www.pwc.com.au Munich Holdings of Australasia Pty Limited Superannuation Scheme Annual actuarial review as at 31 December 2017 PricewaterhouseCoopers Securities Ltd ACN 003 311 617 ABN 54 003 311 617 Holder of Australian Financial Services Licence No 244572 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO BOX D198 PERTH WA 6840 T: 61 8 9238 3000, F: 61 8 9238 3999, www.pwc.com.au
Contents Main report Page 1 Executive summary 3 2 Results 7 3 Data and experience 13 4 Assumptions 17 5 Limitations and reliance 22 Appendices A Benefit summary 25 B Method 27 C Funding policy 28 D Assumptions 30 E Investment arrangements and performance 32 F Insurance 34 G Scheme compliance 35 H Actuarial statements 36 2
Executive summary 3
Executive summary This report is provided to meet the Trustee s legislative and compliance requirements as at 31 December 2017 Trustee Scheme Company Purpose and scope Legislation and governance Statement of compliance Towers Watson Superannuation Pty Limited Munich Holdings of Australasia Pty Limited Prepared for the Trustee to satisfy its obligations under the relevant legislation and regulations, in particular SPS160, in accordance with our letter of engagement dated 15 December 2017 The effective date of this report is 31 December 2017 The previous report, effective date 31 December 2016, was prepared by Janice Jones and was dated 19 June 2017 The next report, effective date 31 December 2018, must be prepared by 30 June 2019 Superannuation Industry (Supervision) Act 1993 Prudential Standard SPS 160: Defined Benefit Matters (July 2013) The Scheme is governed by the consolidated trust deed and rules dated 12 April 2006, along with amending deeds dated 14 February 2007 and 25 February 2010 Accumulation assets and liabilities are not covered by this report, except where noted Our advice to you constitutes Prescribed Actuarial Advice as defined in the Code of Professional Conduct (the Code) issued by the Institute of Actuaries of Australia and our advice complies with the Code in this respect The figures in this report are calculated in accordance with AASB1056 which replaced AAS25 from 1 July 2016 The report has been prepared in accordance with Professional Standards 400, 404 and 410, issued by the Institute of Actuaries of Australia Reliance and limitations See Section 5 for the reliance and limitations for the use of this report Janice Jones FIAA Retirement Incomes and Asset Consulting Authorised Representative (#283988) of PricewaterhouseCoopers Securities Ltd Catherine Nance FIAA Retirement Incomes and Asset Consulting Authorised Representative (#265248) of PricewaterhouseCoopers Securities Ltd Date: 20 4
Executive summary The Scheme as a whole is in a satisfactory position with assets of $59.3 million and accrued liabilities of $55.3 million 1 Measure Defined benefit section experience over the year Comments Net investment returns were higher than expected for the pension assets, 5.2% actual compared to 4.0% expected; and for the active member assets, which are taxed, 4.5% actual compared to 3.5% expected Pension indexation of 1.9% and salary increases of 0.0% were both lower than assumed (2.5% and 4.0% respectively) Five active members became pensioners and were paid their lump sum benefits during the year, which was more than expected. However, there was no pensioner deaths over the year, compared to the expectation of around one per year 2 Assumption changes No changes to the valuation economic or demographic assumptions since last year The Commutation Factor Policy (Lump Sum Benefits) was updated during 2017, with the discount rate reducing from 7.0% to 6.5% to be consistent with the valuation assumptions. The accrued liabilities for the three remaining active members increased by $0.036 million (2%) as result, with no material impact on funding position of the Scheme 3 Funding position for defined benefit section The vested benefit ratio remains at 116% (target 110-120%) The discounted accrued retirement benefits ratio fell from 115% to 114% (target 100-115%) The funding position is projected to remain at the upper end of the target range during the next five years provided investment returns are at least as assumed and Scheme expenses met by the Company (from 2019) Expenses are assumed to be $600,000 per annum (after any tax deductions) based on recent experience and Trustee guidance. If the Scheme meets these expenses from its assets rather than Company contributions then the funding position is projected to decline to 102% after 5 years (if investment returns as assumed) 5
