practical actuarial issues of surplus and minimum benefits – coral van zyl
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Pension Lawyers Association Panel discussion – 15 August 2006
Practical Actuarial Issues of Surplus and Minimum Benefits –
Coral van Zyl
Discussion topics
• Process for surplus schemes• Practical implications of surplus schemes• Process for minimum benefits• Practical implications of minimum benefits
Process for surplus schemes • Establishment of distributable surplus
- Valuation of retirement fund at surplus
apportionment date (SAD) – including
allowance for minimum benefits
- Establish any required contingency reserves
- Make allowance for the cost of exercise
- Finalise any improper use amounts
- Balance is distributable surplus
Process for surplus schemes
• Establish scheme for apportionment of
surplus- Former member top-ups
- Minimum pension increases
- Scheme to apportion residual surplus• apportioned between all stakeholders• method deemed equitable is per historical
contributions
Process for surplus schemes
• Practical implementation- Payment of top ups
- Communication to all stakeholders
Practical implications - Surplus schemes
• Costs of the exercise
• Time consuming data gathering
• Incomplete data records– former member data– historical financial information– minutes of Trustee meetings– previous actuarial valuations
Practical implications - Surplus schemes
• Possible to have enough information for a former member to do top-up calculation, but former member cannot be traced.
• Apportionment of residual surplus – not always considered palatable to
redistribute to former members
– possibility for disputes
Practical implications - Surplus schemes
• Final distribution of surplus– more detailed former member information
required– cost of tracing a member taken out of the
individual member’s top up amount– costs of distribution may negate benefit of top-
ups for smaller amounts
Post surplus?
• Funds behind on statutory valuations and reviews after the SAD
• Surplus monies existing in Funds where nil schemes were submitted – not all Funds will have amended Rules for future surplus
• Deficits could arisen in Funds where surpluses were distributed
• Section 14’s where surpluses have not been transferred need to be revisited
Minimum benefits:
• Active members:– BN 37 of 2003 - Trustees decide between :
• 40% of Earnings Yield• Index linked gilts minus 0.2% (prior to March 2006
was ILG minus 0.95%)– Payment of minimum benefits to exiting
members from 12 months after SAD• Pensioners:
– Trustees establish pension increase policy– Apply minimum pension increase every three
years
Practical implications – Minimum benefits
• Trustees choose between a method effectively based on equities versus one based on bonds – Trustees may not understand the differences– Probable mismatch either way to actual fund
return• Market related – could result in
inconsistencies from month to month• Member queries more complicated to
resolve
Comparison of ILG and EY
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
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ILG
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Practical implications – Minimum benefits
• Pension increase policy – enables decision-making by Trustees– complex to understand– minimum increase in a year of good
investment returns are low
Thank You
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