equivalents 1 134 4.1 2.0 5 0.2 2.0World Government Bonds 150 4.6 5.0 151 6.2 5.0Canadian Fixed Income 342 10.4 8.0 304 12.6 8.0

Real Return AssetsWorld Inflation-Linked Bonds 152 4.6 5.0 171 7.1 5.0Real Estate 362 11.1 10.0 333 13.8 10.0Infrastructure 146 4.5 8.0 175 7.2 8.0

NET INVESTMENTS $ 3,273 100.0% 100.0% $ 2,419 100.0% 100.0%












($ millions) 2010 2009

Securities LendingSecurities lent $ 283 $ 194Collateral contractually receivable 1 296 202








(A) MARKET RISK








Market risk is measured using the method known asValue-at-Risk (VaR). VaR is the maximum loss not exceededwith a given probability defined as the confidence level, overa given period of time. PSP Investments has chosen a yearly95% confidence level to measure and report VaR.PSP Investments uses a Historical VaR model incorporatingthree years of monthly market returns which are scaled to atwelve-month holding period. Risk Management is responsiblefor implementing and maintaining a VaR measurementmethodology for all asset classes and all financial risk factors.




Active Risk Taken



Total Relative VaR (Undiversified) 140 215

Diversification Effect (69) (119)













Terms to Maturity


1 Year1 to 5Years

5 to 10Years

Over 10Years

2010Total

2009Total

Government of Canada bonds $ 13 $ 115 $ 24 $ 27 $ 179 $ 219Provincial and Territorial bonds 13 41 21 38 113 106Municipal bonds – 2 4 – 6 6Corporate bonds 18 43 32 27 120 106ABTNs – 3 – 81 84 74

Total Canadian Fixed Income $ 44 $ 204 $ 81 $ 173 $ 502 $ 511



Real Estate Debt 1 $ 20 $ 12 $ – $ 2 $ 34 $ 54

Grand Total $ 65 $ 256 $ 110 $ 207 $ 638 $ 633














2010 2009


US Dollar $ 444 51.2% $ 331 52.9%Euro 128 14.8 148 23.6British Pound 55 6.4 37 5.9Brazilian Real 47 5.5 5 0.7Hong Kong Dollar 36 4.1 22 3.4Japanese Yen 30 3.5 28 4.5Korean Won 25 2.9 12 1.9New Taiwan Dollar 15 1.6 12 2.0South African Rand 11 1.3 6 1.1Australian Dollar 10 1.2 12 1.9Indian Rupee 11 1.2 6 1.0Turkish Lira 8 0.9 4 0.7Others 47 5.4 3 0.4

Total $ 867 100.0% $ 626 100.0%

PSP Investments and its subsidiaries also have commitments, denominated in foreign currencies of $352 million ($289 million US,€41 million and 22 million South African Rands (ZAR)) for the Plan which are not included in the foreign currency exposure table.






(B) CREDIT RISK





2010 2009



Total 100.0% 100.0%

The breakdown of credit concentration risk for the Plan doesnot include investments in distressed debt included in pooledfunds in the amount of approximately $0.1 billion as atMarch 31, 2010 (2009 – $0.1 billion). Such investments typicallyinclude debt securities of issuers close to default, and theinvestment in such securities are quasi-equity in nature.


As at March 31, 2010, the Plan’s maximum exposure to creditrisk, excluding collateral held and the investments in distresseddebt and collateralized debt obligations described above,amounts to approximately $0.9 billion (2009 – approximately$0.8 billion).


Counterparty risk represents the credit risk from current andpotential exposure related to transactions involving derivativecontracts. In order to minimize derivative contract counterpartyrisk, PSP Investments deals only with counterparties with aminimum credit rating of “A–” as at the trade date, as providedby a recognized credit rating agency. PSP Investments monitorsthe credit ratings of counterparties on a daily basis and has theability to terminate all trades with counterparties who have theircredit rating downgraded below “A–” subsequent to the tradedate. PSP Investments also uses credit mitigation techniquessuch as master-netting arrangements and collateral transfersthrough the use of Credit Support Annexes (CSA).









Additionally, the CSA to the ISDA Master Agreement enablesPSP Investments to realize any collateral placed with it inthe event of the failure of the counterparty and requiresPSP Investments to contribute further collateral whenrequested. The CSA also regulates the exchange of collateralwhen the credit exposure to a counterparty exceeds apredetermined threshold.

On behalf of the Plan, PSP Investments deposited or pledgedsecurities with a fair value of $15 million as collateral withvarious financial institutions as at March 31, 2010 (2009 –$74 million) while securities with a fair value of $13 million(2009 – $8 million) were received from other counterparties ascollateral. PSP Investments does not repledge any collateralheld. All collateral deposited, pledged and received were heldwith counterparties who had a minimum credit rating of “A–”as at March 31, 2010.


