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%

Dec

-01

Feb

-02

Apr

-02

Jun-

02

Aug

-02

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Aug

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb

-06

Apr

-06

Jun-

06

ILG

EY

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