PUBLIC SERVICE SUPERANNUATION FUND. ACTUARIAL EXAMINATION AS AT 31st MARCH, 1939.

Appendix to the Journals of the House of Representatives, 1940 Session I, H-26a

H.—26A

1940. NEW ZEALAND.

PUBLIC SERVICE SUPERANNUATION FUND. ACTUARIAL EXAMINATION AS AT 31st MARCH, 1939.

Laid before Parliament in pursuance of Section 49 (4) of the Public Service Superannuation Act, 1927.

REPORT BY THE ACTUARY APPOINTED BY HIS EXCELLENCY THE GOVERNOR-GENERAL TO MAKE THE ACTUARIAL EXAMINATION OP THE PUBLIC SERVICE SUPERANNUATION FUND. Wellington, 24th May, 1940. 1. I have the honour to submit the following report on the Public Service Superannuation Bund as at 31st March, 1939, in accordance with the requirements of section 49 of the Public Seryice Superannuation Act, 1927, as amended by section 47 of the Finance Act (No. 2), 1939. 2. The scheme came into operation at the Ist January, 1908, and embraces, with the few exceptions set out in section 54 of the Act, all permanent public servants outside the Government Railways Superannuation Fund and the Teachers' Superannuation Fund. Subject to certain conditions temporary employees may elect to become contributors to the Fund. At the valuation date there were 22,328 male and 3,955 female contributors, 1,993 males and 381 females in receipt of retiring-allowances, and 1,248 widows and 291 children in receipt of annuities. Full details of the membership are given in Tables I and II of the appendix. 3. 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. 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 support the retiring-allowances which accrue in virtue of service after entry, and consequently assistance is required from the State ill its capacity as employer. In addition, employment by the State prior to the inception of the scheme ranks as service for pension purposes at full rates, and as no contributions were payable in respect of this service subsidies are required to meet the whole of the retiring-allowances arising therefrom. Finally, widows' and children's annuities were originally at the rate of £18 per annum and ss. per week respectively. These rates were later increased to £31 per annum and £26 per annum respectively, section 114 of the Act making provision for payment from the Consolidated Fund of annual amounts sufficient to meet these increases. The State has to meet therefore —(i) widows' and children's annuities at £13 per annum, (ii) retiring-allowances due to non-contributory seryice, and (iii) such portion of retiring-allowances due to contributory service as is not provided by contributors' contributions. 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 April, 1934, to 31st March, 1939. Revenue. £ s. d. Expenditure. £ s. d. Fund at Ist April, 1934 .. .. 2,964,064 5 6 Members' retiring-allowances .. 2,311,660 4 6 Members' contributions .. .. 1,500,395 16 1 Widows'and children's annuities .. 213,610 2 7 Subsidies— Refunds of contributions .. .. 248,309 15 10 New Zealand Government .. 813,802 18 1 Investments written down, &c. .. 19,129 12 3 Other omployers .. .. 4,301 10 9 Expenses .. .. .. 36,936 0 6 Interest .. .. .. .. 718,086 15 8 Transfers to other funds .. .. 19,548 8 2 Transfers from other funds .. .. 15,972 11 6 Funds at 31st March, 1939 .. .. 3,199,010 8 1 Premiums on conversion of debentures 29,903 5 2 Fines, fees, &c, ~ ~ .. 1,677 9 2 £6,048,204 II 11 £6,048,204 11 11