Executive summary Key recommendation is Company contributions to increase to meet Scheme expenses as incurred from 1 January 2019, estimated Company contributions of $0.7 million for 2019 1 Matter Employer Contributions Recommendations Given the funding position remains within the Trustee s target range The Company s contribution rates for active members (% salary) continue Category A, A1 and A2: 29.3% Category B, B1 and B2: 34.8% Deemed member contribution: 2.206% These contributions for the remaining three members are less than $0.1 million p.a. Also, to maintain the funding position over the next five years The Company to recommence contributing to cover Scheme expenses as they are incurred, from 1 January 2019. This is estimated at $0.6 million p.a. The estimated gross contribution by the Company for 2019 is then $0.7 million 2 Contributions and Funding Policy The long-term funding costs going forward will primarily reflect the experience of the pensioners and the Scheme s expenses, rather than the contributions required for the remaining active members We suggest Trustee consideration of determining the Company's funding costs as a dollar amount sufficient to maintain a specified funding target, and revising the Funding Policy accordingly 3 Commutation Factor Policy The Scheme s Commutation Factor Policy applies investment assumptions to value the portion of benefits that are paid as a lump sum The Policy was updated during 2017, consistent with the Trustee s review of its Investment Governance Framework during 2016 and the current actuarial valuation assumptions 6
Results 7
Funding position The defined benefit section is in a sound funding position, with reserves of $3.8m, or 14% of liabilities, to provide a margin against the risk of adverse experience Vested benefits 35.000 Discounted accrued retirement benefits 35.000 30.000 4.327 30.000 3.838 $ million 25.000 20.000 15.000 10.000 25.479 1.700 31.506 $ million 25.000 20.000 15.000 10.000 25.479 2.189 31.506 5.000 5.000 0.000 Pensioner members Active members (VB) Reserves (VB) Net assets 0.000 Pensioner members Active members (DARB) Reserves (DARB) Net assets In my opinion, the financial position of the Scheme is not, and is not about to become, unsatisfactory In my opinion, the assets of the Scheme are adequate to cover the value of the accrued liabilities as at 31 December 2017 The minimum requisite benefit in respect of superannuation guarantee contributions (accumulated at the Scheme s earning rate) is $0.639 million excluding voluntary accumulation accounts (advised by Willis Towers Watson), which is more than covered by the assets available for active defined benefit members The reserves over discounted accrued retirement benefits are $3.8 million, 14% of the total liabilities of $27.7 million, and 12% of total assets including reserves of $31.5 million 8
Vested benefits The vested benefit (VB) index has remained at 116% and is within the VB index target range of 110%-120% Vested Benefits liabilities and index Commentary 40 35 The VB index measures the extent to which vested benefit entitlements are covered by the assets $ million 30 25 20 15 10 4.327 1.700 25.479 4.743 7.288 21.504 Reserves Active members (VB) Pensioner members The VB index of 116% is within the Trustee s target range of 110% to 120% The Trustee s target range is set at a level to maintain a buffer against adverse experience For pensioners, the current pension in payment is valued at the present value of expected future payments 5 0 31 December 2017 31 December 2016 For active members, the vested benefit is the benefit payable if the member voluntarily resigned on 31 December 2017 VB index 116% 116% The VB index has not moved over the year, as the impact of less than expected deaths during the year and assets used to pay Scheme expenses, were offset by the favourable investment returns, lower indexation and early retirements. 9
Discounted accrued retirement benefits The discounted accrued retirement benefit (DARB) index has fallen from 115% to 114% and is within the funding target range of 100%-115% DARB liabilities and index Commentary 40 35 30 25 3.838 2.189 4.470 7.561 The DARB index measures the extent to which retirement benefit entitlements are covered by the assets, and is also known as the Funding Ratio The DARB index of 114% is within the Trustee s target range of 100% to 115% $ million 20 15 10 25.479 21.504 Reserves Active members (DARB) Pensioner members The Trustee s target range is set at a level to maintain a buffer against adverse experience For pensioners, the current pension in payment is valued at the present value of expected future payments 5 0 31 December 2017 31 December 2016 DARB index 114% 115% The DARB index has declined slightly over the year, primarily due to the less than expected deaths during the year and assets used to pay Scheme expenses, offset by the favourable investment returns, lower indexation and early retirements. For active members, the discounted accrued retirement benefit is the greater of: - The present value of the member s accrued early retirement benefit - The present value of the member s accrued normal retirement benefit 10
Changes in the Scheme s defined benefit reserves The Scheme s reserves fell from $4.5 million to $3.8 million, primarily due to the unfavourable membership experience and Scheme expenses being met from reserves Change in reserves over the year Commentary The contributions (+$0.214 million) offset the cost of accrual (-$0.213 million) The reserves earned $0.162 million, and the Scheme assets had higher than expected returns ($0.292 million) resulting in a net increase of $0.454 million in the reserves Expenses ($0.547 million) were paid from the Scheme s assets, as agreed with the Actuary last year Membership experience had a negative impact on the reserves (-$0.504 million) as there were no pensioner deaths in the year which is fewer than expected The change in Commutation Factor Policy basis served to slightly improve active member benefits, reducing reserves by $0.036 million 11