(C) LIQUIDITY RISK













($ millions)Less than 3

Months3 to 12Months

Over 1Year Total

Non-derivative-related financial liabilitiesAmounts payable from pending trades $ (33) $ – $ – $ (33)Securities sold short (9) – – (9)Capital debt financing (44) (2) (76) (122)Accounts payable and other liabilities (2) – (1) (3)

Total $ (88) $ (2) $ (77) $ (167)

($ millions)Less than 3

Months3 to 12Months

Over 1Year Total


Total $ 10 $ 19 $ (24) $ 5





5. FUND TRANSFERS

PSP Investments received fund transfers of $323 million forthe year ended March 31, 2010 (2009 – $314 million) from theRoyal Canadian Mounted Police Pension Fund. The transfersreceived are comprised of the net employer and employeecontributions to the Royal Canadian Mounted Police pensionplan in respect of member service after April 1, 2000.




($ millions) 2010 2009


64 67Net realized gains (losses) 3 108 (440)Net unrealized gains (losses) 367 (306)

Investment Income (Loss) $ 539 $ (679)




Investment income (loss) by asset mix based on the economicintent of the investment strategies of the underlying assets asoutlined in the SIP&P, for the year ended March 31, afterallocating net realized and unrealized gains (losses) oninvestments to the asset classes to which they relate, is asfollows:

($ millions) 2010 2009

World EquityCanadian Equity $ 262 $ (256)Foreign Equity:


Private Equity 86 (115)Nominal Fixed Income



Absolute Return 1 77 (142)

Investment Income (Loss) $ 539 $ (679)






7. EXPENSES




2010 2009



Total 100.0% 100.0%




($ thousands) 2010 2009

Salaries and benefits $ 3,826 $ 3,458Professional and consulting fees 665 716Office supplies and equipment 802 629Other operating expenses 301 572Depreciation of fixed assets 508 333Occupancy costs 309 259Custodial fees 111 89Remuneration earned by Directors 58 66Travel and related expenses for


Total $ 6,615 $ 6,155






As of March 31, 2010, PSP Capital Inc. has $649 million (2009 –$1,579 million) of short-term promissory notes outstandingwith maturity dates between 14 and 120 days of issuance, ofwhich $46 million (2009 – $113 million) has been allocated tothe Royal Canadian Mounted Police Pension Plan Account andincluded in Note 3 (a) as a short-term investment-relatedliability. As at March 31, 2010, PSP Capital Inc. has $1 billion(2009 – $1 billion) of medium-term notes issued andoutstanding, of which $72 million (2009 – $72 million) has beenallocated to the Royal Canadian Mounted Police Pension PlanAccount. These medium-term notes bear interest of 4.57% perannum and have a maturity date of December 9, 2013. Thesemedium-term notes are included in Note 3 (a) as a long-terminvestment-related liability. As at March 31, 2010, the fair valueof these medium-term notes is $1,073 million (2009 –$1,054 million), of which $76 million (2009 – $76 million) hasbeen allocated to the Royal Canadian Mounted Police PensionPlan Account. The maximum authorized by the Board ofDirectors for both the short-term promissory notes andmedium-term notes is $2 billion. The capital raised, primarilyused to finance investments in the Real Estate andInfrastructure asset classes, is unconditionally and irrevocablyguaranteed by PSP Investments and is in accordance with theapproved PSP Investments’ corporate policy for leverage.



($ thousands) 2010 2009

Short-term promissory notes $ 527 $ 4,039Medium-term notes 3,235 717

Total $ 3,762 $ 4,756




– To maintain an appropriate credit rating to achieve accessto the capital markets at the lowest cost of capital. ThroughPSP Capital Inc., and its leverage policies, PSP Investmentshas the ability to raise capital by issuing short-termpromissory notes and medium-term notes. Note 8 providesinformation on the capital debt financing andNote 4 (c) provides information on PSP Investments’liquidity. Additionally, as at March 31, 2010, PSP Investmentshas an operating line of credit of $10 million (2009 –$10 million). As at March 31, 2010, no amounts have beenwithdrawn (2009 – nil).









As at March 31, 2010, PSP Investments agreed to guarantee, aspart of an investment transaction, a non-revolving term loan.In the event of a default, the Plan would assume the obligationup to $29 million (2009 – $29 million) plus interest and otherrelated costs.


