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UNISA Retirement Fund

Statutory Actuarial Valuation

Report

31 December 2016

UNISA Retirement Fund i

31 December 2016

Table of Contents

Section 1 : Executive summary.............................................................................................................3

Section 2 : Background and Valuation Data ........................................................................................8

Section 3 : Funding Objective, Valuation Method and Assumptions ............................................ 13

Section 4 : Valuation Results ............................................................................................................. 21

Section 5 : Inter-Valuation Experience .............................................................................................. 27

Section 6 : Minimum Pension Increases ........................................................................................... 29

Section 7 : Investment Strategy ......................................................................................................... 30

Section 8 : Signature ........................................................................................................................... 32

Annexure 1 – Summary of Benefits ................................................................................................... 33

Annexure 2 – Summary of Membership ............................................................................................ 35

Annexure 3 – Summary of Assets ..................................................................................................... 37

Annexure 4 – Fund Revenue Statement ............................................................................................ 40

Annexure 5 – Valuation Assumptions ............................................................................................... 41

Annexure 6 – Valuation Results on the Bond-Based approach ..................................................... 43

Annexure 7 – Asset / Liability Matching ............................................................................................ 45

ii UNISA Retirement Fund

Willis Towers Watson Confidential

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UNISA Retirement Fund 3

31 December 2016

Section 1: Executive summary

1.1 Introduction and purpose of valuation

1.1.1 This report sets out the results of the statutory actuarial valuation of the UNISA Retirement Fund (the “Fund”) as at 31 December 2016. The report has been prepared for the Board of the Fund (the “Board”).

1.1.2 A statutory actuarial valuation of the Fund was carried out with an effective date of 31 December 2015 and the report in respect of this valuation was accepted by the Registrar of Pension Funds (the “Registrar”) in a letter dated 30 January 2017 (case number 424306).

1.1.3 The report is addressed to the Board, but a copy should be sent to all the Fund’s participating employers.

1.1.4 The main purposes of this actuarial valuation are to:

■ compare the value of the Fund’s assets with the value of the liabilities on a best estimate basis as at the valuation date in order to assess the financial solvency of the Fund;

■ analyse the financial progress of the Fund over the year since the previous statutory valuation date (31 December 2015);

■ review the assumptions used in the current valuation in light of the recent experience of the Fund;

■ analyse the sources of any actuarial surplus/ strain that has arisen in the period;

■ assess an appropriate level of future contributions until the next valuation;

■ advise on the sustainability of the target pension increase policy of the Fund with specific reference to the provisions of Interpretation Note 1 of 2012, as issued by the Financial Services Board;

■ comment on the appropriateness of the investment strategy at the valuation date;

■ review the allocation of Fund assets relative to its contingency reserve accounts, and determine the actuarial surplus (if any) of the Fund; and

■ satisfy the statutory and legislative requirements of the Registrar of Pension Funds.

1.1.5 This valuation report has not been prepared for any purpose other than that outlined in Section 1.1.4 above. As such, it should not be used or relied upon by any other person for any other purpose, including, without limitation, by individual members of the Fund for individual investment or other financial decisions – those persons should take their own professional advice on such investment or financial decisions. Neither we nor Towers Watson (Pty) Ltd (“Willis Towers Watson”) accept any responsibility for any consequences arising from any third party relying on the report. Except with the written consent of Willis Towers Watson, the recipient may not reproduce, distribute or communicate (in whole or in part) this report to any other person, except as required by statute.

1.1.6 This report has been peer reviewed in terms of Willis Towers Watson’s standard internal peer review process. This internal peer review does not constitute a Formal Review as defined in the Explanatory Note on Peer Review issued by the Actuarial Society of South Africa.

1.1.7 The highlights of the report are summarised in sections 1.3 to 1.7 of the Executive Summary.

4 UNISA Retirement Fund


1.2 Employer Accounting Disclosures and Professional Guidance

1.2.1 This report does not address the pension expense of the University of South Africa (the “Employer” or “UNISA”) or the relevant disclosure information that is required in the Employer’s financial statements in relation to the Fund for the purposes of the relevant pension accounting standards. The same applies to all other participating employers.

1.2.2 This report has been prepared in accordance with the requirements of PF Notice 2 of 2016, Board Notice 149 of 2010 (Report by a Valuator in Relation to a Statutory Actuarial Valuation) issued by the Registrar and with the professional guidelines for actuarial reports (SAP 201) issued by the Actuarial Society of South Africa and current as at the date of signature of the report.

1.3 Financial Condition of the Fund

1.3.1 The table below summarises the financial position of the Fund as at the valuation date and compares this to the position as at the previous statutory valuation of the Fund.

Item

Current valuation

Previous valuation

31-Dec-16 31-Dec-15

R’ million R’ million

Defined Contribution liabilities (incl. living annuity balances) 4 958.6 4 834.9

Defined Benefit underpin liability (active members) 59.0 60.0

Pensioner liability (life pensioners paid from the Fund) 936.0 776.8

Sub-total: best estimate liabilities 5 953.6 5 671.7

Pensioner Solvency Reserve Account 48.6 87.3

General Reserve Account (recommendation) 41.3 34.1

Employer Surplus Account (recommendation) 191.1 184.9

Sub-total: reserves 281.0 306.3

Total: membership liabilities and reserves 6 234.6 5 978.0

Assets: Net Fund assets at Market Value 6 234.6 5 978.0

Actuarial surplus/ (deficit) after setting aside reserves - -

Funding level 100.0% 100.0%

Market value asset ÷ best estimate liabilities 104.7% 105.4%

1.3.2 The results are explained in more detail in section 4 of the report.

1.3.3 The funding level of the Fund (calculated as the ratio of total net Fund assets to the aggregate of the best estimate membership liabilities, Pensioner Solvency Reserve Account, General Reserve Account and the Employer Surplus Account balance) has remained at 100% when compared to the previous valuation date.

1.3.4 At the previous valuation date, the market value of the Fund’s net assets exceeded the overall best estimate membership liabilities by R306.3 million (implying a ratio of overall assets to best estimate liabilities of 105.4%). At the current valuation date, the market value of the Fund’s net assets exceeded the overall best estimate membership liabilities by R281.0 million (implying a corresponding ratio of 104.7%).


31 December 2016

1.3.5 A reconciliation of the movement in the reserve accounts over the inter-valuation period is given in section 5 of the report.

1.3.6 In our opinion the Fund is able to continue with its reasonable benefit expectation of granting pension increases of 50% of inflation as the pensioner liability is fully funded on a best estimate basis. The Fund also has a margin of safety in the form of a pensioner solvency reserve amounting to R48.6 million at the valuation date, which represents 5.2% of the best estimate pensioner liability. In addition, the Fund has a “matching” strategy in place for the pensioner assets, which accounts for 50% of the total pensioner assets at the valuation date. This means there is greater stability regarding short term future pension increases.

1.3.7 A separate solvency reserve has not been recommended for the defined benefit underpin as part of this valuation. We are satisfied that the balance in the Employer Surplus Account (“ESA”) is sufficient to cover any increase in the cost of the defined benefit underpin under normal market conditions. Specifically the balance in the ESA represents more than three times the assessed value of the minimum benefit underpin liability, noting that this liability has been calculated making full allowance for eligible members’ prospective service rather than just the portion accrued with reference to past service. Even if the coverage ratio reduced to 1.5 times or twice the assessed cost of the minimum benefit liability the position would be very healthy (in this regard, our comments in Section 2.8 should be noted).

1.3.8 The balance in the ESA is also available to cover adverse experience in relation to the Fund’s pensioners. Should the pensioner section of the Fund become underfunded on the basis that there are insufficient assets available to meet the then current pensions payable with no allowance for future increases, the Rules of the Fund stipulate that the Employer is required to make additional contributions to the Fund “as determined by the Actuary”. The balance in the Employer Surplus Account is also available to cover this risk. This risk is covered to some extent by the pensioner solvency reserve referred to above and the provision for future pension increases which has been incorporated in the best estimate assumptions.

1.4 Future Contribution Rates

1.4.1 The recommended Employer future service contribution rates are shown below (members are not required to make contributions to the Fund).

Contributions with effect from 1 January 2017

Period: With effect from 1 January 2017

% of salary bill Members other than

Former Vista members

Former Vista (Category A)

members*

DC retirement saving 16.00% 18.50%

Risk benefits 1.45% 1.45%

Fund expenses 0.45% 0.45%

Total UNISA contribution rate 17.90% 20.40%

*This contribution category applies only to those former Vista members who elected the option of the 18.5% contribution rate towards retirement funding.

1.4.2 The risk benefits contribution rate payable by the participating employers is inclusive of amounts contributed to a separate disability income scheme and funeral arrangement outside the Fund. The amount contributed in respect of such benefits is 0.298% of pensionable salary bill.

1.4.3 It is highlighted that the risk benefits of the Fund are normally reviewed on an annual basis (the review carried out effective 1 January 2016 resulted in the insurer guaranteeing the rates for two years until 31 December 2017). The risk benefits will once again be reviewed with effect from 31 December 2017.



1.4.4 It is recommended that the provision for Fund expenses be reduced from 0.45% to 0.40% of pensionable salaries. In theory, this change should take place coincident with the effective date of the valuation, i.e. with effect from 1 January 2017. However, in practice the annual actuarial valuation is normally only finalised towards the end of the calendar year. We therefore recommend that the provision for Fund expenses be reduced from 0.45% to 0.40% of pensionable salaries with effect from 1 January 2018.

1.4.5 The recommended Employer contribution rate covers the on-going benefits provided for in terms of the Rules and the related ancillary disability income and funeral benefits. (Note that the on-going cost in respect of the defined benefit underpin is nil as the liability has been calculated based on full prospective service, rather than accrued service.)

1.4.6 The recommended Employer contribution rate will be formally reviewed again as part of the next actuarial valuation which will be carried out with an effective date of 31 December 2017.

1.5 Summary of membership

1.5.1 The valuation results are based on the membership data as provided by the Fund’s administrator. The data as at the current valuation date has been summarised in the table below, which also includes the comparable statistics from the previous valuation of the Fund.

Statistics 31 Dec 2016 31 Dec 2015

In-service members

Number of members 4 660 4 277

Total annual pensionable salary (R’ million) R 1 889.6m R 1 730.2m

Salary-weighted average age (years) 46.6 46.4

Average past service term (years) 10.1 10.6

No. members entitled to the minimum retirement benefit 771 837

Life Annuity Pensioners paid from the Fund

Number of pensioners 537 496

Total annual pension (R’ million) R 87.4m R 71.1m

Average age (years) 64.9 64.2

Living Annuity Pensioners paid from the Fund

No. of defined contribution (DC) living annuity pensioners 14 14

Total living annuitant DC account balance (R’ million) R 55.7m R 54.9m

Average living annuitant DC account balance (R’ million) R 4.0m R 3.9m

1.5.2 In Annexure 2 below, summary statistics are shown separately for the in-service members entitled to the minimum retirement benefit (i.e. the so-called “defined benefit underpin” members).

1.6 Minimum Pension Increases

1.6.1 The minimum pension increase requirements of the Pension Funds Act as they relate to the Fund at the current valuation date are considered in section 6 of the report.

1.7 Summary of Recommendations

1.7.1 Board Notice 149 of 2010 requires that the Board acknowledges any recommendations made by the valuator in a (statutory) valuation report. For ease of reference the main recommendations arising out of this valuation are as follows.


31 December 2016

1.7.1.1 We recommend that the level of the General Reserve Account be set at R41.3 million at the valuation date (refer to sections 4.5 and 5.3 below).

1.7.1.2 We recommend that R38.7 million, representing the amount by which the value of the Pensioner Account (as per the annual financial statements) is less than the assessed pensioner best estimate liability, be transferred from this Pensioner Solvency Reserve Account to the Pensioner Account, in order to give a balance for the Pensioner Solvency Reserve Account of R48.6 million at the valuation date. This is simply to ensure that the values reflected in the annual financial statements correspond with the values determined in this report - refer to point 4.4.6 for an explanation in this regard.

1.7.1.3 We recommend that R0.8 million be transferred from the Employer Surplus Account to the Minimum Benefit Account, decreasing the Employer Surplus Account to a value of R191.1 million at the valuation date. This represents the small amount by which the Minimum Benefit Account is lower than the defined benefit underpin best estimate liability (refer to sections 4.6 and 5.2 below).

