John Wiley & Sons Australia Superannuation Fund

Transcription

1 Consulting (Australia) Pty Ltd ABN AFS Licence # Exhibition Street Melbourne Vic 3000 GPO Box 9946 Melbourne Vic Fax julie.a.cook@mercer.com 5 June 2012 John Wiley & Sons Australia Superannuation Fund A sub-fund of Spectrum Super Statement of Advice Report to the Trustee on the Actuarial Investigation as at 30 June 2011 J:\Client\J\John Wiley (IOOF04) & (WILEY1)\Actuarial\Triennial Review\ \8-correspondence

2 Contents Executive Summary Key results and recommendations Purpose Financial position as at 30 June Financing objective adopted for investigation Main items of Fund experience Recommended contribution rates Projection of coverage of accrued benefit liabilities Key risks Illustration of potential investment volatility Other statements and recommendations Additional information Action required Actuary s certifications Membership, Assets and Experience Membership Assets Experience Change in financial position since previous valuation Valuation methodology, assumptions and results Funding Requirements Financing the benefits Actuarial assumptions Method of calculating the Actuarial Value of Accrued Benefits Valuation results in summary Contribution requirements Investment volatility Fund Design and Policies Background information Summary of benefits Investment policy Crediting Policy Insurance SIS Statements Glossary

3 Certificates Summary of actuary s report for the purposes of Australian Accounting Standard AAS25 Funding and Solvency Certificate Throughout this report the is referred to as the Fund. Any reference to the Employer may include all employers who participate in the Fund as appropriate to the context. 2

4 Executive Summary This report on the actuarial investigation of the Fund as at 30 June 2011 has been prepared to meet the requirements of the Fund s governing rules and the SIS legislation. Experience over review period The overall experience over the review period was negative, with the adverse impact of investment returns (which were lower than expected) outweighing the favourable impact of lower than expected salary increases. Sections 1.4 and 2.3 provide further details. Financial position as at 30 June 2011 A summary of the financial position of the defined benefits section of the Fund as at 30 June 2011 is set out below: Defined Benefits June 2011* $ 000s Asset 1,423 June 2011 Index June 2009 Index Vested Benefit (Early Retire from age 57) 1, % 89.3% SG Minimum Benefits 1, % 94.4% Actuarial Value of Accrued Benefit (PSL) 1, % 82.0% *this table excludes additional balances of $209,000 for members of the defined benefit section of the Fund as at 30 June 2011 Refer to the Glossary (Section 6 of this report) for descriptions of the measures of liability shown above and Sections 1.2 and 2.2 for further comments and comparison with the position at the previous investigation date. The coverage levels at 30 June 2011 were lower than the levels projected at the previous actuarial investigation, due to the overall negative experience over the intervening two years (refer section 1.4). Although the asset coverage has improved since the previous investigation as at 30 June 2009, the Fund remains in an unsatisfactory financial position as defined under SIS legislation. However, the Fund assets now cover the SG Minimum Benefits and therefore the Fund is considered to be technically solvent under SIS legislation. Recommended contribution rates Based on the assumptions adopted and allowing for experience after 30 June 2011, in order to meet the financing objective by 30 June 2014 (the latest date of the next valuation), the following minimum contributions are required: Defined Benefit members: Current contributions of 27% of DB members salaries, plus an additional 18% of Category B member s salary to 30 June 2012; Additional contributions of $15,000 per month for the period from 1 July 2012 to 30 June 2014; plus 3

5 Top-up contributions in relation to any benefit payments for defined benefit members, set at a level to ensure that coverage of Vested Benefits for continuing members is not reduced. Accumulation members: 9% of Ordinary Time Earnings (or such lesser amount as required to meet the employer s obligations under superannuation guarantee legislation or employment agreements. This recommended contribution program is expected, on the basis of the actuarial assumptions adopted for this investigation, to restore the Fund to a satisfactory financial position by 30 June

6 1 Key results and recommendations This section highlights the critical issues relating to the Fund s financial position and summarises the key findings and recommendations resulting from this investigation. 1.1 Purpose I have prepared this report exclusively for the Trustee of the John Wiley & Sons Australia Superannuation Fund for the following purposes: Present the results of an Actuarial Investigation of the Fund as of 30 June 2011; Review Fund experience for the period since the previous actuarial investigation (effective at 30 June 2009); Recommend contributions to be made by the Employer intended to allow the Fund to meet its benefit obligations in an orderly manner, and to reach and maintain an appropriate level of security for members accrued benefit entitlements; Satisfy the requirements of the Fund s Trust Deed for actuarial investigations of the Fund s financial position; and To meet legislative requirements under relevant Commonwealth superannuation legislation. 5