11. COMMITMENTS


($ millions) 2010 2009

Private Equity $ 223 $ 331Real Estate 99 129Infrastructure 30 41Public markets 23 41

Total $ 375 $ 542


RESERVE FORCE PENSIONPLAN ACCOUNT

AUDITORS’ REPORT

To the Minister of National Defence

We have audited the Balance Sheet of the Public Sector Pension Investment Board – Reserve Force Pension Plan Account (theReserve Force Pension Plan Account) as at March 31, 2010, and the Statements of Net Income (Loss) from Operations andComprehensive Income and of Changes in Net Assets for the year then ended. These financial statements are the responsibilityof the Public Sector Pension Investment Board’s (PSP Investments) management. Our responsibility is to express an opinion onthese financial statements based on our audit.


In our opinion, these financial statements present fairly, in all material respects, the financial position of the Reserve ForcePension Plan Account as at March 31, 2010, and the results of its operations and changes in its net assets for the year then endedin accordance with Canadian generally accepted accounting principles. As required by the Financial Administration Act, wereport that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year.

Further, in our opinion, the transactions of the Reserve Force Pension Plan Account that have come to our notice during ouraudit of the financial statements have, in all significant respects, been in accordance with the applicable provisions of Part X ofthe Financial Administration Act and regulations, the Public Sector Pension Investment Board Act and regulations and theby-laws of PSP Investments and its wholly-owned subsidiaries.

1






BALANCE SHEET

As at March 31

($ thousands) 2010 2009

ASSETSInvestments (Note 3 (a)) $ 241,523 $ 130,550Investment-related assets (Note 3 (a)) 3,131 2,528Other assets 63 36

TOTAL ASSETS $ 244,717 $ 133,114

LIABILITIESInvestment-related liabilities (Note 3 (a)) $ 13,529 $ 17,753Accounts payable and other liabilities 61 72Due to the Public Service Pension Plan Account 114 51

TOTAL LIABILITIES $ 13,704 $ 17,876

NET ASSETS $ 231,013 $ 115,238

Accumulated net loss from operations and comprehensive income $ 5,541 $ (25,998)Accumulated fund transfers 225,472 141,236

NET ASSETS $ 231,013 $ 115,238









($ thousands) 2010 2009







($ thousands) 2010 2009


Fund transfers (Note 5) 84,236 85,513Net income (loss) from operations and comprehensive income 31,539 (25,294)

Increase in net assets for the year 115,775 60,219






ORGANIZATION

The Public Sector Pension Investment Board(PSP Investments) is a crown corporation established underthe Public Sector Pension Investment Board Act (“the Act”)with a mandate to invest the net contributions of the PublicService, Canadian Forces, Royal Canadian Mounted Police andReserve Force pension plans in financial markets.

The Reserve Force Pension Fund was established byamendments to the Canadian Forces Superannuation Act, toreceive contributions and make benefit payments in respect ofmember service after March 1, 2007. The net contributions aretransferred, by the Reserve Force Pension Fund, to PSPInvestments – Reserve Force Pension Plan Account forinvestment. PSP Investments maintains records of the pensionfund’s net contributions, as well as the allocation of itsinvestments and the results of its operations in the plan account.

PSP Investments is responsible for managing amounts that aretransferred to it in the best interests of the beneficiaries andcontributors under the Canadian Forces Superannuation Act.The amounts are to be invested with a view of achieving amaximum rate of return, without undue risk of loss, withregards to the funding, policies and requirements of theCanadian Forces Superannuation Act.



These financial statements present the financial position andoperations of PSP Investments and its wholly-ownedsubsidiaries as they pertain to the investment of the netcontributions transferred to it from the Reserve Force PensionFund in respect of member service after March 1, 2007.Accordingly, they do not reflect all of the assets or the detailsof the pension contributions, payments and liabilities of theReserve Force Pension Fund. The financial statements havebeen prepared in accordance with Canadian generallyaccepted accounting principles (GAAP) and the requirements





Market prices or rates are used to determine fair value where anactive market exists (such as a recognized securitiesexchange), as it is the best evidence of the fair value of aninvestment. If quoted market prices or rates are not available,then fair values are estimated using present value or othervaluation techniques, using inputs existing at the end of thereporting period that are derived from observable market data.










TRANSACTION COSTS




INCOME RECOGNITION

The investment income (loss) has been allocatedproportionately based on the asset value held by the ReserveForce Pension Plan Account (“the Plan”).