1.7.1.4 We recommend that the portion of the Employer contributions allocated to meet Fund operating expenses be reduced from 0.45% to 0.40% of pensionable salaries with effect from 1 January 2018, and that this rate is reviewed as part of each annual actuarial valuation.

1.8 Actuarial Opinion

1.8.1 Based on the current benefit and membership structure, we certify that the Fund is in a sound financial position as at the current valuation date.

1.8.2 Based on the current benefit and membership structure, we certify that the Fund should remain financially sound if total contributions to the Fund are paid at the rates as summarised under section 1.4.1 above until completion of the next valuation, expected to be carried out with an effective date no later than 31 December 2017.

1.8.3 In our opinion, the valuation basis used for the purposes of the valuation (which has been set based on market conditions applicable at the valuation date) is consistent with the Fund’s pension increase policy.

1.9 Certificate of assets and insurance arrangements of the Fund

1.9.1 We hereby certify that we are satisfied with the nature and structure of the assets of the Fund, as recorded in the Fund’s audited financial statements as at 31 December 2016, and set out in Annexure 3 to this report, and that the matching of the assets with the liabilities is, in our opinion, adequate.

1.9.2 We further confirm that the Board has implemented an investment strategy which, in our opinion, is not unsuited to the liability profile of the Fund.

1.9.3 Finally, we certify that we are satisfied with the nature of the reinsurance arrangements in place which aim to cover the (lump sum and pension) benefits payable to in-service members of the Fund upon death in service.

This report is signed in Section 8 below.



Section 2: Background and Valuation Data

2.1 Valuation Data

2.1.1 The valuation is based on the data as described below. The results of the actuarial valuation set out in this report depend on the accuracy and completeness of this data.

Benefits

2.1.2 The benefits provided by the Fund are summarised in Annexure 1. The benefits are defined in terms of the Rules of the Fund.

Membership Data

2.1.3 Alexander Forbes provided the membership data in its capacity as administrator to the Fund. Checks have been done on the data for reasonableness and consistency. All queries raised during the process of checking the valuation data have been resolved with Alexander Forbes, and any amendments to the data, as agreed with Alexander Forbes, have been taken into account in the valuation results set out in this report.

2.1.4 The membership data has been reconciled with the data used for the previous statutory valuation of the Fund as at 31 December 2015.

2.1.5 Overall we are satisfied that the membership data utilised is materially correct given the purposes of the valuation. It is specifically highlighted that we did not check the application of the life stage model (see point 7.3.2 below) nor the build-up of member Fund Credits on an individual basis as part of this valuation.

2.1.6 A summary of the membership data used for the current valuation (and that used in the previous valuation) is given in Annexure 2.

Assets

2.1.7 A summary of the investments of the Fund at the current and previous valuation dates is given in Annexure 3. This annexure also summarises the main changes in the investment strategy that have taken place over the inter-valuation period.

Fund Accounts

2.1.8 We have been provided with audited financial statements of the Fund for the financial year ended 31 December 2016. The information on the Fund’s assets at the valuation date, and the summary of income and expenditure over the inter-valuation period (included as Annexure 4) is based on the information presented in these financial statements.

Data limitations

2.1.9 This report is based on data available to us at, or prior to, the date on which it was signed, and takes no account of developments which have become known after that date. The Board bears the primary responsibility for the accuracy of the information provided. They will have relied on others for the maintenance of accurate data, including the Administrator, and the Employer which must provide and update the membership information. Nevertheless it is the Board’s responsibility to ensure the adequacy of these data requirements. We have taken reasonable steps to satisfy ourselves that the data provided is of adequate quality for the purposes of the valuation, including carrying out basic tests to detect obvious inconsistencies. As stated above, these checks have given us no reason to doubt the correctness of the information supplied. It is


31 December 2016

not possible, however, for us to confirm that the detailed information provided, including that in respect of individual members and the assets, is correct.

2.2 Contributions since the Previous Valuation

2.2.1 The contribution rates (reflected as a percentage of pensionable salaries) since the previous valuation are summarised in the tables below. Please note the risk benefit cost shown includes the cost of the ancillary disability income and funeral benefits.

Contributions from 1 January 2016 to 31 December 2016

Period: 1 January 2016 to 31 December 2016

% of salary bill Members aged

less than 60


members*






2.2.2 In 2015 the termination age of the disability income benefit was improved to age 65 so there is no longer any differentiation between the contribution rates towards risk benefits for members aged less than 60 and members aged 60 and older, as all members (with the exception of USAf members, who maintained a normal retirement age of 60 years) are now entitled to disability benefits until age 65.

2.3 Material Fund developments: Rule changes

2.3.1 As noted in the previous valuation report, the Fund's Rules were revised on 3 December 2015 to take into account changes to the Income Tax Act effective from 1 March 2016. The revised Rules were approved and registered by the Financial Services Board (“FSB”) on 27 May 2016 and take effect from 1 March 2016. The aims of the revision in as far as it affects the valuation include:

■ To allow for additional member contribution categories and additional voluntary contributions so that members have the option to save more for retirement via the Fund;

■ To provide for the deferred pensioner option at retirement consistent with the Income Tax legislation that came into effect 1 March 2015;

■ Allow for the contributions in respect of the unapproved disability and funeral benefit scheme not to be directed via the Fund but rather paid directly to the Insurer by the respective participating employers. The same applies to the disability income benefit payable to members directly instead of via the Fund. (The annual financial statements for the year ended 31 December 2016 noted under Significant Matters that this particular revised rule only be implemented on 1 March 2017 to coincide with the tax year as well as to simplify the operational changes to be made by the insurers, the participating employers and the Fund.);

2.3.2 There were no other changes made to the Fund’s Rules during the inter-valuation period that had a financial implication.



2.4 Material Fund Developments

Changes to Investment Strategy

2.4.1 The material changes to the Fund’s investment strategy over the inter-valuation period have been summarised in Annexure 3 of this report.

PF Notice No. 2 of 2016: Financial Soundness

2.4.2 In July 2016 the FSB published PF Notice No. 2 of 2016 which deals with the criteria for financial soundness and the valuation basis in terms of which financial soundness will be determined by the FSB. The Notice also deals with the particulars of a Scheme of Arrangement for dealing with any deficit revealed in a fund.

2.4.3 The explanatory memorandum to the Notice states that it will only be applicable for statutory submissions made by a fund with an effective date after the publication of the notice, which occurred on 8 July 2016. The current valuation as at 31 December 2016 is therefore the first valuation for the Fund prepared in line with PF Notice 2 of 2016.

2.4.4 The Notice prescribes the valuation basis to be used in determining the value placed on the assets and liabilities of a fund. In particular, the Notice is prescriptive in terms of how key financial assumptions, such as the discount rate and future inflation rate, may be determined. In this regards, we highlight the following:

Discount rate assumption: The Fund’s DB liabilities (life pensioners paid from the Fund and minimum benefit underpin) are currently valued using a discount rate determined according to the “equity risk premium” approach. It is highlighted that the Notice confirms that this is an acceptable approach. However it sets out a specific methodology for determining the discount rate on a risk premium approach, which is to set the discount rate equal to a “risk-free” government bond yield (of an appropriate duration) plus a risk premium which may not exceed 3% per annum on the growth asset component of the underlying assets. In section 3.2 of this report, we reconcile the method used in the current valuation (which determines the discount rate with reference to the long-term inflation assumption plus an allowance for a “real return” premium which can reasonably be expected based on the prospective returns of the underlying assets) with the method described in PF Notice 2.

Inflation assumption: In determining the allowance for future price inflation, the Notice specifies that an inflation risk premium not exceeding 0.5% p.a. may be used. We have used an inflation risk premium of 0.5% p.a. in determining the future price inflation rate for the current valuation, in line with the requirements of the Notice. At the previous valuation date an inflation risk premium of 1.2% p.a. was used to determine the future price inflation assumption.

2.4.5 The Notice specifies that the valuator must report on the financial condition (including the funding level and future contribution rate) of a fund both on the “bond-based basis” and a “funding basis”. In addition, to the extent that a fund uses a different basis to the bond-based basis to determine its funding objectives, and/or where it chooses to set up explicit contingency reserves, this must be reported on in addition to the results on the bond-based basis.

2.4.6 As we have used the “risk premium approach” for determining the discount rate in our funding basis, the financial condition of the Fund, determined on the “bond-based basis”, has also been determined. The results of the valuation using the bond-based basis to determine the discount rate are shown in Annexure 6.

2.4.7 Finally, the quantification of actuarial surplus for the purpose of Section 15C of the Pension Funds Act may only be determined with reference to the higher of the liabilities determined using


31 December 2016

the bond-based basis and the value of liabilities and any contingency reserves determined on the funding basis.

2.4.8 This valuation report has been prepared in compliance with PF Notice 2.

2.5 Pension Increases during the inter-valuation period

2.5.1 The pension increase policy of the Fund is to target annual pension increases on 1 April each year of approximately 50% of the change in the headline inflation rate over the previous calendar year. Such increases are not guaranteed and depend largely on the long-term investment returns earned on the assets underlying the Pensioner Account.

2.5.2 Pensioners received an increase of 5.2% with effect from 1 April 2016 (pro-rated for pensioners who had been receiving a pension for a period of less than 12 months as at the date of the increase). Inflation (as measured by CPI) over the previous calendar year (i.e. over the 12 to 31 December 2015) was 5.2%.

2.5.3 In Section 6 below we have considered the minimum pension increase requirements of the Pension Funds Act, and how they relate to the Fund at the current valuation date.

2.6 Investment Returns over the inter-valuation period

2.6.1 The Fund operates a life stage model for in-service members consisting of three portfolios (Inflation Target, Stable and Income Protection) as well as separate strategies in respect of pensioners and Fund reserves. In addition a Shari’ah-law compliant portfolio is offered to members as an “own choice” portfolio option.

2.6.2 The table below sets out the investment performance of each of these investment channels, net of investment manager fees, over the inter-valuation period.

Investment channel 12 months to

31 December 2016

Inflation Target Portfolio 1.7%

Stable Portfolio 3.8%

Income Protection Portfolio 8.4%

Shari'ah Portfolio 5.2%

Pensioner Portfolio 3.1%

Reserves 3.8%

2.6.3 The net returns over the 12 months ended 31 December 2016, with the exception of the Income Protection Portfolio, were lower than headline CPI which was 6.8% over this period.

2.7 Risk benefits

2.7.1 The Fund insures its risk benefits on an annual renewal basis. This means that in the event of adverse claims experience the insurer can increase the premium rates at the annual renewal date (i.e. 1 January each year). (In this regard it is noted that the rates agreed with the insurer as part of the 1 January 2016 risk “re-broke” were guaranteed for a period of 2 years, i.e. until 31 December 2017.) In terms of the Fund Rules, the Employer will contribute a maximum of 6.5% of pensionable salary for risk benefits (including the separate disability and funeral benefits) and expenses. In the event that the cost of providing the risk benefits and meeting the Fund’s expenses exceeds the 6.5% cap, the Fund’s risk benefits may need to be reduced.

2.7.2 The current total contribution rate (i.e. over the year commencing on 1 January 2017) payable for risk benefits (1.45%) and expenses (0.45%) is 1.90% of pensionable salary. Therefore the



Fund has a large margin of safety before the 6.5% cap is breached and the risk benefits need to be reduced.

2.7.3 The insured death-in-service benefits consist of a lump sum equal to 2 x the member’s annual pensionable salary at the date of death as well as a pension to a qualifying spouse equal to 35% of the member’s annual pensionable salary at date of death. The insurance arrangements in respect of the spouse’s pension are structured on an approximate basis in the form of an additional age-based multiple of pensionable salary, with the result that the Fund may make a profit or loss in the event of any particular member’s death. It is highlighted that there is therefore some exposure in this regard over and above the reinsurance premiums paid, noting that the quantum of exposure is very small, and over time, the Fund has in fact made a profit from this basis of insurance.

2.7.4 It should also be noted that the former Vista members are entitled to different risk benefits to the ordinary members, which are set out in Annexure 4 of the Fund’s Rules. These risk benefits are insured in line with the ordinary members on an approximate basis.

2.7.5 We believe that the level of risk to the Fund in respect of risk benefits is acceptable given the current level of the General Reserve Account, and taking into account the margin of safety identified in terms of the current contribution rate required for risk benefits and expenses, as described above.

