C. General Business Disclosures
This section includes disclosures for operations which are significant in size and/or nature for Finance.
C1. General insurance activities
Finance provides insurance and risk management services to Australian General Government Sector entities. The classes of business cover include: Liability, Property, Motor Vehicle, and Personal Accident and Travel.
These services are funded from the Comcover Special Account, refer to Note F3.1.
Policy and measurement
Premium revenue
Premium revenue includes amounts charged excluding Goods and Services Tax (GST). Premiums are recognised as revenue over the period insured which is from 1 July to 30 June each year.
Notional reinsurance expense
A notional reinsurance charge of $5.0 million is paid to the Official Public Account (OPA) each year.
Reinsurance and other recoveries
Reinsurance and other recoveries received or receivable in respect of gross claims paid and movements in reinsurance and other recovery assets are recognised as revenue in the year they occur.
Reinsurance and other recovery assets are actuarially assessed as the present value of the expected future receipts, calculated on the same basis as the outstanding claims liability.
Claims expense and outstanding claims liabilities
Claims expense represents claims payments and the movement in the gross outstanding claims liability.
The outstanding claims liability is actuarially assessed and measured at the central estimate of the present value of expected future payments of claims incurred at the reporting date with an additional risk margin to allow for inherent uncertainty in the central estimate. The expected future payments include those in relation to unpaid reported claims; claims incurred but not reported (IBNR); claims incurred but not enough reported (IBNER); and indirect expenses that are expected to be incurred in settling these claims. Changes in claims estimates are recognised in the surplus/(deficit) in the year in which the estimates are changed.
Assets backing general insurance liabilities
The balance of the Comcover Special Account and receivables from insurance activities are held to back general insurance liabilities. For further information in relation to the Comcover Special Account, refer to Note F3.1.
Key judgements and estimates
Finance takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. The claim estimates and judgements are regularly evaluated and updated based on historical experience and other factors. However, given the uncertainty in the estimation process, it is likely that the final outcome will prove to be different from the original liability established.
Finance’s activities are classified into two main categories: Property (Property, Motor Vehicle and Personal Accident and Travel) and Liability. Different actuarial methods and assumptions are applied at a more granular level taking into account the characteristics of the class of business, claim type and the extent of the development of each past accident period.
The estimation of IBNR and IBNER are generally subject to a greater degree of uncertainty where claims notification and settlement may not happen for many years after the event giving rise to the claim. For this reason, Liability classes of business typically display greater variability between the initial estimates and final outcomes.
Key actuarial assumptions
The key actuarial assumptions for the determination of the outstanding claims liabilities are set out in the table below:
30 June 2019 |
30 June 2018 |
|||
Property |
Liability |
Property |
Liability |
|
Average discount rate |
1.0% |
1.0% |
2.0% |
2.2% |
Average inflation rate |
2.2% |
3.2% |
2.4% |
3.4% |
Average weighted term to settlement (years) |
1.7 |
2.6 |
1.6 |
2.7 |
Expense rate |
1.0% |
1.6% |
1.4% |
1.6% |
Risk margin |
19.1% |
19.3% |
16.0% |
19.0% |
Process used to determine actuarial assumptions
Discount rate |
To allow for the time value of money, projected payments are discounted at a risk free rate derived from market yields on Australian Government securities at the reporting date. |
Inflation rate |
Claims inflation is incorporated into the resulting projected payments to allow for both expected levels of economic inflation and superimposed inflation. Economic inflation is based on economic indicators such as the Consumer Price Index (CPI) and/or increases in average weekly earnings. Superimposed inflation is past claims inflation in excess of wage inflation. A review of past claims reveals no evidence of superimposed inflation. |
Average weighted term to settlement |
The average weighted term to settlement is based on historic payment patterns. |
Expense rate |
Claims handling expenses are calculated by reference to Finance’s claims handling remuneration agreements for direct expenses and internal costs for indirect expenses. |
Risk Margin |
The risk margin is assessed by examining the historical variability of the claims experience, considering industry studies and benchmarks and applying actuarial judgement, especially in respect of uncertainties not reflected in the claims data. This assessment is performed for each class of business. Diversification benefit is allowed for, with consideration given to industry studies and benchmarks. |
Sensitivity analysis
Finance has conducted sensitivity analysis to quantify the impact of changes in the key underlying assumptions on the surplus/(deficit). The sensitivity analysis has been performed for each variable independently of all other changes and is net of reinsurance and other recoveries. The table below describes how a change in each assumption will affect the surplus/(deficit).
30 June 2019 |
30 June 2018 |
||||
Property |
Liability |
Property |
Liability |
||
Assumption |
Movement |
$'000 |
$'000 |
$'000 |
$'000 |
Average discount rate |
+1% |
4,054 |
6,437 |
2,415 |
6,360 |
-1% |
(3,886) |
(6,122) |
(2,319) |
(6,048) |
|
Average inflation rate |
+1% |
(4,000) |
(6,302) |
(2,485) |
(6,601) |
-1% |
4,092 |
6,493 |
2,539 |
6,810 |
|
Average weighted term to settlement (years) |
+1 year |
(2,887) |
(5,336) |
(626) |
(2,490) |
-1 year |
3,482 |
5,634 |
261 |
2,078 |
|
Expense rate |
+1% |
(2,284) |
(2,393) |
(1,438) |
(2,324) |
-1% |
2,284 |
2,393 |
1,438 |
2,324 |
|
Risk margin |
+1% |
(1,936) |
(2,039) |
(1,257) |
(1,984) |
-1% |
1,936 |
2,039 |
1,257 |
1,984 |
The movements are the absolute movement in the assumption (e.g. +1% increase in the expense rate for Property from 1.0% to 2.0%).