7 1.2 Financial position as at 30 June 2011 A summary of the financial position of the defined benefits section of the Fund as at 30 June 2011 is set out below: Defined Benefits June 2011* $ 000s Asset 1,423 June 2011 Index June 2009 Index Vested Benefit (Early Retire from age 57) 1, % 89.3% SG Minimum Benefits 1, % 94.4% Actuarial Value of Accrued Benefit (PSL) 1, % 82.0% *This table excludes additional balances of $209,000 for members of the defined benefit section of the Fund as at 30 June 2011 Refer to the Glossary (Section 6 of this report) for descriptions of the measures of liability shown above and Section 2.4 for comparison with the position at the previous investigation date. Vested Benefits coverage At 30 June 2011 Fund assets were less than Vested Benefits. Accordingly the Fund was considered to be in an unsatisfactory financial position under SIS legislation. SG Minimum Benefits coverage Fund assets at 30 June 2011 were greater than SG Minimum Benefits and hence the Fund was considered to be solvent under SIS legislation. As total SG Minimum Benefits are lower than total Vested Benefits, the financing objective of 105% coverage of Defined Benefit Vested Benefits automatically provides targeted SG Minimum Benefits coverage in excess of the 100% level required for solvency. Actuarial Value of Accrued Benefits coverage The 87.0% coverage of the Actuarial Value of Accrued Defined Benefits at 30 June 2011 was below 100%. Reports on actuarial investigations under the SIS legislation are required to include the actuary s opinion as to the adequacy of assets to meet accrued benefit liabilities (the Actuarial Value of Accrued Benefits) at the investigation date and over the following three years (the required statement is included at Section 5 of this report). SIS does not specify any consequences of a negative opinion. Overall financial position The coverage levels at 30 June 2011 were slightly lower than the levels projected at the previous actuarial investigation, due to the overall negative experience over the intervening two years (refer Section 1.4). The Fund was in an unsatisfactory financial position as defined under SIS legislation with coverage levels of Vested Benefits failing to meet the financing objectives. 6

8 1.3 Financing objective adopted for investigation The financing objective I have adopted for this investigation is to maintain the value of the Fund s assets at least equal to: 100% of accumulation account balances plus 100% of Vested Benefits (Early Retire as a right from Age 57) for defined benefit members. A margin over vested defined benefits provides security against adverse experience such as poor investment returns. Given that the defined benefit section of the Fund is currently under-funded against Vested Benefits, no margin has been incorporated in the financing objective at this stage. However, I recommend that the Trustee adopt a secondary target of asset coverage of 105% of defined benefit Vested Benefits in 5 year s time. It is noted that achieving the financing objective of 105% of Vested Benefits for defined benefit members would also result in a satisfactory margin of coverage over 100% of SG Minimum Benefits. Hence it is not considered necessary to adopt specific financing objectives in relation to this liability measure. 1.4 Main items of Fund experience The more significant factors affecting the Fund s financial experience during the period since the previous actuarial investigation in 30 June 2009 were as follows: Item Investment Returns Salary Increases Membership Changes Assumed at previous investigation 12% for first year, then 6.5% p.a. (compound average 9.2% pa) Fund experience Comment on effect 7.3% pa Adverse effect investments grew at a slower rate than assumed 4.5% p.a. 3.6% pa Positive effect benefit liabilities grew more slowly than expected At rates as detailed in previous report No members exited A Cat B member attained age 57 and became eligible for higher early retirement benefit (with employer consent) The overall experience over the review period was negative, with the adverse impact of investment returns (which were lower than expected) outweighing the favourable impact of lower than expected salary increases. Section 2 provides further details of Fund membership, assets and experience. 7

9 1.5 Recommended contribution rates Based on the assumptions adopted and allowing for experience after 30 June 2011, in order to meet the financing objective by 30 June 2014 (the latest date of the next valuation), the following minimum contributions are required: Defined Benefit members: Current contributions of 27% of DB members salaries, plus an additional 18% of Category B member s salary to 30 June 2012; Additional contributions of $15,000 per month for the period from 1 July 2012 to 30 June 2014; plus Top-up contributions in relation to any benefit payments for defined benefit members, set at a level to ensure that coverage of Vested Benefits for continuing members is not reduced. Accumulation members: 9% of Ordinary Time Earnings (or such lesser amount as required to meet the employer s obligations under superannuation guarantee legislation or employment agreements. This recommended contribution program is expected, on the basis of the actuarial assumptions adopted for this investigation, to restore the Fund to a satisfactory position by 30 June Projection of coverage of accrued benefit liabilities I have prepared a projection of Fund assets and benefit liabilities based on: the actuarial assumptions adopted for this valuation; the effects of changes in Vested Benefits due to members becoming eligible for the early retirement benefit, but allowing for known investment experience from 30 June 2011 to 2 March 2012 of -3.7%, and assuming that the Employer contributes on the basis as recommended above. 8

10 The results of that projection are as follows: Projected Coverage of Defined Benefit Liabilities 140% 130% 120% 110% 100% 90% 80% June Vested Benefits (early retire from age 57) PSL MRB Target This chart shows that, projected Fund assets will cover projected Vested Benefits (assuming early retirement from age 57) by 30 June The graph also shows the coverage level of assets compared with the Actuarial Value of Accrued Benefits, which is also known as the Past Service Liability (PSL). The Trustee should note that this projection is based on the assumptions adopted, which represent a single scenario from the range of possibilities. The future is uncertain and the Fund s actual experience will differ from those assumptions; these differences may be minor in their overall effect, or they may be significant and material. In addition, different sets of assumptions or scenarios may also be within the reasonable range and results based on those alternative assumptions would be different. However the coverage ratios will be reviewed at least once every three years, and the Trustee s monitoring of the experience specified in the Notifiable Events section of the Funding and Solvency Certificate will provide a means of identifying adverse experience which warrants an immediate review of the Fund s financial position. Also note the monitoring program recommended in Section Sections 1.8 and 3.7 provide an illustration of the impact of investment volatility on the projected coverage of Vested Benefits. 1.7 Key risks There are a number of risks relating to the operation of the Fund. The more significant financial risks relating to the defined benefits are: 9