2.8 Material Fund Developments after the Valuation Date

Utilisation of a portion of the balance in the Employer Surplus Account (ESA)

2.8.1 In March 2017, the Employer-appointed Board members of the Fund approved a request from the Employer to ring-fence an amount of R60 million of the balance in the ESA for use by the Employer in terms of the permissible uses set out in of Section 15E(1) of the Pension Funds Act. Specifically, the Employer-appointed Board members approved a partial contribution holiday for the Employer at a month to be agreed upon between the Fund and the Employer, with the value of the partial contribution holiday to be funded from the R60 million earmarked amount. In this regard, a contribution holiday in the amount of R20 million was funded from the ESA in July 2017.

2.8.2 The results of the current valuation show that the balance of the ESA was R191.1 million as at 31 December 2016. Ignoring investment returns subsequent to the valuation date, a R60 million reduction to the ESA would result in a revised balance of R131.1 million, which still represents 2.2 x the minimum benefit underpin liability (allowing for eligible members’ full prospective service, rather than just the portion accrued with reference to past service). This still represents a healthy coverage ratio.

Other material post-valuation developments

2.8.3 In our opinion, and to the best of our understanding, there have been no other developments in relation to the Fund subsequent to the current valuation date that would have a material adverse impact on the financial position of the Fund nor cause us to alter any of the conclusions reached as part of the valuation process.


31 December 2016

Section 3: Funding Objective, Valuation Method and Assumptions

The requirement to make actuarial assumptions arises only in respect of those in-service members

who are entitled to the defined benefit underpin, as well as the life annuitant pensioners that are paid

from the Fund.

3.1 Valuation Method

3.1.1 The defined contribution liabilities have been taken to be the aggregate of the Member Credits and Supplementary Account balances (i.e. accumulated retirement savings plus investment returns thereon) and the Living Annuity Pensioner Account balance as at the valuation date.

3.1.2 The Fund’s defined benefit (“DB”) underpin has been valued using the Full Funding Method (“FFM”). Under this method, the liability in respect of the DB underpin is based on prospective service, i.e. total past service to the valuation date plus total potential future service to the assumed retirement age. Since the full prospective service is provided for in the calculation of the liability, the ongoing cost of providing the benefit as it accrues from year to year is nil.

The DB underpin liability is calculated as the difference between the following values (subject to a minimum of zero):

The present value of the projected DB benefit at retirement based on prospective service to the normal retirement date; and

The present value of the projected current DC Fund Credit (excluding the balance in the Supplementary Account, if applicable) to retirement plus future retirement funding contributions up to normal retirement, allowing for future assumed investment returns.

Although full potential service has been taken into account, the results are shown separately in respect of past service and future service. The liability in respect of past service is calculated as the FFM DB underpin value multiplied by the ratio of past service to prospective service. Similarly, the future service liability is calculated as the FFM DB underpin value multiplied by the ratio of future service to prospective service.

The FFM is an appropriate and equitable funding method for a hybrid fund such as the Fund which has most members that are on a total cost of employment remuneration basis, otherwise the cost of the DB underpin in respect of future service would be unfairly spread across the entire membership (including the Fund’s defined contribution only members).

3.1.3 The total of the FFM DB liability plus the defined contribution liabilities, the liability in respect of life annuitant pensioners and the value of any reserve accounts, is compared with the “fair value” of the assets (see definition below) and the resulting surplus (or deficit) is shown.

3.2 Valuation assumptions: in-service member defined benefit underpin

Discount rate or assumed future investment returns

3.2.1 The discount rate has been set with reference to the long-term inflation assumption (see below) plus an allowance for a long-term “real return” premium, i.e. the long-term returns in excess of inflation which we consider can reasonably be expected to be delivered in terms of the Fund’s investment strategy under normal market conditions.



3.2.2 This is considered to be an appropriate approach in the context of the long-term nature of the Fund which allows it to benefit from the value of time diversification where a material percentage of the Fund’s assets are invested in “growth assets” (i.e. equities and property) and the volatility of such asset classes reduces with time under normal market conditions.

3.2.3 It bears explaining that the above method for determining the discount rate includes an allowance for the equity risk premium (i.e. the additional return that investors expect to receive as a result of investing in “riskier” assets such as equities, when compared to “less risky” assets such as bonds). Allowing for an equity risk premium is consistent with the investment strategy of the Fund and is permitted in terms of current actuarial professional guidance, but it is highlighted that if this premium does not come through in the future returns earned on the Fund’s assets, then the discount rate assumption will have proven to be too high with the benefit of hindsight, and the valuation will have overstated the financial position of the Fund.

3.2.4 The discount rate for the current (31 December 2016) valuation has therefore been set at 10.2% per annum which equates to a rate of price inflation plus 3.5% per annum. A discount rate of 10.5% per annum (derived using a consistent approach, i.e. determined as the previous inflation assumption of 7% per annum, plus 3.5% per annum) was used in the previous valuation as at 31 December 2015.

3.2.5 Paragraph 3.12 of PF Notice 2 of 2016 states as follows with reference to the determination of the discount rate: “When using this approach [the risk premium approach], the risk premium added must be equal to or greater than 0%, but may not exceed 3% per annum on the growth asset component, i.e. equity and property.” Our calculations below indicate that the use of a discount rate assumption of 10.2% per annum is consistent with this provision of PF Notice 2:

The assets underlying the DB underpin reserve and the Pensioner Reserves both have a strategic allocation of 50% to growth assets (i.e. global and local equities and property).

On the basis that “P” is the proportion of the applicable underlying assets invested in the fixed interest component (or, in the case of the Pensioner Reserve, the liability hedging portfolio) and “1-P” is the portion invested in the growth component, the budgeted investment return (or discount rate) can be determined with reference to the following equation:

(P x Nt) + (1 - P) x (Nt + ERP), where:

o Nt is the yield on a nominal government bond of duration similar to the term of the liabilities, which was 9.3% per annum at the valuation date (see Annexure 6 below);

o P = 50%, so (1 – P) = 50%; and

o ERP equals the equity risk premium on the growth asset component.

Solving the above equation for the ERP on the basis of a discount rate of 10.2% per annum shows that our basis uses an assumed ERP on the growth asset component of 1.8% per annum, which is below the maximum permitted rate of 3% per annum.

3.2.6 Furthermore, In light of the comment in 3.2.3 above we have set out a sensitivity analysis in Section 4.3 below which shows how the valuation position of the Fund would change if the in-service member defined benefit underpin liabilities were valued using different investment return scenarios. (The sensitivity analysis also examines the effect of using different salary increase assumptions.)


31 December 2016

Long-term future price inflation

3.2.7 The long-term future price inflation assumption has been set at 6.7% per annum, which is consistent with the relationship between long-dated conventional and inflation-linked government bond yields (which is expected to give a reasonable estimation of the market’s expectation of inflation) at the valuation date. The derivation also takes into account an assumed inflation risk premium which is implicit in nominal bond yields.

At the current valuation date the inflation risk premium has been set at 0.5% per annum. This reflects a decrease of 0.7% p.a. from the inflation risk premium used at the previous valuation date. This reduction is required to comply with provision of PF Notice No. 2 of 2016 as discussed in Section 2.4 above.

3.2.8 The assumed value for inflation is above the top-end of the inflation rate target band set by the South African Reserve Bank (i.e. 3% - 6% p.a.), but reflects the market’s implied pricing of future inflation at the valuation date.

3.2.9 At the previous valuation date, the assumed long-term inflation rate was 7.0%, which was set in a consistent fashion with the method applied for the current valuation, with the exception that the inflation risk premium used in the previous valuation was not restricted to a maximum of 0.5% per annum.

3.2.10 Note that the actual numeric value assigned to price inflation is not critical in deciding on a suitable valuation basis because the other key financial assumptions (salary increases and investment returns) are, using our approach, set relative to this assumption. However, to derive a "best estimate" basis one should use an assumption which seems reasonable in the current environment and is based on market expectations of the future, as we have done.

Long-term future salary increases

3.2.11 The other important assumption is future salary increases. In order to derive this assumption, one must add a differential above general price inflation, since salary inflation is expected to outpace price inflation over the long term.

Salary increases (general and notch increases) have been assumed to take place at a rate of 2.7% p.a. higher than price inflation which equates to assumed nominal salary increases of 9.4% p.a. A rate of 9.7% p.a. was used in the previous (31 December 2015) statutory valuation, derived in a consistent way with the approach used for the current valuation.

3.2.12 As part of the valuation process, we have looked at the actual salary increase experience of the “sustaining” DB underpin members (i.e. those DB underpin members active at the current and previous valuation dates). The data provided by the Fund’s administrator indicates that sustaining DB underpin members, on average, received salary increases equal to some 8% over the inter-valuation period. Such variation in actual versus expected salary increases is normal. Our understanding is that the Employer expects long-term salary increases (including promotional increases) to exceed general inflation by 2% to 3% p.a. and accordingly we are comfortable that the ongoing assumption of salary increases at a rate of 9.4% per annum (i.e. 2.7% p.a. higher than inflation) is reasonable.

3.2.13 It is highlighted that the sensitivity analysis mentioned above also considers the impact on the funding level of the Fund of different assumed rates of future salary increases for the DB underpin members. (We would expect the salary increases for these members to be materially similar to those granted to members not entitled to this underpin. Presumably the promotional element of salary increases will reduce as the average age increases for the (closed) pool of DB underpin members, but we have not reduced the salary increase assumption to allow for this.)



Net pre-retirement discount rate

3.2.14 The net (pre-retirement) discount rate applied to in-service members is thus 0.73% p.a. (calculated as 1.102 ÷ 1.094 – 1). This is significantly lower than the 40% FTSE/JSE Earnings Yield discount rate (the basis adopted by the Fund) implied in terms of the Minimum Benefits provisions of the Pension Funds Act (1.75% p.a. as at 31 December 2016), thus resulting in a Fund liability well in excess of the requirements of the Act.

3.2.15 The net discount rate applied to in-service members remained constant compared to that used in the previous valuation (0.73% p.a.).

Demographic assumptions

3.2.16 No allowance has been made for resignation and mortality rates prior to retirement in calculating the value of the defined benefit underpin. This is a slightly conservative assumption although the incidence of resignations and deaths of DB underpin members is expected to be low.

3.2.17 No specific allowance is made for an age-related scale in respect of promotional salary increases.

3.2.18 Members are assumed to retire at their normal retirement age based on the data provided by the Fund’s administrator and members at/over the assumed retirement age (65) are assumed to retire at the valuation date. This is in line with the approach adopted for the previous valuation.

Post-retirement assumptions

3.2.19 In line with the Fund Rules the applicability of the minimum retirement benefit has been determined by converting the member’s retirement capital into a pension at a net after-retirement interest rate of 6% p.a. and using the PA(90) standard mortality table, rated down by 1 year for both males and females. (The same assumptions were used in the previous valuation.) The reasonability of using a 6% net after-retirement interest rate (in relation to the Fund’s pension increase policy) is assessed in the next section.

3.3 Valuation assumptions: pensioners

Post-retirement net interest rate and assumed rate of pension increases

3.3.1 The discount rate for the valuation of the pensioner liability has been set as 10.2% p.a. (i.e. 3.5% p.a. ahead of assumed inflation) as at the current valuation date taking into account the investment strategy underlying the pensioner reserve (refer to discussion under point 3.2.5 above).

3.3.2 The Rules specify that the Fund must convert retirement capital into pensions at an interest rate of 6% p.a. Based on an assumed long-term investment return of 10.2% p.a., the future rate of pension increases that would be consistent with the net discount rate of 6% p.a. is 3.96% p.a. i.e. (1.102 ÷ 1.0396) – 1 = 6%.

3.3.3 Thus, the pensioner liability has been valued making provision for future pension increases of 3.96% p.a., which equates to 59% of the assumed long term inflation rate of 6.7% p.a. (A pension increase assumption of 4.2% p.a. was used in the previous valuation, which equated to 60% of the inflation assumption at the time.)

3.3.4 Interpretation Note 1 of 2012 (“IN12012”) issued by the Financial Services Board is aimed at clarifying the Registrar’s position with regard to the obligations of retirement funds in setting and complying with their pension increase policies. In relation to the professional duty of the valuator, IN12012 specifies that:

a fund’s valuation basis must be set in a manner consistent with its pension increase policy;


31 December 2016

the valuator must align the funding plans with the fund’s pension increase policy; and

the valuator must ensure that there is no disconnect between the pension increase policy and the valuation basis.