Insurance risk management
Finance is exposed to insurance risk, which is discussed below.
Objectives, policies and processes for managing insurance risk
Finance provides insurance and risk management services to deliver a net benefit to the Australian Government over the longer term. The transfer of insurance risk from participating general government sector entities offers the most comprehensive and cost effective approach to the management of risk exposures. The provision of a captive fund focuses on improving risk identification and management in entities and increases in transparency and accountability to the Australian Government and the public.
Key processes to manage the insurable risk exposure of the Commonwealth include:
- Detailed risk exposure surveys
- Actuarial modelling of claims history, exposures and industry experience to provide an estimate of expected claims costs for the insured year and to determine the annual premium collection
- Claim management and investigation processes
- Appointment of an independent actuary for valuation services of the outstanding claims liability
- Whole of government policy development and risk management advisory and education services to improve risk awareness and capability of Fund Members.
Concentration of insurance risk
No reinsurance policies were placed in 2018-19 (2017-18: nil), reflecting the capacity of the Australian Government to cost-effectively self-insure against infrequent large claims.
C1.1. Underwriting result
Departmental |
||
30 June |
30 June |
|
2019 |
2018 |
|
$'000 |
$'000 |
|
Direct premium revenue |
||
Premium revenue |
128,452 |
138,344 |
Premium revenue eliminated on consolidation |
1,139 |
1,181 |
Total direct premium revenue |
129,591 |
139,525 |
Notional reinsurance expense |
(5,000) |
(5,000) |
Net premium revenue |
124,591 |
134,525 |
Net incurred claims |
||
Insurance claims |
(180,191) |
(97,246) |
Reinsurance and other recoveries revenue |
1,142 |
299 |
Total net claims |
(179,049) |
(96,947) |
Other underwriting expenses |
(8,863) |
(8,282) |
Underwriting result |
(63,321) |
29,296 |
Revenue from Government |
7,743 |
8,004 |
Operating surplus/(deficit) |
(55,578) |
37,300 |
C1.2. Net claims incurred
30 June 2019 |
30 June 2018 |
|||||
Current year |
Prior years |
Total |
Current year |
Prior years |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
Gross claims incurred |
||||||
Undiscounted |
142,295 |
24,128 |
166,423 |
110,459 |
(15,748) |
94,711 |
Discount and discount movement |
(3,748) |
12,479 |
8,731 |
(6,262) |
4,857 |
(1,405) |
Gross claims incurred discounted |
138,547 |
36,607 |
175,154 |
104,197 |
(10,891) |
93,306 |
Reinsurance and other recoveries |
||||||
Undiscounted |
(769) |
(197) |
(966) |
(678) |
454 |
(224) |
Discount and discount movement |
2 |
(178) |
(176) |
2 |
(77) |
(75) |
Reinsurance and other recoveries discounted |
(767) |
(375) |
(1,142) |
(676) |
377 |
(299) |
Net claims incurred |
137,780 |
36,232 |
174,012 |
103,521 |
(10,514) |
93,007 |
Claims handling expense |
5,037 |
3,940 |
||||
Total net claims |
179,049 |
96,94 |
The $36.2m increase in prior years net claims is due to changes in the expected cost for two property claims incurred in 2017-18. These movements were partially offset by valuation decreases in the liability portfolio for prior year claims where development in the very large class of claims has been more favourable than expected.
C1.3. Reinsurance and other recoveries receivable
Departmental |
||
30 June |
30 June |
|
2019 |
2018 |
|
$'000 |
$'000 |
|
Reinsurance and other recoveries |
||
Reinsurance and other recoveries |
2,411 |
3,363 |
Discount to present value |
(153) |
(329) |
Total reinsurance and other recoveries |
2,258 |
3,034 |
C1.4. Outstanding claims liability
Departmental |
||
30 June |
30 June |
|
2019 |
2018 |
|
$'000 |
$'000 |
|
Gross claims liability - undiscounted |
401,454 |
335,740 |
Discount to present value |
(9,120) |
(16,456) |
Gross claims liability - discounted |
392,334 |
319,284 |
Claims handling expense |
5,130 |
4,860 |
Gross central estimate |
397,464 |
324,144 |
Risk margin |
76,271 |
57,768 |
Outstanding claims liability |
473,735 |
381,912 |
Risk margin adopted |
19.2% |
17.8% |
Probability of adequacy of the risk margin |
75% |
75% |
Reconciliation of the movement in discounted outstanding claims liability
30 June |
30 June |
|||
2019 |
2018 |
|||
Property |
Liability |
Total |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
|
Net outstanding claims liability at the beginning of the year |
145,371 |
233,507 |
378,878 |
432,699 |
Incurred claims |
68,345 |
69,435 |
137,780 |
103,521 |
Claims payments |
(42,064) |
(39,349) |
(81,413) |
(146,828) |
Unwinding of discount |
1,816 |
4,866 |
6,682 |
5,043 |
Risk margin release |
(5,382) |
(6,017) |
(11,399) |
(7,869) |
Changes in assumptions and experience |
61,968 |
(21,019) |
40,949 |
(7,688) |
Net outstanding claims liability at the end of the year |
230,054 |
241,423 |
471,477 |
378,878 |
Reinsurance and other recoveries |
491 |
1,767 |
2,258 |
3,034 |
Gross outstanding claims liability at the end of the year |
230,545 |
243,190 |
473,735 |
381,912 |
C1.5 Claims development table
The following table shows the development of the estimated undiscounted outstanding claims relative to the ultimate expected claims for the 10 most recent accident years. |
||||||||||||
Prior |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
Estimate of net ultimate claims costs |
||||||||||||
At end of accident year |
50,778 |
121,801 |
61,550 |
66,779 |
114,162 |
102,138 |
91,686 |
86,286 |
93,055 |
117,798 |
||
One year later |
48,922 |
108,067 |
70,345 |
63,441 |
106,114 |
119,144 |
87,813 |
91,391 |
139,062 |
|||
Two years later |
47,317 |
100,453 |
67,843 |
65,399 |
96,653 |
