Actuarial assumptions for New Zealand superannuation scheme valuations

1. Actuarial assumptions for New Zealand superannuation scheme valuations Andrea Gluyas and Christine OrmrodNovember 2010

2. Actuarial assumptions for New Zealand superannuation scheme valuations • Why this paper? • Pensioner mortality assumptions • Other valuation assumptions

3. Why this paper?

4. The role of the actuary assisting in audit “An understanding of the work of the management’s expert includes … determination of whether the auditor has the expertise to evaluate the work of the management’s expert, or whether the auditor needs an auditor’s expert for this purpose.” “If information to be used as audit evidence has been prepared using the work of a management’s expert [e.g. an actuary], the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes,: • Evaluate the competence, capabilities andobjectivity of that expert; • Obtain an understanding of the work of that expert; and • Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.”

5. The role of the actuary assisting in audit -cont “Considerations when evaluating the appropriateness of the management’s expert’s work as audit evidence for the relevant assertion may include: • The relevance and reasonableness of that expert’s findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements; • If that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods; and • If that expert’s work involves significant use of source data the relevance, completeness, and accuracy of that source data.” “Aspects of the management’s expert’s field relevant to the auditor’s understanding may include: • Whether that expert’s field has areas of specialty within it that are relevant to the audit. • Whether any professional or other standards and regulatory or legal requirements apply. • What assumptions and methods are used by the management’s expert, and whether they are generally accepted within that expert’s field and appropriate for financial reporting purposes • The nature of internal and external data or information the auditor’s expert uses.”

6. Superannuation scheme valuations in New Zealand Superannuation Schemes Act 1989 • No guidance NZSA Professional Standard No.2 • Mostly relates to disclosure NZ IAS 19 valuations • Discount rate: risk –free • Other assumptions: Entity’s best estimate

7. Pensioner Mortality Assumptions

8. What are we seeing? • NZLT 2005-2007 less 2 years • NZLT 2005-2007 less 1 year and less 3 years • NZLT 2000-2002 less 2 years • PA(90) less 3 years and less 4 years • NZLT 2005-2007 less 1 year, with mortality improvements Is the mortality assumption reasonable?

9. Findings from the NPF Schemes • No evidence of selection against the Schemes • Consistency in the “shape” of the curve over the years and different shapes for differ Schemes • Percentage rather than an age deduction gives a better fit to the experience • Consistent evidence of mortality improvement • Mortality differentials • DBPA and non DBPA show statistically different mortality • Males and females are significantly different percentages of population mortality (DBPA: 80% and 100%)

10. Non-DBPA male pensioner mortality experience

11. DBPA male pensioner mortality experience

12. Non-DBPA female pensioner mortality experience

13. DBPA female pensioner mortality experience

14. Population mortality improvements

15. NPF mortality improvement formula

16. Age adjustment mortality improvement allowance

17. How much difference does it make?

18. How much difference does it make?

19. What mortality assumption is reasonable? Given: • We find quite different mortality rates between different schemes • Irrefutable evidence of mortality improvement • Pensioner mortality is generally one of the more significant assumptions • Pensioner liabilities are often increasing as a proportion of a scheme’s total liabilities, and • That there is a relatively straightforward actuarial formula for mortality improvement. Should we be telling our auditing colleagues that New Zealand life tables with a two year deduction is reasonable for both current pensioner mortality and future improvements in pensioner mortality?

20. Other potential approaches to mortality asssumptions • Sliding scale against population mortality • Effect of removing impaired lives • And may be?

21. Other valuation assumptions

22. Discount rates – Funding valuations PS2 asks for: “an explanation of how the values for these assumptions were derived. This explanation shall include at least: • If the investment earnings assumption is one of the most financially significant assumptions, an explanation of the relationship between the investment earnings assumption and the current investment strategy the scheme, any changes assumed in the future to the investments strategy and the allowances made for each of future investment expenses, administration expenses and taxation”

23. Discount rates – NZ IAS 19 Methodology for Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes NZ IAS 19 valuations, issued by the Treasury • Long term risk free discount rates • Considers all available data • Adopted a stable approach to extrapolation • Issued at 30 June, 31 October, 31 December and 28 February • Clear methodology

24. Treasury paper Other issues discussed in the paper: • Use of a term structure for discount rate, to automatically match the duration of liabilities • Risk premium • Scarcity discount • Adjustments to reflect the liquidity of liabilities • The differences between Government Stock and bank swap rates • The approach for durations longer than the longest traded government stock • Common errors such as not annualising half yearly rates

25. Other assumptions • Pension increases • Administration expenses • Retirement ages • Commutation option