THE UNIVERSITY OF NEW SOUTH WALES PROFESSORIAL SUPERANNUATION FUND ACTUARIAL VALUATION AS AT 31 DECEMBER 2017

Transcription

1 15 March 2018 Equity Trustees Superannuation Limited C/- Ms M Carbone Level 1, 575 Bourke Street MELBOURNE VIC 3000 Dear Trustee, THE UNIVERSITY OF NEW SOUTH WALES PROFESSORIAL SUPERANNUATION FUND ACTUARIAL VALUATION AS AT 31 DECEMBER 2017 Executive Summary Introduction You requested that ALEA Actuarial Consulting Pty Limited ( ALEA ) conducts an actuarial valuation of The University of New South Wales Professorial Superannuation Fund (the Fund ) as at 31 December 2017 for the purpose of compliance with the Superannuation Industry (Supervision) Act 1993 (the SIS Act ). I understand the Fund is not a non-complying fund under the SIS Act and that it complies with all relevant superannuation legislation. The previous actuarial valuation of the Fund was undertaken as at 31 December 2016 (my report dated 6 April 2017). The purposes of this present investigation are: to provide an assessment of the financial position of the Fund; and to confirm the level of contributions required to be paid by the University of New South Wales (the University ) to fund members benefits. This report is undertaken in accordance with: the provisions of the Prudential Standard SPS160 ( SPS160 ) Defined Benefit Matters; the requirements of the SIS Act; and the Institute of Actuaries of Australia s professional standard relating to the actuarial investigation of defined benefit funds and reporting of the results of such an investigation Professional Standard 400 ( Investigations of the Financial Condition of Defined Benefit Superannuation Funds ). 1

2 Background and Benefits (Appendix A) The Fund is closed to new members and provides current members with defined benefits only. Pensioner members receive pension payments from the Fund. The principal parties involved with the Fund are: Equity Trustees Superannuation Limited the Trustee ; The University of New South Wales (the University ) the Employer; and KPMG Superannuation Services Pty Limited the Administrator. The Fund is governed by a Trust Deed dated 1 July 1995 (as amended). There were no amendments to the Deed advised by the Administrator since the latest actuarial investigation as at 31 December Accordingly, the basis on which members defined benefits entitlements are provided remains unchanged. A brief summary of our understanding of these entitlements is included in Appendix A. Membership (Appendix B) As at 31 December 2017, two (2) active professors were entitled to receive defined benefits from the Fund and seventy-four (74) pensioner members were receiving pension benefits. There were also fourteen (14) pensioner widows entitled to receive pension benefits from the Fund under the Surviving Spouse Pension ( SSP ). Accordingly, there was a total of 90 members in the Fund as at 31 December During the period from 1 January 2017 to 31 December 2017 the level of Professorial Salary increased from $185,891 to $191,509 (effective from 12 January 2018) i.e. at an average annual rate of approximately 3.0% per annum which was the same as the rate of Professorial Salary increase assumed in the previous actuarial valuation. I have reviewed the member data provided by the Administrator for this valuation and I am satisfied it is appropriate for use in this valuation. A brief summary of this data is included in Appendix B. Investment Assets and Strategy (Appendix C) The assets of the Fund are invested in a combination of domestic fixed interest investments, equities (local and overseas) and cash. The net market value of these assets as at 31 December 2017 after allowing for outstanding transactions was advised to be approximately $39,030,000 as at that date. This figure was adjusted to allow for Operational Risk Financial Requirement ( ORFR ) reserve of approximately $134,000 as at 31 December 2017 as advised by the Administrator. We were advised also that there were no accumulation benefits in the Fund as at 31 December Therefore, the net market value of assets supporting the defined benefits section of the Fund as at 31 December 2017 was estimated to be approximately $38,896,000. 2

3 Over the period from 1 January 2017 to 31 December 2017 the Fund s average rate of earnings was approximately 9.8% per annum (gross of tax and net of fees) which was greater than the 6.5% per annum (gross of tax and net of expenses) rate assumed in the previous valuation. The Administrator also advised that approximately 59% of the Fund s defined benefits section assets as at 31 December 2017 were presently invested in growth assets i.e. shares (local and overseas) with the remaining 41% invested in non-growth assets i.e. fixed interest and cash. On the basis of the above, it is my opinion the current investment strategy is appropriate at this time as a long-term strategy for the Fund given: the nature of the principal benefit liabilities of the Fund i.e. pension payments; the Fund is closed to new defined benefit members; and the University s continued financial support. However, it is appropriate also to note that continuation of the current strategy requires regular monitoring of future investment returns and cash flow requirements for members. Assumptions, Taxation and Other Regulatory Matters (Appendix D) Financial Assumptions Active Members (over age 60): Investment returns Professorial Salary increase 6.5% per annum 3.0% per annum Pensioners (after pensions commence and for pensions in payment): Investment returns Professorial Salary increase 6.5% per annum 3.0% per annum These rates are the same as were adopted in the previous actuarial valuation of the Fund as at 31 December A brief discussion of the changes in financial assumptions is included in Appendix D. Demographic Assumptions Active Members I have assumed that any current active member over age 60 retires at the date of this valuation and will commence a pension at that time. No other assumptions were made regarding future exits from the Fund in respect of active members. These assumptions are the same as were adopted in the previous actuarial valuation of the Fund as at 31 December Pensioners The mortality rates used in this valuation are appropriate to the 2005 year as provided by the Australian Bureau of Statistics in its publication Population Projections Australia