FUND TRANSFERS


INCOME TAXES


USE OF ESTIMATES























3. INVESTMENTS



($ thousands) 2010 2009



US Large Cap Equity 10,670 10,138 2,442 3,273EAFE Large Cap Equity 10,321 10,683 3,962 5,715Small Cap Developed World Equity 9,766 8,889 2,491 3,149Emerging Markets Equity 12,594 10,686 4,984 5,500

Private Equity 26,224 26,786 14,525 17,271Nominal Fixed Income

Cash, Cash Equivalents and Other 1 23,125 23,790 10,476 11,344World Government Bonds 5,475 5,651 2,588 2,069Canadian Fixed Income 35,444 34,345 24,380 24,313

Real Return AssetsWorld Inflation-Linked Bonds 1,683 1,562 669 415Real Estate 30,669 34,434 24,245 24,882Infrastructure 11,791 12,278 9,252 7,970

Absolute Return 12,056 6,629 8,947 6,415

INVESTMENTS $ 241,523 $ 233,120 $ 130,550 $ 139,661

Investment-Related AssetsAmounts receivable from pending trades $ 744 $ 744 $ 874 $ 874Derivative-related receivables 2,387 27 1,654 222

Total Investment-Related Assets $ 3,131 $ 771 $ 2,528 $ 1,096

Investment-Related LiabilitiesAmounts payable from pending trades $ (2,288) $ (2,288) $ (1,725) $ (1,725)Securities sold short (564) (656) (1,211) (1,512)Derivative-related payables (2,075) (13) (5,834) (334)Capital debt financing:

Short-term (3,243) (3,243) (5,386) (5,386)Long-term (5,359) (5,122) (3,597) (3,494)

Total Investment-Related Liabilities $ (13,529) $ (11,322) $ (17,753) $ (12,451)

NET INVESTMENTS $ 231,125 $ 222,569 $ 115,325 $ 128,306

1 Includes floating rate notes with maturities greater than one year with a fair value of $6,974 thousand for the Plan (2009 – $63 thousand).













The Real Estate asset class is comprised of direct investmentsin companies, in properties, third-party debts and fundinvestments in the real estate sector. Real Estate investmentsare classified into two portfolios (an equity portfolio and adebt portfolio). The equity portfolio is comprised of directinvestments in properties and companies in the office, retail,industrial, hospitality and residential sectors, as well as privatefunds and publicly traded securities invested in real estateassets. The debt portfolio is comprised of third-party loanssuch as junior and senior debts, construction loans, bridgeloans, income-participating loans, mezzanine loans and otherstructured investments (collectively “Real Estate Debt”) wheresignificant portions of the value are attributed to theunderlying real estate assets. The Real Estate asset class

is accounted for net of all third-party financings. As atMarch 31, 2010, the total amount of third-party financingincluded in the Real Estate asset class contracted by directinvestments controlled by PSP Investments for the Plan isapproximately $10,750 thousand (2009 – approximately$7,150 thousand).

The Infrastructure asset class is comprised of directinvestments in companies and fund investments. They includeinvestments in companies engaged in the management,ownership or operation of assets in power, regulatedbusinesses, transportation, telecom or social infrastructure.The Infrastructure asset class is accounted for net of all third-party financings. As at March 31, 2010, the total amountof third-party financing included in the Infrastructure assetclass contracted by direct investments controlled byPSP Investments for the Plan is approximately $500 thousand(2009 – approximately $500 thousand).

Investment management fees, as disclosed in Note 1, areincurred for Private Market Investments and generally varybetween 0.1% and 2.1% of the total invested and/or committedamount. Investment management fees of $759 thousand forthe year ended March 31, 2010 (2009 – $545 thousand) wererecorded against investment income (loss).

















Nominal Fixed Income includes Cash, Cash Equivalents andOther, Canadian Fixed Income and World Government Bonds.Cash Equivalents include short-term instruments having amaximum term to maturity of one year. Floating rate notes areincluded in Cash, Cash Equivalents and Other, provided thefinal maturity date does not exceed three years and thecoupons reset more than once per year. Bonds reported asNominal Fixed Income include Canadian government bonds,Canadian provincial and territorial bonds, Canadian municipalbonds and corporate bonds, as well as international sovereign

bonds. World Inflation-Linked Bonds reported as Real ReturnAssets are fixed income securities that earn inflation adjustedreturns.

PSP Investments holds ABTNs reported as Canadian FixedIncome in the investment portfolio. The ABTNs were receivedin exchange for third-party or non-bank sponsored asset-backed commercial paper (ABCP) that suffered a liquiditydisruption in mid-August 2007 and were subsequentlyrestructured in January 2009. The ABTNs had an original facevalue of $1,962 million, of which $5,934 thousand has beenallocated to the Plan. During the year ended March 31, 2010,PSP Investments received $67 million of principal repaymentson the ABTNs. During the year ended March 31, 2010, principalrepayments on the ABTNs of $334 thousand has beenallocated 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, ofwhich $4,840 thousand was allocated to the Plan. As atMarch 31, 2010, the margin funding facilities had not beendrawn upon. As part of the exchange of the non-bank ABCP forthe ABTNs, it was agreed to include in the agreement amoratorium which prevents collateral calls for a period of18 months ending July 21, 2010.