The assumption set out in point 3.3.3 is slightly higher at this time than the Fund’s pension increase policy (which targets increases of some 50% of inflation, subject to the affordability thereof). However, this may not be the case in future, for example if market conditions were to change significantly leading to a reduction in the expected real return from the pensioner assets. We therefore recommend that this position is monitored in future valuation reports to ensure consistency between the valuation basis and the pension increase policy.

3.3.5 In line with the basis above, the pensioner assets would need to earn a “real return” (i.e. in excess of inflation) of some 2.9% p.a. (compared to the assumed real rate of 3.5% p.a.) in order to achieve the target level of 50% of inflation pension increases. (Since 1 January 2016, the primary investment objective of the Pensioner Portfolio is to deliver a real return of 4% per annum over rolling 6-year periods, with an observed standard deviation of 10% per annum. Prior to this date, the target real return for this portfolio was 4.5% p.a.)

Pensioner mortality

3.3.6 Pensioner mortality is assumed to be in line with the PA(90) mortality table rated down by 1 year separately for males and females.

Pensioner expenses

3.3.7 The pensioner liability includes an explicit allowance for pensioner expenses (which are deducted in practice from the Notional Pensioner Account) based on the assumption of total administration costs of approximately R102 per pensioner per month (R105 per pensioner per month at the previous valuation), which is in line with the average actual pensioner administration costs reported in the audited financial statements over the 2016 financial year (noting that these exclude the pensioners’ share of the other operational expenses (e.g. actuarial, audit, etc.). This allowance increases the overall pensioner best estimate liability by some R6.9 million.

Notional Pensioner Account

3.3.8 The Notional Pensioner Account (“NPA”) comes from the financial statements and represents the asset build-up of pension considerations transferred to this account in respect of new pensioners, plus investment return based on the assets underlying the pensioner liabilities, less pension payments and expenses.

3.3.9 Determining the NPA in this fashion is a long-established practice of the Fund. However, for completeness it is highlighted that this method of calculation of the NPA will, all other things equal, lead to a higher value than that determined according to the strict requirements of the Pension Funds Act, which have generally been interpreted to mean that these “pensioner asset build-up” calculations are only carried out in respect of pensioners who are alive at the valuation date, and hence exclude the assets in respect of pensioners that have died prior to the valuation date (i.e. so-called “mortality profits”).

3.3.10 We are, however, comfortable with the approach used by the Fund, which is also arguably fairer to the pensioners.

3.4 Solvency reserve for pensioners

3.4.1 The Fund has set up a solvency reserve for pensioners as per PF Circular No. 117. (It should be noted that the provisions of PF Circular 117 specifically related to valuations as at a fund’s



statutory surplus apportionment date (which for the Fund was 31 December 2002), but can also be seen as establishing “best practice” for subsequent valuations.)

3.4.2 The purpose of such a solvency reserve is primarily to protect the Fund against the possibility of poor future investment returns on the pensioner assets. The solvency reserve can also be regarded as contingency reserve against future improvements in pensioner mortality.

3.4.3 At the valuation date, the implied nominal return on inflation-linked bonds is 8.8% p.a., calculated as the real return of 2.1% p.a. on inflation-linked bonds of a similar term to the pensioner liabilities, plus assumed long-term inflation of 6.7% p.a. as at the current valuation date. We have made an adjustment to this return of 0.3% p.a. to allow for the implementation and maintenance costs associated with a matching strategy within the Pensioner Reserve, hence the net assumed nominal investment return is 8.5% per annum.

3.4.4 We have made provision for pension increases of 3.96% p.a. (59% of inflation) and so the net after-retirement discount rate for solvency purposes is 4.37% p.a. (i.e. 1.085 ÷ 1.0396 - 1). The corresponding net after-retirement discount rate used in the previous valuation was 4.2% p.a.

3.4.5 For solvency purposes we have assumed mortality in line with the PA(90) mortality table rated down 2 years for males and females.

3.4.6 Furthermore, we have allowed for mortality improvements of 1.5% per annum in respect of both annuitant’s and spouse’s mortality, applying for all future years with effect from 2013. Allowing for some form of pensioner mortality improvement (in the context of determining pensioner solvency reserves) is consistent with the Willis Towers Watson house view approach, and is also in line with our understanding of how insurers are currently pricing mortality risks, noting that this assumption almost certainly includes a degree of conservatism as the insurers are careful to allow for improvements in pensioner longevity.

3.4.7 Consistent with the Act we have limited the solvency reserve to that which can be afforded by the Fund, i.e. to a maximum of the NPA (adjusted, if applicable, in terms of our ongoing valuation of the pensioner matching asset structure) less the best estimate liability.

3.5 Comparative valuation assumptions

3.5.1 The table below summarises the key assumptions used in the current and previous valuations.

Valuation assumption Current valn. Previous valn.

31 Dec 2016 31 Dec 2015

Best estimate assumptions

Investment return 10.20% 10.50%

Inflation 6.70% 7.00%

Salary increases 9.40% 9.70%

Net pre-retirement “gap” 0.73% 0.73%

40% of Earnings Yield on JSE ALSI 1.75% 2.08%

Capitalisation factor for minimum benefit 6%, PA90(-1) 6%, PA90(-1)

Pension increases* 3.96% 4.20%

Ratio of pension increases to full inflation 59% 60%

Fair value assets (excl. pensioner matching strategy) Market value Market value

Value of pensioner matching strategy See 3.7 See 3.7

Valuation method (DB underpin liability) FFM FFM

Assumed retirement age (DB underpin liability)** 65 65


31 December 2016

Key assumptions (continued)

Valuation assumption Current valn. Previous valn.

31 Dec 2016 31 Dec 2015

Pensioner solvency reserve assumptions

Nominal return on ILBs 8.80% 8.90%

Cost of implementing matched strategy -0.30% -0.30%

Assumed gross investment returns 8.50% 8.60%

Provision for pension increases 3.96% 4.20%

Net after-retirement interest rate 4.37% 4.20%

Post-retirement mortality basis PA90(-2) PA90(-2)

Allowance for pensioner mortality improvements from 2013 1.5% p.a. 1.5% p.a.

*The current valuation allows for the actual 3.7% pension increase declared effective 1 April 2017, and makes provision for annual increases of 3.96% per annum on 1 April each year thereafter.

**There are two USAf DB underpin members who have a normal retirement age of 60 years. In addition, members in receipt of a disability income benefit prior to 30 June 2015 also retained a normal retirement age of 60.

3.5.2 Overall, the best-estimate assumptions in relation to the defined benefit underpin have remained the same in relative terms compared to the previous valuation.

3.5.3 The pensioner solvency reserve assumptions have weakened marginally compared to those used in the previous valuation.

3.5.4 The “gaps” between the assumptions are more important than the absolute values of each assumption in isolation. In particular, the defined benefit underpin liability for active members is highly dependent on the difference between the assumed rate of investment return pre-retirement and general future salary increases.

The actuarial valuation assesses the long-term costs of the Fund based on a certain set of assumptions, which may be regarded as a budget. It is important to note that the assumptions are not “predictions” or “guarantees”, and that the Fund’s actual experience will differ from the assumptions, and that it is the actual experience that defines the ultimate long-term cost of the Fund. It is therefore expected that items of surplus or deficit will emerge between valuations as a result of actual experience differing from the assumptions. This will impact on the funding levels at subsequent valuations.

3.6 Asset valuation (excluding pensioner matching strategy)

3.6.1 With the exception of the assets underlying the pensioner cash flow matching strategy (see Section 3.7 below), the “fair value” of the assets is taken to be the market value.

3.7 Valuation of assets underlying pensioner cash flow matching strategy

3.7.1 The Fund’s pensioner cash flow matching strategy includes exposure to a structured deposit with Absa Bank Limited and a swap arrangement with Nedbank Limited. The combined value of these arrangements, as reflected in the Fund’s annual financial statements, is R138.4 million (Absa Bank Limited R64.6 million; Nedbank Limited R73.8 million). It has been confirmed that these values reflect the “early termination value” of the assets, being the value assuming the arrangements are liquidated and all associated costs are recovered by Absa and Nedbank respectively.



3.7.2 In our opinion, these investments should be viewed as “on-going” assets which in all likelihood will be held to maturity. We have therefore valued these assets as the expected present value of the inflation-adjusted cash flows they will generate over the full term from the valuation date to the maturity of the respective schemes.

3.7.3 The cash flow matching structures with Absa and Nedbank were put in place in order to match 12 years’ of pension payments starting from 1 April 2010 and 1 January 2012 respectively, both annually adjusted on 1 April each year with the year-on-year inflation to the preceding 31 December. We have therefore assumed that future inflation adjustments to the series of projected cash flows will take place at the long-term assumed inflation rate of 6.7%. These cash flows are discounted to the valuation date at the rate of 8.8% p.a., as per the implied nominal return on inflation-linked bonds (see 3.4.3 above).

3.7.4 This method places a value of R138.5 million on these assets, which is only R0.1 million higher than the combined early termination value of these assets. On this basis we have not written up the early termination values, hence there is no adjustment required to the values reflected in the Fund’s financial statements. (Similarly, the “early termination” value of the matching portfolio was not written up at the previous valuation.)

3.7.5 The remainder of the pensioner assets (the “best ideas” portfolio) have been valued at market value for the purposes of the valuation.


31 December 2016

Section 4: Valuation Results

4.1 Valuation Results

4.1.1 The table below provides a summary of the liabilities, assets and funding level of the Fund as at the current and previous valuations. (All figures below are given in R’ million.)

Item Current valn. Previous valn.

31 Dec 2016 31 Dec 2015

Defined Contribution Liabilities 4 958.6 4 834.9

Member Credit Accounts 4 846.4 4 723.5

Member Supplementary Accounts 56.5 56.5

Living Annuity Pensioner Account 55.7 54.9

Best Estimate Defined Benefit Liabilities 995.0 836.8

Value of defined benefit underpin (past service) 42.6 44.8

Value of defined benefit underpin (future service) 16.4 15.2

Pensioner liability (best estimate) 936.0 776.8

Sub-total: Overall best estimate member liabilities 5 953.6 5 671.7

Reserve Accounts 281.0 306.3

Pensioner Solvency Reserve Account 48.6 87.3

General Reserve Account (recommended – see 4.5) 41.3 34.1

Employer Surplus Account (recommended – see 4.6) 191.1 184.9

Sub-total: Overall membership liabilities & reserves 6 234.6 5 978.0


Actuarial surplus/ (deficit) 0.0 0.0


Market value of assets ÷ best estimate liabilities 104.7% 105.4%

4.1.2 The valuation results summarised above show that the Fund had a funding level of 100.0% and nil actuarial surplus (as defined in terms of the Rules of the Fund) at the current valuation date.

4.1.3 At the previous valuation date, the market value of the Fund’s net assets exceeded the overall best estimate membership liabilities by R306.3 million (implying a ratio of overall assets to best estimate liabilities of 105.4%). At the current valuation date, the market value of the Fund’s net assets exceeded the overall best estimate membership liabilities by R281.0 million (implying a corresponding ratio of 104.7%).

4.1.4 The movements between the values at the previous and current valuation dates are discussed in the sections below.

4.1.5 It is highlighted that the Member Supplementary Account (which is a defined contribution account) refers to that part of the Member Credit Account which is equal to the accumulation (with Fund returns) of Employer contributions in lieu of its obligation to fund the post-retirement medical aid premiums for eligible members, plus any voluntary contributions by members, plus any other contributions which accrue to the Member Supplementary Account in terms of the Fund’s Rules.



4.2 Living Annuity Pensioner Account

4.2.1 The financial statements reflect a balance in the Living Annuity Pensioner Account equal to R55.7 million at the current valuation date (R54.9 million at the previous valuation date).

4.2.2 Section 14B(3)(c) of the Pension Funds Act states that a pension increase policy is not required for pensioners where the amount of the pension is elected by the pensioner from time to time, and is paid from the fund in terms of the rules. This exemption clearly covers the case of pensioners who have elected living annuities payable from the Fund. Furthermore Interpretation Note 1 of 2010 (issued by the FSB in March 2010 in order to clarify certain points regarding the application of minimum pension increases) confirms that the minimum pension increase requirements do not apply to this category of pensioners. Hence we have excluded the Living Annuity Pensioner Account balance from the Notional Pensioner Account (NPA) and reflected it as a separate (defined contribution) liability, which is consistent with the structure of this account as per the Rules of the Fund.