4 This is the same as was assumed in the previous actuarial valuation of the Fund as at 31 December Asset Valuation The net market value of assets has been used in this valuation on the basis that it represents an objective value of the Fund s assets. The adjusted market value of assets supporting the defined benefit section of the Fund as at 31 December 2017 was estimated to be approximately $38,896,000, after allowing for the Fund s ORFR reserve. Expense Assumptions An allowance of 2.5 times Professorial Salary was included in this investigation. This allowance is less than the assumption used in the previous actuarial valuation of the Fund as at 31 December 2016 (3.5 times) and reflects the reduced level of Fund expenses. Superannuation Tax The Fund is liable for tax at 15% (the concessional rate for regulated superannuation funds) on University contributions less insurance charges and certain expenses where applicable. Tax at 15% is also payable directly by some investment managers on the fund s investment earnings less certain deductions. However, the effective rate of tax paid by the Fund on both University contributions and investment earnings is generally less than 15%. Previously the Administrator advised an effective rate of tax on University contributions of approximately 6.6% of its contributions (if any) and we have assumed this to be the rate applicable at this time. However, it is appropriate to note also that the University is not making contributions to the Fund at this time. This assumption is the same as the rate assumed in the previous valuation as at 31 December Transfer Balance Cap The Government has introduced a $1,600,000 cap on the total amount that can be transferred into the tax-free retirement phase effective from 1 July Further, individuals with lifetime pensions (including defined benefit pensions) will be subject to a defined benefit income cap of $100,000 per annum from 1 July 2017 (the Cap ). While this change is unlikely to have any impact upon the Fund, members whose pensions are in excess of the Cap are likely to be required to pay tax on the amount exceeding it at their marginal rate of tax. Other Regulatory Matters Prudential Standard SPS160 ( SPS160 ) Defined Benefit Matters SPS160 commenced with effect from 1 July 2013 and includes a number of matters to be addressed in actuarial investigations. It also provides for the establishment of a shortfall limit for the Fund to be used as a measure of the extent to which the Trustee considers an unsatisfactory financial position, arising due to temporary investment market fluctuations, may be corrected within one (1) year. 4

5 In compliance with SPS160, the Trustee decided upon a shortfall limit for the Fund as a VBI figure of 100%. On this basis, the shortfall limit has not been breached as at 31 December In my opinion, the current shortfall limit is appropriate for the purpose of SPS160 at this time. Prudential Standard SPS114 ( SPS114 ) Operational Risk Financial Requirement ( ORFR ) In accordance with the requirements of SPS114 we understand the Trustee agreed to establish the ORFR level for the Fund on a gradual basis with transfers made from the Fund to a designated cash account. The ORFR balance held as at 31 December 2017 was approximately $134,000 (as advised by the Administrator) which represents approximately 0.35% of the Fund asset value as at that date. Funding Position (Appendix E) It is instructive to consider various measures of the funding status of the Fund. A brief summary of such measures is given below with further details provided in Appendix E. It should be a minimum requirement that if a superannuation fund was wound up on the valuation date the available assets were sufficient to pay members leaving service benefits i.e. their Vested Benefits. It is also important to assess a fund s position as an ongoing entity. The Fund s progress in this regard is determined by comparing the value of assets with the total Value of Accrued Benefits as at the date of the valuation. The Fund s current financial position is illustrated by the following index figures: NCP/ACP/SSP NCP/ACP/SSP 31 December December 2017 Vested Benefits Index (VBI) 125% 126% Value of Accrued Benefits Index (VABI) 125% 126% As all members are above the age of 60, the value of their Accrued Benefits is equal to the value of their Vested Benefits. Consequently the VABI is the same as the VBI. A VBI of 126% indicates the Fund was in a satisfactory financial position on a wind-up basis whilst a VABI of 126% indicates also that the Fund was in a sound financial position on an ongoing basis in respect of its defined benefit liabilities as at 31 December The Fund s financial position improved slightly since the previous valuation as at 31 December A brief discussion of the reasons for this change is included in Appendix H. The Fund does not have any Minimum Requisite Benefit entitlements as at 31 December 2017 as all members are receiving pension payments or have withdrawn their Minimum Benefits. 5

