Practical Actuarial Issues of Surplus and Minimum Benefits – Coral van Zyl

1. Pension Lawyers Association Panel discussion – 15 August 2006 Practical Actuarial Issues of Surplus and Minimum Benefits – Coral van Zyl

2. Discussion topics • Process for surplus schemes • Practical implications of surplus schemes • Process for minimum benefits • Practical implications of minimum benefits

3. Process for surplus schemes • Establishment of distributable surplus • - Valuation of retirement fund at surplus • apportionment date (SAD) – including • allowance for minimum benefits • - Establish any required contingency reserves • - Make allowance for the cost of exercise • - Finalise any improper use amounts • - Balance is distributable surplus

4. Process for surplus schemes • Establish scheme for apportionment of • surplus • - Former member top-ups • - Minimum pension increases • - Scheme to apportion residual surplus • apportioned between all stakeholders • method deemed equitable is per historical • contributions

5. Process for surplus schemes • Practical implementation • - Payment of top ups • - Communication to all stakeholders

6. Practical implications - Surplus schemes • Costs of the exercise • Time consuming data gathering • Incomplete data records • former member data • historical financial information • minutes of Trustee meetings • previous actuarial valuations

7. Practical implications - Surplus schemes • Possible to have enough information for a former member to do top-up calculation, but former member cannot be traced. • Apportionment of residual surplus • not always considered palatable to redistribute to former members • possibility for disputes

8. Practical implications - Surplus schemes • Final distribution of surplus • more detailed former member information required • cost of tracing a member taken out of the individual member’s top up amount • costs of distribution may negate benefit of top-ups for smaller amounts

9. Post surplus? • Funds behind on statutory valuations and reviews after the SAD • Surplus monies existing in Funds where nil schemes were submitted – not all Funds will have amended Rules for future surplus • Deficits could arisen in Funds where surpluses were distributed • Section 14’s where surpluses have not been transferred need to be revisited

10. Minimum benefits: • Active members: • BN 37 of 2003 - Trustees decide between : • 40% of Earnings Yield • Index linked gilts minus 0.2% (prior to March 2006 was ILG minus 0.95%) • Payment of minimum benefits to exiting members from 12 months after SAD • Pensioners: • Trustees establish pension increase policy • Apply minimum pension increase every three years

11. Practical implications – Minimum benefits • Trustees choose between a method effectively based on equities versus one based on bonds • Trustees may not understand the differences • Probable mismatch either way to actual fund return • Market related – could result in inconsistencies from month to month • Member queries more complicated to resolve

12. Comparison of ILG and EY

13. Practical implications – Minimum benefits • Pension increase policy • enables decision-making by Trustees • complex to understand • minimum increase in a year of good investment returns are low

14. Thank You