218,627 |
96,971 |
89,415 |
||||
Three years later |
70,257 |
91,789 |
68,396 |
62,028 |
89,631 |
215,052 |
92,516 |
|||||
Four years later |
65,808 |
84,123 |
67,312 |
58,498 |
82,685 |
205,636 |
||||||
Five years later |
65,956 |
82,395 |
62,705 |
55,203 |
75,963 |
|||||||
Six years later |
51,423 |
80,279 |
59,872 |
54,526 |
||||||||
Seven years later |
49,163 |
80,399 |
61,182 |
|||||||||
Eight years later |
48,760 |
85,097 |
||||||||||
Nine years later |
49,230 |
|||||||||||
Estimate of net ultimate claims costs |
49,230 |
85,097 |
61,182 |
54,526 |
75,963 |
205,636 |
92,516 |
89,415 |
139,062 |
117,798 |
||
Cumulative payments |
(48,782) |
(79,188) |
(53,694) |
(48,868) |
(56,227) |
(165,809) |
(53,812) |
(38,291) |
(22,828) |
(9,607) |
||
Net claims liability - undiscounted |
6,103 |
448 |
5,909 |
7,488 |
5,658 |
19,736 |
39,827 |
38,704 |
51,124 |
116,234 |
108,191 |
399,422 |
Discount to present value |
(86) |
(5) |
(86) |
(95) |
(52) |
(258) |
(663) |
(800) |
(1,173) |
(2,677) |
(3,098) |
(8,993) |
Net claims liability - discounted |
6,017 |
443 |
5,823 |
7,393 |
5,606 |
19,478 |
39,164 |
37,904 |
49,951 |
113,557 |
105,093 |
390,429 |
Claims handling expense |
5,130 |
|||||||||||
Net central estimate |
395,559 |
|||||||||||
Net risk margin |
75,918 |
|||||||||||
Total net outstanding claims liability |
471,477 |
|||||||||||
Reinsurance and other recoveries |
2,258 |
|||||||||||
Total gross outstanding claims liability |
473,735 |
C2. Investment funds
Finance provides advice on the investment mandates and governance arrangements for the investment funds. This includes advice on the credit of amounts to and debits of amounts from the investment funds. The Future Fund Board of Guardians (the Board), supported by the Future Fund Management Agency (FFMA), is responsible for the management and investment of the assets of the investment funds. The investment funds consist of the respective special accounts and the investments of the:
- Building Australia Fund (BAF) – an investment fund established by the Nation-building Funds Act 2008 to make payments in relation to the creation or development of transport, communication, eligible national broadband network, energy and water infrastructure. Legislation to close the BAF received Royal Assent on 30 July 2019 and is now subject to proclamation for the date of effect.
- Education Investment Fund (EIF) – an investment fund established by the Nation-building Funds Act 2008 to make payments in relation to the creation or development of higher education, research, vocational education and training, and eligible education infrastructure and to make transitional Higher Education Endowment Fund payments. The EIF is expected to be closed during 2019-20, subject to the passage of legislation.
- DisabilityCare Australia Fund (DCAF) – an investment fund established by the DisabilityCare Australia Fund Act 2013 to reimburse the Commonwealth, states and territories for costs incurred in relation to the National Disability Insurance Scheme Act 2013.
- Medical Research Future Fund (MRFF) – an investment fund established under the Medical Research Future Fund Act 2015 to support medical research and innovation into the future.
- Aboriginal and Torres Strait Islander Land and Sea Future Fund (ATSILSFF) – an investment fund established under the Aboriginal and Torres Strait Islander Land and Sea Future Fund Act 2018 to make annual and discretionary payments to the Indigenous Land and Sea Corporation.
Key judgements and estimates
In applying Finance's accounting policies, management has made a number of judgements and applied estimates and assumptions to future events. Judgements and estimates which are material to the financial statements are located throughout the investment funds disclosure.
Policy and measurement
Investment mandate
Each fund has an investment mandate that is determined by the responsible Ministers under legislation. For the BAF, EIF and DCAF the investment mandates set a target benchmark return of the Australian three month bank bill swap rate + 0.3% per annum calculated on a rolling 12 month basis (net of fees). The investment mandates also require the Board to invest in such a way as to minimise the probability of capital losses over a 12 month horizon.
The investment mandate for the MRFF sets an average return of at least the Reserve Bank of Australia (RBA) Cash Rate target + 1.5% to 2.0% per annum, net of investment fees, over a rolling 10 year term as the benchmark return on the Fund. In targeting the benchmark return, the Board must determine an acceptable but not excessive level of risk measured in terms such as the probability of losses in a particular year.
The investment mandate for the ATSILSFF sets an average return over the long term of at least the CPI + 2.0% to 3.0% per annum, net of costs, as the benchmark return on the fund. In constructing the portfolio, the Board must determine an acceptable but not excessive level of risk for the fund.
Investments
Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. Investments are initially measured at fair value, net of transaction costs that are directly attributable to acquisition or issue of the investment.
Investments in collective investment vehicles are recorded at fair value on the date which consideration is provided to the contractual counterparty under the terms of the relevant subscription agreement. Any associated due diligence costs in relation to these investments are expensed when incurred.
The following methods are adopted by the investment funds in determining the fair value of investments:
- Listed securities, exchange traded futures and options and investments in listed managed investment schemes are recorded at the quoted market prices on relevant stock exchanges.