6 Valuation Results and Future Contribution Rates (Appendix F) Current University Contribution Rate In the last actuarial valuation of the Fund undertaken as at 31 December 2016 (my report dated 6 April 2017), I recommended the University contributes nil in respect of all defined benefit and pensioner members for the period from 1 January 2017 to 31 December Based on advice from the Administrator I understand the University had adopted this recommendation. University Contribution Rate from 1 January 2018 On the basis of the funding method and assumptions set out in Appendix D, the calculated contribution rate payable by the University is nil i.e. the University is not required to make any contributions to the Fund to meet its defined benefit liabilities or the cost of Fund expenses. I recommend the University continues its contribution holiday in relation to the defined benefit liabilities until at least 31 December 2018 at which date the VBI is expected to remain above the 125% level. This arrangement is expected also to increase the Fund s VBI to above 130% by 31 December 2020 i.e. in three (3) years from 31 December Notwithstanding the above, experience in the future is likely to differ from assumed experience over this period and it is possible the Fund s VBI will reduce in future years. In this event the University may be required to recommence its contributions to the Fund at some future time. Financial Experience since 31 December 2017 During the period from 1 January 2018 to 31 January 2018 the Fund s assets earned an average of approximately 0.4% over the period i.e. approximately 5.0% per annum (based on market experience over the period). Consequently, the Fund s overall investment return since 31 December 2017 is expected to be less than was assumed in this valuation (6.5% per annum) and would have an unfavourable impact upon the Fund s present financial position. However, I have not taken this into account when determining the University s recommended contribution arrangements given the volatility experienced in financial markets since then. Sensitivity Analyses and Material Risks (Appendix G) I have undertaken sensitivity analyses in relation to key assumptions used in this valuation i.e. the investment earnings rate, the salary growth rate and the mortality decrement rates used in this valuation. The results of the analyses are discussed in Appendix G. During the process of this valuation, I have identified two (2) material risks that are expected to have an impact on the Fund s future financial position: longevity risk i.e. the risk that pensioners will live for a longer (or shorter) period than expected; and the pace of funding i.e. the rate at which the University meets the cost of members pension benefits. 6

7 Each of these risks was re-assessed during the process of this investigation. I believe such risks remain within the Fund at this time and that they may have an impact on the Fund s future financial position. Fund Experience during the Valuation Period (Appendix H) Surplus or deficit items arose during the valuation period due to actual experience differing from the experience assumed as at the previous valuation. The effects of these differences are discussed briefly in Appendix H. Pension Certification SIS Regulation 9.31(1)(c) (Appendix I) This Regulation requires that where a pension is provided it must be certified by an actuary as having a high probability of being paid during the term of the pension i.e. at least a 70% probability (as specified in Regulation 9.31(1)(c)). On the basis of the pension details provided by the Trustee and Administrator, I certify that the level of Fund assets as at 31 December 2017 provides such a high probability. This is based on the assumption that: the University contributes to the Fund in accordance with the contribution arrangements set out in this report; the current investment strategy continues over the period during which pensions are to be paid (or a suitable alternative strategy is implemented); and the University ensures that all pension payments are met as and when they fall due. This certification is provided for the year ending 31 December I confirm it is consistent with the requirements of Guidance Note 465 issued by the Institute of Actuaries of Australia. Reliance and Limitation It is important to note that this valuation has relied upon the accuracy and completeness of all the data, and other information provided by the Administrator and the University for the purpose of this valuation. I have not carried out any independent verification or audit of the data provided but have carried out various reasonableness checks of the data and where necessary, I have discussed data issues with the Administrator and clarified relevant matters. It should be noted that if any data, or other information provided to us, is inaccurate or incomplete, then this report and any recommendation may need to be revised. This report is produced solely for the use of the Trustee and the University. No other use of, or reference to, this report should be made without prior written consent, nor should the whole or part of this report be disclosed to any other person without prior written consent. Recommendations On the basis of the above I recommend: the University contributes nil in respect of all defined benefit and pensioner members for the period from 1 January 2018 to 31 December 2018; and 7

8 the next actuarial valuation is undertaken at a date no later than 31 December 2018 to comply with the requirements of SPS160 and the SIS Act and Regulations. Yours sincerely, David O Keefe Fellow of the Institute of Actuaries of Australia Director ALEA Actuarial Consulting Pty Limited 8

9 APPENDIX A BENEFIT CONDITIONS AND ENTITLEMENTS General The Fund is governed by a Trust Deed dated 1 July 1995 (as amended). There were no amendments to the Deed advised by the Administrator since the latest actuarial investigation as at 31 December Accordingly, the basis on which members defined benefits entitlements are provided remains unchanged. The principal parties involved with the Fund at this time are: Service Provided Trustee Employer Administrator Party Equity Trustees Superannuation Limited The University of New South Wales KPMG Superannuation Services Pty Limited Accumulation Benefits Section This section provides members with accumulation benefits payable upon leaving the Fund for any reason. Benefits are fully funded by member and University contributions (as specified in the Trust Deed) and are excluded from this valuation. Defined Benefits Section Definitions Professorial Salary ( PS ): Normal Retirement Age ( NRA ): The annual rate of Professorial Salary as advised by the University is $191,509 (effective from 12 January 2018). 60 Non-Contributory Pension ( NCP ) The benefit on retirement at or after the NRA with more than five (5) years service is a noncontributory pension of 20% of PS plus 1% of PS for each year of professorial service in NSW above five (5) years (subject to a maximum pension of 25% of PS for periods of ten (10) or more years of professorial service). There is no benefit payable on retirement, or withdrawal before the NRA, or with less than five (5) years service. Similarly there is no benefit payable in the event of the death of the member. Additional Contributory Pension ( ACP ) Sub-Category B1 Member: Members electing to receive this additional pension contribute at the rate of 2.75% if aged between 45 and 50, increasing by 0.25% for each year above age 50, to a maximum of 5% from age 59. The benefit on retirement at or after the NRA with more than five (5) years service is a pension of 5% of PS. 9