4.3 Defined Benefit Underpin

4.3.1 The small overall reduction in the value of the defined benefit underpin liability (in respect of past and future service) results from the combined effect of a number of items, the most important of which was the actual investment returns earned on eligible members’ defined contribution account balances and the actual increases in pensionable salaries over the inter-valuation period, compared to the respective actuarial assumptions made in this regard. The liability will also grow each year as the members approach retirement (i.e. the so-called “interest cost”) but this will be countered by the extent to which there are “exits” from the DB underpin pool (retirements or withdrawals).

4.3.2 It is highlighted that the defined benefit underpin liability is highly sensitive to changes in the actuarial assumptions, particularly the “gap” between the assumed rate of investment return pre-retirement and general future salary increases. This is demonstrated in terms of the sensitivity analysis below.

Item/ scenario “Valuation” 1 2 3 4

Nominal investment returns 10.20% 9.20% 11.20% 10.20% 10.20%

Real investment returns 3.50% 2.50% 4.50% 3.50% 3.50%

Nominal salary increases 9.40% 9.40% 9.40% 10.10% 8.70%

Real salary increases 2.70% 2.70% 2.70% 3.40% 2.00%

Net pre-retirement "gap" 0.73% -0.18% 1.65% 0.09% 1.38%

Total DB underpin liability (R’m) 59.0 156.0 26.3 112.5 33.8

Increase (%) vs. best estimate basis N/A 164% -55% 91% -43%

Increase (R'm) vs. best estimate basis N/A 97.0 -32.7 53.5 -25.2

4.3.3 The different scenarios in the sensitivity analysis can be explained as follows:

■ Scenario “Valuation” – this is the “base” scenario which corresponds with the best-estimate assumptions, as explained in Section 3.2 above.

■ Scenario “1” examines a pessimistic outcome for future investment returns where the long-term real returns achieved reduce from 3.5% p.a. to 2.5% p.a. In this scenario, the salary increase assumption is maintained at 2.7% p.a. real, which means that salary increases are assumed to outpace future investment returns. This would be a somewhat unusual outcome in normal market conditions unless salary increases are very high but even on this basis the balance in the Employer Surplus Account will be sufficient to cover the increase in the DB underpin liability.


31 December 2016

■ Scenario “2” examines an optimistic outcome for future investment returns in terms of which the long-term real returns achieved increase from 3.5% p.a. to 4.5% p.a. In this scenario, the salary increase assumption is again maintained at 2.7% p.a. real.

■ Scenario “3” looks at the situation where salary increases granted to the members entitled to the DB underpin are assumed to take place at 3.4% p.a. real, which is 0.7% per annum higher than the base assumption. Investment returns are as per the base assumption (3.5% p.a. real) so future salary increases are assumed to be only very slightly behind future investment returns.

■ Scenario “4” looks at the situation where salary increases granted to the members entitled to the DB underpin are assumed to take place at 2.0% p.a. real, which is 0.7% per annum lower than the base assumption. Investment returns are as per the base assumption (3.5% p.a. real).

4.3.4 From the above it can be seen that a roughly 1% per annum change in the net pre-retirement discount rate (i.e. the difference between investment returns and salary increases) has a very significant impact on the calculation of the DB underpin liability.

Overall comment on investment returns and salary increases

4.3.5 We remain concerned that after a period of strong investment returns (over the past 5 years, the real returns on the Inflation Target, Stable and Pensioner Portfolios have been 7.8%, 6.1% and 6.5% per annum respectively) the Fund is more exposed to financial risk going forward. The financial position of the Fund is currently very healthy but, as demonstrated above it can deteriorate rather quickly if investment returns are poor and/or salary increases prove to be much higher than budgeted for. However, the fact that the balance in the ESA provides a coverage ratio of 3.2 times the assessed value of the minimum benefit liability provides a very health margin of safety. Even if the coverage ratio was to reduce, say to 1.5 times to twice the said liability, the position would still be healthy.

4.4 Pensioner liability and pensioner solvency reserve account

4.4.1 The best estimate pensioner liability has increased significantly over the inter-valuation period, mainly as a result of new retirements that elected a life pension over the period.

4.4.2 The amount allocated to the Pensioner Solvency Reserve Account at the current valuation date is R48.6 million (R87.3 million at the previous valuation date).

4.4.3 The full required solvency reserve in respect of pensioners has been calculated in accordance with the provisions of Circular PF 117 using the “discontinuance matched approach”. This is consistent with the approach used in previous valuations. The pensioner liability calculated on the solvency reserve basis (refer to Section 3.4) is equal to R1 181.5 million. The pensioner liability calculated on the “best estimate” basis is R936.0 million. The difference between these two values of R245.5 million (or 26% of the best estimate liability) is then the full solvency reserve required for the pensioners of which 15% is attributable to removing the equity risk premium and 11% is due to the more conservative longevity allowance.

4.4.4 According to the audited financial statements of the Fund, the balance of the Pensioner Account (or Notional Pensioner Account / NPA) is R984.6 million at the valuation date. This is taken as the aggregate of the Pensioner Account of R897.3 million and the Pensioner Solvency Reserve Account of R87.3 million in terms of the annual financial statements.

4.4.5 The excess of the Notional Pensioner Account (R984.6 million) over the best estimate liability (R936.0 million) is equal to R48.6 million, hence the pensioner solvency reserve has been restricted to this amount, consistent with the provisions of Circular PF 117. This represents a pension smoothing reserve of some 5.2% of the best estimate liabilities which represents a



buffer against future investment returns being poor, and/or future mortality being lighter than assumed.

4.4.6 It is highlighted that the value of the Pensioner Account in the annual financial statements (R897.3 million) reflects an accounting build-up over the particular financial year. This value is expected to differ from the actuarial liability in respect of the pensioners at the same date (R936.0 million) which is determined as part of this valuation and represents the present value of the projected future pension payments, calculated based on the assumptions set out in Section 3 above. Therefore at each actuarial valuation date, a recommendation is made to realign the financial statement values of the Pensioner Account and Pensioner Solvency Reserve Account with the final values determined as part of the actuarial valuation – see 1.7.1.2 above.

4.4.7 The amount allocated to the Pensioner Solvency Reserve Account of R48.6 million represents some 20% of the full required solvency reserve determined according to the provisions of Circular PF 117. While this ratio may appear low, it is highlighted that the basis provides for future pension increases of 59% of inflation on a basis which is materially similar to what an insurer would charge to guarantee such increases. The Pensioner Solvency Reserve Account is a buffer to smooth pension increases and in any case the Board can limit future pension increases as they are subject to affordability.

4.4.8 In our opinion the Fund is able to continue with its reasonable benefit expectation of pension increases of 50% of inflation as the pensioner liability is fully funded on a best-estimate basis (refer to the discussion in point 3.3.4 above) . As explained above the Fund also has a margin of safety in the form of a solvency reserve for pensioners which equates to some 5.2% of the liabilities calculated on a best estimate basis.

4.5 General reserve account

4.5.1 The balance of the General Reserve as per the financial statements of the Fund is equal to R41.3 million, which represents approximately 0.69% of the total in-service member and pensioner liabilities at the valuation date. We are comfortable to retain the General Reserve Account at this level and to reassess the position at the next valuation date.

4.6 Employer surplus account

4.6.1 The actual balance of the Fund’s Employer Surplus Account as per the financial statements of the Fund at the valuation date is R191.9 million. A recommendation stemming from this report is that an amount of R0.8 million (being the actuarial strain resulting from the movement in the defined benefit underpin liability over the year) should be transferred from the Employer Surplus Account to fund the strain, leaving an Employer Surplus Account balance of R191.1 million at the valuation date.

4.6.2 We are satisfied that the balance in the Employer Surplus Account (ESA) is sufficient to cover any increase in the cost of the defined benefit underpin under normal market conditions. The situation would need to be reviewed if the Employer decides to use a significant proportion of the ESA (as permitted in terms of the Pension Funds Act) and/or investment returns are poor and/or salary increases granted by the Employer exceed inflation by a large margin (refer to sensitivity analysis under Section 4.3 above).

4.6.3 The balance in the Employer Surplus Account is also available to cover adverse experience in relation to the Fund’s pensioners. Should the pensioner section of the Fund become underfunded (i.e. there are insufficient assets available to meet the pensions payable with no allowance for future increases), the Rules of the Fund stipulate that the Employer is required to make additional contributions to the Fund “as determined by the Actuary”, and the balance in the Employer Surplus Account is also available to cover this risk.


31 December 2016

4.7 Member surplus account

4.7.1 The Fund was in deficit at its statutory Surplus Apportionment Date (31 December 2002) and hence the Member Surplus Account (MSA) (even though only formally registered in terms of the Rules at a later stage) was zero at that date. No allocations have been made to this account since the Surplus Apportionment Date and the balance of the MSA as at the current valuation date is therefore zero.

4.8 Current cost of benefits

4.8.1 The recommended Employer future service contribution rates are shown below (members are not required to make contributions to the Fund), noting that the cost of the risk benefits includes the cost of the ancillary disability income and funeral expenses.

Contributions with effect from 1 January 2017

Period: With effect from 1 January 2017

% of salary bill Members other than

Former Vista members


members*





4.8.2 There is no longer any differentiation between the contribution rates towards risk benefits for members aged less than 60 and members aged 60 and older, as all members (with the exception of USAf members – see section 2.2 above) are now entitled to disability benefits until age 65.


Risk Benefits

4.8.3 The risk benefits contribution rate payable by the Employer is inclusive of amounts contributed by UNISA to a separate disability income scheme and funeral arrangement outside the Fund.

4.8.4 It is highlighted that the risk benefits of the Fund are reviewed on an annual basis. The risk benefits review carried out at the end of 2015 resulted in a reduction in the overall cost of the risk benefits which is reflected in the 2016 contribution summary tables above. In this regard it is noted that the rates agreed with the insurer as part of the 1 January 2016 “risk re-broke” were guaranteed for a period of 2 years, i.e. until 31 December 2017.)

4.8.5 Reviewing the risk benefits on an annual basis means that in the event of adverse claims experience the insurer can increase the premium rates. In terms of the Fund Rules, the Employer will contribute a maximum of 6.5% of pensionable salary for risk benefits (including the separate disability and funeral benefits) and expenses. The current contribution rate (i.e. over the year commencing on 1 January 2017) payable for risk benefits and expenses is 1.90% of pensionable salary and therefore the Fund has a large margin of safety before the 6.5% cap is breached and the risk benefits need to be reduced.

Fund Expenses

4.8.6 The General Reserve Account analysis for 2016 indicates that a profit of R1.9 million has arisen in respect of the actual Fund expenses relative to the contributions in respect of expenses. A similar profit of R1.9 million arose in the previous financial year and in fact the total profits from



this issue since the start of 2009 have amounted to R16.5 million (an average of R2.06m over the last eight years).

4.8.7 At the previous valuation date, it was recommended that the provision for Fund expenses be reduced from 0.50% to 0.45% of pensionable salaries with effect from 1 January 2017, which was agreed and implemented by the Board.

4.8.8 Our recommendation is that with effect from 1 January 2018, the provision for Fund expenses is once again marginally reduced from 0.45% to 0.40% of pensionable salaries.

In this regard the annual pensionable salaries of in-service members at the valuation date (31 December 2016) total some R1 889.6 million (there was an increase in the active membership of some 9% over the valuation period). Assuming the pensionable salary bill remains constant over the year (i.e. the effect of salary increases plus new joiners is offset by exits) a 0.4% allocation to Fund expenses would amount to R7.6 million. Fund operational expenses for 2016 amounted to R8.2 million, with R0.6 million relating to pensioners (see comments in 3.3.7 above) being deducted from the Pensioner Reserve. Deducting the pensioner expenses gives a balance of R7.6 million, meaning that the expected allocation could support the current level of ongoing administration costs, but with no allowance for an increase in such costs. However, an average annual profit in the region of R2 million has emerged in the General Reserve Account over the last eight years, and this account (which currently stands at R41.3 million) could easily support an expense overrun in 2018 (the accrual of additional profits to this account is likely to result in another surplus distribution exercise). Finally, we note that the Fund is valued annually hence the allocation toward Fund expenses and the level of the General Reserve Account will be reviewed as part of the 31 December 2017 valuation.