- Unlisted managed investment schemes and collective investment vehicles are re-measured based on the estimated fair value of the net assets of each scheme or vehicle at the reporting date. Collective investment vehicles are entities that enable investors to pool their money and invest the pooled funds, rather than buying securities directly. Collective investment vehicles are used to invest in private equity funds, hedge funds, debt funds, listed equity funds, infrastructure funds and property funds and are usually structured as interests in limited partnerships and limited liability companies.
In determining the fair value of the net assets of unitised unlisted managed investment schemes and collective investment vehicles, reference is made to the underlying unit price provided by the manager (where available), capital account statements and the most recent audited financial statements of each scheme or vehicle.
Manager valuation reports are reviewed to ensure the underlying valuation principles are materially compliant with AAS and applicable industry standards including International Private Equity and Venture Capital Valuation Guidelines as endorsed by the Australian Private Equity and Venture Capital Association Limited. - Derivative instruments including forward foreign exchange contracts, interest rate swaps, credit default swaps and futures are recorded at their fair value on the date the contract is entered into and are subsequently re-measured to their fair values at each reporting date. The investment funds have entered into derivative contracts to manage their exposure to foreign exchange risk, interest rate risk, equity market risk and credit risk. The investment funds also use derivatives to gain indirect exposure to market risks. Further disclosures regarding the use of derivatives by the investment funds are presented in Note C2.3.
- Asset backed securities, bank bills, negotiable certificates of deposit, mortgaged backed securities, government securities and corporate debt securities which are traded in active markets are valued at the quoted market prices. Securities for which no active market is observable are valued at current market rates using broker sourced market quotations and/or independent pricing services as at the reporting date.
MRFF Investment Companies (MRFFICs)
Whilst all investments are held by the Board in respect of the relevant investment fund, some investments are indirectly held through wholly owned investment holding companies, MRFFICs.
The MRFFICs are funded primarily via loan arrangements from the MRFF. These loans are designated as financial assets and measured at fair value with changes in their fair value recognised in the Administered Schedule of Comprehensive Income. Loan assets are repayable on demand. Interest rates are set on the loans having regard to the 10-year government bond rate in the market in which the underlying investment is made.
As the MRFFICs hold a material portion of the investments of the investment funds, these are recorded on a net assets basis in Finance’s Administered primary schedules. Additional disclosures detailing the underlying investments held by the MRFFICs are provided in Notes C2.2 and C2.3 to provide users with additional information in relation to the investment portfolio and Finance’s exposure.
Income
Interest income is interest earned on cash and cash equivalents. Dividends, franking credits and distribution income are recognised when the right to receive payment is established.
Net realised gains/losses on investments held at FVPL includes:
- Realised interest income including coupon payments received during the year
- Net realised gains/losses including realised gains and losses as compared to the original cost of the investment
- Net realised changes in the fair value including the current year unrealised gains/losses on investments held at reporting date.
Foreign currency
Items included in the financial statements of the investment funds are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The financial statements are presented in Australian dollars, which is the functional and presentation currency.
All foreign currency transactions during the period are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency items at reporting date are translated at the exchange rate existing at reporting date.
Exchange differences are recognised in profit and loss in the period in which they arise.
C2.1. Investment funds operating results
30 June |
30 June |
||||||
2019 |
2018 |
||||||
BAF |
EIF |
DCAF |
MRFF |
ATSILSFF |
Total |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
Revenue |
|||||||
Interest |
27,090 |
26,533 |
121,385 |
17,765 |
23 |
192,796 |
140,885 |
Dividends and distributions |
- |
- |
- |
250,404 |
- |
250,404 |
36,716 |
Total revenue |
27,090 |
26,533 |
121,385 |
268,169 |
23 |
443,200 |
177,601 |
Gains on financial investments |
102,554 |
125,665 |
342,517 |
308,264 |
18,361 |
897,361 |
763,532 |
Total income |
129,644 |
152,198 |
463,902 |
576,433 |
18,384 |
1,340,561 |
941,133 |
Expenses |
|||||||
Supplier expenses |
3,719 |
4,215 |
10,836 |
13,969 |
308 |
33,047 |
26,736 |
Foreign exchange losses |
34,975 |
57,859 |
121,609 |
56,635 |
- |
271,078 |
225,700 |
Total expenses |
38,694 |
62,074 |
132,445 |
70,604 |
308 |
304,125 |
252,436 |
Net investment funds return |
90,950 |
90,124 |
331,457 |
505,829 |
18,076 |
1,036,436 |
688,697 |
less Investment funds |
- |
2,000 |
2,087,755 |
204,863 |
- |
2,294,618 |
129,897 |
Net surplus/(deficit) |
