NAPSA operates a Defined Benefit (DB) Scheme under which pension benefits are not directly linked to the actual contributions made.
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The Value of An Actuary For Pension Schemes
Analysis in brief : An Actuary plays a vital role in supporting Pension Schemes in the maintenance of business continuity and solvency. These functions range from assisting in the set up and amendment of investment policy, drafting and amendment of rules to ensure compliance with the regulations as well as calculating members’ exit benefits. Actuaries work across several lines of business which include General Insurance, Life Insurance, Health, Banking and Pensions. Most of the actuarial work involves the use of different sophisticated methods and assumptions to determine solvency. In general, a business is said to be solvent if its assets are more than its liabilities. Like any other business, a Pension Scheme is run with the objective of realising a surplus at the end of each financial year. The surplus is then equitably distributed to the scheme members. The Actuary plays a part in the distribution of the surplus to ensure that there is business continuity and maintenance of solvency.
To achieve solvency, there are several pieces that need to be put together. For example, the investment policy of the scheme needs to be robust and the scheme rules need to be compliant with the regulations. The Actuary can assist in both the set up and amendment of the investment policy as well as the drafting and amendment of rules to ensure compliance with the regulations.
When scheme members exit the Pension Scheme, they need to be paid their actual benefits in line with scheme rules. However, mistakes can be made on calculating these benefits. In that regard, an actuary can assist the administrators with correctly calculating the members’ exit benefits.
In summary, an actuary plays important roles in the smooth running of a Pension Scheme. Such roles include but are not limited to the ones summarised in the chart below:
Prospects under the National Pension Scheme Act amendments
We note that the government is in the process of amending the National Pension Scheme Act No. 40 of 1996, which will provide members of the Scheme an option to access part of their contributions before retirement age. We understand that the government aims to implement the reform to provide an alternative source of capital for scheme members in order to alleviate the challenges of accessing capital from financial institutions. This is expected to have a positive impact on the economy if this additional capital is channelled toward sustainable savings vehicles or business opportunities.
We expect Actuaires to play a critical role in this process through the provision of a comprehensive actuarial valuation of the scheme’s liability position. This will be carried out in order to determine the current actuarial surplus or deficit position of the National Pension Scheme Authority (NAPSA), before members are able to access part of their contributions.
It is worth highlighting that there are several risks that will need to be critically considered as a result of changing the structure of NAPSA, to allow halfway withdrawals. These risks are driven by a combination of the following factors:
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Low-income earners are uplifted to ensure that they get a minimum pension even when their actual contributions and investment returns may well be below the level that they contributed.
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NAPSA urgently needs to carry out a comprehensive actuarial valuation of the scheme’s liability position in order to determine the current actuarial surplus or deficit position of NAPSA, before members are able to access part of their contributions.
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If in deficit, the situation would require both employee and employer contributions to be increased to meet the shortfall.
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Actuarial valuations are based on a number of assumptions prevailing at the time of the valuation and these assumptions may change at subsequent valuations. An example of a key assumption is Mortality rate (i.e. the number of years a pensioner is expected to live and therefore receive their pension benefits).
By Blessmore Elvis Chakundura : Senior Actuarial Analyst at Gralix Actuarial Consulting