Contribution Rate Review

4.8.9 The recommended Employer contribution rate covers the on-going benefits provided for in terms of the Rules. (Note that the ongoing cost in respect of the DB underpin is nil as the liability has been calculated based on full prospective service, rather than accrued service.)

4.8.10 The recommended Employer contribution rate will be formally reviewed again as part of the next actuarial valuation which will be carried out with an effective date of 31 December 2017. (Note that this date coincides with the date upon which the next review of the risk benefits takes place, hence the rates payable in terms of risk benefits may also change depending on the outcome of this review.)

4.8.11 For completeness, it is highlighted that any increase / reduction in the total Employer contribution rate will result in a reduction / increase in the “take home” pay for Fund members who are on a total cost to company remuneration structure.


31 December 2016

Section 5: Inter-Valuation Experience

5.1 Introduction

5.1.1 The approach taken in this valuation (consistent with the previous valuation) of reserving for the full Notional Pensioner Account means a surplus or deficit can only arise as a consequence of the experience on the defined benefit underpin and/or changes in the General Reserve Account.

5.1.2 The sections below show the build-up of the Employer Surplus Account (ESA) and General Reserve Account (GRA) over the inter-valuation period.

5.2 Reconciliation of Employer Surplus Account (ESA)

5.2.1 The table below sets out a reconciliation of the ESA over the inter-valuation period.

Item ESA reconciliation

R’ million

ESA at previous valuation date (per statutory valuation) 184.9

Investment return earned on ESA 7.0

Sub-total: ESA balance per financial statements 191.9

Actuarial gain/ (loss) over the year (0.8)

Recommended ESA value at current valuation date 191.1

5.2.2 An overall actuarial loss of R0.8 million has emerged over the 12-month inter-valuation period, and our recommendation is that this should be debited against the ESA in terms of Rule 37.2.7 of the Fund’s Rules.

5.2.3 The actuarial loss results mainly from the net effect of the following items, some of which are gains, while others are losses (note that we have only looked at the most important items of gain and loss over the year):

■ Actual investment returns earned on the assets underlying the Fund Credits of DB underpin-entitled members were lower than the investment return assumption used in the previous valuation (the latter being 10.5% per annum). This caused an estimated loss of approximately R24.0 million.

■ Actual average salary increases for DB underpin members over the inter-valuation period were lower than the assumed rate of 9.7% leading to a gain of approximately R30.3 million.

■ The change in the actuarial assumptions has resulted in an actuarial loss of R0.9 million. Although the key financial assumptions have remained very similar in relative terms, the use of a lower nominal investment return assumption (and a lower salary increase assumption) has led to a small loss emerging.

■ Other miscellaneous items in aggregate are estimated to have given rise to a net loss of R6.2 million over the year.



5.3 Reconciliation of General Reserve Account (GRA)

5.3.1 The table below sets out the build-up of the General Reserve Account over the inter-valuation period.

Item R’ million

Opening balance as at 1 January 2016 (as per the previous valuation) 34.1

Unallocated return on Bank Account not unitised 1.8

Performance fees accrued in Dec 2015 and Dec 2016, but only reflected in unit prices in 2016 and 2017

2.5

Profit on contributions in respect of expenses relative to actual expenses funded from the GRA

1.9

Adjustments -0.5

Investment returns on the GRA over the year 1.5

Closing balance per annual financial statements as at 31 December 2016 41.3

5.3.2 The table above shows an expense profit of R1.9 million arising over the inter-valuation period.

5.4 Adjustments required to Minimum Benefit Account

5.4.1 The Minimum Benefit Account (which effectively represents the defined benefit underpin liability) as at 31 December 2016 was R58.2 million in the annual financial statements of the Fund.

5.4.2 The value of total defined benefit underpin liability at the current valuation date amounted to R59.0 million (R42.6 million in respect of the accrued past service portion and R16.4 million in respect of the future service portion). The Minimum Benefit Account will therefore need to be credited with an amount of R0.8 million in order to increase the value per the annual financial statements to be in line with the corresponding valuation liability.

5.4.3 The increase of R0.8 million to the Minimum Benefit Account can be reconciled with the corresponding actuarial loss which we are recommending is debited to the Employer Surplus Account over the year ending 31 December 2016 (refer to the table in 5.2.1 above).


31 December 2016

Section 6: Minimum Pension Increases

6.1 Minimum Pension Increases

Background

6.1.1 The Pension Funds Act requires registered retirement funds to provide pension increases that meet specified “minimum pension increase” requirements. The details of these requirements are quite complex, and are not clearly defined in all respects. In recognition of this, the Financial Services Board issued Interpretation Note 1 of 2010 (IN12010) in March 2010, which clarified the regulator’s interpretation on certain points.

6.1.2 As stated under Section 4.2 above, it is highlighted that this section of the report does not apply to the Fund’s living annuity pensioners.

Minimum Pension Increase (“MPINC”) Test

6.1.3 The Fund is required to carry out a Minimum Pension Increase (“MPINC”) test once every three years. The application of this test normally coincides with the statutory valuation date, but is complicated by the fact that the Fund’s pensioners receive annual increases on 1 April each year.

6.1.4 During 2007, the Pension Funds Act was amended to state that no minimum increase is required if it will make a fund “financially unsound”. The FSB clarified its interpretation of this phrase in IN12010 such that a fund should be considered financially unsound unless it is able to make full allocations to reserves.

6.1.5 The minimum pension increase test carried out as part of the Fund’s statutory actuarial valuation effective 31 December 2014 showed that no action was required by the Fund at that date, as the Fund was not able to set aside the full required solvency reserve for pensioners.

6.1.6 It is therefore not a requirement of the Act that the test formally is carried out as part of this statutory valuation, although it is highlighted that the position at the current valuation date is similar to that which applied at the previous valuation date in that the Fund is again unable to set aside the full required solvency reserve for pensioners - see table below in terms of which the Notional Pensioner Account is compared to the pensioner liabilities (calculated on both the best estimate and solvency reserve bases).

Comparison of NPA to pensioner liabilities

Current valuation

31 Dec 2016 (R’ million)

Previous valuation

31 Dec 2015 (R’ million)

Notional Pensioner Account (NPA) (see section 4.4) 984.6 864.1

Best estimate pensioner liability 936.0 776.8

Ratio of NPA to best estimate pensioner liability 105.2% 111.2%

Full req’d Solvency Reserve pensioner liability (see section 4.4) 1 181.5 988.0

Is Fund able to set aside full solvency reserves for pensioners No No

Ratio of NPA to solvency reserve pensioner liability 83.3% 87.5%

6.1.7 In terms of the ratio of the NPA to the solvency reserve pensioner liability, our comments under section 4.4 above should be noted.

6.1.8 The next formal application of the minimum pension increase test should be carried out no later than 31 December 2017.



Section 7: Investment Strategy

7.1 Background

7.1.1 The Board is responsible for the investment of the Fund’s assets, and needs to ensure that the investment strategy of the Fund remains appropriate given the nature of the Fund’s liabilities.

7.1.2 In addition, Board Notice 149 of 2010, issued by the Registrar of Pension Funds requires the actuary to certify the suitability of the Fund’s investment strategy as part of the valuation report.

7.2 Investment Strategy for in-service members

7.2.1 The investments of the Fund as at the valuation date are summarised in Annexure 3 of this report.

7.2.2 Investment returns are declared monthly to the Fund credits of the active members of the Fund based on the returns earned on the underlying investments.

7.2.3 The Fund follows an age-related life stage model in respect of active members that do not exercise investment choice and hence the returns applied to each member’s fund credit naturally vary according to a member’s age and the investment portfolio in which his/her fund credit is invested.

7.2.4 The returns credited to members’ Fund credits are calculated net of the respective investment management fees.

7.2.5 Differentiation therefore occurs between members in the level of returns that are credited to the member accounts as a result of the following:

■ Members in the Fund’s life stage model will receive different returns based on the investments underlying their Fund credits (which vary according to members’ retirement ages); and

■ Members who have made different positive elections (in terms of the investment choice options available under the Fund) with regard to their Fund credits and future contributions will earn the appropriate rates of investment return on these amounts.

7.2.6 Differentiation based on the scenarios identified above is clearly equitable.

7.2.7 Certain members present as at 1 September 1996 are entitled to a minimum retirement benefit. The assets underlying the liability held in respect of this “defined benefit underpin” are invested separately in the “reserves” of the Fund. It is highlighted that if any of the members entitled to this benefit make a positive election to opt out of the life stage model (in which their defined contribution Fund credit is invested), they forfeit their entitlement to the defined benefit underpin.

7.2.8 It is important to note that the Fund is operated on the basis that there are sufficient assets in each of the member portfolios to cover the liability in respect of that portfolio. Analysis has been carried out to confirm that that was indeed the case as at the valuation date.

7.2.9 The matching of assets and liabilities (the latter based on the values provided by the Fund’s Administrator) is closely monitored on a monthly basis as part of the overall unitisation process.


31 December 2016

7.3 Investment Strategy for Defined Benefit Pensioners

7.3.1 The Fund applies a separate investment strategy in respect of defined benefit pensioners (i.e. those pensioners who have elected to receive a life pension from the Fund).

7.3.2 The strategy consists of a cash flow matched strategy (refer to Annexure 3 for details) together with a market-linked “best ideas” portfolio.

7.4 Investment Strategy for Defined Contribution (Living Annuity) Pensioners

7.4.1 The Fund offers the option of a living annuity to retirees. There is no default investment strategy for pensioners that elect this option and they must nominate an investment strategy as any combination of the Inflation Target, Stable, Income Protection and Shari’ah Portfolios.

7.5 Investment Strategy for Reserves

7.5.1 All of the reserves of the Fund, apart from the Pensioner Reserve, are invested in the Stable Portfolio. This portfolio has an overall strategic allocation of some 50% to “market related” or “growth” assets (domestic and offshore equities, and domestic property) with the balance being invested in domestic short-term absolute and enhanced cash portfolios. (The short-term domestic absolute portfolio will also have some exposure to growth assets.)

7.5.2 A cash flow matching strategy has been implemented for the Pensioner Reserves with the aim of matching 50% of the pensioner liabilities (see Note (d) in Annexure 3 of the report). The strategic allocation to the matching portfolio has therefore been set at 50% of pensioner assets, with the balance of the assets invested in a combination of domestic and offshore equities, domestic and offshore property and credit assets.

7.6 Certification

7.6.1 I have examined the investment strategy (for defined contribution members this refers to the default investment strategy) and certify that it is appropriate in relation to the nature and term of the various liabilities of the Fund taking into account that a solvency reserve is held in respect of the pensioners and there is a significant balance in the Employer Surplus Account to deal with any shortfall in respect of the defined benefit underpin.



Section 8: Signature

Name

Greg Hatzkilson

Peet Naude

Ant Lester

Capacity/ Position

Fund Valuator/ Associate Associate Peer review

Qualification Date:

B.Econ.Sci, FASSA 31 August 2017

B.Sc, FASSA 31 August 2017

B.Sc. 31 August 2017

Assisted by: Lerato Malima B.Sc. (Hons)

Name of Employer

Towers Watson (Pty) Ltd

Address 1st Floor 44 Melrose Boulevard Melrose Arch Johannesburg, 2196


31 December 2016

Annexure 1 – Summary of Benefits

Introduction

A summary of the Fund benefits is provided below. These are the benefits in effect at the valuation date. For full details of the Fund benefits, reference should be made to the Fund’s Rules.

Eligibility

Employees of UNISA, USAf, PURCO SA or any employer permitted in terms of the Rules to participate in the Fund, who in terms of their conditions of service are required to join the Fund.

Normal retirement age

With effect from 1 January 2013 the normal retirement age changed such that it is now the end of the calendar year in which the member attains the age of 65 years (with the exception of USAf members who retained a normal retirement age of 60 years).

In the case of a member who is in receipt of a disability income benefit as at 30 June 2015, the normal retirement date is the end of month in which the member turns 60. In the case of a member who becomes entitled to a disability income benefit after 1 July 2015, the normal retirement date is the end of the month in which the member turns 65. If a different retirement age is specified in the member’s employment contract, the normal retirement age shall be the age so specified unless the member is in receipt of a disability income benefit as at 30 June 2015 in which case the above provisions apply.

