actuarial assumptions for new zealand superannuation scheme valuations

Actuarial assumptions for New Zealand superannuation scheme valuations

Andrea Gluyas and Christine OrmrodNovember 2010

PricewaterhouseCoopers

Why this paper?

Pensioner mortality assumptions

Other valuation assumptions

Actuarial assumptions for New Zealand superannuation scheme valuations


Why this paper?


“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.”

The role of the actuary assisting in audit


“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.”

The role of the actuary assisting in audit -cont


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

Superannuation scheme valuations in New Zealand


Pensioner Mortality Assumptions


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?

What are we seeing?


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

Findings from the NPF Schemes


65-69 70-74 75-79 80-84 85-89 90-94 95-9980%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

Actual mortality as a percentage of NZLT2005-07 - Non-DBPA males

1996-1999 1999-2002 2002-2005 2005-2008 NZLT2005-2007

Age

Non-DBPA male pensioner mortality experience


65-69 70-74 75-79 80-84 85-89 90-94 95-9980%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

Actual mortality as a percentage of NZLT2005-07 - DBPA males

1996-1999 1999-2002 2002-2005 2005-2008 NZLT2005-2007

Age

DBPA male pensioner mortality experience


65-69 70-74 75-79 80-84 85-89 90-94 95-9960%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

Actual mortality as a percentage of NZLT2005-07 - Non-DBPA females

1996-1999 1999-2002 2002-2005 2005-2008 NZLT2005-2007

Age

Non-DBPA female pensioner mortality experience


65-69 70-74 75-79 80-84 85-89 90-94 95-9960%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

Actual mortality as a percentage of NZLT2005-07 - DBPA Females

1996-1999 1999-2002 2002-2005 2005-2008 NZLT2005-2007

Age

DBPA female pensioner mortality experience


Population mortality improvements

6061626364656667686970717273747576777879808182838485868788899091929394959697989995%

100%

105%

110%

115%

120%

Three years of mortality improvement from population statistics

Females Males


60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99100%

105%

110%

115%

120%

125%

Mortality improvement expected using mortality improvement formula

2002-2005 1999-2002 1996-1999

NPF mortality improvement formula


60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99100%

105%

110%

115%

120%

125%

130%

135%

140%

145%

150%

Total mortality improvement implied by an age adjustment

-1 age adjustment -2 age adjustment -3 age adjustment

Age adjustment mortality improvement allowance


35 45 55 65 75 85-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Value of annuity of $1,000pa - Male single lifePercentage difference from value using NZ2005-07 -2 years

Non-DBPA DBPA NZLT0507 mort impNZLT0507-2 NZLT0507

How much difference does it make?


35 45 55 65 75 85-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Value of annuity of $1,000pa - Female single lifePercentage difference from value using NZ2005-07 -2 years

Non-DBPA DBPA NZLT0507 mort impNZLT0507-2 NZLT0507

Age

How much difference does it make?


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?

What mortality assumption is reasonable?


Sliding scale against population mortality

Effect of removing impaired lives

And may be?

Other potential approaches to mortality asssumptions


Other valuation assumptions


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”

Discount rates – Funding valuations


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

Discount rates – NZ IAS 19


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

Treasury paper


Pension increases

Administration expenses

Retirement ages

Commutation option

Other assumptions

actuarial assumptions for new zealand superannuation scheme valuations

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