Outlook Provided the Company meets the Scheme expenses from 2019, the Scheme has sufficient reserves to protect its solvency for a few years even if returns are up to 2% pa less than expected but not enough to withstand a major investment shock (e.g. 10% pa lower than assumed in first year, i.e. -6% pa) Projections to 2022 The projections below show the Funding Ratio applying the assumed investment returns of 4% p.a. (before tax) and a range of different returns: 140% 130% 120% 110% 100% 90% 80% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 +/- 1% pa +/- 2% pa Target range As assumed Shock scenario Historic The shock scenario is -6% return in 2018 and -1% in 2019, before reverting to +4% pa (before tax) from 2019 to 2021 Commentary If the investment earnings are 2% pa lower than assumed for 5 years, the Funding Ratio would decline to around 102% In the shock scenario the Funding Ratio falls below 100% during 2019 However, given the relatively low risk investment portfolio, the current reserves provide a margin to protect against weaker short-term investment performance. Sustained or significant losses will require Company intervention to protect solvency Contribution recommendation Applying the Funding Policy I recommend that the Company contribution rates are: - Category A, A1 and A2: 29.3% salaries - Category B, B1 and B2: 34.8% salaries - Deemed member contributions: 2.206% salaries - Expenses: Met from 1 January 2019, estimated $600,000 per annum This to be reviewed next year in light of experience June 2017 12
Data and experience 13
Membership Overall membership experience during 2017 had a slight negative effect on the Scheme s funding position Age profile (age next birthday) Membership summary Active members Pensioner members Male Female Number of members 3 35 Average age 57.3 72.9 100 and over 95 to 99 90 to 94 85 to 89 80 to 84 75 to 79 70 to 74 65 to 69 60 to 64 55 to 59 50 to 54 45 to 49 40 to 44 Under 40 χ Average past service 28.6 years Average salary / pension $89,000 $38,085 Total salary / pension $0.267 million $1.334 million Experience summary Salaries of continuing active members increased by 0.0% during 2017, less than the 4.0% assumed Pensions in payment were increased by 1.9% from 1 January 2018, less than the 2.5% assumed Five active members retired during the year, compared to two to three expected No pensioner members died during the year, compared to one expected 6 4 2 0 2 4 6 Pensioner members Active members All Scheme data was provided to us by Willis Towers Watson and prepared by the Scheme administrator, Link 14
Assets The assets of the Scheme decreased slightly over the last year, due to benefit payments and expenses, even though investment returns were higher than expected All figures in $ million 31 December 2017 31 December 2016 Net market value of total assets 59.306 1 61.988 2 Less Accumulation member assets (including defined benefit member accumulation accounts) 27.615 28.275 Operational risk financial requirement 3 0.185 0.177 Leaving Assets available for defined benefits 31.506 33.535 In 2017, the net investment returns reported by Willis Towers Watson were higher than assumed in last year s valuation: Active (taxed): 4.5% actual vs 3.5% assumed Pensioner (untaxed): 5.2% actual vs 4.0% assumed Sourced from: (1) 2017 Signed Financial Statements provided by Willis Towers Watson on 27 March 2018 (2) 2016 Financial Statements provided in 2017. Note that the 2017 financial statements amended the presentation of the 2016 results. (3) Including accumulation assets, the operational risk financial requirement holding is 0.31% of assets, above the target of 0.25%. 15
Other experience Expenses were met from the Scheme assets during 2017, as was recommended last year The Scheme s investment governance framework was updated in March 2018 As the Trustee s real return objectives were retained at 1.0% pa real (in excess of Consumer Price Index inflation) for assets backing active members and 1.5% pa real for asset backing pensioner members over rolling 10 year periods, the update has no impact on this valuation We have also shown five year projections on a range of returns Crediting rate policy The crediting rate policy is incorporated within the investment governance framework We reviewed the policy within the March 2018 investment governance framework and find it appropriate with regard to the management of the Scheme s liabilities and equity between members Other Contributions were paid as recommended Expenses were met from Scheme assets as recommended Actual expenses ($0.547 million) were higher than assumed ($0.500 million) Since 1 January 2018 Investment returns to 31 March 2018 were 0.3% compared with the return objectives of 1.0% (gross of tax) for the period 16
Assumptions and Risks 17