Upon reaching the normal retirement age, members may elect to defer receipt of their retirement benefits (subject to certain conditions which the Board may impose) up to such maximum age as may be specified in the Income Tax Act, but no later than age 75.

Retirement benefits

The retirement benefit is the Member Fund Credit. For certain members present at 1 September 1996 this is subject to a minimum retirement benefit calculated as the capital equivalent of a pension determined as a specified accrual rate, multiplied by the member's average pensionable salary over the last two years prior to retirement, multiplied by pensionable service, excluding any balance in the member’s Supplementary Account.

The pension accrual rate used to calculate the minimum retirement benefit is as follows.

Age last birthday at retirement Accrual Rate

60 1/55

61 1/54

62 1/53

63 1/52

64 1/51

65 1/50

The member may elect to receive this benefit as any combination of cash and/or pension. The member may further elect that his/her pension benefit be paid from the Fund or an insurer of the member’s choice.

The Fund offers the choice of a life annuity or a living annuity although the provision of the living annuity is subject to certain limitations as determined by the Board.



Early retirement

The member may early retire from the age of 55 onwards. The retirement benefit is the Member Fund Credit. The minimum retirement benefit (if applicable) will be reduced by 0.5% per month, for each month between the early retirement age and age 60.

Late retirement

Members retiring after the normal retirement date will also receive their Member Fund Credit.

Resignation benefits

The resignation benefit is the Member Fund Credit. (For those members entitled to the defined benefit underpin, their Member Fund Credit must be tested against the statutory minimum individual reserve, and increased to this level if necessary.)

Death-in-service benefits

On death in service on or before normal retirement age the benefit is the total of:

The Member Fund Credit; plus

Twice the member’s annual pensionable salary; plus

A spouse’s pension of 35% of the member’s annual pensionable salary at his/her date of death. If there is no spouse, but surviving minor children, this 35% benefit will be paid to the children.

It is highlighted that different death-in-service benefits apply for those members defined in the Rules as Vista Members.

Contribution rates

The Employer pays the full contribution to the Fund – the contribution rates, determined as a percentage of Pensionable Salary, are as follows:

Pension saving: 16.0%

Risk benefits* and expenses: 6.5% (maximum)

*Inclusive of amounts contributed by all employers to a separate disability income scheme and funeral arrangement outside the Fund.

Category A members: In addition to the contribution which it makes as set out above, the Employer contributes an additional amount of 2.5% of pensionable salary for those members of the Fund that are classified as Category A members in terms of the Rules and who opted to select this category. All such contributions shall be credited to the Member’s Supplementary Account.

Voluntary contributions: In-service members, while not being required to make contributions to the Fund, may elect to make additional voluntary contributions at a specified Rand amount, or such regular contributions which may be any one of 2.5%, 5% or 7.5% of pensionable salary, provided that the maximum contribution for a Category A member shall be 5% of pensionable salary. Any such regular member contributions are credited to the Member’s Supplementary Account.


31 December 2016

Annexure 2 – Summary of Membership This Annexure gives a summary of the membership of the Fund as at the current and previous valuation dates. The membership summaries are provided separately for active members (in this case, statistics are shown for all active members, and additional statistics are shown for only those active members that are entitled to the minimum retirement benefit) and pensioners.

Active Members (All)

Membership statistics

Statistic 31.Dec.16 31.Dec.15

Number of members* 4 660 4 277

Total annual pensionable salary (R’ million)* R 1 889.6m R 1 730.2m

Average annual pensionable salary (R’ 000)* R 407 000 R 406 000

Salary-weighted average age (years) 46.6 46.4

Average past service term (years) 10.1 10.6

Number of members entitled to the minimum retirement benefit 771 837

*This includes members at the current valuation date that are in receipt of a disability income benefit but remain members of the Fund. The membership also includes “deferred members” at the current valuation date, as well as a small number of “nil contributors”. The pensionable salary statistics exclude the deferred members and nil contributors.

Average salary increases to members present at both valuation dates**

Average salary comparison

Number of members present at both dates** 4 079

Average pensionable salary 31 December 2015 R 403 000

Average pensionable salary 31 December 2016 R 435 000

Increase in average pensionable salary over 2016 7.9%

**This excludes members classified as “deferred” or “nil contributors”, i.e. where the member’s pensionable salary is zero) as at 31 December 2016.

Active Members (entitled to minimum retirement benefits)

Membership profile of members entitled to DB underpin: current valuation (31 Dec 2016)

Age group Number Average pens.

Salary

Average Service (years)

Average member

Credit (excl. Suppl.)

Total minimum

benefit liability

Average total minimum

benefit liability

40-44 27 R 380 009 22.0 R 1 767 191 R 2 569 580 R 95 170

45-49 122 R 409 159 23.1 R 2 144 037 R 8 527 518 R 69 898

50-54 162 R 454 333 25.4 R 2 631 940 R 16 652 788 R 102 795

55-59 236 R 519 628 28.3 R 3 572 073 R 19 079 865 R 80 847

60-65 224 R 598 745 31.1 R 4 626 688 R 12 203 635 R 54 481

Totals 771 R 506 525 27.5 R 3 391 762 R 59 033 386 R 76 567



Membership profile of members entitled to DB underpin: previous valuation (31 Dec 2015)

Age group Number Average pens.

Salary

Average Service (years)

Average member

Credit (excl. Suppl.)

Total minimum

benefit liability

Average total minimum

benefit liability

35-39 2 R 333 396 20.2 R 1 684 271 R 0 R 0

40-44 50 R 353 007 21.0 R 1 756 063 R 1 596 810 R 31 936

45-49 129 R 386 136 22.9 R 2 146 197 R 9 515 313 R 73 762

50-54 194 R 449 677 24.9 R 2 725 201 R 17 582 199 R 90 630

55-59 239 R 487 532 27.9 R 3 529 899 R 13 319 080 R 55 728

60-65 223 R 557 115 31.0 R 4 382 523 R 17 895 468 R 80 249

Totals 837 R 474 174 26.8 R 3 256 805 R 59 908 870 R 71 576

Life Annuity Pensioners paid from the Fund

Current valuation (31 December 2016) excluding suspended pensioners

Item Principal

pensioners Spouse’s pensions

Children’s pensions

Total

Number of pensioners 345 182 10 537

Total annual pension (R’ million) R 70.2m R 16.4m R 0.8m R 87.4m

Average age (years) 68.9 60.2 13.1 64.9

Previous valuation (31 December 2015) excluding suspended pensioners

Item Principal

pensioners Spouse’s pensions

Children’s pensions

Total

Number of pensioners 307 178 11 496

Total annual pension (R’ million) R 55.8m R 14.5m R 0.8m R 71.1m

Average age (years) 68.5 59.8 13.4 64.2

Living Annuity Pensioners paid from the Fund (Defined Contribution)

In addition to the Fund pensioners receiving a life annuity, there are also a small number of pensioners

in receipt of a living annuity from the Fund at the valuation date. Brief statistics for the living annuity

pensioners at the current and previous valuation dates are given below.

Item Current

valuation 31 Dec 2016

Previous valuation

31 Dec 2015

No. of defined contribution (DC) living annuity pensioners 14 14

Total living annuitant DC account balance (R’ million) R55.7m R54.9m

Average living annuitant DC account balance (R’ million) R4.0m R3.9m


31 December 2016

Annexure 3 – Summary of Assets

Net assets of the Fund at the current and previous valuation dates

The market values of the overall Fund net assets (per the annual financial statements (AFS)) at the current and previous valuation dates are reflected in the table below.

Asset Manager Asset Class / Mandate Note

Current valuation

31 Dec 2016 R’ million

Previous valuation

31 Dec 2015 R’ million

Abax SA Equities 620.9 631.5

Allan Gray SA Equities 558.8 506.7

Truffle SA Equities 413.3 424.8

Visio Capital SA Equities 503.6 511.7

Sub-total SA Equities 2 096.6 2 074.7

Investec SA Listed Property 236.2 231.2

Meago SA Listed Property 129.4 117.7

Sub-total SA Listed Property 365.6 348.9

Prudential SA Bonds 175.5 157.6

Investec SA Bonds 175.7 159.5

Sub-total SA Bonds 351.2 317.1

Investec Credit Opportunities SA High Yield Debt 222.1 196.0

Vantage Green X Renewable Energy Debt (a) 42.0 48.0

Sub-total SA High Yield Debt 264.1 244.0

Investec Credit Income SA Enhanced Cash 538.2 419.6

Investec Money Market (d) 600.5 459.3

Sub-total SA Cash and “Enhanced Cash” 1 138.7 878.9

Absa Pensioner Matching Structured deposit: pensioner matching (c) 64.6 72.2

Nedbank Pensioner Matching Swap arrangement: pensioner matching (c) 73.8 77.3

Futuregrowth IDIL bond fund (b) 45.7 -

Investec Enhanced SA Inflation-Linked Bonds 173.6 163.9

Investec Money Market (d) 90.5

Vantage Green X Renewable Energy Debt (a) 45.9 38.2

Sub-total SA Bonds (Pensioner Matching) (d) 494.1 351.6

Coronation Inflation Plus SA Absolute Return 127.3 203.3

Sub-total SA Absolute Return 127.3 203.3

Investment Solutions Shari'ah Shari'ah (Global Balanced) 14.3 12.1

Sub-total Shari'ah (Global Balanced) 14.3 12.1

Orbis Global Equities 223.6 218.6

Coronation GEM Global Equities 112.3 111.6

Hosking Partners Global Equities 361.3 439.5

Walter Scott Global Equities 220.9 252.6

Lindsell Train Global Equities 215.7 265.2

Sub-total Global Equities 1 133.8 1 287.5

Pimco Global Bonds 142.6 155.6

Sub-total Global Bonds 142.6 155.6

Resolution Capital Global Real Estate 151.5 165.3

Sub-total Global Real Estate 151.5 165.3

Sub-total: Investments per annual financial statements 6 279.8 6 039.0

Net current assets (including allowance for non-current liabilities) -45.2 -61.0

Total net assets per financials 6 234.6 5 978.0

Adjustment to financials - -

Total net assets for valuation 6 234.6 5 978.0



Notes relating to the Fund’s assets

The following notes highlight the key features of and changes to the investment strategy of the Fund which took place over the inter-valuation period (i.e. over the 12 months ended 31 December 2016):

a) The Vantage portfolio invests in the senior debt of a number of renewable energy projects. Of the total balance in the Vantage Green X Fund at the valuation date (R87.9 million), 47.8% is allocated to the Inflation Target Portfolio (R42.0 million) and 52.2% to the Pensioner Matching component of the Pensioner Portfolio (R45.9 million)

b) With effect from 31 March 2016, an investment was made into the Futuregrowth Infrastructure and Development Inflation-Linked (IDIL) Bond Fund. This investment forms part of the pensioner matching strategy.

c) The aggregate value of the pensioner matching portfolios with Absa and Nedbank of R138.4 million shown in the 31 December 2016 financial statements reflects the “early termination” values of these assets, being the value assuming the structures are liquidated at this date, and all costs recovered by the banks. It is however reasonable to view these investment as “ongoing”, meaning that in all likelihood, they will be held to maturity. We have therefore valued these assets as the expected value of the inflation-adjusted cash flows they will generate over the full term from the valuation date to maturity. The combined value of the matched cash flows determined in this manner exceeds the combined “early termination” values by some R0.1 million at the valuation date. On this basis we have not written up the early termination values, hence there is no adjustment required to the values reflected in the Fund’s financial statements.

d) The value of the pensioner best estimate liability plus the recommended pensioner solvency reserve amounts to R984.6 million. The “ongoing” value of the pensioner matching structures (as described above) of R494.1 million therefore represents some 50% of the pensioner liabilities (including the solvency reserve). It is highlighted that this includes an amount of R90.5 million which was transferred from the Investec Money Market portfolio shortly after year-end, but has been reflected within the Pensioner Matching section in the table above in order to more accurately represent the level of assets in this section at the valuation date.

Reconciliation of Fund investments with financial statements

A reconciliation has been carried out on the level of investments reflected in the Fund’s financial statements compared to the market value of the corresponding investments as reported by the Fund’s investment managers. (The 31 December 2015 values are shown for comparison purposes.)

