The New Zealand Refining Company Pension Fund ANNUAL REPORT 2014
Contents Page Trustees Report The year in review 2 Trustees Certificate 3 Investment Returns 4 Actuarial Certificate 6 Report of the Independent Auditors on the Summary Financial Statements 7 Financial Summaries Statement of Changes in Net Assets 8 Statement of Net Assets 9 Statement of Cash Flows 10 Notes to the Financial Summaries 11 Trust Deed Amendments 12 Events After Balance Date 12 Member and Pensioner Statistics 13 Directory 14
Trustees Report The year in review 1 April 2013 31 March 2014 I am pleased to report, on behalf of the Trustees, on the fifty-first year of the Funds operations. Financial Performance The year ended 31 March 2014 delivered another strong financial performance, with returns from investments being consistent with last year, totalling $11.4 million (2013: $11.4 million). This represented a gross of tax and fees return for the Fund of 16.4% (2013: 17.6%), which is significantly higher than the long-term expected rate of return of 9.3% per annum (gross of tax and fees, which equates to an expected rate of return of 6% net of tax and fees). Our investment consultants, Mercer, have provided a commentary on the relative performance of each of the Fund Managers within this annual report. It is pleasing to note that the Fund s return was 3% above the Benchmark return of 13.4%. Actuarial Review The actuarial review as at 31 March 2013 was completed during the financial year and this showed that the Fund s modest surplus had increased from $0.5 million to $2.8 million. The results of the actuarial review are summarised in Mercer s Actuarial Certificate, included in page 7 of this report, a full copy of the Actuarial report has been posted on the Fund s web-site. Funding Rate Mercer s recommended to Trustees that the Company should continue to contribute at the maximum rate specified in the trust deed of 14% of members salaries (including contributions tax) and the Company has accepted this recommendation. Mercer advised that the Company contribution rate of 14% is not expected to be sufficient to fund members future benefits at the current level and the cost of these benefits is expected to be 17.3% of members salaries (including contributions tax). However the $2.8 million surplus will be sufficient to cover the difference between the 14% company contributions and 17.3% cost, if the experience of the Fund is in accordance with Mercer s assumptions until the next actuarial review (31 March 2016). Review of Fund In January 2012, the Company announced its intention to review the longer-term sustainability of the Fund. This review was completed during 2013 and resulted in the Company recommending additional options to enable more flexibility in the scheme. The recommendations were endorsed by the Trustees. The Trustees worked with the Company and advisors to amend the Trust Deed and implement the increased flexibility. As a result the revised Trust Deed, effective 7 April 2014, was issued. The amendments included in the Trust Deed are outlined on page 11 of this Report and a full copy can be obtained on the website. The revised Trust Deed has enabled the Trustees to make a cash out offer to Pensioners. This offer was made, effective 31 May 2014, and 59 pensioners opted to convert 100% of their pension entitlements to a cash lump sum and 11 pensioners converted 50%. This resulted in $7,158k being paid from the fund. The Trustees are now working with the Company to provide a cash out offer to current members. Trustees Following the departure of Ken Rivers, the Fund continues to operate with four Managing Trustees. The Financial Markets Conduct Act 2013 will require the appointment of an Independent Trustee by 1 December 2016. Details of the requirements and role of an Independent Trustee have yet to be finalised, however, they will be required to be licenced under the Financial Markets Conduct Act 2013. Membership changes Membership of the Fund at the end of March 2014 was 120, decreasing by 10 during the year. Three members resigned from company service, four members retired from company service, one member opted to take a deferred pension and two transferred to a disability pension. The Trustees would also like to extend their sympathies to the family of the deceased pensioners, Godard van Blommestein, Margery Adcock, Vera Blackman, and Netta Morgan. Overall pensioner numbers were 166 at the end of March 2014, an overall increase of four during the year. Best wishes to all On behalf of the Trustees, I wish all members and pensioners good health and happiness in the year to come. Regards Lisa Parkes Trustee 2