11 Investment risk borne by the Employer. The risk is that investment returns will be lower than assumed and the Employer will need to increase contributions to offset this shortfall. Salary growth risk borne by the Employer. The risk is that wages or salaries (on which future benefit amounts will be based) will rise more rapidly than assumed, increasing benefit amounts and thereby requiring additional employer contributions. Legislative risk borne by the Employer. The risk is that legislative changes could be made which increase the cost of providing the defined benefits for example an increase in the rate of tax on superannuation funds or an increase in the Superannuation Guarantee (SG) rate. The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Changes arising from the Cooper Review of Australia s Superannuation System may also have some impact. 1.8 Illustration of potential investment volatility The Fund s defined benefit assets reflect the investment strategy outlined in Section 4.3 of this report. The value of these assets is likely to display a degree of volatility, which could result in the coverage of Vested Benefits being below 100% in three years time (i.e. lower than the adopted for this investigation). The projection shown below indicates that, in three years time, there is an 80% chance that coverage of Vested Benefits will be in the range of 97% to 110%. Please refer to Section 3.7 of this report for further details. Projected Coverage of Defined Benefit Liabilities (Vested Benefits Early Retire from age 57) 130% 125% 120% 115% 110% 105% 100% 95% 90% 85% June Low Return Valuation Assumption High Return 10

12 The Fund s Funding and Solvency Certificate will specify Notifiable Events which the Trustee needs to test for on a regular basis. These are designed to detect adverse experience that warrants an immediate review of the Fund s financial position. Recommendations on the monitoring process are set out in Section Other statements and recommendations Investment policy With effect from 6 September 2011, the investment policy was changed to invest all assets and future contributions in the IOOF Multimix Conservative Growth Trust with a benchmark 30% exposure to growth assets such as shares and property and a benchmark 70% exposure to defensive assets such as cash and fixed interest. The previous defined benefit investment policy had the potential for substantial variability in investment returns but the recent change in investment policy should reduce the volatility of long-term investment returns. With the defined benefits having been closed to new members for some time now and a significant amount of retirement benefits due to become payable in the next few years the projections carried out as part of this actuarial investigation indicate that a substantial reduction of defined benefit assets is expected over the next 4-6 years. The shorter-term liability profile reduces the ability of the Fund to ride out the ups and downs in returns that are expected from investment strategies with substantial exposure to growth assets. The recent change in the Fund s investment strategy to a more conservative approach has reduced the level of exposure to growth assets and has the potential to reduce the volatility in investment returns. Taking into account the Fund s financial position and the nature and term of the Fund s defined benefit liabilities, I consider that the current defined benefit investment policy remains a suitable policy at present. Please refer to Section 4.3 for further information and commentary Crediting Policy While I consider that the main features of the unit pricing and crediting policy are generally suitable, I recommend that the Trustee considers the following enhancements for defined benefit crediting rates: Determining a separate interim rate for the period from the end of the month to the date of payment during a month to better reflect the underlying investment return for that period. Determine the annual rates based on the compounding of monthly interim rates to better reflect the impact of the timing of cash flows during the year. 11

13 Please see section 4.4 for further details Insurance I consider that the Fund s current insurance arrangements are suitable and provide adequate protection for the Fund. Section 4.4 of the report provides further details Requirements due to unsatisfactory financial position Section 130 of the SIS Act requires that if an actuary forms the opinion that a Fund s financial position may be unsatisfactory, or may be about to become unsatisfactory, and that opinion was formed in performing an actuarial function, the actuary must advise both the Trustee and the regulator (APRA) in writing immediately (an unsatisfactory financial position applies where assets are less than Vested Benefits). These requirements apply, as an actuarial valuation is an actuarial function under the Act, and I am of the opinion that the Fund is currently in an unsatisfactory financial position. I have previously made the necessary notifications to both APRA and the Trustee. The Fund s assets are sufficient to fully cover the SG Minimum Benefits at 30 June 2011 despite not fully covering Vested Benefits. Therefore the Fund is not considered to be technically insolvent. This does not necessarily mean that the Fund s assets are adequate to cover Vested Benefits or the Actuarial Value of Accrued Benefits, and the Trustee should be looking to arrange adequate funding to provide for the Fund s full benefit liabilities over time, and not just maintaining coverage of the MRBs above 100% Monitoring of financial position In practice, actual experience is likely to vary from the actuarial assumptions and hence the future Vested Benefits coverage levels are likely to vary from the projected levels set out in Section 1.6. Section 1.8 illustrates the sensitivity of the projections to the Fund s investment return. I therefore recommend that the progress of the Fund s coverage of Vested Benefits be reviewed after each annual review of the Fund to ascertain if an adjustment to the Employer contribution levels is required prior to the next complete investigation. The Trustee should also continue to monitor the Notifiable Events specified in the Fund s Funding and Solvency Certificate and advise the Actuary should any actual or potential Notifiable Events occur. 12