Management’s best estimate of the fair value ofPSP Investments’ ABTNs allocated to the Plan as atMarch 31, 2010 is equal to $5,919 thousand (2009 –$3,145 thousand). The fair value of the ABTNs allocated to thePlan has been reduced by the impact of the funding facilitiesamounting to $325 thousand on March 31, 2010 (2009 –$321 thousand). PSP Investments recorded an increase of$3,108 thousand in the fair value of the ABTNs allocated to thePlan during the year ended March 31, 2010 (decrease of$638 thousand during the year ended March 31, 2009).














In addition to the different asset classes outlined in theStatement of Investment Policies, Standards and Procedures(SIP&P), PSP Investments employs a number of absolutereturn strategies through units of externally managed pooledfunds.















(i) Swaps








(ii) Futures


(iii) Forwards


(iv) Options

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

















($ millions) 2010 2009

NotionalValue



Equity and Commodity DerivativesFutures $ 565 $ – $ – $ – $ 2,143 $ –Total Return Swaps 17,602 578 (6) 572 9,926 362Variance Swaps – – – – 365 20Warrants and Rights 6 5 – 5 3 3Options: Listed-written 26 – – – – –

Currency DerivativesForwards 50,860 1,548 (139) 1,409 70,363 (583)Options: OTC-purchased 3,267 20 – 20 2,112 24

OTC-written 853 – (4) (4) 532 (7)Interest Rate Derivatives

Bond Forwards 1,027 – (11) (11) 1,191 –Futures 2,605 – – – – –Interest Rate Swaps 19,498 121 (192) (71) 13,422 (14)Total Return Swaps 14,041 93 (68) 25 12,029 188Swaptions – – – – 8,551 –Options: Listed-purchased 2,120 – – – – –

Listed-written 5,817 – (2) (2) 8,510 –OTC-written – – – – 5,118 –

Credit Derivatives 1 :Purchased 142 6 – 6 218 177Sold 3,714 16 (1,653) (1,637) 5,569 (4,350)

Total $ 122,143 $ 2,387 $ (2,075) $ 312 $ 140,052 $ (4,180)









($ thousands) 2010 2009

Less than 3 months $ 45,948 $ 83,2333 to 12 months 56,272 40,518Over 1 year 19,923 16,301

Total $ 122,143 $ 140,052





Level 3: Valuation is based on model-based techniques forwhich significant assumptions are not observable in themarket. They reflect management’s assessment of theassumptions that market participants would use in pricingthe financial instruments.








($ thousands) Level 1 Level 2 Level 3 No LevelTotal

Fair Value

World EquityCanadian Equity & Foreign Equity $ 88,027 $ 7,029 $ – $ – $ 95,056Private Equity – – 26,224 – 26,224

Nominal Fixed Income 674 56,952 6,418 – 64,044Real Return Assets

World Inflation-Linked Bonds – 1,683 – – 1,683Real Estate – – 30,669 – 30,669Infrastructure – – 11,791 – 11,791

Absolute Return – 6,187 5,869 – 12,056

INVESTMENTS $ 88,701 $ 71,851 $ 80,971 $ – $ 241,523

Investment-Related AssetsAmounts receivable from pending trades 1 $ – $ – $ – $ 744 $ 744Derivative-related receivables – 2,361 26 – 2,387

Total Investment-Related Assets $ – $ 2,361 $ 26 $ 744 $ 3,131

Investment-Related LiabilitiesAmounts payable from pending trades 1 $ – $ – $ – $ (2,288) $ (2,288)Securities sold short (564) – – – (564)Derivative-related payables (2) (444) (1,629) – (2,075)Capital debt financing:

Short-term – (3,243) – – (3,243)Long-term – (5,359) – – (5,359)

Total Investment-Related Liabilities $ (566) $ (9,046) $ (1,629) $ (2,288) $ (13,529)

NET INVESTMENTS $ 88,135 $ 65,166 $ 79,368 $ (1,544) $ 231,125












2010

($ thousands)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Opening Balance $ 14,525 $ 3,847 $ 33,497 $ 2,329 $ (4,135) $ 50,063Purchases 23,369 – 21,913 5,479 8 50,769Sales/Settlements (15,025) (1,411) (25,061) (102) (3) (41,602)Total gains (losses) 1 3,355 3,982 12,111 (1,837) 2,527 20,138Transfers into or out of Level 3 – – – – – –

Closing Balance $ 26,224 $ 6,418 $ 42,460 $ 5,869 $ (1,603) $ 79,368


2010

($ thousands)

WorldEquity

NominalFixed

Income

RealReturnAssets

AbsoluteReturn

Derivative-related


(net)