Trustees Certificate The Trustee s certify that: i) All contributions required to be made to the Fund in accordance with the Trust Deed have been received by the fund. ii) iii) iv) All benefits required to be paid by the Fund in accordance with the Trust Deed have been paid by the fund. A full actuarial report on the Fund was prepared as at 31 March 2013, which showed a positive funding position in respect of past service benefits. The rates of contributions paid by the Company have been maintained at the maximum required by the Deed (14%) in accordance with the recommendations contained in the applicable report of the actuary. The market value of the assets of the Fund at 31 March 2014 exceeded the total value of benefits that would have been payable had all members of the Fund ceased to be members at that date and had provision been made for the continued payment of all benefits being paid to members and other beneficiaries at that date. Denise Jensen Garry McRae v) At no time during the year ended 31 March 2014 was more than 10% of the assets of the Fund invested directly or indirectly in the share capital of The New Zealand Refining Company Limited. Lisa Parkes Margaret Pennington 3
Investment Returns Market Review Global equity markets rallied strongly over the twelve months, as investor confidence improved and economic growth in many large developed nations gathered a stronger footing. The big focus of the year was on the United State Federal Reserve (Fed) and the timing around when the Fed would start scaling back its quantitative easing programme. Global bonds struggled under the weight of stronger economic data and rising bond yields, as investors started rotating out of safe haven bond assets into equities. Domestically, the New Zealand economy continued to lead the developed world in respect of economic growth and monetary policy tightening. With the rebuild in Canterbury gaining momentum and construction of Auckland houses straining to keep pace with demand, the NZ economy is being well supported on the domestic front. GDP growth is approaching a 10 year high. The New Zealand sharemarket continued its strong run, with the first quarter of 2014 the 8th strongest quarterly return in two decades, a continuation of the bull market established in March 2009. With New Zealand s terms of trade at long-term highs, the New Zealand Dollar rose to near record highs against many of our main trading partners. Investment Managers The Fund Managers employed by the Fund as at 31 March 2014 for each asset class were: Trans-Tasman Equities Management Investors Global Equities Investors Global Listed Property Investors New Zealand Bonds Zealand Global Bonds Fisher Funds Management) Fund returns Harbour Asset AMP Capital AMP Capital AMP Capital ANZ New PIMCO (through The Fund s return (gross of tax and fees) was 16.4% for the financial year ended 31 March 2014. This was 3.0% above the Fund's benchmark return of 13.4%. On a net of investment management fees basis this placed the Fund in the upper quartile of the 30 funds surveyed in the Mercer KiwiSaver Survey (Growth Universe). On an absolute return basis, the best performing sectors were Global Equities (22.6%), Trans-Tasman Equities (20.3%) and Global Listed Property (11.5%). On a relative basis, all of your fund managers performed above or near their benchmarks with the exception of PIMCO (-0.6%) in the Global Bonds sector. The most notable outperforming manager was Harbour (+5.9%) in the Trans-Tasman Equities sector. 4
Investment Returns Investment returns The following chart summarises how the Fund's different assets have performed over the year relative to their benchmarks. Fund Manager Returns: March 2014 Financial Year Overall Fund 13.4% 16.4% Actual Benchmark New Zealand Bonds -1.9% -1.7% Global Bonds New Zealand Cash 3.1% 3.7% 3.8% 2.7% Global Listed Property 7.9% 11.5% Trans-Tasman Equities 17.5% 20.3% Global Equities 19.2% 22.6% -5% 0% 5% 10% 15% 20% 25% Gross Returns (before tax and fees) Asset Allocation Summary The following chart summarises the overall asset allocation of the Fund as at 31 March 2014. Sector Allocation Global Equity 47.8% NZ Cash 3.6% Trans-Tasman Equity 19.7% Global Bonds 7.2% NZ Bonds 7.1% Global Property14.6% 5
Actuarial Certificate Results of the last Actuarial Review We carried out the last formal actuarial review of the Fund as at 31 March 2013. The results of that review can be summarised as follows: Financial Position $000 s Value of assets 76,689 Actuarial value of accrued liabilities 73,901 Excess of assets over accrued liabilities 2,788 The results show that the Fund s surplus assets had increased and the Funded remained in a satisfactory financial position as at that date. However, the Fund s financial position is not strong enough to be able to support any recommendation for an increase in pensions. In addition, as part of our normal review procedures, we also looked at all the actuarial assumptions and made several changes. The principal assumptions used to calculate the value of the accrued liabilities were: Investment earnings: Salary increases: Pension increase rate: Mortality