TEACHERS' SUPERANNUATION FUND. ACTUARIAL EXAMINATION AS AT 31st JANUARY, 1939.

Appendix to the Journals of the House of Representatives, 1940 Session I, E-08a

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1940. NEW ZEALAND.

TEACHERS' SUPERANNUATION FUND. ACTUARIAL EXAMINATION AS AT 31st JANUARY, 1939.

Laid before Parliament in -pursuance of Section 111 (4) of the Public Service Superannuation Act, 1927.

REPORT BY THE ACTUARY APPOINTED BY HIS EXCELLENCY THE GOVERNOR-GENERAL TO MAKE THE ACTUARIAL EXAMINATION OF THE TEACHERS' SUPERANNUATION FUND. Wellington, 28th August, 1940. 1. I have the honour to submit the following report on the Teachers' Superannuation Fund as at 31st January, 1939, in accordance with the requirements of section 111 of the Public Service Superannuation Act, 1927, as amended by section 47 of the Finance Act (No. 2), 1939. 2. The original scheme came into operation on the Ist January, 1906. Various modifications have been introduced from time to time, the present position being defined in the Public Service Superannuation Act, 1927, and its amendments. With few exceptions all contributors to the Fund are normally employed either in an educational branch of a Government Department or by the governing body of an educational institution which is maintained wholly or in part by grants from the public revenue or by the proceeds of public endowments granted by the Crown. Contributors who cease to be so employed may remain contributors for a period of twelve months less one day, and for such further period not exceeding three years as the Board, in special cases, approves. New contributors are of two classes—those who must contribute as a condition of employment and those who may elect to become contributors. The position, generally, is as follows : — (a) All persons permanently appointed as teachers in public schools by Education Boards must become contributors; other persons permanently appointed by Education Boards may elect to become contributors. (b) All persons permanently appointed by the governing bodies of educational institutions upon which Education Boards have representation may elect to become contributors. (c) All persons permanently appointed to an educational branch of a Government Department must become contributors. (d) All persons permanently appointed by the University of New Zealand and its colleges must become contributors. At the valuation date there were 4,089 male and 4,564 female contributors, 573 males and 1,110 females in receipt of retiring-allowances, and 311 widows and 70 children in receipt of annuities. Details of the membership are given in Tables I and II of the Appendix. §. The contributions and benefits specified in the Act are set out in Table 111 of the Appendix. The principal benefit is an annual retiring-allowance the amount of which is determined by reference to salary and service, and contributors' contributions are percentages of salaries, the percentages varying with the ages at which the first contributions became payable. The contributions payable by contributors are, on the average, insufficient to support the benefits granted, and consequently financial assistance is required from the State in its capacity as employer. It is convenient to consider this assistance under three headings : — (a) Originally, widows' and children's annuities were at the rates of £18 per annum and ss. per week respectively. Later, these rates were increased to £31 and £26 per annum respectively, and section 114 of the Act provides for payment from the Consolidated Fund of annual amounts sufficient to meet these increases. (b) Service prior to the inception of the scheme in the case of original contributors, and prior to admission in the case of certain classes of contributors admitted thereafter, ranks for pension purposes at full or part rates. As no contributions were paid by these contributors in respect of such service, the whole of the retiring-allowances arising therefrom have to be met by the State. (c) After allowing for expenses of administration, widows' annuities at £18 per annum, children's annuities at £13 per annum, and all other subsidiary benefits, the contributions payable by contributors are, on the average, insufficient at all ages at entry to provide the retiring-allowances which accrue in virtue of contributory service. Such portion of these allowances as is not provided by contributors' contributions falls on the State.