10 Sub-Category B2 Member: Members electing to receive this additional pension contribute at the rate of 3%. The benefit on retirement at or after the NRA with more than five (5) years service is a pension of 3% of PS. Sub-Category B3 Member: Members electing to receive this additional pension contribute at the rate of 2.75%. The benefit on retirement at or after the NRA with more than five (5) years service is a pension of 5% of PS. In the event of retirement or withdrawal before the NRA, or with less than five (5) years service, the member can elect to contribute an additional amount equivalent to the contributions that would have been made had they remained in the Fund until their NRA and they will be entitled to the above benefit. If the member does not make these additional contributions, the member will not be entitled to the additional pension, and the benefit will be a return of the member s own contributions with interest. The benefit payable in the event of death of the member before age 60 is a return of the member s own contributions with interest. However, if death occurs within the five (5) year period after the NRA, the pension continues to be paid to the surviving spouse for an additional five (5) years. Surviving Spouse Pension ( SSP ) Where a member elects to contribute to the provision of a Surviving Spouse Pension, their spouse will be provided with a pension benefit, following the death of the pensioner, of an amount of up to 20% of PS. A member s rate of contribution varies with their age as described in the Trust Deed. The benefit payable on withdrawal before the NRA, or the death of the spouse before the member, is a return of the member s own contributions with interest. 10

11 APPENDIX B MEMBERSHIP DATA As at 31 December 2017 there were 90 members in the Fund. The following table provides a summary of changes in membership since 31 December 2016: Actives Pensioners Widows Total Number of members as at 31/12/ New members Exits = Number of members as at 31/12/ The following table provides a summary of membership details as at 31 December 2017: Actives Pensioners Widows Number of members Average age Salaries or pension amounts (p.a.) $383,018 $3,917,036 $457,707 The number of active members under the Fund remained unchanged over the period since 31 December 2016 and each of these remaining members is over age 60. The total number of members in the Fund has fallen over the period (from 93 to 90 members) reflecting the deaths of four (4) pensioners and the commencement of one (1) widow s pension payments from the Fund. During the period from 1 January 2017 to 31 December 2017 the level of Professorial Salary increased from $185,891 to $191,509 (effective from 12 January 2018) i.e. at an average annual rate of approximately 3.0% per annum which was the same as the rate of Professorial Salary increase assumed in the previous actuarial valuation i.e. 3.0% per annum. This valuation was made having regard to liabilities calculated on the basis of member details advised by the Administrator and benefit provisions as described in the Trust Deed. I am satisfied reasonable steps have been taken to ensure the reliability of the data used in this valuation. 11

12 APPENDIX C ACCOUNTS, ASSETS AND INVESTMENTS STRATEGY AND PERFORMANCE Fund Accounts A summary of the Fund s accounts follows below. It relates to the combined transactions of all sections of the Fund over the year ending 31 December The above figures are based on unaudited transactions for the year ending 31 December 2017 and include allowances for outstanding transactions of the Fund. Assets The Fund s assets are invested in a range of assets, including: ($ 000) ($ 000) Net Market Value of Fund Assets as at 31 December ,972 Income: Net Investment Income 3,611 3,611 Outgo: Administration/Investment Expenses (288) Taxation 162 Benefit/Pension Payments (4,427) (4,553) Net Market Value of Fund Assets as at 31 December ,030 the Legg Mason Australian Bond Trust; the PIMCO Australian Bond Fund; the Maple Brown Abbott Australian Equity Trust; the Schroders Australian Equity Fund; the SSGA Global Index Plus (Hedged) Trust; the SSGA Global Index Plus Trust; the BlackRock Wholesale Indexed Australian Equity Fund; and a cash management fund. This figure was adjusted to allow for ORFR reserve of approximately $134,000 as at 31 December 2017 as advised by the Administrator. We were advised also that there were no accumulation benefits in the Fund as at 31 December Therefore, the net market value of assets supporting the defined benefits section of the Fund as at 31 December 2017 was estimated to be approximately $38,896,

13 Investment Strategy The allocation of the Fund s assets, by investment sector, in respect of the Fund s defined benefits section is illustrated in the following figures: The above charts reflect advice received from the Administrator where I understand that approximately 59% of the Fund s defined benefits section assets as at 31 December 2017 were invested in growth assets i.e. shares (local and overseas) with the remaining 41% invested in non-growth assets i.e. fixed interest and cash. This is the similar to the Fund s asset allocations as at 31 December