H.—26a,

5. The effective rates of interest credited to the Fund in each year of the quinquennium were as follows :— Effective Rate of Interest. £ 8. d. Year ended 31st March, 1935 .. .. .. .. 514 8 per cent. 1936 .. .. ..593 1937 .. 417 9 1938 .. .. .. .. 4 510 1939 .. .. .. ..434 Amounts by which investments have been written down, investment losses, premiums recovered on conversion of local-body debentures, and other similar items have been taken into account in calculating the above rates. As the circumstances giving rise to the above-mentioned investment losses have practically disappeared, it is probable that the tendency for the rates to decrease year by year will be arrested, and that somewhat over 4 per cent, will be realized for the next few years. The item, subsidies from other employers, represents amounts received from the Samoan and Cook Island Administrations and the Imperial War Graves Commission in respect of contributors to the Fund who are on loan from the New Zealand Public Service. These subsidies are calculated at the rate of £1 for each £1 of contribution paid by such contributors. 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 in the future ? 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 increase, 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. For example, in. paragraph 5 it is shown that the rate of interest credited to the accumulated funds has fallen from £5 14s. Bd. per cent, for the year ended 31st March, 1935, to £4 3s. 4d. per cent, for the year ended 31st March, 1939. Obviously it can no longer be assumed that the funds will earn ii per cent, per annum, the rate of interest assumed in the 1934 valuation, and, for the reasons given in paragraph 5, 4 per cent, has been adopted for this valuation. If when the next valuation, comes to be made the yield on the funds has in fact fallen below 4 per cent, and there is then no immediate prospect of the rate increasing, a still lower rate must be adopted for that 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 : — Capital value of the benefits specified in the Act, both existing and prospective in £(000) respect of present members .. .. .. .. .. ..23,472 Capital value of future expenses in respect of present members .. . . . . 137 £(000) 23,609 Capita] value of existing contributors' future contributions .. .. 5,486 Capital value of future subsidies from other employers .. .. .. 8 Funds as per revenue account .. .. .. .. .. 3,199 8,693 Balance .. .. .. .. .. .. .. £14,916 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 respcct of existing members. Omitting the capital value of future expenses in respect of existing members, the resulting amount, £14,779,000, is comparable with the corresponding figure given in the previous valuation report—viz., £9,748,000 —an increase of £5,031,000. Various factors have operated to bring about this large increase, the three 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 State subsidies fell far short of interest on the State's liability, the net effect being an increase of approximately £1,526,000. (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. During the quinquennium the number of contributors increased by about 51 per cent., the consequent increase in the State's capital liability being £989,000. (iii) As stated in paragraph 6, the valuation basis has been strengthened mainly by decreasing the rate of interest from 4| to 4 per cent, occasioning an increase of approximately £2,200,000. These three items together account for £4,715,000 of the increase, the balance arising from the aggregation of a number of small items,

2

H.—26a

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 49 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 50 provides for payment from the Consolidated Fund each year of " the sum of eighty-six thousand pounds, together with such further amount (if any) as is deemed by the Governor-General 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 provides 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 : — Capital value of benefits, existing and prospective in respect of existing members, £(000) provided by members' contributions .. .. .. .. .. 13,952 Capital value of future expenses in respect of existing members. .. .. 137 £(000) 14,089 Capital value of existing contributors' future contributions .. .. 5,486 Capital value of future subsidies from other employers .. .. 8 Funds as per Revenue Account .. .. .. .. .. 3,199 8,693 Deficiency .. .. .. .. t. .. £5,396 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 members' 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., £216,000 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 £312,000, for example, would redeem the deficiency completely in 30 years. Similarly, uniform annual payments of £273,000 and £251,000 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 retiringallowances 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 V" of the Appendix. For the year ended 31st March, 1940, for example, it is estimated that retiring-allowances will amount to £507,000, £182,000 being due to non-contributory service and £325,000 to contributory service. After allowing for expenses of administration and subsidiary benefits, the accumulated contributions of the retired members will provide £177,000 of retiring-allowances due to contributory service. The remainder of the retiring-allowances due to contributory service—viz., £148,000 —falls on the State, as do also retiring-allowances due to non-contributory service amounting to £182,000. 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 £27,000 for the year, and the State has to provide the balance at £13 per annum, estimated at £20,000.

3

H —26 A.