Total

Total realized gains (losses) $ 577 $ 2 $ 219 $ (1) $ 1 $ 798

Total unrealized gains (losses) $ 2,778 $ 3,980 $ 11,892 $ (1,836) $ 2,526 $ 19,340

Total gains (losses) 1 $ 3,355 $ 3,982 $ 12,111 $ (1,837) $ 2,527 $ 20,138











2010 2009

($ thousands) Fair Value

PolicyPortfolio


PolicyPortfolio

Long-TermTarget


US Large Cap Equity 10,544 4.6 5.0 3,161 2.7 5.0EAFE Large Cap Equity 10,205 4.4 5.0 3,559 3.1 5.0Small Cap Developed World Equity 9,873 4.3 5.0 2,666 2.3 5.0Emerging Markets Equity 14,920 6.5 7.0 7,241 6.3 7.0

Private Equity 27,096 11.7 10.0 14,300 12.4 10.0Nominal Fixed Income

Cash & Cash Equivalents 1 9,451 4.1 2.0 250 0.2 2.0World Government Bonds 10,626 4.6 5.0 7,181 6.2 5.0Canadian Fixed Income 24,124 10.4 8.0 14,511 12.6 8.0

Real Return AssetsWorld Inflation-Linked Bonds 10,714 4.6 5.0 8,153 7.1 5.0Real Estate 25,562 11.1 10.0 15,878 13.8 10.0Infrastructure 10,353 4.5 8.0 8,346 7.2 8.0

NET INVESTMENTS $ 231,125 100.0% 100.0% $ 115,325 100.0% 100.0%












($ thousands) 2010 2009

Securities LendingSecurities lent $ 20,003 $ 9,217Collateral contractually receivable 1 20,873 9,647

Securities BorrowingSecurities borrowed 564 1,211Collateral contractually payable 2 595 1,240







(A) MARKET RISK








Market risk is measured using the method known asValue-at-Risk (VaR). VaR is the maximum loss not exceededwith a given probability defined as the confidence level, over agiven period of time. PSP Investments has chosen a yearly95% confidence level to measure and report VaR.PSP Investments uses a Historical VaR model incorporatingthree years of monthly market returns which are scaled to atwelve-month holding period. Risk Management is responsiblefor implementing and maintaining a VaR measurementmethodology for all asset classes and all financial risk factors.




Active Risk Taken

(Relative VaR – $ thousands) 2010 2009

World Equity $ 3,436 $ 2,689Real Return Assets 4,335 3,634Absolute Return 2,053 3,958

Total Relative VaR (Undiversified) 9,824 10,281

Diversification Effect (4,914) (5,664)

Total Relative VaR $ 4,910 $ 4,617












Terms to Maturity

($ thousands)Less than1 Year

1 to 5Years

5 to 10Years

Over 10Years

2010Total

2009Total

Government of Canada bonds $ 925 $ 8,142 $ 1,711 $ 1,872 $ 12,650 $ 10,423Provincial and Territorial bonds 907 2,881 1,540 2,651 7,979 5,052Municipal bonds 20 112 251 38 421 286Corporate bonds 1,283 3,034 2,250 1,908 8,475 5,474ABTNs – 224 – 5,695 5,919 3,145

Total Canadian Fixed Income $ 3,135 $ 14,393 $ 5,752 $ 12,164 $ 35,444 $ 24,380

Total World Government Bonds $ 42 $ 2,369 $ 1,641 $ 1,423 $ 5,475 $ 2,588

Total World Inflation-Linked Bonds $ – $ 407 $ 388 $ 888 $ 1,683 $ 669

Real Estate Debt 1 $ 1,373 $ 875 $ – $ 163 $ 2,411 $ 2,566

Grand Total $ 4,550 $ 18,044 $ 7,781 $ 14,638 $ 45,013 $ 30,203

1 Real Estate Debt is a components of the Real Estate asset class disclosed in Note 3 (a).













2010 2009

Currency Fair Value % of Total Fair Value % of Total(in thousands of Canadian $)

US Dollar $ 31,343 51.2% $ 15,778 52.9%Euro 9,066 14.8 7,051 23.6British Pound 3,883 6.4 1,769 5.9Brazilian Real 3,342 5.5 222 0.7Hong Kong Dollar 2,527 4.1 1,023 3.4Japanese Yen 2,143 3.5 1,326 4.5Korean Won 1,753 2.9 568 1.9New Taiwan Dollar 997 1.6 595 2.0South African Rand 786 1.3 317 1.1Australian Dollar 756 1.2 562 1.9Indian Rupee 749 1.2 289 1.0Turkish Lira 545 0.9 206 0.7Others 3,285 5.4 137 0.4

Total $ 61,175 100.0% $ 29,843 100.0%

PSP Investments and its subsidiaries also have commitments, denominated in foreign currencies of $24,875 thousand($20,380 thousand US, €2,896 thousand, £6 thousand and 1,559 thousand South African Rands (ZAR)) for the Plan which are notincluded in the foreign currency exposure table.