90,950 |
88,124 |
(1,756,298) |
300,966 |
18,076 |
(1,258,182) |
558,800 |
C2.2 Investment funds financial position
30 June |
30 June |
||||||
2019 |
2018 |
||||||
BAF |
EIF |
DCAF |
MRFF |
ATSILSFF |
Total |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
Assets |
|||||||
Financial assets measured at amortised cost |
|||||||
Cash and cash equivalents |
1,326,627 |
1,366,666 |
5,383,620 |
1,203,281 |
415 |
9,280,609 |
7,901,067 |
Cash held in OPA1 |
- |
- |
840,000 |
- |
- |
840,000 |
- |
Other receivables |
12,311 |
20,772 |
25,777 |
49,906 |
8 |
108,774 |
78,543 |
Total financial assets measured at amortised cost |
1,338,938 |
1,387,438 |
6,249,397 |
1,253,187 |
423 |
10,229,383 |
7,979,610 |
Financial assets measured at FVPL |
|||||||
Interest bearing securities |
2,622,417 |
2,576,830 |
10,922,024 |
3,597,427 |
2,025,435 |
21,744,133 |
18,234,420 |
MRFFICs |
- |
- |
- |
1,796,135 |
- |
1,796,135 |
914,188 |
Listed equities and managed |
- |
- |
- |
1,638,076 |
- |
1,638,076 |
1,099,917 |
Collective investment vehicles |
- |
- |
57,401 |
1,475,696 |
- |
1,533,097 |
1,412,778 |
Restricted cash |
8,775 |
12,188 |
42,993 |
55,616 |
- |
119,572 |
149,919 |
Derivatives |
7,707 |
9,841 |
19,055 |
12,161 |
- |
48,764 |
32,971 |
Total financial assets measured at FVPL |
2,638,899 |
2,598,859 |
11,041,473 |
8,575,111 |
2,025,435 |
26,879,777 |
21,844,193 |
Total assets |
3,977,837 |
3,986,297 |
17,290,870 |
9,828,298 |
2,025,858 |
37,109,160 |
29,823,803 |
Liabilities |
|||||||
Financial liabilities measured at amortised cost |
|||||||
Trade creditors and accruals |
1,385 |
1,382 |
4,629 |
4,223 |
173 |
11,792 |
7,302 |
Unsettled purchases |
11,863 |
21,003 |
49,985 |
35,263 |
- |
118,114 |
83,730 |
Total financial liabilities measured at amortised cost |
13,248 |
22,385 |
54,614 |
39,486 |
173 |
129,906 |
91,032 |
Financial liabilities measured at FVPL |
|||||||
Derivatives |
7,857 |
11,712 |
31,638 |
34,183 |
- |
85,390 |
157,327 |
Total financial liabilities measured at FVPL |
7,857 |
11,712 |
31,638 |
34,183 |
- |
85,390 |
157,327 |
Total liabilities |
21,105 |
34,097 |
86,252 |
73,669 |
173 |
215,296 |
248,359 |
Net assets |
3,956,732 |
3,952,200 |
17,204,618 |
9,754,629 |
2,025,685 |
36,893,864 |
29,575,444 |
1 Administered special accounts (Note F3.2). |
Collective investment vehicles
The investment funds, directly and via the MRFFICs, have committed to provide capital to various collective investment vehicles. The total of these commitments at reporting date is $1,303 million (2018: $386 million). The investment fund’s commitments, being capital calls, are set out in the various underlying subscription documents. While the actual timing of the capital calls to be made by the managers of these vehicles is uncertain, as it is dependent on the managers sourcing suitable investment opportunities, the investment funds have recorded the commitments as being current in accordance with the underlying legal documents. The investment funds have appropriate liquidity planning in place to ensure a suitable allocation of resources will be available to cover these future commitments of capital.
The table below provides more detailed information on the commitments and outstanding calls of collective investment vehicles held directly by the MRFF, DCAF and via MRFFICs at reporting date:
30 June 2019 |
|||||
Description of underlying Strategy |
Capital committed local currency |
Outstanding commitments AUD equivalent |
Net capital cost AUD equivalent |
Fair value AUD equivalent |
|
$'000 |
$'000 |
$'000 |
$'000 |
||
Directly held by MRFF and DCAF |
|||||
Alternatives |
AUD |
1,200,120 |
- |
1,054,085 |
1,020,591 |
Debt |
AUD |
275,000 |
- |
275,025 |
289,425 |
Debt |
USD |
40,000 |
17,100 |
36,774 |
37,624 |
Global infrastructure |
USD |
250,000 |
339,952 |
14,782 |
13,795 |
Listed equities |
AUD |
25,000 |
- |
25,000 |
23,317 |
Property |
USD |
212,017 |
161,908 |
136,772 |
148,345 |
Total |
518,960 |
1,542,438 |
1,533,097 |
||
Via MRFFICs |
|||||
Alternatives |
AUD |
568,217 |
143,352 |
425,195 |
416,121 |
Alternatives |
USD |
185,000 |
1,540 |
247,338 |
263,361 |
Debt |
USD |
40,000 |
42,724 |
13,987 |
15,123 |
Private equity |
AUD |
100,707 |
48,484 |
47,100 |
51,629 |
Private equity |
EURO |
52,682 |
15,178 |
23,963 |
41,768 |
Private equity |
USD |
601,194 |
511,188 |
263,060 |
362,346 |
Property |
USD |
22,983 |
21,575 |
10,120 |
11,781 |
Total |
784,041 |
1,030,763 |
1,162,129 |
C2.3 Managing financial risk
The investment funds have entered into forward foreign exchange currency contracts to manage its exposure to foreign exchange risk. The investment funds also use interest rate futures and swaps to manage their exposure to interest rate risk and credit default swaps to manage their exposure to credit risk and/or gain indirect exposure to credit risk. The use of derivative financial instruments by the investment funds is governed by the Nation-building Funds Act 2008, the DisabilityCare Australia Fund Act 2013, the Medical Research Future Fund Act 2015 and the Aboriginal and Torres Strait Islander Land and Sea Future Fund Act 2018.
C2.3.1 Market risk
Market risk is the risk of loss arising from movements in the prices of various assets flowing from changes in interest rates and foreign currency risk.
Interest rate risk
Interest rate risk exposure
The investment funds are exposed to risk of loss arising from movement in the prices of various assets flowing through interest rate changes. The total exposure for each class of financial asset is set out below.