14 On the basis of the above, it is my opinion the current investment strategy is appropriate at this time as a long-term strategy for the Fund given: the nature of the principal benefit liabilities of the Fund i.e. pension payments; the Fund is closed to new defined benefit members; and the University s continued financial support. However, it is appropriate also to note that continuation of the current strategy requires regular monitoring of future investment returns and cash flow requirements for members. Investment Performance During the period from 1 January 2017 to 31 December 2017 the Fund s investment performance in respect of the defined benefits section assets (as advised by the Administrator) was approximately 9.8% per annum gross of tax and net of fees. By comparison, the SuperRatings Fund Crediting Rate Survey indicated an asset-weighted average return for superannuation fund managers, with similar asset allocations, of approximately 8.1% per annum for the same period ending 31 December It should be noted that the average investment return obtained from the SuperRatings Fund Crediting Rate Survey represents an average rate net of tax, investment fees and expenses which differs from the Fund s average investment return for the period ending 31 December 2017, which is gross of tax and net of investment fees and expenses. On this basis, the Fund s investment performance in respect of the Fund s defined benefits section assets over the period was expected to be similar to the average return achieved by superannuation funds with similar investment strategies. 14

15 APPENDIX D VALUATION METHODS AND ASSUMPTIONS Valuation Objectives The objectives of the valuation are: to assess the level of the Fund s benefit liability as at the valuation date in respect of the defined benefits section of the Fund; and to determine suitable contribution arrangements for the funding of members benefits that will prove adequate and remain relatively stable in the long-term. Valuation Method A funding method is a systematic basis for meeting the cost of benefits over the years of operation of the Fund. It recognises that a member s benefit entitlements should be funded as uniformly as possible over his or her working lifetime and the assets of the Fund should cover the total benefits which members would reasonably expect if they left the Fund. The main methods available cover a range of options, including the extremes of: Pay-As-You-Go (PAYG) funding where no assets are accumulated and the University meets the cost of members benefits at the time of payment i.e. a potentially infinite funding period; and full funding where sufficient assets are accumulated to meet the cost of all member benefits (in respect of both retrospective and prospective entitlements) at all times i.e. a nil funding period. It is important the Trustee understands that all funding methods expect to produce the same total cost of benefits. The choice of a funding method will only affect the funding period (i.e. the pace ) at which the total cost of benefits is met by the University. The approach historically adopted by public sector plans, including the Fund, was the PAYG method where benefit payments were effectively guaranteed by the relevant government or sponsoring body. This is not usually a practical option for private sector plans which instead adopt a steady rate of funding over time with the aim of meeting the cost of current benefit liabilities and accumulating assets steadily to meet members expected future liabilities. The University has previously adopted a funding approach to meeting all liabilities under the Fund, with the University now funding for defined benefit liabilities on a regular basis. The present valuation was made using a Target Funding Method to determine the level of University contributions required to meet the Fund s future expected benefit and expense obligations. This method was used also in the previous actuarial valuation as at 31 December 2016 (my report dated 6 April 2017). 15

16 Assumptions In determining the present value of future expected benefits, assumptions are required about a variety of factors, both economic and demographic. The following paragraphs outline the considerations taken into account in setting these assumptions. Financial Assumptions The following rates were adopted in valuing liabilities for this valuation: Active Members (over age 60): Investment returns Professorial Salary increase 6.5% per annum 3.0% per annum Pensioners (after pensions commence and for pensions in payment): Investment returns Professorial Salary increase 6.5% per annum 3.0% per annum The assumed rate of Professorial Salary growth and investment return are the same as were used in the previous valuation as at 31 December Demographic Assumptions Active Members I have assumed that any current active member over age 60 retires at the date of this valuation and will commence a pension at that time. No other assumptions were made regarding future exits from the Fund in respect of active members. These assumptions are the same as were adopted in the previous actuarial valuation of the Fund as at 31 December Pensioners The mortality rates used in this valuation are appropriate to the 2005 year as provided by the ABS in its publication Population Projections Australia This is the same as was assumed in the previous actuarial valuation of the Fund as at 31 December The following mortality rates were adopted at various ages for pensioner members: Number Expected to Die Out of 10,000 Lives at the Age Start of Each Year at the Age Shown To*: Males Females , ,738 1,355 *Note: Based on the ABS publication Population Projections Australia (Cat. No ) from 3 March 2003 and using the 2005 mortality rates. 16