(B) CREDIT RISK





2010 2009



Total 100.0% 100.0%

The breakdown of credit concentration risk for the Plan doesnot include investments in distressed debt included in pooledfunds in the amount of $9,989 thousand as at March 31, 2010(2009 — $6,825 thousand). Such investments typically includedebt securities of issuers close to default, and the investmentin such securities are quasi-equity in nature.

As at March 31, 2010, the Plan also has a net notional exposureof $3,067 thousand to collateralized debt obligations, of whichapproximately 64% of the dollar exposure is rated “Investmentgrade”, as well as funding facilities of a maximum amount of$4,840 thousand to support potential margin calls on theABTNs (Note 3 (a) (iii)).

As at March 31, 2010, the Plan’s maximum exposure to creditrisk, excluding collateral held and the investments in distresseddebt and collateralized debt obligations described above,amounts to $64,927 thousand (2009 — $37,536 thousand).


Counterparty risk represents the credit risk from current andpotential exposure related to transactions involving derivativecontracts. In order to minimize derivative contractcounterparty risk, PSP Investments deals only withcounterparties with a minimum credit rating of “A–” as at thetrade date, as provided by a recognized credit rating agency.PSP Investments monitors the credit ratings of counterpartieson a daily basis and has the ability to terminate all trades withcounterparties who have their credit rating downgraded below“A–” subsequent to the trade date. PSP Investments also usescredit mitigation techniques such as master-nettingarrangements and collateral transfers through the use ofCredit Support Annexes (CSA).









Additionally, the CSA to the ISDA Master Agreement enablesPSP Investments to realize any collateral placed with it inthe event of the failure of the counterparty and requiresPSP Investments to contribute further collateral when requested.The CSA also regulates the exchange of collateral when thecredit exposure to a counterparty exceeds a predeterminedthreshold.

On behalf of the Plan, PSP Investments deposited or pledgedsecurities with a fair value of $1,043 thousand as collateralwith various financial institutions as at March 31, 2010(2009 – $3,535 thousand) while securities with a fair value of$892 thousand (2009 – $361 thousand) were received fromother counterparties as collateral. PSP Investments does notrepledge any collateral held. All collateral deposited, pledgedand received were held with counterparties who had aminimum credit rating of “A–” as at March 31, 2010.


(C) LIQUIDITY RISK













($ thousands)Less than3 Months

3 to 12Months

Over1 Year Total

Non-derivative-related financial liabilitiesAmounts payable from pending trades $ (2,288) $ – $ – $ (2,288)Securities sold short (564) – – (564)Capital debt financing (3,118) (125) (5,359) (8,602)Accounts payable and other liabilities (47) – (14) (61)

Total $ (6,017) $ (125) $ (5,373) $ (11,515)

($ thousands)Less than3 Months

3 to 12Months

Over1 Year Total

Derivative-related financial assets and liabilitiesDerivative-related assets $ 878 $ 1,398 $ 111 $ 2,387Derivative-related liabilities (163) (97) (1,815) (2,075)

Total $ 715 $ 1,301 $ (1,704) $ 312





5. FUND TRANSFERS

PSP Investments received fund transfers of $84,236 thousandfor the year ended March 31, 2010 (2009 – $85,513 thousand)from the Reserve Force Pension Fund. The transfers receivedare comprised of the net employer and employeecontributions to the Reserve Force pension plan in respect ofmember service after March 1, 2007.




($ thousands) 2010 2009

Interest income $ 1,781 $ 1,132Dividend income 1,789 1,136Other income 890 617Security lending income (net) 1 41 17Dividend expense (112) (89)Interest expense (Note 8) (237) (184)Transaction costs (89) (77)External investment management fees 2 (141) (125)

3,922 2,427Net realized gains (losses) 3 6,395 (17,810)Net unrealized gains (losses) 21,537 (9,789)


1 Includes fees on securities borrowed.2 These are amounts incurred for public market investments that are paid directly byPSP Investments (Note 1). This excludes amounts incurred for Private MarketInvestments, disclosed in Note 3 (a) (ii), and certain public market pooled fundinvestments in the amount of $56 thousand for the year ended March 31, 2010 (2009 –$22 thousand) that are not paid directly by PSP Investments.

3 Includes foreign currency gains (losses) of $2,468 thousand for the year endedMarch 31, 2010 (2009 – $(1,555) thousand).