14 1.10 Additional information Significant events since the investigation date The recommendations take into account the actual investment return of -3.7% from 30 June 2011 to 2 March Share markets have continued to experience significant volatility, including recent falls in asset values. However, I consider that the recommended financing objective and contribution program, combined with regular monitoring remain appropriate for the purpose of this Review. The legislated increase in the Superannuation Guarantee rate from 9% to 12% has not been taken into account. I am not aware of any other significant events that have occurred since 30 June 2011 which would have a material impact on the recommendations in this report. Next actuarial investigation - Required at a date no later than 30 June At that time, the adequacy of the Employer contribution levels will be reassessed. Note that the monitoring process recommended in Section may lead to an earlier reassessment ahead of the next full actuarial investigation. Enclosed Certificates - A certificate for Australian Accounting Standard AAS25 purposes is enclosed and forms part of this report. A new Funding and Solvency Certificate is also enclosed. Next Benefit Certificate required at or before the expiry of the current Benefit Certificate (which expires 30 June 2012). This certificate is required primarily by the Employer to demonstrate compliance with its Superannuation Guarantee obligations to employees who are members of the Fund. However the Trustee must ensure the benefits paid from the Fund are not lower than the minimum benefits specified in the Benefit Certificate. Actuarial advice on the impact and implementation of the increase in the SG rate should be sought before preparation of the new certificate Action required The Trustee should consider this report and confirm its agreement (or otherwise) to the contribution and other recommendations. The Trustee should also seek formal agreement from the Employer to contribute in line with the recommendations. The Employer has been consulted in relation to the contribution recommendations, and has indicated to me that it intended to adopt and implement those contributions. The Trustee should continue to monitor the contribution requirements under the Fund s Funding and Solvency Certificate and seek contributions from the Employer as appropriate. 13

15 Note that if contributions paid are lower than recommended, the SIS legislation may require the actuary to report this to APRA. Actuarial advice on the implementation and any impact of the increase in the SG rate should be sought before preparation of the new certificate Actuary s certifications Professional standards and scope This report has been prepared in accordance with generally accepted actuarial principles, internal standards, and the relevant Professional Standards of the Institute of Actuaries of Australia, in particular PS400 which applies to...actuarial investigations of the financial condition of wholly or partially funded defined benefit superannuation funds. Use of report This valuation report should not be relied upon for any other purpose or by any party other than the Trustee of the Fund and the Employer(s) who contribute to the Fund. is not responsible for the consequences of any other use. This report should be considered in its entirety and not distributed in parts. The advice contained in this report is given in the context of Australian law and practice. No allowance has been made for taxation, accountancy or other requirements in any other country. Actuarial Uncertainty and Assumptions An actuarial investigation report contains a snapshot of a Fund s financial condition at a particular point in time, and projections of the Fund s estimated future financial position based on certain assumptions. It does not provide certainty in relation to a Fund s future financial condition or its ability to pay benefits in the future. Future funding and actual costs relating to the Fund are primarily driven by the Fund s benefit design, the actual investment returns, the actual rate of salary inflation and any discretions exercised by the Trustee or the Employer. The Fund s actuary does not directly control or influence any of these factors in the context of an actuarial investigation. The Fund s future financial position and the recommended Employer contributions depend on a number of factors, including the amount of benefits the Fund pays, the cause and timing of member withdrawals, Fund expense, the level of taxation and the amount earned on any assets invested to pay the benefits. These amounts and others are uncertain and unknowable at the valuation date, but are predicted to fall within a reasonable range of possibilities. 14

16 To prepare this report, assumptions, as described in Section 3, are used to select a single scenario from the range of possibilities. The results of that single scenario are included in this report. However, the future is uncertain and the Fund s actual experience will differ from those assumptions; these differences may be significant or material. In addition, different assumptions or scenarios may also be within the reasonable range and results based on those assumptions would be different. Actuarial assumptions may also be changed from one valuation to the next because of mandated requirements, Fund experience, changes in expectations about the future and other factors. We did not perform, and thus do not present, an analysis of the potential range of future possibilities and scenarios. Because actual Fund experience will differ from the assumptions, decisions about benefit changes, investment policy, funding amounts, benefit security and/or benefit related issues should be made only after careful consideration of alternative future financial conditions and scenarios, and not solely on the basis of a set of valuation results. Data and Fund Provisions To prepare this report, we have relied on financial and participant data provided by the Fund s administrator. The data used is summarised in this report. We have reviewed the financial and participant data for internal consistency and general reasonableness and believe it is suitable for the purpose of this report. We have not verified or audited any of the data or information provided. We have also relied upon the documents, including amendments, governing the Fund as provided by the Trustee. The Trustee is ultimately responsible for the validity, accuracy and comprehensiveness of this information. If the data or Fund provisions are not accurate and complete, the valuation results may differ significantly from the results that would be obtained with accurate and complete information; this may require a revision of this report. Further Information If requested, the actuary is available to provide any supplementary information and explanation about the actuarial investigation. Prepared by... Julie Cook Fellow of the Institute of Actuaries of Australia 5 June

17 I have reviewed this report under s professional Peer Review Policy. I am satisfied that it complies with applicable professional standards and uses assumptions and methods which are suitable for the purpose.... Richard Codron Fellow of the Institute of Actuaries of Australia 16