The annual subsidies required under these headings range from £349,000 to £359,000 for the five years, and average £353,000 per annum. The. Fund should receive these Subsidies in the middle of the year to which they apply—i.e., on 30th September. 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 t'o, say, £357,000. 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 .. .. .. 216,000 On account of retiring-allowances and widows' and children's annuities which will be payable during the five years Ist April, 1939, to 31st March, 1944.. .. .. .. .. .. .. 357,000 Total annual subsidy required .. .. .. .. £573,000 Any subsidy or part thereof paid after its due date should be increased at interest at 4 per cent, up to the actual date of payment. The whole of the above subsidy is not payable from the Consolidated Fund as might be inferred from the legislation quoted in paragraph 9. Legislation enacted in 1927 and amended in 1934 provides that where a contributor's salary is payable from some source other than the Consolidated Fund part of the total subsidy paid to the Fund in any year shall be met from the same source as is his salary. The apportionment of the subsidy payable in any year into the amounts payable from the various sources is outside the scope of this report, but it may be noted that a substantial proportion of the contributors to the Fund are employed by Departments whose expenses of administration are not a charge on the Consolidated Fund, and that therefore a considerable part of the subsidy paid in any year does not fall on the Consolidated Fund. S. Beckingsale, Fellow of the Institute of Actuaries, Government Actuary. The Public Service Superannuation Board, Wellington.

APPENDIX.

TABLE I. Membership at Successive Valuations.

4

Contributors. Retired Contributors. Widows. Children. Males. Females. Males. Females. Valuation Date. „ . „ . , CO . m . +7 . I +7 I -a* -z-ci s ■a-ig | -a iff s | .1 | g 3 92 fl H S -9 2 £ 3-Sn rO rj.a O 43 rQ | |1 III | || 111 a |.|| I §|g a ! | I £ «Jo,a «js j?5 J <25 a _ d d 2 <1 £ £ £ £ £ £ £ £ 31st Deo., 1910.. 7,465 1,280,459 88,007 906 77,660 4,582 366 37,904 14 348 60 1,080 47 611 1913.. 9,611 1,704,408 111,297 1,198 115,970 6,710 517 56,065 22 679 138 2,484 134 1,742 1916.. 11,850 2,135,272 133,169 1,463 154,500 8,793 671 78,956 39 1,387 250 4,500 273 3,549 1919.. 11,919 2,782,848 168,369 2,297 302,179 16,600 789 105,700 51 1,805 394 7,092 451 5,863 31st Mar., 1924.. 12,814 3,562,493 203,466 2,207 389,595 21,200 1,269 229,726 108 6,783 516 9,288 469 6,097 1927.. 14,908 4,062,769 226,884 2,006 371,879 20,110 1,394 285,451 169 14,052 624 11,232 429 5,577 1930.. 15,705 4,449,338 243,987 2,271 409,070 21,993 1,503 321,053 203 16,956 773 23,963 391 10,166 1934.. 15,125 4,017,267 215,134 2,244 379,183 20,070 1,944 421,477 304 27,698 968 30,008 342 8,892 1939.. 22,328 6,446,441 342,961 3,955 611,321 31,594 1,993 454,892 381 35,959 1,248 38,688 291 7,566 * 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 reducod. By 1939 the difference was negligible. t Up to 1927 these annuities are at the following rates : Widow, £18 per annmn ; child, £13 per annum. After 1927 they are at £31 per annum and £20 per annum respectively.

H.—26A.

TABLE 11. Movement in Membership during the Intervaluation Period Ist April, 1934, to 31st March, 1939. I. 'Contributors. Males. Females. Number at Ist April, 1934 . . .. .. .. 15,125 2,244 New entrants admitted .. .. .. .. .. 9,713 3,981 Transferred from other funds .. .. .. .. 72 7 24,910 6,232 Retiring-allowances granted — (i) Age or service .. .. .. .. .. 418 81 (ii) Medically unfit .. .. .. . . .. 145 35 Deaths attracting— (i) Refunds of contributions .. .. .. .. 177 25 (ii) Widows' annuities .. .. .. .. 129 Refunds of contributions granted— (i) In lieu of retiring-allowances .. .. .. 21 3 (ii) Not entitled to retiring-allowances .. .. .. 1,654 2,071 Transferred to other funds .. .. .. .. 38 62 Total exits .. .. .. .. .. .. 2,582 2,277 Number at 31st March, 1939 .. .. .. 22,328 3,955