Financial assets exposed to interest rate risk |
Variable interest rate |
Fixed interest rate |
Non-interest bearing |
Total |
30 June 2019 |
$'000 |
$'000 |
$'000 |
$'000 |
Cash and cash equivalents |
9,280,609 |
- |
- |
9,280,609 |
Cash held in OPA |
- |
- |
840,000 |
840,000 |
Interest bearing securities |
4,577,795 |
17,215,252 |
- |
21,793,047 |
Other financial assets |
- |
- |
5,195,504 |
5,195,504 |
Total investment |
13,858,404 |
17,215,252 |
6,035,504 |
37,109,160 |
Total interest rate swaps (notional amount) |
||||
Pay |
(140,943) |
(276,009) |
- |
|
Receive |
276,009 |
140,943 |
- |
|
30 June 2018 |
||||
Cash and cash equivalents |
7,901,067 |
- |
- |
7,901,067 |
Interest bearing securities |
5,680,397 |
12,603,583 |
- |
18,283,980 |
Other financial assets |
- |
- |
3,638,755 |
3,638,755 |
Total investment |
13,581,464 |
12,603,583 |
3,638,755 |
29,823,802 |
Total interest rate swaps (notional amount) |
||||
Pay |
(310,252) |
(213,668) |
- |
|
Receive |
213,668 |
310,252 |
- |
Interest rate derivative contracts
The investment funds had open positions in exchange traded interest rate futures contracts and interest rate swap agreements at the reporting date. Interest rate derivative contracts are used by the investment fund’s managers to manage the exposure to interest rate risk and to ensure it remains within approved limits. The notional value of the open contracts and their fair value are set out below.
30 June 2019 |
30 June 2018 |
|||
Notional |
Fair market value |
Notional |
Fair market value |
|
$'000 |
$'000 |
$'000 |
$'000 |
|
Open contracts |
||||
Buy domestic interest rate futures contracts |
92,347 |
393 |
379,080 |
2,625 |
Sell domestic interest rate futures contracts |
(1,296,430) |
(707) |
(1,187,986) |
(474) |
Buy international interest rate futures contracts |
391,724 |
7,444 |
531,321 |
3,219 |
Sell international interest rate futures contracts |
(2,093,961) |
(10,856) |
(2,221,695) |
(1,690) |
Receiver (fixed) interest rate swap agreements |
(127,497) |
3,979 |
310,252 |
(1,642) |
Payer (fixed) interest rate swap agreements |
276,009 |
(2,351) |
(213,668) |
722 |
Buy forward contracts on mortgage backed securities |
166,796 |
228 |
- |
- |
Sell forward contracts on mortgage backed securities |
(32,369) |
(47) |
- |
- |
Total open contracts |
(1,917) |
2,760 |
Interest rate sensitivity analysis
The investment funds are exposed to interest rate risk in relation to their investments. The impact of a change in interest rates is disclosed in the table below, with all other variables held constant. The table demonstrates the impact on the operating result of a 20 basis point (2018: 20 basis point) change in bond yields with all other variables held constant. It is assumed that the 20 basis point change occurs as at the reporting date and there are concurrent movements in interest rates and parallel shifts in the yield curves. A 20 basis point movement would impact on the debt portfolios' (including derivatives) contribution to the investment funds operating result. The impact on the operating result includes the increase/(decrease) in interest income on variable rate securities from the basis point change.
Sensitivity by year |
Risk variable |
Change in risk variable |
Net cost of services |
$'000 |
|||
2019 |
Discount rate |
+0.2% |
54,644 |
-0.2% |
(54,034) |
||
2018 |
Discount rate |
+0.2% |
21,257 |
-0.2% |
(21,230) |
Foreign currency risk
The investment funds undertake certain transactions denominated in foreign currencies and are therefore exposed to the effects of exchange rate fluctuations. Exposure to foreign currency risk is managed utilising forward foreign exchange contracts. The exposure in AUD equivalents to foreign currency risk at reporting date is as follows.
USD |
EURO |
GBP |
Other |
Total |
|
30 June 2019 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
Cash and cash equivalents |
204,175 |
73,277 |
20,671 |
7,069 |
305,192 |
Interest bearing securities |
2,653,071 |
855,210 |
1,219,104 |
1,034,808 |
5,762,193 |
Listed equities |
924,357 |
137,983 |
81,092 |
595,125 |
1,738,557 |
Collective investment vehicles |
852,920 |
41,768 |
- |
- |
894,688 |
Other investments |
21,510 |
14,820 |
831 |
7,195 |
44,356 |
Receivables |
59,168 |
3,904 |
868 |
2,373 |
66,313 |
Payables |
(84,548) |
(10,848) |
(7,698) |
(13,106) |
(116,200) |
Total physical exposure |
4,630,653 |
1,116,114 |
1,314,868 |
1,633,464 |
8,695,099 |
Forward exchange contracts |
|||||
Buy foreign currency |
1,102,601 |
326,347 |
26,437 |
182,833 |
1,638,218 |
Sell foreign currency |
(4,912,955) |
(1,283,496) |
(1,332,196) |
(1,026,280) |
(8,554,927) |
Total derivative exposure |
(3,810,354) |
(957,149) |
(1,305,759) |
(843,447) |
(6,916,709) |
Net exposure |
820,299 |
158,965 |
9,109 |
790,017 |
1,778,390 |
Financial assets exposed to currency risk |
|||||
30 June 2018 |
|||||
Cash and cash equivalents |
142,278 |
91,625 |
8,409 |
11,167 |
253,479 |
Interest bearing securities |
2,705,853 |
869,000 |
1,114,505 |
828,299 |
5,517,657 |
Listed equities |
447,992 |
62,082 |
31,704 |
286,987 |
828,765 |
Collective investment vehicles |
420,209 |
52,569 |
- |
- |
472,778 |
Other investments |
(6,971) |
(305) |
154 |
(1,025) |
(8,147) |
Receivables |
52,820 |
2,733 |
163 |
1,184 |
56,900 |
Payables |
(67,906) |
(9,027) |
- |
(6,723) |
(83,656) |
Total physical exposure |
3,694,275 |
1,068,677 |
1,154,935 |
1,119,889 |
7,037,776 |
Forward exchange contracts |
|||||
Buy foreign currency |
968,692 |
296,923 |
236 |
19,556 |
1,285,407 |
Sell foreign currency |
(3,844,478) |
(1,379,591) |
(1,160,985) |
(740,684) |
(7,125,738) |
Total derivative exposure |
(2,875,786) |
(1,082,668) |
(1,160,749) |
(721,128) |
(5,840,331) |
Net exposure |
818,489 |
(13,991) |
(5,814) |
398,761 |
1,197,445 |
Foreign currency sensitivity analysis
The sensitivity analysis table below demonstrates the impact on the operating result of a movement in the value of the AUD relative to the actual net exposures as at year end, with all other variables held constant.