18 2 Membership, Assets and Experience This section provides membership and asset information and summarises the principal elements of Fund experience since the last actuarial investigation. 2.1 Membership Defined benefit section membership summary The experience in this section relates to Defined Benefits only. Membership changes can normally be expected to have a financial effect upon a Fund, the extent of which depends largely on their number, the ages at which members leave, and the size of the benefit payments. The Defined Benefit membership movement during the review period is as follows: Benefit Category B C Total Members at 30 June less Exits Members at 30 June 2011 as used for projections of experience

19 In addition, there were 194 members at 30 June 2011 with total Vested Benefits of $6,256,000 whose benefits are determined wholly on a defined contributions (or accumulation ) basis. All new members join the accumulation section of the Fund. The membership data used for this investigation was provided by the Fund s administrator. I have carried out some broad reasonableness checks on the data and I am satisfied with the quality of the data and its suitability for this purpose Defined benefit member age profile The 30 June 2011 defined benefit membership split by age is shown in the following graph: Defined Benefit Member Age Distribution at 30 June Number Cumulative % age 100.0% 90.0% 80.0% Number % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Percentage Age attained at June % 2.2 Assets The net market value of the Fund s assets as at 30 June 2011 amounted to $7,888,000 (based on the data provided by the Fund s administrator). Accounts for accumulation members totalled $6,256,000 and accumulation accounts for defined benefit members (primarily additional voluntary contribution accounts) totalled $209,000, leaving assets of $1,423,000 to support the defined benefit liabilities of the Fund. This value has been used for the purposes of the valuation. The data used for this investigation was supplied by the administrators of the Fund. Although we have no reason to doubt the quality of the data, the results of this investigation are dependent on that quality. I am, however, satisfied that the data provided is reasonable for the purposes of this investigation. 18

20 2.3 Experience Investment returns and crediting rates The table below shows the rates of investment earnings (after tax, investment fees and asset based administration fees) for assets supporting defined benefits over the period since the previous investigation. Period Return Assumed in 2009 Year ending 30 June % 12.0% Year ending 30 June % 6.5% Average Return over Period (p.a.) 7.3% 9.2% The average investment return for the two year period to 30 June 2011 was 7.3% p.a. compared to our longer term assumption at the last actuarial investigation of 12% for the first year, followed by 6.5% p.a. The lower than assumed return had a negative impact on the Fund s financial position Salary increases Salaries for the current defined benefit members increased by an average of 7.3% (3.6% p.a.) over the period compared to our longer term assumption at the last actuarial investigation of 9.2% (4.5% p.a). The slightly lower than assumed salary increases had a positive impact on the Fund s financial position Changes in membership/decrements There were no changes in the defined benefit membership during the period under review. However, one Category B member attained age 57 and became eligible for a higher early retirement benefit (with employer consent) Contributions The previous actuarial investigation made the following recommendations in order to restore the Fund s vested benefit coverage ratio to 100% by 30 June 2012: Benefit Category Defined Benefit members Others (Accumulation members) Contribution Rate (% salary) Employer contribution of 27% of salaries for all defined benefit members, plus an additional 18% of salaries for the member in Category B. At rate required to meet Superannuation Guarantee requirements The Employer contributions are currently in line with these recommendations. 19

21 2.4 Change in financial position since previous valuation The table below shows the coverage of assets over Vested Benefits and the Actuarial Value of Accrued Benefits as at 30 June 2011, and the corresponding values at the previous valuation date. Coverage of Defined Benefits by Assets 30 June June 2009 Vested Benefit (Early Retire from 91.3% 89.3% age 57) SG Minimum Benefits 106.4% 94.4% Actuarial Value of Accrued Benefit (PSL) 87.0% 82.0% While the coverage levels at 30 June 2011 have improved since 30 June 2009, they are lower than projected at our previous Investigation. The overall experience over the review period was negative, with the adverse impact of investment returns (which were lower than expected) outweighing the favourable impact of lower than expected salary increases. 20

22 3 Valuation methodology, assumptions and results This section sets out the considerations, methods and assumptions involved in performing the actuarial projections of future experience and shows the results of those projections. The actuarial process includes projections of possible future Fund assets and benefit liabilities on the basis of actuarial assumptions about future experience. These assumptions include investment returns, salary/wage increases, crediting rates, rates at which members cease service for different reasons, and various other factors affecting the financial position of the Fund. Material assumptions are set out in Section 3.3. It is not expected that these assumptions will be precisely borne out in practice, but rather that in combination they will produce a model of possible future experience that is considered a suitable basis for setting contribution rates. 3.1 Funding Requirements Provisions of the Trust Deed The rules of the Fund include requirements that: the Trustee ensures an actuarial investigation of the Fund is conducted when required by legislation. Accordingly actuarial investigations are carried out at three yearly intervals at a minimum; and if the Employer fails at any time to make the level of contributions recommended in the last Actuary s report the Trustee must take whatever steps are prescribed by legislation and may consult the Actuary to determine the appropriate course of action. 21