17 Asset Valuation The net market value of assets has been used in this valuation on the basis that it represents an objective value of the Fund s assets. The adjusted market value of assets supporting the defined benefit section of the Fund as at 31 December 2017 was estimated to be approximately $38,896,000, after allowing for the Fund s ORFR reserve. Expense Assumptions An allowance of 2.5 times Professorial Salary was included in this investigation. This allowance is less than the assumption used in the previous actuarial valuation of the Fund as at 31 December 2016 (3.5 times) and reflects the reduced level of Fund expenses. Superannuation Tax The Fund is liable for tax at 15% (the concessional rate for regulated superannuation funds) on University contributions less insurance charges and certain expenses where applicable. Tax at 15% is also payable directly by some investment managers on the fund s investment earnings less certain deductions. However, the effective rate of tax paid by the Fund on both University contributions and investment earnings is generally less than 15%. Previously the Administrator advised an effective rate of tax on University contributions of approximately 6.6% of its contributions (if any) and we have assumed this to be the rate applicable at this time. However, it is appropriate to note also that the University is not making contributions to the Fund at this time. This is the same as the rate assumed in the previous valuation as at 31 December Transfer Balance Cap The Government has introduced a $1,600,000 cap on the total amount that can be transferred into the tax-free retirement phase effective from 1 July Further, individuals with lifetime pensions (including defined benefit pensions) will be subject to a defined benefit income cap of $100,000 per annum from 1 July 2017 (the Cap ). While this change is unlikely to have any impact upon the Fund, members whose pensions are in excess of the Cap are likely to be required to pay tax on the amount exceeding it at their marginal rate of tax. Other Regulatory Matters Prudential Standard SPS160 Defined Benefit Matters SPS160 commenced with effect from 1 July 2013 and includes a number of matters to be addressed in actuarial investigations. It also provides for the establishment of a shortfall limit for the Fund to be used as a measure of the extent to which the Trustee considers an unsatisfactory financial position, arising due to temporary investment market fluctuations, may be corrected within one (1) year. In compliance with SPS160, the Trustee decided upon a shortfall limit for the Fund as a VBI of 100%. On this basis, the shortfall limit has not been breached as at 31 December In my opinion, the current shortfall limit is appropriate for the purpose of SPS160 at this time. 17

18 Prudential Standard SPS114 Operational Risk Financial Requirement In accordance with the requirements of SPS114, we understand the Trustee has agreed to establish the ORFR level for the Fund on a gradual basis with transfers made from the Fund to a designated cash account. The ORFR balance held as at 31 December 2017 was approximately $134,000 (as advised by the Administrator) which represents approximately 0.35% of the Fund asset value as at that date. General These assumptions are realistic in terms of likely long-term experience and provide a reasonable estimate of the Fund s future experience. However, the Trustee should expect that the actual future experience of the Fund will vary from that assumed above in any particular year and that funding levels will fluctuate accordingly. Over the long term, these assumptions reflect our best estimate of the emerging benefit costs. It is important to note that the long-term cost of the benefits does not depend directly on the chosen assumptions, but on the Fund s own future experience. 18

19 APPENDIX E FUNDING STATUS General It is instructive to consider various measures of the funding status of the Fund. These measures assist in monitoring the progress of the Fund over time. They can be readily calculated at annual intervals between major valuations of the Fund. Vested Benefits Index The first measure compares the value of assets with members Vested Benefits as at the valuation date and provides an indication of the Fund s solvency on a short-term basis. The Vested Benefit liability amounts as at 31 December 2017 are calculated as the sum of the Fund s liabilities in respect of: active members aged at least 60 the value of their current pension entitlements as at 31 December 2017; and pensioner members the value of their current pension entitlements as at 31 December The Fund s current financial position is illustrated by considering the following funding index figures as at 31 December 2017: The VBI as at 31 December 2017 has increased slightly since 31 December 2016 and is above the minimum acceptable level (100%) representing a satisfactory financial position as at that date. A brief discussion of reasons for this improvement in the index since 31 December 2016 is included in Appendix H. Value of Accrued Benefits Index 31 December December 2017 $'000 $'000 A. Vested Benefits 31,940 30,773 B. Market Value of Assets 39,840 38,896 C. Vested Benefits Index (B/A) 125% 126% Surplus/(Deficit) 7,900 8,123 The second measure compares the value of assets of the Fund with the total actuarial value of members accrued benefits and provides an indication of the Fund s solvency on a longterm basis. The actuarial value of active members accrued benefits is calculated from the Fund s retirement, death and withdrawal benefit formulae based on service completed, salaries as at the valuation date, current pensions payable, the valuation assumptions and method described above. The actuarial value of pensioner members accrued benefits is calculated as the value of their current pension entitlements. 19

20 As all members are above the age of 60, the value of their Accrued Benefits is equal to the value of their Vested Benefits. On this basis the VABI is the same as the VBI above. Superannuation Guarantee Minimum Benefits Index The Fund does not have any Minimum Requisite Benefit entitlements as at 31 December 2017 as all members are receiving pension payments or have withdrawn their Minimum Benefits. Accordingly we understand the Fund is no longer used by the University to satisfy its SG obligations for any of the Fund s members. Retrenchment Benefits There are no retrenchment benefits applicable to pensioners. Termination Benefits In the event of termination of the Fund there are no specific benefits described under the Trust Deed. However, Clause 22 of the Trust Deed requires that members are paid by the Trustee an amount which is of equivalent value representing the interest of the member or pensioner in the Fund on the winding up of the Fund for any reason. Further, we understand that under Clause 22.2 of the Trust Deed, any amount remaining in the Fund, in the event of termination of the Fund, will be paid to the University. 20

