1. Actuarial assumptions for New Zealand superannuation scheme valuations
Andrea Gluyas and Christine Ormrod November 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
“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 and objectivity 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.”
“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.”

5. The role of the actuary assisting in audit -cont
“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.”
“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.”

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 less 1 year and less 3 years
NZLT less 2 years
PA(90) less 3 years and less 4 years
NZLT less 1 year, with mortality improvements
Is the mortality assumption reasonable?

9. Findings from the NPF Schemes
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%)
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

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