Summary of key assumptions The only change to the key assumptions since 31 December 2016 is that the Company will recommence contributing to meet the Scheme expenses from 1 January 2019 Assumption 31 December 2017 31 December 2016 Pension indexation 2.5% pa 2.5% pa Salary increases 4.0% pa 4.0% pa Net investment return (active) 3.5% pa 3.5% pa Net investment return (pensioner) 4.0% pa 4.0% pa Active member withdrawal rates (retirement or resignation) 0% under age 60 20% of age 60-64 100% if 65 or older 0% under age 60 20% of age 60-64 100% if 65 or older Pre-retirement mortality rates Nil Nil Post-retirement mortality rates Expenses 60% of ALT 2010-2012 at age 55 increasing to 100% of ALT 2010-2012 at age 100, with 25-year mortality improvements $0.600 million pa (net) Met by Company contributions from 1 January 2019 60% of ALT 2010-2012 at age 55 increasing to 100% of ALT 2010-2012 at age 100, with 25-year mortality improvements $0.500 million pa (net) Met from Scheme assets Group life premium costs 0.3% salaries 0.3% salaries 18
Risks Key risks faced by the Scheme Economic risk The ongoing financial position of the Scheme is impacted by general economic conditions such as interest rates and inflationary expectations, as they impact the experience compared to the assumptions In order to ensure that the Scheme has a margin to buffer any adverse short-term movements in market conditions and any adverse mortality experience (fewer deaths than expected), a target DARB ratio of up to 115% remains appropriate We note a decline in the ratio to 100% is likely to mean the Scheme is also close to its Shortfall Limit and additional contributions would be recommended to restore a larger margin. Investment risk If there is a substantial change in the value of the Scheme s defined benefit assets, the solvency position may change significantly The projections indicate that the Scheme can withstand subdued returns (of the order of 2% pa before tax) for three years and still maintain suitable coverage of the DARB However continued under-performance, or a single investment shock, could lead to the Scheme failing the solvency test at a future date Longevity risk The Scheme is exposed to material longevity risk, that is, an increasing life expectancy of pensioners would lead to an additional requirement for assets to ensure that pension payments can be made for life Legislative risk Due to continuing budget pressures and an ageing population, we expect further attention on the regulation and taxation of superannuation over the coming years We believe the current mortality assumptions are sufficiently conservative for the purposes of the valuation but note the small number of pensioners means experience will not follow assumptions in any one year 19
Risks, continued Company support may be required to ensure pension benefits remain fully funded into the future The defined benefit section of the Scheme is likely to be entirely pensions in payment within a few years and the Company will no longer be contributing on behalf of active employees. Any adverse experience from the economic and/or longevity risks discussed on the previous page would mean the Scheme s funding position deteriorates. Additional Company contributions may then required to ensure the Scheme continues to have sufficient assets to meet its target funding of 100% to 115% of accrued benefits. On the basis the Scheme continues as is, with Company support, the current pensions in payment have been valued at $25.479 million, applying the current valuation assumptions (see page 18). In the event the Company wished to remove the requirement for ongoing financial support, the Trustee could purchase equivalent lifetime annuities from a commercial provider. The market value of the pensions would be determined by the annuity provider applying their own assumptions and commercial terms, and the purchase value would likely be higher than this valuation. We have broadly estimated indicative market values by assuming a discount rate of (i) 2.5% pa (i.e. nil real return) and (ii) 1.5% pa (i.e. negative 1% real return) to reflect more conservative assumptions and a profit margin. The resulting estimated value ranges from $31 million to $36 million, that is, in the order of 20% to 40% higher than the funding value. At these levels, the Scheme would be unlikely to have sufficient assets and would require Company contributions (as a lump sum) to fund the purchase. At this time, the Company has indicated its ongoing support of the Scheme and capacity to contribute if required ensure the Scheme s funding targets continue to be met. We have therefore assumed pensioner members will remain in the Scheme and the valuation assumptions remain appropriate. 20
Sensitivities The results are sensitive to investment earnings and pension indexation (CPI). With only three active members, all nearing retirement, the salary inflation assumption has little impact. Assumption Current valuation Sensitivity 1 Impact on DARB liability $27.668 m Base Value Pension indexation 2.5% + 1.0% pa (to 3.5% pa) Salary increases 4.0% + 1.0% pa (to 5.0% pa) Net investment returns 3.5% active / 4.0% pensioner + 1.0% pa (to 4.5% pa active / 5.0% pa pensioner) + $3.741 m / + 14% + $0.177 m / + 1% - $3.173 m / - 11% Post-retirement mortality rates 60% of ALT 2010-2012 at age 55 increasing to 100% age 100 20% lower (to 40% of ALT 2010-2012 at age 55 increasing to 80% age 100) + $1.754 m / + 6% 1. The sensitivities shown here are to illustrate the relative impact of a change on the DARB liability, and do not represent upper or lower bounds on the range of possible assumptions 21