23 3.1.2 Professional requirements Under Professional Standard 400 issued by the Institute of Actuaries of Australia, the funding method selected by the actuary must aim to provide that: (a) members' benefit entitlements (including any pension increases provided by the Trust Deed or in accordance with either precedent or the intentions of the Trustee and/or Fund Sponsor) are fully funded before the members retire; and (b) the assets of the Fund from time to time, after making full provision for the entitlements of any beneficiaries or members who have ceased to be employed, exceed the aggregate of benefits which employed members would reasonably expect to be payable to them on termination of membership, including the expenses of paying those benefits, and having regard to the provisions of the Trust Deed and the likely exercise of any Options or Discretions. (Paragraph of PS400). Accordingly the actuary needs to be satisfied that any funding program is expected to provide a level of assets which meets or exceeds immediate benefit entitlements based on members reasonable expectations. Should assets fall below that level, the funding program needs to aim to lift assets to at least the required level over a reasonable time period and to maintain assets at or above the required level thereafter. The financing objective (refer Section 1.3) has been set on the basis that members reasonable expectations on termination would be to receive their vested benefit entitlement. 3.2 Financing the benefits Ultimate cost of providing Fund benefits The ultimate cost to the Employer of providing Fund benefits is: the amount of benefits paid out; plus the expenses of running the Fund, including tax; less members contributions; and the return on investments. The ultimate cost to the Employer will not depend on the actuarial investigation assumptions or methods used to determine the recommended Employer contribution rate, but on the actual experience of the Fund. The financing method and actuarial assumptions adopted will however affect the timing of the contribution requirements from the Employer. 22

24 3.2.2 Financing method There are various financing methods that could be followed in setting the Employer contribution level. This investigation uses the Attained Age Normal method. Under this method, the Normal Cost is the estimated level rate of Employer contributions required to provide benefits in respect of future service (i.e. service after the investigation date) for existing members. The Normal Cost ignores any surplus or deficiency of assets over accrued liabilities. The recommended Employer contribution rate may then be set above or below the normal cost for a suitable period of time to amortise any surplus/deficiency and to take into account the Fund s financing objectives. Under this method of financing, the level of the Employer contributions may vary from time to time to ensure that the Fund remains on course towards its financing objectives. It is noted that, as the defined benefits are closed to new members and (on the assumptions adopted) the cost of future service benefits increases with age, the Normal Cost is expected to gradually increase as the defined benefit membership ages. I consider that the Attained Age Normal method is suitable in the Fund s current circumstances as the Normal Cost reflects the expected (on the assumptions adopted) employer cost of future service benefits and the recommended contribution rate can be varied around the Normal Cost to take into account the projected financial position as compared with the financing objective. The Attained Age Normal method was also used at the previous investigation. 3.3 Actuarial assumptions Economic assumptions The most significant assumption made in estimating the cost of defined benefits is the difference between: the assumed rate of investment earnings; and the rate of salary increases used in the projections of future benefit payments. This difference is commonly referred to as the gap. 23

25 The key economic long term assumptions adopted for this investigation are: Main Assumptions Investment returns (after tax, asset-based administration fees and investment fees) # 4.5% per year General salary increases 4.0% per year # in the projections of Fund experience shown in Sections 1.6, 1.8 and 3.7, the first year investment return assumed, incorporates allowance for the actual return over the period 30 June 2011 to 2 March 2012 of -3.7%. The assumption for investment returns is based on the expected long-term investment return for the Fund s current benchmark investment mix, calculated using Investment Consulting s assumptions of the means and standard deviations of returns from the various underlying asset classes and the correlations of returns between those asset classes. The general salary increase assumption is based on long term economic forecasts for future increases in average weekly earnings (AWOTE) and discussions with the Employer Other assumptions New members The Fund s defined benefit section is closed to new entrants. No allowance has been made for new members. Expenses Based on recent experience, administration and management expenses plus the net cost of group life insurance for defined benefit members are assumed to average 2.8% of defined benefit members salaries. Tax It is assumed that the current tax rate of 15% continues to apply to the Fund s assessable income, along with current tax credits and other concessions. All future Employer contributions are assumed to be subject to 15% contribution tax, after deduction of any insurance premiums and administration and management costs. All contribution recommendations quoted in this report are gross of contribution tax. No allowance has been made for any surcharge liability as members benefits will be reduced by a surcharge offset amount equal to the surcharge payments made, accumulated at the Fund crediting rate. Surcharge was abolished with effect from 1 July No allowance has been made for excess contributions tax, as this is payable by the member and cannot be met from defined benefits. 24

26 Death and Disablement I have maintained the same assumptions in relation to rates of death and total and permanent disablement (TPD) as were adopted at the 30 June 2009 actuarial investigation. Given the small size of the Fund, these are based on the experience of similar Funds administered or advised by. Examples of the number of death and total and permanent disablements assumed per 1,000 members at each age are given below: Age Assumed Death Rate Assumed TPD Rates Retirement I have assumed no retirements other than at normal retirement age (age 62). Resignation As all current members are now over age 50, it is assumed that there will be no resignations. Superannuation Guarantee (SG) rate The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Actuarial advice on the implementation and any impact of the change should be obtained. Value of Assets For the purpose of the investigation, the value placed on the assets was determined as set out in Section Changes in assumptions since the previous valuation The following table sets out changes in assumptions from those used in the previous investigation and the reasons for the changes: Assumption 30 June 2011 Valuation 30 June 2009 Valuation Investment 4.5% p.a. 12% for first year, Returns then 6.5% p.a. Reason for change Fund has changed to a more conservative investment strategy with effect from 6 September General Salary Increases 4.0% p.a. 5.5% p.a. Discussion with employer based on Fund experience 25