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4. The revenue and expenditure of the Fund during the quinquennium elapsed since the last valuation are summarized in the following account: — Consolidated Revenue Account, Ist February, 1934, to 31st January, 1939. Revenue. £ s. d. Expenditure. £ s. d. Fund at Ist February, 1934 .. 1,003,184 16 1 Retiring and other allowances .. 1,600,804 16 10 Members'contributions .. .. 650,454 13 5 Refunds of contributions .. .. 173,517 210 Subsidies— Expenses .. .. .. 17,169 5 7 New Zealand Government .. 849,969 3 9 Transfers to other funds .. .. 3,040 19 5 Government of Fiji .. .. 1,205 15 6 Transfer to Investment Reserve .. 2,000 0 0 Interest .. .. .. .. 265,326 6 7 Fund at 31st January, 1939 .. 975,734 17 3 Transfers from other funds .. .. 1,304 1 7 Profit on realization of securities, &c. 822 5 0 £2,772,267 1 11 £2,772,267 1 11 The subsidies received from the Government of Fiji are in respect of teachers who, at the time of their appointment by the Government of Fiji to schools in Fiji, were contributors to the Fund in New Zealand. The subsidies are of such amount as together with the contributors' contributions will on the average provide the benefits accruing from such service. 5. The effective rates of interest credited to the Fund in each year of the quinquennium were as follows : — Effective Rate of Interest. £ s. d. Year ended 31st January, 1935 . . .. .. .. .. 516 4 Year ended 31st January, 1936 .. .. .. .. .. 512 0 Year ended 31st January, 1937 .. .. .. .. ..586 Year ended 31st January, 1938 .. .. .. .. ..567 Year ended 31st January, 1939 . . . . .. .. ..5 111 The above yields are high compared with those realized on other funds of similar type during the same period. The explanation appears to lie in the facts that, except for the final year of the quinquennium under review, the funds have decreased steadily for a number of years past, and that during the same period interest-rates have decreased also. Obviously during a period of falling interest-rates the yield realized on a decreasing fund will fall much less rapidly than in the case of an increasing fund. In both cases funds invested in old high-interest-bearing securities which mature have to be reinvested at the current lower rate, but where the funds are increasing new money also is invested at the lower rate ; hence the proportion of the fund invested in low-interest-bearing securities increases more rapidly in one case than in the other. It is obvious, also, that the ultimate effect on both types of fund will be the same ; and it is anticipated, therefore, that the yield on the Teachers' Fund will decline still further during the next few years. 6. An actuarial valuation of any pension scheme is made in order to answer such questions as, " What funds must be in hand now if existing members are to be assured of the benefits to which they are or will become entitled ? " From the nature of the case neither the amount of the payments made both by and to members nor the actual dates on which they will be made can be known with certainty, but reliable estimates can be made by the application of averages deduced from the past experience and suitably corrected to allow for future trends where evidence of such exists. Rates of mortality, withdrawal, retiral, salary increases, and all other like functions entering into the valuation have been deduced from the experience of members during the intervaluation period. Comparison with similar factors deduced at previous valuations indicated that it was necessary to change the valuation basis from that adopted at the last valuation. Where changes have been made, in nearly all cases the effect has been to place greater values on the prospective liabilities and assets, and hence on the net liability brought out by the valuation. From the conclusions drawn in paragraph 5, for example, it is evident that it is no longer safe to assume that the funds will earn 4£ per cent, per annum, the rate of interest used in the 1934 valuation. The highest rate that can be assumed with any degree of confidence is 4 per cent, per annum, and this rate has been adopted accordingly. A special point arose in connection with the salaries involved in the valuation. At the valuation date new salary scales for public-school teachers were being brought into operation. The process was not completed until April, 1940, but the Education Department supplied information enabling the final salaries resulting from the adoption, of the new scales to be brought into account in the valuation. 7. The results of the valuation are given in full in Table IV of the Appendix. Summarized briefly, they are as follows, all amounts being to the nearest thousand pounds : — £(000) Capital value of the benefits specified in the Act, both existing and prospective, in respect of present members .. .. .. .. .. .. 12,454 Capital value of future expenses in respect of present members .. .. .. 48 12,502 £(000) Capital value of existing contributors' future contributions .. .. 1,924 Capital value of future subsidies from the Government of Fiji .. .. 2 Funds as per Revenue Account .. .. .. .. .. 976 2,902 Balance .. .. .. .. . . .. .. £9,600

