Reserve Bank of Australia Annual Report – 2015 Financial Statements Note 14 – Superannuation Funds

Overview

Based on independent actuarial estimates, the RBA defined benefit superannuation fund (the OSF) was in surplus at 30 June 2015. This actuarial analysis is based on the full actuarial valuation prepared as at 30 June 2014, and is consistent with AAS 25 – Financial Reporting by Superannuation Plans. As required by relevant legislation, the next actuarial review of the fund as at 30 June 2017 will be undertaken early in 2017/18.

For financial statement purposes, disclosures on superannuation follow AASB 119. Disclosures under AASB 119 are based on the assumption of future liabilities being discounted at the yield on high-quality Australian dollar corporate bonds. This places a higher present value on those liabilities than the funding assessment under AAS 25, which discounts them at the assumed return on fund assets. In terms of AASB 119, the RBA currently carries a liability for defined benefit superannuation.

Structure of funds

The RBA has two superannuation funds: the Reserve Bank of Australia Officers' Superannuation Fund (OSF) and the Reserve Bank of Australia UK Pension Scheme. Current and future benefits of these schemes are funded by member and RBA contributions and the existing assets of these schemes. The RBA's superannuation expenses for these schemes are included in net profits and shown in Note 2. Administration and other operational costs, and any recoupment of costs from the funds, are also included in Note 2. There were no other related party transactions between the RBA and the funds during 2014/15.

The OSF is a hybrid fund licensed by APRA, with a mix of defined benefit members, defined contribution members and pensioners. Defined benefit members receive a defined benefit in accordance with the Fund's Trust Deed. All members have unitised accumulation balances, which comprise employer contributions and members' personal contributions plus earnings on these contributions. The OSF is classified as a single-employer plan in terms of AASB 119. Defined benefit membership in the OSF was closed to new RBA staff from 1 August 2014. From that date, new staff have been offered defined contribution superannuation.

The UK Pension Scheme is a closed defined benefit scheme subject to relevant UK regulation.

Funding valuation – AAS 25

Full independent actuarial valuations of the OSF and UK Pension Scheme are conducted every three years. The most recent funding valuation of the OSF was at 30 June 2014. The latest valuation of the UK Pension Scheme was at 30 June 2013. At these valuations, the actuaries concluded that, on the basis of accrued benefits, both funds were in surplus and in a satisfactory financial position.

The funding valuation of the OSF in 2014 was based on the Attained Age Funding method, consistent with AAS 25. Accrued benefits were determined as the value of the future benefits payable to members (allowing for future salary increases), discounted by the expected rate of return on assets held to fund these benefits. At the time of this review, the surplus of the OSF was $110.3 million, as the assets of the OSF of $1,149.0 million exceeded the accrued benefits of $1,038.7 million. The OSF surplus measured on this basis as at 30 June 2015 amounted to $141.5 million (assets of $1,238.1 million less accrued benefits of $1,096.6 million).

The RBA maintained its contribution rate to the OSF defined benefit at 18.3 per cent of salaries in 2014/15. This is consistent with the actuary's recommendations at the 2014 triennial review.

The latest triennial funding valuation for the UK Pension Scheme was prepared as at 30 June 2013 and was also based on the Attained Age Funding method. On this basis, the UK Pension Scheme recorded a small deficit at 30 June 2015 (assets of $26.4 million compared with accrued benefits of $26.5 million), compared with a surplus of $0.1 million at 30 June 2014 (assets of $21.5 million compared with accrued benefits of $21.4 million). The Trustees of this scheme will keep its funding position under review.

Accounting valuation – AASB 119

For financial statement purposes, the financial positions of the OSF and UK Pension Scheme are valued in accordance with AASB 119. Information on these valuations and their impact on the financial statements are provided in a detailed reconciliation at the end of this Note.

The RBA's projected defined benefit superannuation obligation has been discounted to its present value by applying the yield on high-quality Australian dollar corporate bonds at 30 June 2015. The yield on Australian government bonds was applied in the previous year. The use of corporate bonds is in accordance with AASB 119 (refer to Note 10). As yields on corporate bonds are higher than those on Australian government bonds of equivalent maturity, this change has reduced by $241.7 million the value of the RBA's defined benefit obligation at 30 June 2015. This amount is reflected in the Bank's other comprehensive income; there is no effect on net profit in the current financial year.

AASB 119 requires disclosures of significant actuarial assumptions, a maturity analysis of the defined benefit obligation and key risk exposures. Unless otherwise stated, information is provided only for the OSF, as the UK Pension Scheme is not material.

Actuarial assumptions

The principal actuarial assumptions for the AASB 119 valuation of the OSF are:

Maturity Analysis

The weighted-average duration of the defined benefit obligation for the OSF is 18 years (18 years at 30 June 2014). The expected maturity profile for defined benefit obligations of the OSF is as follows:

Risk exposures

The RBA is exposed to risk from its sponsorship of the OSF defined benefit plan. Key risks include investment, interest rate, longevity, salary and pension risks.

Investment risk is the risk that plan assets will not generate returns at the expected level.

Interest rate risk is the exposure of the defined benefit obligations to adverse movements in interest rates. A decrease in interest rates will increase the present value of these obligations. This may, however, be partially offset by an increase in value of the interest-bearing securities held by the OSF.

Longevity risk is the risk that OSF members live longer than actuarial estimates of life expectancy.

Salary risk is the risk that higher than assumed salary rises increase the cost of providing a salary-related pension.

Pension risk is the risk that pensions increase at a faster rate than assumed and increases the cost of providing pensions.

The OSF's member and accounting services were outsourced in 2013/14. Appropriate practices and procedures have been adopted to manage the associated risks.

The table below shows the estimated change in the defined benefit obligation resulting from movements in key actuarial assumptions. These estimates change each assumption individually, holding other factors constant; they do not incorporate any correlations among factors.

Asset Distribution

The distribution of the OSF's assets at 30 June is provided in the table below. This distribution relates to the option used by the OSF to fund members' defined benefits.

AASB 119 Reconciliation

A detailed reconciliation of the AASB 119 valuation of the two superannuation funds is shown in the table below. In the case of the OSF, these details relate only to the defined benefit component of the fund as the RBA faces no actuarial risk on defined contribution accumulation balances. Excluding defined contribution balances has no effect on the measurement of the financial position of the OSF. At 30 June 2015, accumulation balances in the OSF totalled $265.0 million ($236.8 million as at 30 June 2014).