in retirement: 6% p.a. net of tax and investment expenses 3.5% p.a. No provision New Zealand Life Tables: 2010-12 less 2 years Company Contribution Rate Our recommendation to the Trustees from the 2013 review was that the Company should continue to contribute at the maximum rate specified in the trust deed of 14% of members salaries (including contribution tax) for the period until the results of the next review of the Fund as at 31 March 2016 become available. This recommendation was accepted by the Company. We also advised that the maximum Company contribution rate of 14% was not expected to be sufficient to fund members future benefits at the current level. The cost of these benefits is expected to be 17.3% of members salaries (including tax), which is above the maximum rate. However, due to the surplus assets that exist, if the experience of the Fund is in accordance with our assumptions, the Company will not be required to make further contributions to keep the Fund in actuarial balance (i.e. assets equal to the value of the accrued liabilities). Exchanging Pensions for Lump Sums When members retire, they may exchange part of their pension for a lump sum. The amount paid for each dollar of pension (known as the commutation rate ) is reviewed by the actuary as part of the formal review process. We recommended in both 2010 and 2013 that the commutation factors be changed so that the amounts paid as lump sums continue to reflect the value of the pensions being surrendered, as calculated using the latest actuarial assumptions. The Trustees accepted our recommendations. Robert Schoonraad, (BSc, FIA) Fellow of the New Zealand Society of Actuaries Mercer (N.Z.) Limited 16 June 2014 6
Report of the Independent Auditors on the Summary Financial Statements to the members of The New Zealand Refining Company Pension Fund The accompanying summary financial statements on pages 8 to 12 which comprise the summary statement of net assets as at 31 March 2014, the summary statement of changes in net assets, and the summary statement of cash flows for the year then ended, and related notes, are derived from the audited financial statements of The New Zealand Refining Company Pension Fund (the Fund ) for the year ended 31 March 2014. The summary financial statements do not contain all the disclosures required for full financial statements under generally accepted accounting practice in New Zealand. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements of the Fund. Our audit of the financial statements for the year ended 31 March 2014 was completed on 29 August 2014 and our unmodified opinion was issued on that date. We have not undertaken any additional audit procedures in relation to those financial statements from the date of the completion of our audit and those financial statements and the summary financial statements do not reflect the effects of events that occurred subsequent to the date of our report on those financial statements. This report is made solely to the Fund s members, as a body. Our audit work has been undertaken so that we might state to the Fund s members those matters which we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Fund s members, as a body, for our audit work, for this report or for the opinions we have formed. Trustee s Responsibility for the Summary Financial Statements The Trustees are responsible for the preparation and presentation of the summary financial statements in accordance with FRS-43: Summary Financial Statements ( FRS 43 ). Auditors Responsibility Our responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (New Zealand) 810: Engagements to Report on Summary Financial Statements. Other than in our capacity as auditors we have no relationships with, or interests in the Fund. Opinion In our opinion, the summary financial statements on pages 8 to 12 have been correctly extracted from the audited financial statements of the Fund for the year ended 31 March 2014 and are consistent, in all material respects, with those audited financial statements. Restriction on Use of our Report This report has been prepared for inclusion in the annual report. We disclaim any responsibility for reliance on this report or the amounts included in the summary financial statements, for any purpose other than that for which they were prepared. Chartered Accountants 19 September 2014 Auckland PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