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8. The above balance is the amount by which the accumulated funds are insufficient to assure present members the benefits to which they are or will become entitled after allowing for the contributions which they will pay. It is therefore the capital value of future subsidies which the State must pay in respect of existing members. Omitting the capital value of future expenses in respect of existing members, the resulting amount, £9,552,000, is comparable with the corresponding figure given in the previous valuation report —viz., £6,484,000, an increase of £3,068,000. Various factors have operated to bring about this large increase, the four most important being as follows : — (i) As the State's liability is found at any given date by discounting amounts payable in future, it follows that the capital liability increases thereafter at interest unless the subsidies actually paid are greater than the interest attracted. During the quinquennium under review the subsidies paid fell short of interest on the State's liability, the net effect being an increase of approximately £676,000. (ii) Each new entrant's contributions are insufficient on the average to support the benefits he attracts, and therefore the State's liability is increased by the admission of new entrants. Contributors admitted during the quinquennium introduced an increase of approximately £391,000 in the State's liability. (iii) As stated in paragraph 6, the valuation basis has been strengthened by decreasing the rate of interest from 4J per cent, to 4 per cent., occasioning an increase of approximately £1,280,000. (iv) Salaries, in general, have been increased by the introduction of the new salary scales mentioned in paragraph 6. As both retiring-allowances and contributions are based on salaries, the contributions and prospective retiring-allowances of current contributors have been increased also. The capital value of the increases in contributions is less, however, than the capital value of the increases in prospective retiring-allowances, and the difference, approximately £485,000, falls to increase the State's liability. These four items together account for £2,832,000 of the increase. The balance arises from the aggregation of a number of smaller items. 9. It is doubtful if the capital value of the State's liability in respect of the whole scheme is of more than academic interest, for the financial structure adopted at the inception of the scheme does not provide for the funding of the State's liability. Section 111 of the Act directs that the results of an examination of the Fund shall be set forth '' in a report, which shall be so prepared as to show the state of the Fund . . . having regard to the prospective liabilities and assets and the probable annual sums required by the Fund to provide the retiring and other allowances falling due within the ensuing three years without affecting or having recourse to the actuarial reserve appertaining to the contributors' contributions." Section 112 provides for payment from the Consolidated Fund each year of " the sum of fortythree thousand pounds, together with such further amount (if any) as is deemed by the GovernorGeneral in Council in accordance with the aforesaid report of the actuary to be required to meet the charges on the Fund during the ensuing year." The inferences to be drawn from these two sections are that (i) after allowing for subsidiary benefits and expenses of administration, contributors' contributions are to be accumulated until the contributors retire, and the amounts so accumulated are to be applied then to pay such portion of the retiring-allowances granted by the Act as they will; and (ii) the remainder of the aggregate retiringallowances is to be met each year by the State, and for this reason the reports made from time to time on the position of the Fund are to include estimates, for each of the three years following the investigation, of that part of the aggregate retiring-allowances which is not provided by the accumulated contributions. 10. It follows from the inferences of the preceding paragraph that the Fund is a part only of the complete scheme ; its liabilities are expenses of administration, widows' annuities at £18 per annum, children's annuities at £13 per annum, all other subsidiary benefits, and such part of the retiringallowances as contributors' contributions will provide ; and its assets are contributors' future contributions and the accumulated funds. Obviously, the accumulated funds have been built up solely by contributors' past contributions, for the State subsidy received in any year is disbursed in that year to the beneficiaries entitled to it. The State could, in fact, pay the portion of the benefits it prov ides direct to the beneficiaries, but it is convenient and practical to make the distribution through the Fund. Following is a summary of the position of the Fund on this basis, all amounts being to the nearest thousand pounds : — £(000) Capital value of benefits, existing and prospective in respect of existing members, provided by members' contributions .. .. .. .. .. 5,431 Capital value of future expenses in respect of existing members .. .. .. 48 5,479 £(000) Capital value of existing contributors' future contributions .. .. 1,924 Capital value of future subsidies from the Government of Fiji .. .. 2 Funds as per Kevenue Account .. .. .. .. .. 976 2,902 Deficiency .. .. .. .. .. .. £2,577