27 3.4 Method of calculating the Actuarial Value of Accrued Benefits The calculation of the Actuarial Value of Accrued Benefits has been carried out using a method of apportionment of benefits between past and future membership that satisfies the requirements of Professional Standard No. 402 of the Institute of Actuaries of Australia and is acceptable for Australian Accounting Standard AAS25 purposes. More details on the method can be found in the attached summary of the actuarial report prepared for AAS25 purposes. 3.5 Valuation results in summary The actuarial projection of possible future experience produced the following results, where projected future payments have been converted to a present value by discounting at the assumed rate of investment returns. Item Present Value of future defined benefits payments in respect of membership accrued at valuation date Present Value of future defined benefits payments in respect of membership after valuation date Present Value of future fund operating costs and tax on contributions Total Present Value of future payments out of Fund Actuarial Value $000s 1, ,220 Value of Fund Assets at 30 Jun ,423 Present Value of future Employer contributions 642 (based on Normal Cost of 20.4% of salaries) Total available Assets (in absence of other contributions) 2,065 Excess/(Deficit) of Assets to value of benefits (213) In practice it will be necessary to vary the employer contribution rate over time to ensure that the assets grow to a point where they provide 100% coverage of Vested Benefits, and then remain at a level which at least covers 100% of Vested Benefit in future. Based on main assumptions a supplementary contribution of 18% of Category B salaries to 30 June 2012 is needed to lift projected assets to a level of 100% of projected Vested Benefits. Note: the values above make no allowance for the weaker than assumed investment return emerging in the period since 30 June

28 3.6 Contribution requirements Based on the assumptions adopted for this investigation, I estimate that the Employer s long-term defined benefit funding costs (i.e. the Normal Cost of funding future service defined benefit accruals for each category, determined as set out in Section above) are as follows: Defined Benefit Membership Group Employer long-term cost (of future benefit accrual) (% of Salary/Wage) Category B 23.7% Category C 19.7% Average (weighted by salary) 20.4% However, based on the assumptions adopted and allowing for experience after 30 June 2011, in order to meet the financing objective by 30 June 2014 (the latest date of the next valuation), the following minimum contributions are required: Defined Benefit members: Current contributions of 27% of DB members salaries, plus an additional 18% of Category B member s salary to 30 June 2012; Additional contributions of $15,000 per month for the period from 1 July 2012 to 30 June 2014; plus Top-up contributions in relation to any benefit payments for defined benefit members, set at a level to ensure that coverage of Vested Benefits for continuing members is not reduced. Accumulation members: 9% of Ordinary Time Earnings (or such lesser amount as required to meet the employer s obligations under superannuation guarantee legislation or employment agreements. 3.7 Investment volatility I have considered the impact of investment volatility on the Fund s financial position over the next few years using a high return and a low return scenario. The returns under both scenarios have been derived from assumptions about the likely risk attached to the Fund s defined benefit investment strategy. Using the investment return model and assumptions adopted, there is approximately only a 10% chance of the Fund s cumulative investment return being less than the low return scenario. Similarly, there is approximately only a 10% chance of the Fund s cumulative investment return being greater than the high return scenario. Allowance has been included for a -3.7% return for the period immediately following 30 June 2011 to 2 March

29 For the period Assumed Cumulative Investment Return (%) ending 30 June "Low Return" Investigation "High Return" % -2.6% -0.3% % 1.8% 7.2% % 6.4% 13.2% % 11.1% 19.1% % 16.2% 25.1% % 21.4% 31.5% The cumulative investment return is the total return from 30 June 2011 up to 30 June in the year shown. The assumed returns allow for short term variation in annual investment results which gradually revert to the average long term annual rate adopted for the valuation. The extent of variation allowed for in these projections reflects the Fund s asset mix and s views on potential variability in investment results in various investment sectors. The graph below shows the effect on the projected ratio of assets to Vested Benefits for defined benefit members under the high return and low return scenarios, with all other investigation assumptions remaining unchanged. Projected Coverage of Defined Benefit Liabilities (Vested Benefits Early Retire from age 57) 130% 125% 120% 115% 110% 105% 100% 95% 90% 85% June Low Return Valuation Assumption High Return The Fund s Vested Benefits coverage is highly sensitive to changes in the investment returns. Based on fluctuations in investment returns only, and assuming other experience is in line with the assumptions adopted for this investigation, there is approximately an 80% chance that the coverage of assets over Vested Benefits at 30 June 2014 will fall in the range from 97% to 110%. 28

30 Please note that the Low Return Scenario and the High Return Scenario shown above are illustrations only, and show what may occur under assumed future experiences which differ from our baseline assumptions. These scenarios do not, in any way, constitute upper or lower bounds and the actual future coverage of Vested Benefits may differ significantly from the range shown above, depending on actual future experience. In my view, the Trustee should be satisfied with the expected level of security over the next few years if the Employer contributes at the recommended levels. However, given the sensitivity of the Fund s financial position to future experience, I have recommended in Section that regular monitoring of the Fund s experience and financial position be undertaken to ascertain whether an adjustment to the recommended contribution program is required prior to the next complete investigation. It is also noted that Section 1.7 includes an illustration of the effect on the Actuarial Value of Accrued Benefits and the long term employer contribution rate (the estimated employer cost of future service benefits) of assuming a lower long-term earning rate. 29