Reconciliation 31 Dec 2016

(R’m) 31 Dec 2015

(R’m)

Investment values per AFS 6 279.8 6 039.0

Add: accounts receivable

Interest and dividends 1.1 0.9

Unsettled trades 3.5 1.7

Less: accounts payable

Unsettled trades -3.5 -2.4

Investment administration fees -0.6 -0.8

Sub-total 6 280.3 6 038.4

Investment values per managers 6 280.3 6 038.4

The investment values reported by the Fund’s investment managers match the corresponding values reflected in the 31 December 2016 financial statements. Based on the results of this reconciliation, we are of the opinion that the fair value of assets used for valuation purposes is materially correct.


31 December 2016

Split of Investments by Asset Class

Based on the Fund’s SA Reserve Bank Asset Allocation Report as at 31 December 2016, the investments of the Fund were split between the main asset classes at the valuation date according to the following chart.

It should be noted that the overall offshore exposure of 24% (17.7% international equities, 2.4% international property and 3.9% international bonds and cash) includes exposure of some 0.7% to Africa (ex-South Africa).

Investment returns

The Fund operates a life stage model for in-service members consisting of three portfolios (Inflation Target, Stable and Income Protection) as well as separate strategies in respect of pensioners and reserves held to cover minimum benefits. The Fund also has a small Shari’ah-compliant portfolio.

The table below sets out the investment performance of each of these investment channels, net of investment manager fees, over the 2016 calendar year.

Investment channel 12 months to

31 December 2016

Inflation Target Portfolio 1.7%

Stable Portfolio 3.8%

Income Protection Portfolio 8.4%

Shari'ah Portfolio 5.2%

Pensioner Portfolio 3.1%

Reserves 3.8%

SA equities (excl. listed property),

31.7%

SA property, 6.9%

SA bonds and debentures, 23.3%

SA loans, 1.3%

SA cash and deposits, 12.7%

Other SA assets, 0.2%

International equities (excl. property),

17.7%

International property, 2.4%

International bonds and cash, 3.9%



Annexure 4 – Fund Revenue Statement This annexure gives a summary of the Fund’s revenue account for the year ended 31 December 2016, taken from the Fund’s audited financial statements (AFS) for this period.

Period 12 months to

31 December 2016 (R’000)

Fund net asset value per 31 December 2015 financial statements 5 978.0

Inflows

Employer contributions: Retirement 302.8

Employer contributions: Reinsurance & expenses 31.2

Employer contributions: Benefit enhancements 0.4

Member contributions: Additional voluntary contributions 3.3

Reinsurance proceeds 33.9

Transfers from other funds 9.3

Gross investment returns 206.5

Sub-total of inflows 587.4

Outflows

General administration expenses -8.2

Reinsurance premiums -21.8

Investment manager fees -29.2

Benefits awarded: Monthly annuities -2.8

Benefits awarded: Monthly pensions -75.8

Benefits awarded: Lump sums on retirement -103.6

Pre-retirement: Death benefits -26.8

Pre-retirement: Retrenchment benefits -1.6

Pre-retirement: Withdrawal benefits -52.1

Pre-retirement: Divorce benefits -8.5

Allocation of returns to unclaimed benefits & transfers -0.4

Sub-total of outflows -330.8

Net Fund assets as at 31 December 2016 per financial statements 6 234.6

Adjustment to net asset value -

Net Fund assets as at 31 December 2016 for valuation purposes 6 234.6

The amounts reflected above in respect of benefit payments include the allocation of net investment returns where applicable.


31 December 2016

Annexure 5 – Valuation Assumptions This annexure sets out the actuarial assumptions used in the calculations for the current valuation.

Valuation method

The defined contribution liabilities have been taken to be the aggregate of the Member Credits and Supplementary Account balances (i.e. accumulated retirement savings plus investment returns thereon) and the Living Annuity Pensioner Account balance as at the valuation date.

The Fund’s defined benefit (“DB”) underpin has been valued using the Full Funding Method (“FFM”). Under this method, the liability in respect of the DB underpin is based on prospective service, i.e. total past service to the valuation date plus total potential future service to the assumed retirement age. Since the full prospective service is provided for in the calculation of the liability, the ongoing cost of providing the benefit as it accrues from year to year is nil.

The DB underpin liability is calculated as the difference between the following values (subject to a minimum of zero):

The present value of the projected DB benefit at retirement based on prospective service to the normal retirement date; and

The present value of the projected current DC Fund Credit to retirement plus future retirement funding contributions up to normal retirement, allowing for future assumed investment returns.

Although full potential service has been taken into account, the results are shown separately in respect of past service and future service. The liability in respect of past service is calculated as the FFM DB underpin value multiplied by the ratio of past service to prospective service. Similarly, the future service liability is calculated as the FFM DB underpin value multiplied by the ratio of future service to prospective service.

The full funding liability (on the valuation assumptions) plus the defined contribution liabilities, the liability in respect of life annuity pensioners and the value of any reserve accounts is compared with the “fair value” of the assets and the resulting surplus (or deficit) is shown.

Valuation assumptions: In-service members

The following assumptions have been made in calculating the accrued value of the defined benefit underpin (the same assumptions were used at the previous valuation date, unless otherwise stated).

Discount rate for valuation of the liabilities: 10.2% p.a. (10.5% p.a. in previous valuation)

Salary increases (general and promotional): 9.4% p.a. (9.7% p.a. in previous valuation)

Price inflation: 6.7% p.a. (7.0% p.a. in previous valuation)

Decrements prior to retirement: Nil

Normal Retirement Age: 65 (unless otherwise specified in the data provided – see definition of normal retirement age in Annexure 1)

The conversion factor at retirement is based on a 6% net investment return and PA(90) ultimate mortality separately for males and females rated down by 1 year. It has been assumed that all members are married at retirement and that the wife is three years younger than the husband.

In all cases the liability is subject to the minimum individual reserve as per the Act.



Life annuity Pensioners

The pensioner liability has been assessed at a discount rate of 10.2% p.a. (10.5% p.a. in the previous valuation).

Provision has been made for annual pension increases of 3.96% p.a. (4.2% p.a. in previous valuation) which represents 59% of the expected inflation rate of 6.7% p.a. (Note the comments under Section 3.3 above in this regard.)

The pensioner liability has been valued using PA(90) ultimate mortality separately for males and females rated down by 1 year. A solvency reserve has been calculated for the pensioners on the basis of a net discount rate of 4.37% p.a. and pensioner mortality of PA(90) ultimate rated down 2 years, plus allowance for mortality improvements as explained in section 3.4 above.

The total required solvency reserve exceeds the balance in the Notional Pensioner Account and so the pensioner solvency reserve has been limited to the balance in the Notional Pensioner Account.

Insurance of spouse’s pension

The spouse’s pension, which is payable on death in service, has been insured on the basis that all members are married and the husband is 3 years older than the wife. These benefits have been approximated to insured multiples of annual pensionable salary as follows:

Age of member at date of death Insurance factor (for 35% spouse’s pension)

Males Females

25 years or younger 5.8 5.6

26 years up to 35 years 5.7 5.4





61 and older 4.3 3.2

Fund assets

The Fund assets have been valued at market value. (Refer to comments in Section 3.7 above relating to the approach used to value the assets underlying the pensioner matching structure.)


31 December 2016

Annexure 6 – Valuation Results on the Bond-Based approach As required by PF Notice No. 2 of 2016, funds which utilise the “risk-premium” approach to determining the discount rate must also report on their position using the “bond-based” approach, which requires that the discount rate selected be based on the market yields on appropriate bonds at the valuation date, without the addition of a risk premium to the discount rate.

The bond-based basis is identical to the best estimate funding valuation basis in all respects except for the removal of the risk premium in determining the discount rate.

A comparison of the valuation assumptions on the funding basis (i.e. the best estimate basis calculated using the “risk premium” approach) and the “bond-based” basis is set out below:

Valuation assumptions as at 31 Dec 2016 “Bond-based”

basis Best estimate

basis

Investment return 9.30% 10.20%

Inflation 6.70% 6.70%

Salary increases 9.40% 9.40%

Net pre-retirement “gap” -0.09% 0.73%

Capitalisation factor for minimum benefit 6.00% 6.00%

Pension increases (kept the same on the bond-based basis) 3.96% 3.96%

Pensioner net post-retirement interest rate 5.14% 6.00%

Financial position determined on the bond-based approach

As the Fund’s funding valuation basis is determined on the risk premium approach, as defined in PF Notice No. 2 of 2016, the Notice requires that the valuator also determine and report on the financial position had the bond-based approach been used. The table below sets out the financial position calculated on this bond-based approach at the valuation date (for indicative purposes only). Comparatives have been provided on the Fund’s funding basis, before recommended inter-account transfers (i.e. the risk premium approach).

Item as at 31 Dec 2016 (amounts shown in R’m) “Bond-based”

approach Best estimate

basis

Defined Contribution liabilities (incl. living annuity balances) 4 958.6 4 958.6

Defined Benefit underpin liability (active members) 142.0 59.0

Pensioner liability (life pensioners paid from the Fund) 1 005.1 936.0

Sub-total: best estimate liabilities 6 105.7 5 953.6

Pensioner Solvency Reserve Account - 48.6

*General Reserve Account 41.3 41.3

Employer Surplus Account (recommendation) 87.6 191.1

Sub-total: reserves 128.9 281.0

Total: membership liabilities and reserves 6 234.6 6 234.6


Actuarial surplus/ (deficit) after setting aside reserves 0.0 0.0


Market value asset ÷ best estimate/bond-based liabilities 102.1% 104.7%



*We highlight that PF Notice 2 states the following in relation to the funding level disclosed on the Bond-based basis: “The funding level and the contribution rate in terms of the bond based basis as outlined in paragraph 3.11 [determination of the discount rate on the bond-based basis] must be reported. For the purposes of determining the funding level, the value of contingency reserve accounts must equal zero.” We have however not reduced the value of the General Reserve Account (GRA) to zero under the bond-based approach as we do not feel this would be appropriate given the nature and purpose of this reserve, and taking into account the definition of a contingency reserve account in the Pension Funds Act. In any case, reducing the value of the GRA to zero would simply result in an increase in the recommended level of the Employer Surplus Account from R87.6 million to R128.9 million.

Employer contribution calculated on the bond-based approach

In addition to the effect of the bond-based approach on the financial position of the Fund, the Notice requires that the valuator determine the required employer contribution rate had the bond-based approach been used. As the Defined Benefit underpin liability is determined using the Full Funding Method there is no additional contribution requirement from the Employer in respect of these members. As such, the recommended contribution rates under point 4.8.1 above remain unchanged under the bond-based approach.

Importantly, the above calculations have been performed for indicative purposes only – the required contribution rate from the University is determined on the Fund’s best estimate funding basis.


31 December 2016

Annexure 7 – Asset / Liability Matching

The following table indicates the level of matching between the different investment portfolios and the assets backing the liabilities in those portfolios (after

allowance for the recommendations set out in this report):

Asset / liability matching

Cash at bank

(R’m)

Inflation Target

Portfolio (R’m)

Stable Portfolio

(excluding reserves)

(R’m)

Income Protection

Portfolio (R’m)

Shari’ah Portfolio

(R’m)

Pensioner Portfolio*

(R’m)

Reserves*

(R’m)

Total Fund

(R’m)

Market value of assets 92.2 3 705.5 739.6 539.2 14.3 990.2 291.0 6 372.0

Sundry debtors and creditors -3.9 0.3 0.1 - - 0.1 0.4 -3.0

Benefits payable -86.3 - - -34.9 -1.7 -5.7 - -128.6

Unclaimed benefits -2.0 - - -3.8 - - - -5.8

Net assets 0.8 3 705.8 739.7 500.5 12.6 984.6 291.4 6 234.6

Member credit and supplementary accounts - 3 679.9 716.4 494.0 12.6 - - 4 902.9

Living annuity pensioners - 25.9 23.3 6.5 - - - 55.7

Defined benefit underpin liability - - - - - - 59.0 59.0

Best estimate pensioner liability - - - - - 936.0 - 936.0

Pensioner Solvency Reserve Account - - - - - 48.6 - 48.6

General Reserve Account - - - - - - 41.3 41.3

Employer Surplus Account - - - - - - 191.1 191.1

Total liabilities and reserves - 3 705.8 739.7 500.5 12.6 984.6 291.4 6 234.6

Excess / (shortfall) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -

Funding level N/A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*It should be noted that the values reflected in these columns already take into account the recommendations made in section 1.7 of the report.

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