Andrea Gluyas and Christine Ormrod November 2010

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1 Andrea Gluyas and Christine Ormrod November 2010

2 Why this paper? Pensioner mortality assumptions Other valuation assumptions

4 If information to be used as audit evidence has been prepared using the work of a management s expert [e.g. an actuary], the auditor shall, to the extent necessary, having regard to the significance of that expert s work for the auditor s purposes,: An understanding of the work of the management s expert includes determination of whether the auditor has the expertise to evaluate the work of the management s expert, or whether the auditor needs an auditor s expert for this purpose. Evaluate the competence, capabilities and objectivity of that expert; Obtain an understanding of the work of that expert; and Evaluate the appropriateness of that expert s work as audit evidence for the relevant assertion.

5 Aspects of the management s expert s field relevant to the auditor s understanding may include: Whether that expert s field has areas of specialty within it that are relevant to the audit. Whether any professional or other standards and regulatory or legal requirements apply. Considerations when evaluating the appropriateness of the management s expert s work as audit evidence for the relevant assertion may include: The relevance and reasonableness of that expert s findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements; What assumptions and methods are used by the management s expert, and whether they are generally accepted within that expert s field and appropriate for financial reporting purposes The nature of internal and external data or information the auditor s expert uses. If that expert s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods; and If that expert s work involves significant use of source data the relevance, completeness, and accuracy of that source data.

6 Superannuation Schemes Act 1989 No guidance NZSA Professional Standard No.2 Mostly relates to disclosure NZ IAS 19 valuations Discount rate: risk free Other assumptions: Entity s best estimate

8 NZLT less 2 years NZLT less 1 year and less 3 years NZLT less 2 years PA(90) less 3 years and less 4 years NZLT less 1 year, with mortality improvements Is the mortality assumption reasonable?

9 Consistent evidence of mortality improvement Mortality differentials DBPA and non DBPA show statistically different mortality Males and females are significantly different percentages of population mortality (DBPA: 80% and 100%) No evidence of selection against the Schemes Consistency in the shape of the curve over the years and different shapes for differ Schemes Percentage rather than an age deduction gives a better fit to the experience

Actual mortality as a percentage of NZLT2005-07 -

100% 90% 80% 65-69 70-74 75-79 80-84 85-89 90-94 95-99

10 Actual mortality as a percentage of NZLT Non-DBPA males 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% Age NZLT

100% 90% 80% 65-69 70-74 75-79 80-84 85-89 90-94

11 Actual mortality as a percentage of NZLT DBPA males 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% Age NZLT

90% 80% 70% 60% 65-69 70-74 75-79 80-84 85-89 90-94

12 Actual mortality as a percentage of NZLT Non-DBPA females 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% Age NZLT

Actual mortality as a percentage of NZLT2005-07 - DBPA Females 160% 150% 140% 130% 120% 110% 100% 90% 80%

13 Actual mortality as a percentage of NZLT DBPA Females 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% Age NZLT

14 Three years of mortality improvement from population statistics 120% 115% 110% 105% 100% 95% Females Males

15 Mortality improvement expected using mortality improvement formula 125% 120% 115% 110% 105% 100%

115% 110% 105% 100% 60 65 70 75 80 85 90 95-1

16 Total mortality improvement implied by an age adjustment 150% 145% 140% 135% 130% 125% 120% 115% 110% 105% 100% age adjustment -2 age adjustment -3 age adjustment

17 Value of annuity of $1,000pa - Male single life Percentage difference from value using NZ years 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Non-DBPA DBPA NZLT0507 mort imp NZLT NZLT0507

18 Value of annuity of $1,000pa - Female single life Percentage difference from value using NZ years 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Age Non-DBPA DBPA NZLT0507 mort imp NZLT NZLT0507

Given: We find quite different mortality rates between different schemes Irrefutable evidence of mortality improvement Pensioner mortality is generally one of the more significant assumptions

19 Given: We find quite different mortality rates between different schemes Irrefutable evidence of mortality improvement Pensioner mortality is generally one of the more significant assumptions Pensioner liabilities are often increasing as a proportion of a scheme s total liabilities, and That there is a relatively straightforward actuarial formula for mortality improvement. Should we be telling our auditing colleagues that New Zealand life tables with a two year deduction is reasonable for both current pensioner mortality and future improvements in pensioner mortality?

20 Sliding scale against population mortality Effect of removing impaired lives And may be?

22 PS2 asks for: an explanation of how the values for these assumptions were derived. This explanation shall include at least: If the investment earnings assumption is one of the most financially significant assumptions, an explanation of the relationship between the investment earnings assumption and the current investment strategy the scheme, any changes assumed in the future to the investments strategy and the allowances made for each of future investment expenses, administration expenses and taxation

23 Methodology for Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes NZ IAS 19 valuations, issued by the Treasury Long term risk free discount rates Considers all available data Adopted a stable approach to extrapolation Issued at 30 June, 31 October, 31 December and 28 February Clear methodology

24 Other issues discussed in the paper: Use of a term structure for discount rate, to automatically match the duration of liabilities Risk premium Scarcity discount Adjustments to reflect the liquidity of liabilities The differences between Government Stock and bank swap rates The approach for durations longer than the longest traded government stock Common errors such as not annualising half yearly rates

25 Pension increases Administration expenses Retirement ages Commutation option

General information on PPF Factors GENERAL PRINCIPLES

General information on PPF Factors GENERAL PRINCIPLES General information on PPF Factors General principles Types of PPF Factor There are six types of factor needed to administer the PPF, as well as for