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11. The above deficiency is a measure of the extent to which the State has failed to meet its share of benefits paid in the past. The subsidies actually paid in any year have rarely, if ever, been sufficient to meet the balance of retiring-allowances paid after allowing for the portion provided by member's contributions, and the State, by short paying, has in effect borrowed from existing members a substantial proportion of their accumulated contributions. If no steps are taken to meet this deficiency, it will increase with the passage of time, for it represents funds which should be in hand accumulating at interest. The minimum annual payment which will prevent future increases, therefore, is interest on this capital sum at the valuation rate of interest— i.e., £108,000 per annum. Payment of smaller annual sums will result in the deficiency increasing, and' conversely payment of greater annual sums will result in the deficiency decreasing and ultimately disappearing. A uniform annual payment of £149,000, for example, would redeem the deficiency completely in thirty years. Similarly, uniform annual payments of £130,000 and £120,000 would achieve the same result in forty years and fifty years respectively. 12. Had the State paid the full subsidies required in the past, the deficiency discussed in the preceding paragraph would not now exist and payments from the State in respect of it would not be required. The normal subsidies, however, would still be required —i.e., the State has to meet each year widows' and children's annuities at £13 per annum and such part of the aggregate retiring-allowances paid as is not provided by members' contributions. Estimates of the retiring-allowances and widows' and children's annuities which will be paid in each of the five years following the valuation are given in Table Yof the Appendix. For the year ended 31st January, 1940, for example, it is estimated that retiring-allowances will amount to £323,000, £108,000 being due to non-contributory service and £215,000 to contributory service. After allowing for expenses of administration and subsidiary benefits, the accumulated contributions of the retired members will provide £96,000 of retiring-allowances due to contributory service. The remainder of the retiring-allowances due to contributory service—viz., £119,000 —falls on the State, as do also retiring-allowances due to non-contributory service amounting to £108,000. In the same way, provision has been made by members' contributions for widows' and children's annuities at £18 and £13 per annum respectively, estimated at £7,000 for the year, and the State has to provide the balance at £13 per annum, estimated at £5,000. The annual subsidies required under these headings range from £232,000 to £253,000 for the five years, and average £242,000 per annum. The Fund should receive these subsidies in the middle of the year to which they apply—i.e., on 31st July. The Act, however, provides for payment of the subsidy in the month of January, and consequently the above amount falls to be increased by interest to, say, £246,000. 13. From paragraphs 11 and 12 the minimum annual subsidy required from the State in January of each of the years 1940 to 1944 inclusive is as follows : — £ On account of subsidies short paid in the past .. .. .. 103,000 On account of retiring-allowances and widows' and children's annuities which will be payable during the five years Ist February, 1939, to 31st January, 1944 .. .. .. .. .. .. 246,000 Total annual subsidy required .. .. .. .. £349,000 Any subsidy or part thereof paid after its due date should be increased at interest at 4 per cent, per annum up to the actual date of payment. S. Beckingsale, Fellow of the Institute of Actuaries, Government Actuary. The Teachers' Superannuation Board, Wellington.

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APPENDIX.

TABLE I. Membership at Successive Valuations.

TABLE 11. Movement in Membership during the Intervaluation Period Ist February, 1934, to 31st January, 1939. I. Contributors. Males. Females. Number at Ist February, 1934- .. .. .. .. .. 3,806 5,095 New entrants admitted .. .. .. .. .. 774 1 437 Transferred from other funds .. .. .. .. .. 8 4 4,588 6,536 Retiring-allowances granted:— (i) Age or service.. .. .. .. .. .. 11l 194 (ii) Medically unfit .. .. .. .. .. 54 50 Deaths attracting — (i) Refunds of contributions .. .. .. 33 39 (ii) Widows' annuities .. .. .. .. 18 Refunds of contributions granted— (i) In lieu of retiring-allowances .. .. .. ..2 9 (ii) Not entitled to retiring-allowances .. .. .. 258 1,674 Transferred to other funds .. .. .. .. 23 6 Total exits .. .. .. .. .. .. .. — 499 1 ( 972 Number at 31st January, 1939 .. .. .. 4,089 4, 64 11. Retired Contributors. Males; Females. Number at Ist February, 1934 .. .. .. .. .. 561 981 Retiring-allowances granted— (i) Age or service.. .. .. .. .. .. 11l 194 (ii) Medically unfit .. .. .. .. .. 54 50 726 1,225 Deaths — (i) Attracting widows' annuities .. .. .. 98 (ii) Other .. .. .. .. .. 54 113 Terminated by recovery from ill-health .. .. .. 1 2 Total exits .. .. .. .. .. .. .. — 153 115 Number at 31st January, 1939 .. .. .. 573 1,110