21 APPENDIX F VALUATION RESULTS AND FUTURE CONTRIBUTION RATES Valuation Results Based on the valuation assumptions and method previously described, the present value of active members and pensioners benefits as at 31 December 2017 are as follows: Liabilities Non-Contributory Pension (NCP) Pensions in the course of payment 24,093 $' 000 $' 000 Value of total benefit for active members ,023 Additional Contributory Pension (ACP) Pensions in the course of payment 1,148 Surviving Spouse Pension (SSP) Pensions in the course of payment 3,351 Present Values Value of contingent pensions for retired professors 1,251 4,602 Combined Total Liability (based on past and future service) 30,773 Assets 38,896 Actuarial Surplus/(Deficit) 8,123 The Fund s total benefit liabilities (based on past and future membership) were calculated to be approximately $30,773,000 as at 31 December The Fund had an actuarial surplus of approximately $8,123,000 as at 31 December Current University Contribution Rates In the last actuarial valuation of the Fund undertaken as at 31 December 2016 (my report dated 6 April 2017), I recommended the University contributes nil in respect of all defined benefit and pensioner members for the period from 1 January 2017 to 31 December Based on advice from the Administrator I understand the University did not contribute to the Fund for the year ending 31 December 2017 in accordance with the recommendation. University Contribution Rate from 1 January 2018 On the basis of the funding method and assumptions set out in Appendix D, the calculated contribution rate payable by the University is nil i.e. the University is not required to make contributions to the Fund to meet its defined benefit liabilities or the cost of Fund expenses. I recommend the University continues its contribution holiday in relation to the defined benefit liabilities until at least 31 December 2018 at which date the VBI is expected to remain above the 125% level. This contribution arrangement is expected also to increase the Fund s VBI to above 130% by 31 December 2020 i.e. in three (3) years from 31 December Notwithstanding the above, experience in the future is expected to differ from the assumed experience over this period, and it is possible the Fund s VBI will reduce in future years. 21

22 In this event the University may be required to recommence its contributions to the Fund at some future time. Financial Experience since 31 December 2017 During the period from 1 January 2018 to 31 January 2018 the Fund s assets earned an average of approximately 0.4% over the period i.e. approximately 5.0% per annum (based on market experience over the period). Consequently, the Fund s overall investment return since 31 December 2017 is expected to be less than was assumed in this valuation (6.5% per annum) and would have an unfavourable impact upon the Fund s present financial position. However, I have not taken this into account when determining the University s recommended contribution arrangements given the volatility experienced in financial markets since then. Recommendations On the basis of the above I recommend: the University contributes nil in respect of all defined benefit and pensioner members for the period from 1 January 2018 to 31 December 2018; and the next actuarial valuation is undertaken at a date no later than 31 December 2018 to comply with the requirements of SPS160 and the SIS Act and Regulations. 22

23 APPENDIX G SENSITIVITY ANALYSES AND MATERIAL RISKS Sensitivity Analyses General I have undertaken sensitivity analyses in relation to key assumptions used in this valuation i.e. the investment earnings rate, the salary growth rate and the mortality decrement rates. Based on recent experience and future expectations in respect of the Fund and financial markets, I believe it is appropriate to stress test both the financial and demographic assumptions as follows: the rate of investment earnings (6.5% per annum) increased or decreased by 4.0% per annum; the rate of Professorial Salary/pension growth (3.0% per annum) increased or decreased by 1.0% per annum; and an improvement or deterioration in the mortality decrement rates of 25% of the current rates. It is important the Trustee and the University appreciate these sensitivity analyses are used only to illustrate the possible financial implications for the Fund related to changes in future rates of investment earnings, salary growth and decrement rates. They do not represent upper or lower bounds of possible outcomes that might arise in the future. The table below shows the Fund s projected VBI as at 31 December 2020 under each of the above scenarios and assuming nil University contributions from 1 January The table illustrates the following: Vested Benefit Index 31 December 2020 Current Assumptions 135% Investment Earnings Rate - 4% higher 155% Investment Earnings Rate - 4% lower 117% Professorial Salary/Pension Growth Rate - 1% higher 124% Professorial Salary/Pension Growth Rate - 1% lower 147% Mortality Decrement Rate - 25% improvement 110% Mortality Decrement Rate - 25% deterioration 163% the Fund s VBI may be lower than expected over the three (3) year period if pension growth is higher than expected, investment performance or mortality rates are lower than expected; and the Fund s VBI may remain well above 100% and might be expected to result in the building up of excessive assets if there is favourable financial or demographic experience. Notwithstanding the above, the Fund s VBI is expected to remain no less than 100% in three years time when the various assumptions change. 23