31 4 Fund Design and Policies This section outlines the main characteristics of the Fund, including the design of the defined benefits, investment policy, crediting policy and insurance arrangements. 4.1 Background information The Fund is operated for the benefit of employees of John Wiley & Sons Australia Limited and is a part of Spectrum Super. The Trustee of Spectrum Super, IOOF Investment Management Limited, holds a Registrable Superannuation Entity Licence under the SIS legislation and operates the Fund as required under the Trust Deed. This report is provided for the Trustee and presents the results of the Actuarial Investigation of the Fund as at 30 June It has been prepared in accordance with the requirements of the Trust Deed, the SIS legislation and Professional Standard 400 of the Institute of Actuaries of Australia. The previous actuarial investigation was conducted as at 30 June 2009 by Paul Francis, on behalf of, and the results are contained in a report dated 13 October The Fund is a resident regulated fund and a complying superannuation fund for the purposes of the SIS legislation. The Fund is taxed as a complying superannuation fund. The advice contained in this report is given in the context of Australian law and practice. No allowance has been made for taxation, accountancy or other requirements in any other country. 30

32 4.2 Summary of benefits A summary of the main benefit provisions in respect of defined benefit members is set out below. A full description of the benefits provided by the Fund is set out in the Fund s Participation Agreement, as amended from time to time. Reference should be made to the formal governing documents for definitive statements. Members' Contributions (% of salary) Accrual Rate Final Average Salary (FAS) Deemed at a rate of 5% of salaries Category A: no remaining members Category B: 15% for membership to 30 April 1998, and 17.5% for membership after that date Category C: 12.5% for membership to 30 April 1998, and 15% for membership after that date Average of 3 highest salaries in the 10 years prior to the date of exit Normal Retirement Age 62 Early Retirement Age 57, with employer consent Member Account Member Voluntary Account Surcharge Account Vesting Factor Normal Retirement Benefit Death/Total and Permanent Disability Benefit Accumulation with interest of deemed member contributions Accumulation with interest of voluntary member contributions, less tax (where applicable) Accumulation with interest of any surcharge tax assessments 10% x membership, with a minimum of 40% and maximum of 100% Accrual Rate x Membership x FAS; plus Voluntary Member Account less Surcharge Account A lump sum calculated as if the member had retired at age 62, but assuming salary remains unchanged; plus Voluntary Member Account less Surcharge Account 31

33 Resignation Benefit Category A: Member s share of Fund as determined by the Actuary Categories B and C: Member Account x (1 + Vesting Factor) plus Voluntary Member Account less Surcharge Account Retrenchment Benefit Member s share of Fund as determined by the Actuary All benefits are subject to a minimum Superannuation Guarantee benefit described in the Fund s Benefit Certificate. The Superannuation Guarantee (Administration) Act 1992 This Act requires employers to provide minimum superannuation benefits that are fully vested in their employees within a complying superannuation fund. The contribution rates recommended in this report and the projected financial positions allow for benefits being augmented as necessary to meet the minimum Superannuation Guarantee (SG) benefit described in the Fund s current Benefit Certificate, which is based on an SG rate of 9%. The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Actuarial advice on the implementation and any impact of the change should be obtained. 4.3 Investment policy Assets backing accumulation benefit liabilities The Fund provides members with a range of investment options for their accumulation benefits (including the additional account balances of defined benefit members). The assets supporting the Fund s accumulation benefit liabilities are invested according to members selected investment options and the actual returns on those investments (whether positive or negative) are passed on to members via changes in the unit prices by which member account balances are determined. Thus the Fund s accumulation liabilities and related assets are matched. The Fund s investments are expected to provide a high level of liquidity in normal circumstances. I consider that the Fund s investment policy for assets relating to accumulation liabilities is suitable, having regard to the nature and term of these liabilities. 32

34 Assets backing defined benefit liabilities The Fund changed to a more conservative investment strategy with effect from 6 September 2011, which has the effect of reducing the future investment return assumption based on the current investment model. This change has been incorporated into the current valuation as at 30 June Fund assets were previously invested in the IOOF MultiMiix Balanced Growth Trust but have now been transferred into the IOOF MultiMix Conservative Growth Trust. The Conservative Growth Trust involves a benchmark 30% exposure to growth assets such as shares and property and a benchmark 70% exposure to defensive assets such as cash and fixed interest (refer to table below for benchmark investment allocation of these assets as at the investigation date). Growth assets are expected to earn higher returns over the long term compared to defensive assets, but at the same time to exhibit more variation in returns from year to year. Benchmark Asset Allocation Cash, 23.0% Australian Shares, 11.0% Overseas Shares, 9.0% Alternatives, 5.0% Property, 10.0%, Australian Fixed Interest, 42.0% The defined benefit liabilities (other than the SG minimum benefit) are not affected by the investment return on the Fund s assets. The volatility of the Fund s investment returns will therefore affect the financial position of the Fund from year to year (refer illustrations in section 3.7) and is likely to impact on the required level of Employer contributions (refer illustration in Section 1.7). Given that it is not known when members will take their benefit with certainty, the exact term of the Fund s liabilities is unknown. However, with the defined benefits having been closed to new members for some time now and a significant amount of retirement benefits due to become payable in the next few years, the projections carried out as part of this actuarial investigation indicate that a substantial reduction of defined benefit assets is expected over the next 4-6 years. The Fund s investments are expected to provide a high level of liquidity in normal circumstances. Hence we do not envisage any problem in being able to redeem assets to meet benefit payments as they arise. 33