Contributors. Retired Contributors. Widows. Children. Males. Females. Males. Females. Valuation Date. | |jj Til I 1| Til $ ill i ill I I J I i i M i il 6 i ais ii ii fc «!« jzj SZF <$.2 | |Z! | izj § cfl <\ £ £ £ £ £ £ £ £ 31st Dec., 1910 1,484 328,391 23,081 1,725 218,876 13,313 106 8,585 73 4,260 44 805 47 611 1913 1,800 418,224 28,003 2,217 290,-376 16y942 177 17,065 157 10,867 63 1,147 63 819 1916 1,974 514,396 32,780 2,679 410,011 23,287 223 25,132 232 17,057 87 1,579 69 897 1919 2,009 646,578 40,064 3,007 619,194' 34,252 251 33,145 317 26,840 117 2,119 100 1 300 31st Jan., 1924 2,626 909,727 52,990 4,226 945,773 51,151 344 61,728 486 52,783 152 2,749 96 1248 1927 3,256 1,141,047 64,326 5,115 1,167,514 62,399 406 91,712 597 75,155 183 3,294 85 1 105 1930 3,779 1,315,385 72,063 5,835 1,297,693 68,781 477 117,914 754' 100,196 216 6,709 84 2 184 1934 3,806 1,133',218 60,758 5,095 971,994 51,437 561 154,148 981 135,402 268 8,308 68 l'768 1939 4,089 1,710,083 90,233 4,564 1,280,878 67,391 573 164,695 1,110 150,300 311 9,641 70 1,820 * These are the salaries which would be brought into account in calculating pensions. From 1924 onwards they exceed the actual salaries in that some contributors elected to continue contributing on their former salaries when their actual salaries were reduced The 1939 salaries include adjustments to allow for a salary regrading not fully effective until 1940. t Up to 1927 these annuities are at the following rates: Widow, £18 per annum; child, £13 per annum. After 1927 they are at £31 per annum and £26 per annum respectively.

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111. Widows and Children. Widows. Children. Number at Ist February, 1934 .. .. .. ••• • 68 Annuities granted .. .. • • • • • • • • " 384 116 Deaths .. .. ••••■•• • .. 64 .. Children attaining age fourteen .. •. • • .... 46 Widows remarrying .. .. •• •• ..9 Total exits .. .. ••••••• • • • — 73 — Number at 31st January, 1939 .. .. • • 311 70 TABLE 111. The Contributions and Benefits prescribed by the Act. Contributions. Contributors pay contributions varying with the age at which the first contribution becomes payable, as follows : — Age. Contribution. Under 30 .. .. .. • • 5 per cent, of salary. 30 to 34 .. .. .. 6 35 to 39 .. ■ ■ .. 7 40 to 44 .. .. 8 ~ 45 to 49 .. .. ■• • • 9 50 and over .. .. . . 10 „ Benefits. I. On Retirement because of Age or Service : — An annual retiring-allowance of one-sixtieth of the average salary received during the final three years of service for each year of service, subject to a maximum of forty-sixtieths. Entrants since 24th December, 1909, are subject to a maximum retiring-allowance of £300 per annum. A contributor may retire — (i) After completion of forty years' service (males), thirty years' service (females). (ii) On attainment of age sixty-five (males), age fifty-five (females). Subject to the approval of the Minister of Education, the Board may extend the above provisions to contributors retiring earlier as follows, and may in such cases impose such conditions as to payments into the Fund or otherwise as the Board thinks fit — (i) After completion of thirty-five years' service (males). (ii) On attainment of age sixty (males), age fifty (females). (iii) After completion of thirty years' service and attainment of age fifty-five (males). In all cases the contributor may elect to accept a refund of contributions in lieu of a retiring-allowance. 11. On Retirement at any Time on the Grounds of being Medically Unfit for Further Duty A retiring-allowance calculated as in I or a refund of contributions, at the option of the contributor. 111. On Retirement before becoming entitled to a Retiring-allowance : — A refund of contributions. IY. On Death while contributing or in Receipt of a Retiring-allowance. (i) Leaving no widow : A refund of contributions less any benefits paid during the contributor's life-time, or payable in respect of children. (ii) Leaving a widow : — (a) An annuity of £31 per annum during her widowhood ; or (b) A refund of contributions less any benefits paid during the contributor's lifetime. (iii) Leaving children : 10s. per week to each child until age fourteen.