Financial Summaries The Trustees are pleased to provide a financial summary for the year ended 31 March 2014. Statement of Changes in Net Assets For the year ended 31 March 2014 in New Zealand dollars 2014 2013 Investment activities Gains on financial assets held at fair value through profit or loss 11,300,002 11,325,195 Interest 123,224 52,915 Total revenue 11,423,226 11,378,110 Investment management fees 462,158 401,568 Actuarial 61,873 41,275 Auditor fees 15,456 17,050 Administration Refining NZ management fee 33,408 34,380 Other 107,598 109,140 Total expenses 680,493 603,413 Profit before taxation and membership activities 10,742,733 10,774,697 Income tax expense (1,223,617) (1,574,370) Profit after taxation and before membership activities 9,519,116 9,200,327 Membership activities Contributions Member contributions 739,988 755,043 Employer contributions 1,927,519 1,958,343 Withholding tax (635,334) (645,432) 2,032,173 2,067,954 Benefits paid Pensions 2,832,182 2,744,761 Pension commutation 301,763 988,647 Withdrawals 658,981 312,685 Total benefits paid 3,792,926 4,046,093 Net membership activities (1,760,753) (1,978,139) Net (decrease)/increase in net assets during the year 7,758,363 7,222,188 Net assets available for benefits at beginning of the year 76,689,295 69,467,107 Net assets available for benefits at end of the year 84,447,658 76,689,295 8
Financial Summaries Statement of Net Assets As at 31 March 2014 in New Zealand dollars 2014 2013 Assets Current assets Cash and cash equivalents 3,445,342 2,997,680 Accounts receivable 112,392 104,261 Total current assets 3,557,734 3,101,941 Non current assets Investments AMP Capital Investors 60,161,158 47,031,204 ANZ New Zealand Investments Limited (formerly OnePath) 6,075,069 5,366,386 Fisher Funds Management Limited (formerly Tower) 6,118,383 8,940,262 Harbour Asset Management Limited 8,601,910 12,351,063 Total investments 80,956,520 73,688,915 Deferred tax asset 1,041 8,179 Total non-current assets 80,957,561 73,697,094 Total assets 84,515,295 76,799,035 Liabilities Current liabilities Other payables 67,637 109,740 Total liabilities (excluding net assets available for benefits) 67,637 109,740 Net assets available for benefits 84,447,658 76,689,295 The Trustees of the New Zealand Refining Company Pension Fund authorised these Financial Statements for issue on 29 August 2014. For and on behalf of the Trustees: D M Jensen Trustee L D Parkes Trustee 9
Financial Summaries Statement of Cash Flows For the year ended 31 March 2014 in New Zealand dollars 2014 2013 Cash flows from operating activities Cash provided from: Membership contributions 739,862 753,651 Employer contributions 1,926,850 1,954,479 Less withholding tax (635,117) (644,159) Interest received 128,234 32,915 Total cash inflows from operating activities 2,159,829 2,096,886 Cash applied to: Benefits paid 3,133,945 3,733,408 Refunds to members (or withdrawals) 658,981 312,685 Other expenses 254,645 432,258 Investment management fees 14,596 29,666 Total cash outflows from operating activities 4,062,167 4,508,017 Net cash used in operating activities (1,902,338) (2,411,131) Cash flows from investing activities Cash provided from: Sale of investments/recall from investment managers 2,350,000 4,620,000 Total cash inflows from investing activities 2,350,000 4,620,000 Net increase in cash held 447,662 2,208,869 Cash at the beginning of the year 2,997,680 788,811 Cash at the end of the year 3,445,342 2,997,680 10
Notes to the Financial Summaries (a) (b) (c) (d) (e) (f) The New Zealand Refining Company Pension Fund is a defined benefit superannuation scheme registered in New Zealand under the Superannuation Schemes Act 1989 (registration number 2301) to provide retirement benefits to the employees of The New Zealand Refining Company Limited and is profit oriented.. The specific disclosures included in this summary financial report have been extracted from the full financial statements as at 31 March 2014, issued 29 August 2014, and there have been no changes from the full financial statements. This summary financial report complies with FRS-43 Summary Financial Statements. These financial statements are presented in New Zealand dollars ($), which is also the Fund s functional currency, rounded to the nearest dollar. This summary financial report, although detailed, cannot be expected to provide as complete an understanding of the results as the full financial report would. Persons requiring a copy of the full financial report may obtain one from the Companies office website at www.companiesoffice.govt.nz or by contacting the fund administrator and requesting a copy at no charge. The full financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand. They comply with New Zealand equivalents to International Financial Reporting Standards and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements also comply with International Financial Reporting Standards. The Fund is a reporting entity for the purposes of the Financial Reporting Act 1993 and its financial statements comply with that Act. The full financial statements have been audited by PricewaterhouseCoopers New Zealand. An unqualified opinion has been issued by them on the 29 August 2014. For a better understanding of the Fund's financial position and results of operations for the year, the summary of the financial statements should be read in conjunction with the related audited financial statements. The summary financial statements presented in this publication are consistent with the full Annual Report. (g) Accrued benefits are per the Actuarial Certificate. Vested benefits as at 31 March 2014 total $58,688,407 (2013: $56,903,772). (h) The New Zealand Refining Company Limited has charged a management fee for fund administration, totaling $33,408 (2013: $34,380). 11