Limitations and reliance 22
Limitations and reliance This report is not intended to be read or used by anyone other than the Trustee of the Munich Holdings of Australasia Pty Limited Superannuation Scheme (the Trustee). We prepared this report solely for the Trustee s use and benefit in accordance with and for the purpose set out in our engagement letter with dated 5 December 2017. In doing so, we acted exclusively for the Trustee and considered no-one else s interests. We accept no responsibility, duty or liability: to anyone other than the Trustee in connection with this report to the Trustee for the consequences of using or relying on it for a purpose other than that referred to above. We make no representation concerning the appropriateness of this report for anyone other the Trustee. If anyone other the Trustee chooses to use or rely on it they do so at their own risk. This disclaimer applies: to the maximum extent permitted by law and, without limitation, to liability arising in negligence or under statute; and even if we consent to anyone other than the Trustee receiving or using this report. We have relied on a range of external sources for data. As a result, we are unable to guarantee the accuracy of the data contained in this report. In particular, all membership, asset, investment and accounting information is based upon data as at 31 December 2017 provided by Willis Towers Watson. We have undertaken some reasonableness checks of this data, but ultimately we rely on the accuracy of all data provided to us for the purpose of this review. If there are any material differences between the information set out in this report and the actual circumstances of the Scheme, the opinions provided in this report may not be valid and the actuary should be informed as soon as possible. The advice contained in this report is based on the circumstances of the Scheme as a whole. It does not take into account the specific circumstances of any individual. Past performance is no guarantee of future performance and investment markets are volatile. PricewaterhouseCoopers Securities Ltd does not guarantee that any specific level of returns will be achieved. June 2017 23
Appendices 24
Appendix A - Benefit summary The Scheme provides a combination of defined benefits and accumulation benefits. This report only covers the defined benefits, which are a combination of lifetime pensions and lump sums. The benefits are set out in the trust deed and rules, but the key elements in relation to this report are summarised below. Defined benefit members may also have accumulation accounts payable Membership Contributions Normal retirement benefit The defined benefit section is closed to new members Active defined benefit members are in one of six categories: A, A1, A2, B, B1, B2 There are no remaining members in categories A or B After-tax member contributions are 1.875% (or 2.206% if made by the Company on the member s behalf) Company contributions are the balance of the cost of providing benefits at the rate determined by the Actuary or as agreed by the Company and the Trustee Members can also make additional voluntary contributions to an accumulation account Normal retirement age is 65 Pension benefit is a percentage of salary for each year of service (category A1 and A2 / B1 and B2): - Pre 1989: 1.8% / 1.8% - 1989 to 2000: 1.5% / 2.0% - Post 2000: 1.8% / 2.0% Maximum of 35 years service and overall maximum of 70% of salary Salary is that paid immediately prior to retirement with a minimum of the salary at age 62 years Early retirement benefit Pensions Minimum benefit A member who retires at any time between age 55 and their NRD with at least 10 years of employment (or, with company consent, at any time due to ill health), is entitled to receive an annual pension benefit equal to: If less than 35 years service Completed service to date of early retirement ANRP R Total Potential Service to NRD If 35 or more years of service ANRP x R Where R = (480-x)/480 x = number of complete months from early retirement date to normal retirement date, subject to a maximum of 120 The pension benefit is paid as 50% commuted lump sum and 50% indexed pension Annual pension indexation is in line with Consumer Price Index, subject to a maximum of 5% each year If a pension member dies within five years of first receiving the pension, the balance is payable: - If no dependants, as a lump sum - If dependants, at 100% of the pension until the 5th anniversary, then at 62.5% thereafter to the members spouse and 12.5% to each dependent child (up to a maximum of three) The benefits payable by the Scheme for any reason are subject to a minimum benefit to ensure compliance with SG legislation 25