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TABLE IV. Capital Value of Benefits, Contributions, etc., as at 31st January, 1939.

Due to J ,ue to Contributory Service. Capital Value of n " T contributory Provided by Not provided Service. Members' by Members' Contributions. Contributions. Existing benefits ■ £(000) £(000) £(000) (i) Retiring-allowances— Males .. .. .. .. .. 510 461 430 Females .. .. .. .. .. 459 466 811 (ii) Widows' annuities .. .. .. .. .. 58 42 (iii) Children's annuities .. .. .. .. .. 4 4 Prospective benefits in respect of existing members— (i) Retiring-allowances— Males 88 2,423 2,134 Females .. .. .. .. .. 6 1,383 2,414 (ii) Widows'annuities .. .. .. .. .. 158 114 (iii) Children's annuities .. .. .. .. .. 1] H (iv) Refunds of contributions— (a) On death— Males .. .. .. .. ,. 101 Females .. .. .. .. .. 37 (b) On retirement before becoming entitled to a retiring-allowance— Males .. .. .. .. .. 130 Females .. .. .. .. ,. 199 Future expenses in respect of existing members .. .. 48 Total liabilities in respect of existing members .. .. 1,063 5,479 5,960 Future contributions payable by —• (i) Existing contributors— Males •• •• •• •• .. .. 1,303 Females .. .. .. .. .. . _ 621 (ii) Government of Fiji .. .. .. .. 2 Accumulated funds, as per Revenue Account .. .. .. 976 Liability of the State in respect of existing members .. 1,063 2,577 5,960 Total assets in respect of existing members .. 1,063 5,479 5,960

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TABLE V. Estimate of Retiring-allowances and Annuities which will be payable in each of the Five Years following the Valuation.

Approximate Cost of Paper.—Preparation, not given printing (720 copies), £10 10s. By Authority : E. V. Paul, Government Printer, Wellington.—l94o. Price 6d.]

Year ending 31st January, 1940. 1941. 1942. 1943. 1944. Total— £(000) £(000) £(000) £(000) £(000) Retiring-allowances — (i) Due to non-contributory service .. .. .. 108 104 100 96 92 (ii) Due to contributory service .. .. .. .. 215 228 243 260 277 Widows' and children's annuities .. .. .. .. 12 12 13 13 13 Total .. .. .. .. •• •• 335 344 356 369 382 Provided by contributors' contributions — Retiring-allowances due to contributory service .. .. 96 102 108 115 122 Widows' annuities at £18 per annum and children's annuities at £13 per annum .. .. .. .. •• 7 7 7 7 7 Total .. .. .. .. .. 103 109 115 122 129 To be provided by the State — Retiring-allowances — (i) Due to non-contributory service .. .. .. 108 104 100 96 92 (ii) Due to contributory service .. .. .. .. 119 126 135 145 155 Widows' and children's annuities at £13 per annum .. .. 5 5 6 6 6 Total .. .. .. .. .. • • 232 235 241 247 253