Risk variable |
Change in risk variable |
Net cost of services |
|
$'000 |
|||
2019 |
Exchange rate |
+8.7% |
291,826 |
-8.7% |
(291,826) |
||
2018 |
Exchange rate |
+9.2% |
266,457 |
-9.2% |
(266,457) |
Other price risk
The MRFF and MRFFICs are exposed to price risk arising from equity investments. The equity price risk is the risk that the value of the MRFF equity portfolio will decrease as a result of changes in the levels of equity indices and the price of individual stocks. The MRFF and MRFFICs are held at FVPL. The exposure to equity price risk at the reporting date was as follows:
$'000 |
|
Domestic equities and managed investment schemes |
428,846 |
International equities and managed investment schemes |
1,209,230 |
Total equity price risk exposure |
1,638,076 |
Equity derivative contracts
Equity futures are used to manage the exposure to equity price risk. The notional value and fair value of the MRFF open positions at the reporting date are set out in the following table.
Notional |
Fair market value |
|
30 June 2019 |
$'000 |
$'000 |
Buy domestic equity futures contracts |
3,935 |
27 |
Sell domestic equity futures contracts |
(138,395) |
(760) |
Buy international equity futures contracts |
85,712 |
2,677 |
Sell international equity futures contracts |
(115,336) |
(1,071) |
Total equity derivative contracts |
(164,084) |
873 |
Equity price sensitivity analysis
The analysis below demonstrates the impact of the following movements on the MRFF and MRFFIC’s operating result.
- +/- 20% on Australian equities
- +/- 15% on International equities
The sensitivity analysis has been performed to assess the direct risk of holding equity instruments. The analysis is undertaken on the base currency values of the underlying exposures.
Impact on operating results |
|
30 June 2019 |
$'000 |
20% increase in Australian equities |
79,520 |
15% increase in International equities |
440,472 |
Total |
519,992 |
20% decrease in Australian equities |
(79,608) |
15% decrease in International equities |
(440,519) |
Total |
(520,127) |
C2.3.2 Liquidity risk
Liquidity risk is the risk that the investment funds will not be able to meet their obligations as they fall due. The Nation‑building funds, DCAF and ATSILSFF are currently invested in cash and cash like instruments under the investment mandate. Accordingly, the risk of these funds not being able to meet their obligations is low. The MRFF must be in a position to meet the distribution payments required of it up to the amount periodically declared as distributable by the Board, which is managed under the short-term liquidity risk policy. This includes a short-term crash test which is applied to the portfolio to ensure it is able to meet its immediate cash flow obligations under a plausible but very severe market dislocation.
C2.3.3 Credit risk management
Credit risk is the risk of loss that arises from a counterparty failing to meet their contractual commitments in full and on time, or from losses arising from the change in value of a traded financial instrument as a result of changes in credit risk on that instrument. The Board sets limits on the credit ratings of debt investments when appointing investment managers. These limits are reflected in the underlying investment mandates and are monitored by the FFMA with compliance reported to the Board. The investment funds maximum exposure to credit risk at reporting date in relation to each class of recognised financial asset is the carrying amount of those assets as indicated in the investment funds financial position.
30 June |
30 June |
As at 30 June 2019, the investment funds had an exposure of greater than 58% of its net assets to interest bearing securities issued by domestic banks and cash deposits held with banks. Exposures to individual counterparties greater than 5% of the net assets of the investment funds are identified in this table. |
|
2019 |
2018 |
||
Interest bearing securities issued by |
$'000 |
$'000 |
|
Commonwealth Bank of Australia |
8,525,941 |
7,397,106 |
|
Westpac Banking Corporation |
2,756,847 |
1,679,351 |
|
National Australia Bank |
4,110,034 |
3,228,698 |
|
Australia and New Zealand Banking Group |
5,723,329 |
4,824,166 |
|
Total |
21,116,151 |
17,129,321 |
Credit exposure by credit rating
30 June |
30 June |
The investment funds use Moody's and Standard & Poors credit rating scales to report exposure to credit risk. The long term credit risk exposures range from ‘AAA’ (extremely strong capacity to meet financial commitments) to ‘below investment grade/not rated’. The investments classified as below investment grade are held in debt mandates. This table provides information regarding the credit risk exposures of the debt instruments held by the investment funds at reporting date according to the credit ratings of the underlying debt instruments. |
|
2019 |
2018 |
||
$'000 |
$'000 |
||
Long-term rated securities |
|||
AAA |
3,017,691 |
3,578,802 |
|
AA |
10,191,578 |
8,165,458 |
|
A |
2,081,814 |
2,481,610 |
|
BBB |
238,683 |
161,697 |
|
Below investment grade/not rated |
711,778 |
588,923 |
|
Short-term rated securities |
|||
A-1+ |
13,614,394 |
10,988,986 |
|
A-1 |
817,799 |
42,826 |
|
A-2 |
92,918 |
- |
|
Other |
|||
US Government Guaranteed |
307,001 |
176,746 |
|
Total debt securities held |
31,073,656 |
26,185,048 |
|
Other non-debt financial assets |
6,035,504 |
3,638,755 |
|
Total financial assets |
37,109,160 |
29,823,803 |
Credit risk derivatives
The investment funds managers utilise credit default swaps to gain exposure to, and to hedge, credit risk. The investment funds transact in credit default swaps in the form of centrally cleared over-the-counter contracts. Centrally cleared transactions are cash margined at least daily. Managers are required to fully cash back all sold credit protection positions. Outstanding positions are marked to market and collateralisation of out of the money positions is required by the central clearing exchange.