Appendix A - Benefit summary (continued) Leaving service benefit A member who otherwise leaves is entitled to receive a lump sum benefit equal to: If the member is aged less than 55 If the member is aged at least 55 If a member has completed 35 years of service 75% Complete service to date of leaving ANRP F V Total Potential Service to NRD Complete service to date of leaving ANRP F R Total Potential Service to NRD Complete service to date of leaving Total Potential Service to NRD = 1 Where F = commutation factor used to commute the pension benefit to a lump sum at age 55, as determined by the Actuary V = (1.04)-n n = complete years and complete months from date of leaving to date of 55th birthday Where F = commutation factor used to commute the pension benefit to a lump sum at the age of leaving, as determined by the Actuary R = (480-x)/480 x = number of complete months from retirement date to normal retirement date If a member has completed 35 years of service, then the service ratio simplifies to unity for the purposes of calculating a leaving service benefit More information For more information on the Scheme s benefits refer to the Scheme s Trust Deed and Rules. 26
Appendix B - Method Active members Accrued benefits The past membership component of all benefits payable in the future was calculated on a pro-rata basis, where the accrued retirement multiples are the product of: - Normal retirement pension multiple Pensioner members Present value of expected future pension payments, after allowing for the latest 1 January indexation of pension amounts - Past membership at the valuation date divided by potential membership to normal retirement date The current final pensionable salary of each member was inflated to the expected date of leaving service, and multiplied by the accrued retirement multiple The future benefit was then discounted to a present value using the assumptions detailed in this report Active members Vested benefits The active member vested benefit entitlements are those benefits payable if all active members voluntarily resigned or retired (where eligible) as at the valuation date Pensioner members Present value of expected future pension payments, after allowing for the latest 1 January indexation of pension amounts 27
Appendix C - Funding policy The Scheme s funding policy is set out in full in the policy documentation dated June 2013. Contributions whilst funding positions is within the target range If the DARB ratio falls within the target range (100% - 115%), then the Company will be required to pay the normal contribution rate for each accumulation and defined benefit member, member contributions for each defined benefit member (2.206% of salary before tax) and the expected Scheme expenses The normal contribution rate for defined benefit members is determined for each category as the contribution required to fund the future service liability with no allowance for expenses but with an allowance for group life premiums To mitigate the financial impact of future adverse experience on the funding position and future Company contribution rate we allow a 15% margin on the present value of future service liability, consistent with the upper end of the target range for coverage in the funding policy The resulting standard contribution rate for each category is: Category Company contributions (% salary): Category A, A1, A2 Category B, B1, B2 Deemed member contributions (% salary) Given the small number of active members at 31 December 2017 (3) we have not updated the normal contribution rate calculations with this review Contributions whilst funding positions is above the target range If the DARB ratio is above 115%, the Company may reduce contributions until the DARB ratio falls back to 115% Alternatively, the Company may continue to contribute at the normal contribution rate in order to build up additional reserves Contributions whilst funding positions is below the target range Contribution rate 29.3% pa 34.8% pa 2.206% pa If the DARB ratio falls below 100%, the Company will make additional contributions spread over a period of up to three years such that the DARB ratio will be expected to return to above 100% 28
Appendix C - Funding policy (continued) Funding pensions in payment Typically when a superannuation fund has both pensioners and active members, the pensioner liabilities have first call on the fund assets. Therefore Company contributions are generally determined in relation to the active member liabilities as a percentage of active member salaries, as has been the case for this Scheme. As the Scheme is closed to new defined benefit members, eventually there will be only pensioner members and no active members. While this may not be the case for some 10 years, it is possible that all the active members will resign or retire in a much shorter time frame. From that point, the Company will only be responsible for pension liabilities but may have to make further contributions from time to time to maintain a satisfactory funding position. The Superannuation Legislation Amendment Act 2010 (dated 16 November 2010) inserted new clauses into the Income Tax Assessment Act 1997 (section 290-85) with the intention that Company contributions made to fund the defined benefit pension liabilities of past employees would be deductible subject to certain conditions. When there are no longer any active defined benefit members and if a funding contribution is required, the Company should ascertain their tax position in accordance with the legislation then in force. 29