Investment income (loss) by asset mix based on the economicintent of the investment strategies of the underlying assets asoutlined in the SIP&P, for the year ended March 31, after allocatingnet realized and unrealized gains (losses) on investments to theasset classes to which they relate, is as follows:

($ thousands) 2010 2009

World EquityCanadian Equity $ 15,035 $ (9,071)Foreign Equity:

US Large Cap Equity 1,088 (1,091)EAFE Large Cap Equity 964 (1,414)Small Cap Developed World Equity 1,246 (1,246)Emerging Markets Equity 4,002 (2,146)

Private Equity 5,865 (5,178)Nominal Fixed Income

Cash & Cash Equivalents 170 68World Government Bonds (1,471) 1,396Canadian Fixed Income 813 643

Real Return AssetsWorld Inflation-Linked Bonds (1,104) 628Real Estate 213 (2,739)Infrastructure 743 424

Absolute Return 1 4,290 (5,446)







7. EXPENSES




2010 2009



Total 100.0% 100.0%




($ thousands) 2010 2009

Salaries and benefits $ 182 $ 68Professional and consulting fees 32 14Office supplies and equipment 38 12Other operating expenses 14 12Depreciation of fixed assets 24 7Occupancy costs 15 5Custodial fees 5 2Remuneration earned by Directors 3 1Travel and related expenses for Directors 1 1Communication expenses 1 –

Total $ 315 $ 122






As of March 31, 2010, PSP Capital Inc. has $649 million (2009 –$1,579 million) of short-term promissory notes outstanding withmaturity dates between 14 and 120 days of issuance, of which$3,243 thousand (2009 – $5,386 thousand) has been allocatedto the Reserve Force Pension Plan Account and included inNote 3 (a) as a short-term investment-related liability. As atMarch 31, 2010, PSP Capital Inc. has $1 billion (2009 – $1 billion)of medium-term notes issued and outstanding, of which$3,412 thousand (2009 – $3,412 thousand) has been allocatedto the Reserve Force Pension Plan Account. These medium-term notes bear interest of 4.57% per annum and have amaturity date of December 9, 2013. These medium-term notesare included in Note 3 (a) as a long-term investment-relatedliability. As at March 31, 2010, the fair value of these medium-term notes is $1,073 million (2009 – $1,054 million), of which$5,359 thousand (2009 – $3,597 thousand) has been allocatedto the Reserve Force Pension Plan Account. The maximumauthorized by the Board of Directors for both the short-termpromissory notes and medium-term notes is $2 billion.The capital raised, primarily used to finance investments in theReal Estate and Infrastructure asset classes, is unconditionallyand irrevocably guaranteed by PSP Investments and is inaccordance with the approved PSP Investments’ corporatepolicy for leverage.



($ thousands) 2010 2009

Short-term promissory notes $ 31 $ 150Medium-term notes 206 34

Total $ 237 $ 184




– To maintain an appropriate credit rating to achieve accessto the capital markets at the lowest cost of capital. ThroughPSP Capital Inc., and its leverage policies, PSP Investmentshas the ability to raise capital by issuing short-termpromissory notes and medium-term notes. Note 8 providesinformation on the capital debt financing andNote 4 (c) provides information on PSP Investments’liquidity. Additionally, as at March 31, 2010, PSP Investmentshas an operating line of credit of $10 million (2009 –$10 million). As at March 31, 2010, no amounts have beenwithdrawn (2009 – nil).








As part of investment transactions, PSP Investments and itssubsidiaries guaranteed letter of credit facilities. Thebeneficiaries of these letter of credit facilities have the abilityto draw against these facilities to the extent that thecontractual obligations, as defined in the related agreements,are not met. As at March 31, 2010, the maximum exposure ofthe Plan was $49 thousand (2009 – $50 thousand).

As at March 31, 2010, PSP Investments agreed to guarantee, aspart of an investment transaction, a non-revolving term loan.In the event of a default, the Plan would assume the obligationup to $1,375 thousand (2009 – $1,375 thousand) plus interestand other related costs.


11. COMMITMENTS


($ thousands) 2010 2009

Private Equity $ 15,755 $ 15,796Real Estate 6,960 6,125Infrastructure 2,136 1,966Public markets 1,637 1,972

Total $ 26,488 $ 25,859


PRINCIPAL BUSINESS OFFICE1250 René-Lévesque Blvd. West, Suite 900Montréal, Québec H3B 4W8

T. 514.937.2772F. 514.937.3155 [email protected]

HEAD OFFICE440 Laurier Ave. West, Suite 200Ottawa, Ontario K1R 7X6

T. 613.782.3095F. 613.782.6864

WWW.INVESTPSP.CA

Documents

PUBLIC SECTOR PENSION INVESTMENT BOARd 2010 AnnuAl