Trust Deed Amendments The Managing Trustees and Company replaced the Ninth Trust Deed with a revised Trust Deed, dated 7 April 2014 (the Tenth Deed). The following changes were made to the Trust Deed: Commutation - Members now have the option to commute up to 100% of their pension to a cash lump sum at retirement (previously Category A members were able to commute up to 50% and category B members up to 25%). Pensioner Cash Out Offer The Managing Trustees, with the written consent of the Company, have the ability to offer each Pensioner to commute for a cash lump sum up to 100% of their pension payable on such terms and conditions as the Managing Trustees shall specify. Member Cash Out Offer - The Managing Trustees, with the written consent of the Company, may make a one off written offer to each Member to cash out up to 100% of their Members Accumulated Contributions paid in up to the Effective Date, plus interest as determined by the Managing Trustees. Hardship Clause A hardship withdrawal clause has been introduced. Under this clause, if a member is suffering, or is likely to suffer from significant financial hardship, the Member may apply to the Managing Trustee for a Hardship Withdrawal from the Fund. The withdrawal may, subject to approval of the company, be up to 100% of the Members Accumulated Contributions paid (plus interest as determined by the Managing Trustees). Remuneration of Trustees The Managing Trustees may, with prior approval of the Company, determine and pay appropriate remuneration to a Managing Trustee who is not an employee of the Company (including an Independent Trustees) out of the Fund. Appointment of Independent Managing Trustee The Company continues to appoint Managing Trustees. The Trust Deed has been amended to allow the Company to appoint an Independent Trustee, subject to any statutory or regulatory requirement. An Independent Trustee is defined as a Managing Trustee who is independent as defined by section 131 of the Financial Markets Conduct Act 2013 and whose licence covers the Fund. The Managing Trustees and Company approved an Amendment, dated 23 April 2014, to the Trust Deed to correct two minor drafting errors. Events After Balance Date The Trust Deed was amended in April 2014 as outlined above. Pursuant to these amendments the Managing Trustees provided Pensioners a cash out offer, under clause 14(4) of the Trust Deed. The cash out offer provided Pensioners the opportunity to convert 100%, or in some instances 50%, of their pension entitlements to a cash lump sum, effective 31 May 2014. 70 Pensioners accepted the cash out offer (59 converting 100% of their pension and 11 converting 50% of their pension to a lump sum) resulting in cash payments totalling $7,158k. Those Pensioners who converted 100% of their entitlements ceased to be a member of the Plan at the date of the cash payment. On 13 June 2014 the Managing Trustees introduced an additional investment manager, Colonial First State Investments. The Managing Trustees invested $6,200,000 in the First State Global Listed Infrastructure fund to provide diversification of the global listed property portfolio. 12
Membership Statistics Membership Year Ended 31 March 2014 31 March 2013 Membership at start of year 130 134 Less members: Resigned (3) (1) Retired (4) (2) Disability pension (2) (1) Deferred pension (1) - Membership at end of year 120 130 Pensioners Year Ended 31 March 2014 31 March 2013 Pensioners at start of year Pensioners 118 119 Spouses 41 41 Deferred 3 3 162 163 Add new: Pensioners 7 2 Spouses - 2 Deferred 1 - Less: Deceased (1) (3) Full commutation of spousal pension - (1) Spouses deceased (3) (1) Pensioners at end of year 166 162 Pensioners 124 118 Spouses 38 41 Deferred 4 3 166 162 13
Directory Managing Trustees: Investment Managers: Administrator: D M Jensen G J McRae L D Parkes M C Pennington AMP Capital Investors (New Zealand) Limited ANZ New Zealand Investments Limited (formerly OnePath) Fisher Funds Management Limited (formerly Tower) Harbour Asset Management Limited Colonial First State Investments (from 13 June 2014) S M Dyke Address: Private Bag 9024 Whangarei 0148 Email Address: Actuary: Auditors: Solicitors: Banker: pension@refiningnz.com Mercer (N.Z.) Limited PricewaterhouseCoopers MinterEllisonRuddWatts ANZ Bank New Zealand Limited Telephone: Whangarei (09) 432 8311 Facsimile: Whangarei (09) 432 8035 Website: www.refiningnz.com/site Log on: pension Password: nzrcpensionfund 14