Appendix D - Assumptions Pension indexation Salary increases Investment returns The Reserve Bank of Australia s target is to keep Consumer Price Index inflation in the range of 2-3% pa We have used a pension indexation rate of 2.5% pa, which is consistent with the mid-range of the RBA target The Company has confirmed their medium term salary inflation expectation for these employees is in the order of 4% pa Mortality Active member decrements Expenses Industry research indicates that people with defined benefit pensions have a lower mortality (and higher life expectancy) than the general population The Scheme s membership is more likely to be in the higher socio-economic status, which also corresponds to lower mortality rates than the general population It is appropriate to apply a further reduction to the Australian mortality tables to allow for these points Whilst we have limited experience due to the small number of pensioners, recent experience suggests that the mortality basis assumed has not been unreasonable No new entrants There are only three remaining active members, all 54 or older, so the active member decrements aren t material assumptions The previously assumed withdrawal rates have been maintained for this valuation Where an active member is married the actual age of the spouse is used for the reversionary pension component We have assumed there will be - Nil resignations prior to age 60-20% retirement pa ages 60-64 - 100% retirement at or over age 65 We have assumed that there are no deaths before retirement The Trustee s investment objective is real returns (net of tax and investment expenses) of 1.0% pa for active member assets and 1.5% pa for pension assets This implies nominal returns of 3.5% pa for active members and 4.0% pa for pensioner members 4.0% pa is therefore the objective return before tax and after investment expenses as the pensioner assets are subject to a 0% tax rate Based on the expenses in 2017 and guidance from the Trustee, we have assumed expenses of $600,000 pa after any tax deductions The expenses are assumed to increase in line with the Consumer Price Index 30
Appendix D Assumptions (continued) Active members Salary inflation Spouse Entrants 4.0% pa Actual spouse data No new entrants Exits Nil resignations prior to age 60 20% retirement p.a. between ages 60 and 64 100% retirement at or over age 65 Future pension Assumptions as per pensioner members benefits Pensioner members Pension indexation Spouse reversion Guarantee period Spouse Dependent children 2.5% pa Reversion of 5/8th Five years Actual spouse data None Mortality ALT 2010-12 60% up to age 55 increasing to 100% at age 100 with 25 year mortality improvements Investment return Indexation Commutation factors for accrued benefits % pa % pa Lump sum portion (50%) 6.5% 0% Active members Pension portion (50%) 4% 2.5% Pension members 4% 2.5% Commutation factors for vested benefits Active members Early retirement from 55 Lump sum portion (50%) paid as lump sum Investment return % pa Indexation % pa 6.5% 0% Pension portion (50%) 4% 2.5% Active members Lump sum portion (50%) paid as lump sum 6.5% 0% Resignation before 55 Pension portion (50%) paid as lump sum 6.5% 2.5% Pension members 4% 2.5% 31
Appendix E - Investment arrangements Strategic asset allocation Investment objectives Risk-reducing assets 78% Return-seeking assets 22% Real return (net of tax and CPI inflation) Downside risk (years of negative return) Active assets >1.0% pa <2 years in 20 Pension assets >1.5% pa <2 years in 20 Standard risk measure 3 (low to medium) 3 (low to medium) Commentary We believe that the Scheme s investment policy is reasonable having regard to its liabilities. The low allocation to return seeking assets should limit the volatility of the investment returns and help to limit the volatility of the Company s funding costs over the medium term. However, lower investment returns will increase the Company s funding costs over the long term. The Company recognises this and is committed to maintaining the Scheme in a satisfactory financial position. The Scheme s investments are predominantly in managed investment funds backed by reputable providers. We believe that, in an orderly investment market, these investments will be sufficiently liquid to make pension and benefit payments as required. 32
Appendix E Real return experience (investment returns less inflation) Active members Investment return less salary inflation Pensioner members Investment return less pension indexation 7% 6% 5% 4% 3% 5.2% 4.0% Real return (over salary inflation) Rolling 5 year real return 4.5% 3.0% 9% 8% 7% 6% 5% 7.9% 7.0% Real return (over pension indexation) Rolling 5 year real return 2% 1% 0.4% 0.4% 4% 3% 3.5% 2.3% 2.9% 3.3% 0% -1% -0.5% 2% 1% 0.4% -2% 0% -3% 2011 2012 2013 2014 2015 2016 2017-1% 2011 2012 2013 2014 2015 2016 2017 Active Average return Average real return Last five years 4.3% pa 2.3% pa Pension Average return Average real return Last five years 5.1% pa 3.2% pa 33