11. Retired Contributors. Males. Females. Number at Ist April, 1934 .. .. .. .. 1,944 304 Retiring-allowances granted— (i) Age or service .. .. .. .. .. 418 81 (ii) Medically unfit .. .. .. .. .. 145 35 2,507 420 Deaths — (i) Attracting widows' afrrtufties .. .. .. 343 (ii) Other .. . . .. . . . . .. 169 38 Terminated by recovery from ill health . .... 2 1 Total exits .. .. .. .. .. .. 514 — 39 Number at 31st March, 1939 .. .. .. 1,993 381

111. Widows and Children. Widows. Children. Number at Ist April, 1934 .. .. .. .. 968 342 Annuities granted .. .. .. .. .. 472 252 1,440 594 Deaths .. .. .. .. .. .. .. 163 3 Children attaining age fourteen .. .. .. .. .. 300 Widows remarrying .. .. .. .. .. 29 Total exits .. .. .. .. .. .. 192 — 303 Number at 31st March, 1939 .. .. .. 1,248 291

5

H— 26a

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 iitial 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). The Minister in charge of a Department may retire a contributor earlier as follows, and may in such cases impose such conditions as to payments into the Fund or otherwise as he 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:— (i) Compulsory retirement for any reason other than misconduct after completion of twenty years' service—a refund of contributions with 3| per cent, interest. (ii) Voluntary retirement or dismissal for misconduct—a refund of contributions. IV. 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 lifetime, 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.

6

IT.—26A,

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

7

Hue to ® ue Contributory Service. Capital Value of , N ° n ; ~ 7TT7 ~ ~ contributory Provided by Not provided Service. Members' by Members' Contributions. Contributions. Existing benefits— (i) Retiring-allowances— £(000) £(000) £(000) Males .. .. .. .. .. 1,456 1,559 1,056 Females .. .. .. .. .. 79 152 211 (ii) Widows' annnities .. .. .. .. .. 261 189 (iii) Children's annuities .. .. . . . . . . 14 14 Prospective benefits in respect of existing members — (i) Retiring-allowances— Males .. .. .. .. .. 307 9,322 5,071 Females .. .. .. .. .. 6 501 580 (ii) Widows' annuities .. .. ., .. .. 682 493 (iii) Children's annuities .. .. .. , . .. 58 58 (iv) Refunds of contributions — (a) On deathMales .. .. .. . . ., 528 Females .. .. .. .. .. 16 (b) On retirement before becoming entitled to a retiring-allowance— Males . . .. .. . . . . 725 Females .. .. .. ., .. 134 Future expenses in respect of existing members .. .. 137 Total liabilities in respect of existing members .. .. 1,848 14,089 7,672 Future contributions payable by — (i) Existing contributors — Males .. .. .. .. .. .. 5,236 Females .. .. .. .. .. .. 250 (ii) Samoan Administration, &c. .. .. .. .. 8 Accumulated funds, as per Revenue Account .. .. 3,199 Liability of the State in respect of existing members ,1,848 5,396 7,672 Total assets in respect of existing members 1,848 14,089 7,672

H.—26a

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

Jpproximate Coxt of Paper.—Preparation, not given ; printing (1,900 copies) £12 10*.

Authority: E, Y, Paul, Government, Printer, Wellington.—l94o.

Price 6d.

8

Year ending 31st March, 1940. 1941. 1942. 1943. 1944. Total— Retiring-allowances— £(000) £(000) £(000) £(000) £(000) (i) Due to non-contributory service .. .. .. 182 173 166 158 151 (ii) Due to contributory service .. .. .. .. 325 341 363 390 418 Widows' and children's annuities .. .. .. .. 47 49 50 52 53 Total .. .. .. .. .. 554 563 579 600 622 Provided by contributors' contributions — Retiring-allowances due to contributory service .. .. 177 186 200 217 233 Widows' annuities at £18 per annum and children's annuities at £13 per annum .. .... .. .. .. 27 28 28 29 30 Total .. .. .. .. .. .. 204 214 228 246 263 To be provided by the State— Reti ring-allowances— (i) Due to non-contributory service .. .. .. 182 173 166 158 151 (ii) Due to contributory service .. .. .. .. 148 155 163 173 185 Widows' and children's annuities at £13 per annum .. .. 20 21 22 23 23 Total .. .. .. .. .. .. 350 349 351 354 359