ACTUARIAL INTEREST EXPLAINED
WHAT IS ACTUARIAL INTEREST?
The GEPF is a Defined Benefit fund. The Rules of the Fund stipulate that the benefit payable to a member on retirement is based on his or her pensionable salary and years of membership in the Fund. The benefit payable is not related to the contributions received on behalf of that member. Where a member retires with less than 10 years of service or withdraws from the Fund prior to retirement, the member receives his or her Actuarial Interest in the Fund, which is the estimated value of the benefit that the member has built up in the Fund to the date of exit. Put another way, it is the amount of money the Fund is holding in order to fund the expected future benefit payment to the member.
The total of the Actuarial Interest values for all members and pensioners is compared to the total assets held by the Fund to determine whether the Fund has sufficient assets to meet its liabilities – this is done formally every two years as part of the Actuarial Valuation of the Fund by a valuator who an independent expert in this field and is approved by the regulator. An extract of the valuation results is also reflected in the Fund’s published Annual Report.
Actuarial Interest values are calculated by applying a formula based on the following:
1. The average pensionable (or basic) salary in the last two years prior to exit;
2. The years of membership with the Fund;
3. Any purchase of service or money transferred into the Fund from other funds; and
4. A factor – called an Actuarial Interest Factor – based on the member’s age and whether the member is a “Services” member or an “Other” member.
In calculating the actuarial interest, the Fund determines, for each member, the potential benefit that would be payable in each future year for each type of exit (that is, resignation, death, retirement, etc.). Since the Fund has no way of knowing when and how each member will exit and what the member’s salary will be at the date of exit, this calculation requires that various assumptions be made about the future economic conditions and the demographics (profile) of the entire membership.
The demographic and economic assumptions are reviewed as part of each Actuarial Valuation of the Fund to ensure they remain appropriate and in line with the actual experience to give the best possible estimate of each member’s Actuarial Interest value in the Fund.
• The demographic assumptions relate to the expected number of withdrawals, deaths and retirements of members at each age and how long pensioners are expected to live. These assumptions are specific to the Fund as they are calculated from the actual experience of the Fund- this is the best available indicator of what is likely to take place in the future.
• The economic assumptions relate to the expected level of future inflation, interest rates and investment returns (which are calculated from investment market information), salary increases (which are calculated relative to inflation) and pension increases (which are based on the pension increase policy of the Fund).
As the demographic experience of the Fund and economic circumstance change, it has to be reflected in the demographic and economic assumptions. The Actuarial Interest Factors, and therefore Actuarial Interest values, can increase or decrease as a result of any change in the demographic and economic assumptions. This will, in turn, reflect in a change in the current value of each member’s benefits in the Fund. These changes are not the result of a decision by the Board of Trustees, the employer (government) or employee representative (trade unions).