Appendix F - Insurance The Trustee has taken out insurance with CommInsure to cover the part of the death/total and permanent disablement (TPD) benefit in excess of the vested benefit of each member We understand that the amount of group life insurance for each active defined benefit member is determined as the death benefit (6 times salary) less 10 times normal retirement pension accrued to date On this basis, the total death/tpd benefit for the active defined benefit members was $1.602 million and the group life sum insured amount was $0.361 million The insured amount of $0.361 million together with the fully funded vested benefits of $1.700 million provide more than sufficient coverage of the total death/tpd benefits for the remaining active defined benefit members The group life policy premiums for defined benefit members for 2017 totalled $0.004 million, compared to $0.008 million in 2016 There were no death claims from active members in 2017 We believe the current insurance arrangements for the Scheme are adequate. 34
Appendix G - Scheme compliance The Scheme is a complying fund under the SIS Act and to our knowledge the Scheme is a complying fund for taxation purposes and will remain so in the foreseeable future Under Clause 20.3 of the governing rules, an actuarial review of the Scheme is required once every three years to review the financial position of the Scheme and make recommendations in relation to the level of Company contributions to ensure the financial stability of the Scheme in future years However, a review is required annually under Prudential Standard SPS 160 (Defined Benefit Matters) the previous annual review for the period ending 31 December 2017 was issued on 19 Benefit Certificates and Funding and Solvency Certificates for the Scheme have been issued for the period 1 July 2015 to 30 June 2020 and remain current The Funding and Solvency Certificate must be replaced if any of the notifiable events listed in the certificate occur and the Scheme s actuary has not certified that a revision is not required if required, a replacement certificate must be obtained within three months of the occurrence of the event A Notional Contribution Tax Certificate, dated 26 March 2008, was in place as required over the review period 35
Appendix H - Actuarial statements In accordance with Prudential Standard SPS 160 (Defined Benefit Matters), I hereby make the following statements regarding the Scheme as a whole (including accumulation members assets and liabilities). The value of the net assets of the Scheme as at 31 December 2017, taken at market value, was $59,305,990 I consider the assets, after deducting the operational risk financial requirement, to be sufficient to meet the discounted accrued retirement liabilities of the Scheme, including accumulation account benefits The liabilities of the Scheme as at 31 December 2017 were: - $54,793,897 measured as vested benefits - $55,283,195 measured as the actuarial value of accrued benefits I have recommended that the Company contribute the following amounts over the next three years: - Company contributions for the defined benefit members of 29.3% of salaries for Category A, A1 and A2 members and 34.8% of salaries for Category B, B1 and B2 members - Deemed member contributions at the rate of 2.206% of salaries for defined benefit members - As required to meet Scheme expenses as they are incurred, from 1 January 2019 - The required rate as per the Trust Deed for accumulation only members The next actuarial valuation should be conducted as at a date no later than 31 December 2018. Date: 20 Janice Jones FIAA Retirement Incomes and Asset Consulting Authorised Representative (#283988) of PricewaterhouseCoopers Securities Ltd As at 31 December 2017, the Scheme was not in an unsatisfactory financial position as defined in Regulation 9.04 of the Superannuation Industry (Supervision) Act 1993, nor is it expected to become unsatisfactory during the next three years provided the Company contributes as recommended I believe that the sum of the assets at 31 December 2017, the recommended Company contributions over the next three years, and the expected investment earnings over the next three years will be sufficient to meet the liabilities of the Scheme expected to arise over the next three-year period In respect of the pensions in payment, since the liabilities for pensioners in payment rank ahead of the liabilities for accruing members on wind-up of the Scheme under Clause 29.3 of the Scheme s trust deed, I believe that there is a high degree of probability that the Scheme will be able to pay the pensions currently in payment as required under the governing rules This opinion has been given in accordance with Prudential Standard SPS 160 (Defined Benefit Matters) and in accordance with Professional Standard 410 issued by the Institute of Actuaries of Australia The appropriate funding and solvency certificate for the Scheme was in place during the period of review to 31 December 2017 and I believe that funding and solvency certificates covering the next three-year period will be able to be certified. Catherine Nance FIAA Retirement Incomes and Asset Consulting Authorised Representative (#265248) of PricewaterhouseCoopers Securities Ltd PricewaterhouseCoopers Securities Ltd ACN 003 311 617 ABN 54 003 311 617 Holder of Australian Financial Services Licence No 244572 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, T: 61 8 9238 3000, F: 61 8 9238 3999, www.pwc.com.au