24 Material Risks During the process of this valuation, I have identified two (2) material risks that may have an impact on the Fund s future financial position: longevity risk i.e. the risk that pensioners will live for a longer (or shorter) period than expected; and the pace of funding i.e. the rate at which the University meets the cost of members defined benefits and pension benefits. Longevity Risk Whilst the mortality decrement rates assumed in this valuation are expected to represent a good estimate of the experience likely to apply to the Fund s pensioners there is no guarantee that it will closely reflect the actual experience of the group given its small size. In the event that the Fund s pensioners live longer than expected the University would be required to make contributions to the Fund for a longer period resulting in an increased cost to the University. Conversely, if the Fund s pensioners live for a shorter time than expected the University may be able to make contributions to the Fund for a shorter period resulting in a reduced level of cost to the University. However in this case it is also likely that excess monies might accumulate in the Fund which could be difficult for the University to utilise. The usual method of addressing this risk is to establish a pool of such pensioners with the expectation that where there are a sufficiently large number of pensioners there is a greater chance the assumed mortality rates will be appropriate to the group as a whole, thereby mitigating or removing the longevity risk for the group. Generally this pooling approach to dealing with longevity risk is not available to the Fund unless the Trustee elects to outsource each pensioner s arrangements by purchasing a pension from an external provider. However, where the Trustee seeks to purchase such pensions it is expected the actual cost to the Fund (and the University) would be much greater than the assets presently held within the Fund in support of these pensions. This situation arises due to the external provider s need to allow for its own profit margin/expenses and for a contingency margin that it would build into any purchase price to limit its exposure to possible losses from a greater level of longevity than assumed in its underlying mortality basis. In the absence of any pooling arrangement the Fund will need to accept the longevity risk and to ensure it funds for its costs in an appropriate manner. In particular this might be achieved through regular reviews of the Fund s financial position and the adequacy of the University s contribution arrangements. The Trustee has already implemented such a process with regular annual valuations of the Fund in accordance with the requirements of SPS160 and the SIS Act and Regulations. Whilst this will not alter the possible need for additional contributions by the University or the possibility of accumulating excess levels of assets, it should assist in adjusting the University s cost on a timely basis. 24

25 Pace of Funding Given the result of the sensitivity analyses set out above, it is clear there is a risk that excessive assets may be built up in the Fund. There is also a risk the Fund s assets may not be sufficient to meet future liabilities as they arise. Each of these situations creates a problem for the University where either excess assets accumulate in the Fund which cannot be readily reclaimed by the University in the future, or there is a need to make additional contributions to the Fund if there is a shortfall in assets. Accordingly, the pace of funding of the defined benefit and pension liabilities is an important consideration for the University and represents a risk that either too many, or too little, assets are held in the Fund in the future. I believe this risk is currently monitored through the annual valuation process and for actions to be taken in relation to the University s contribution rate as the need arises or the opportunity presents itself. However, regulations requiring the Fund to maintain a VBI of at least 100% make it difficult to avoid the possibility of generating excess assets in future years. 25

26 APPENDIX H COMPARISON WITH PREVIOUS VALUATION An approximate analysis was made of the change in the Fund s financial position since the previous valuation. The impact of the main items affecting the Fund s financial position is illustrated in the following chart: Investment Earnings Death Release of Pension Liability Interest on Previous Surplus Miscellaneous Expenses Surviving Pensioners -2,500-2,000-1,500-1, ,000 1,500 $'000 Investment Earnings Investment returns on the assets supporting the defined benefits section averaged approximately 9.8% per annum for the period ending 31 December This was greater than the 6.5% per annum expected as at the previous valuation and resulted in an improvement in the Fund s financial position as at 31 December Death Release of Pension Liability When a pensioner dies there is generally a release of liabilities as the pension ceases. A release of liability also arises when a widow (or spouse) dies and their pension ceases. The deaths of a number of pensioners over the period since 31 December 2016 resulted in an improvement in the Fund s financial position as at 31 December Interest on Previous Surplus This is the effect of interest on the surplus at the beginning of the period and resulted in an improvement in the Fund s financial position as at 31 December Expenses Expenses paid from the Fund over the period were less than previously assumed. This resulted in a reduction in the Fund s financial position as at 31 December Surviving Pensioners During the period from 31 December 2016, the Fund s mortality experience was not as expected in the previous valuation such that the pension liabilities for both surviving pensioners and widow pensioners as at 31 December 2017 are greater than expected. The death of one (1) pensioner also resulted in the commencement of a pension payable to the pensioner s spouse. The above was reflected also in payment of benefits that were greater than expected. 26

27 Together this experience resulted in a reduction in the Fund s financial position as at 31 December Miscellaneous This is the effect of other differences between actual experience and the valuation basis. They have not been analysed further, however, their combined net effect is relatively small. 27

28 APPENDIX I ACTUARIAL CERTIFICATION Pension Certification SIS Regulation 9.31(1)(c) This Regulation requires that where a pension is provided it must be certified by an actuary as having a high probability of being paid during the term of the pension i.e. at least a 70% probability (as specified in Regulation 9.31(1)(c)). On the basis of the pension details provided by the Trustee and Administrator I certify that the level of Fund assets as at 31 December 2017 provides such a high probability. This is based on the assumption that: the University contributes to the Fund in accordance with the recommended contribution arrangements set out in this report; the current investment strategy continues over the period during which pensions are to be paid; and the University contributes such additional sums as may be required to ensure that all future pension payments are met as and when they fall due. The above certification is provided for the year ending 31 December 2017 and I confirm it is consistent with the requirements of Guidance Note 465 issued by the Institute of Actuaries of Australia. 28