Notional value |
Fair market value |
||
30 June |
30 June |
||
2019 |
2019 |
||
$'000 |
$'000 |
||
The notional value of the open credit default swap positions, the impact on increasing or reducing credit exposures and their fair value are set out in this table for the MRFF. |
|||
Buy credit protection |
104,150 |
(6,109) |
|
Sell credit protection |
(51,942) |
2,311 |
|
Total |
52,208 |
(3,798) |
C3. Superannuation
C3.1 Overview of schemes
Finance administers the following defined benefit superannuation schemes on behalf of the Australian Government:
- Commonwealth Superannuation Scheme (CSS), including the 1922 Scheme
- Public Sector Superannuation Scheme (PSS)
- Parliamentary Contributory Superannuation Scheme (PCSS)
- Governor-General Pension Scheme (G-GPS)
- Judges' Pensions Scheme (JPS)
- Federal Circuit Court Judges Death and Disability Scheme (FCCJDDS).
The CSS, PSS and PCSS are closed to new members.
Finance recognises an Administered liability for the present value of the Australian Government's expected future payments arising from the PCSS, JPS, G-GPS and FCCJDDS and the unfunded components of the CSS and PSS. These liabilities are based on an annual actuarial assessment. The funded components of these schemes are reported in the financial statements of the respective schemes. Finance also has the responsibility to record the Australian Government's transactions in relation to the above schemes.
Policy and measurement
Actuarial gains or losses are recognised in other comprehensive income (OCI) in the year in which they occur. Interest on the net defined benefit liability is recognised in the surplus/(deficit); the return on plan assets excluding the amount included in interest income is recognised in OCI.
Superannuation liabilities are calculated annually as the present value of future benefit obligations less the fair value of scheme assets. The rate used to discount future benefits is determined by reference to the government bond rate at the reporting date.
Amounts recognised in the Schedule of Comprehensive Income and Schedule of Assets and Liabilities
Other |
|||||||
CSS |
PSS |
PCSS |
G-GPS |
JPS |
FCCJDDS |
Total |
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
30 June 2019 |
|||||||
Revenues |
70,520 |
1,121,948 |
536 |
- |
- |
- |
1,193,004 |
Expenses |
2,463,042 |
5,838,714 |
42,048 |
663 |
89,761 |
962 |
8,435,190 |
OCI |
(13,766,260) |
(31,832,327) |
(223,591) |
(1,918) |
(309,215) |
921 |
(46,132,390) |
Liabilities |
95,503,267 |
134,289,616 |
1,389,754 |
23,232 |
1,845,902 |
938 |
233,052,709 |
30 June 2018 |
|||||||
Revenues |
87,592 |
1,125,818 |
628 |
- |
- |
- |
1,214,038 |
Expenses |
2,551,579 |
5,777,690 |
45,821 |
744 |
82,735 |
893 |
8,459,462 |
OCI |
(1,379,037) |
(5,248,775) |
(25,436) |
(957) |
(134,461) |
804 |
(6,787,862) |
Liabilities |
82,895,248 |
97,480,728 |
1,167,342 |
22,188 |
1,500,165 |
1,362 |
183,067,033 |
The expected employer productivity contributions for 2020 are: $9.3 million for the CSS and $150.5 million for the PSS (2019 actual: $11.1 million for the CSS and $167.2 million for the PSS).
C3.2 Scheme information
The funding arrangements for the various schemes:
Scheme |
Funding arrangements |
1922 Scheme |
Unfunded. There are no longer any members contributing under this Act. Benefits are paid to members from the Consolidated Revenue Fund (CRF). |
CSS and PSS |
Partially funded. Contributions generally comprise basic member contributions and employer productivity (up to 3%) contributions. Benefits are paid to members from the CRF. |
PCSS |
Unfunded. Member contributions are a fixed percentage of: parliamentary allowance; salary for Ministers of State; and allowance by way of salary for office holders, which is paid into the CRF. Benefits are paid to members from the CRF. |
G-GPS, JPS and FCCJDDS |
Unfunded. Members are not required to contribute towards the cost of their benefit during their term of appointment. Benefits are paid to members from the CRF. |
The nature of the benefits provided under the schemes:
Scheme |
Benefits Paid |
1922 Scheme |
The benefit payable is a lifetime indexed pension (indexed in January and July in line with changes in the CPI). The payments and liabilities in respect of these members are included in the CSS amounts. |
CSS |
The types of benefits payable are a lifetime indexed pension (indexed in January and July in line with changes in the CPI), a lifetime non-indexed pension and a lump sum payment. The main retirement benefit is the employer-financed indexed pension that is calculated by a set formula based on a member's age, years of contributory service and final salary. Where a member has preserved their benefit in the scheme, when the benefit becomes payable the employer financed indexed pension is calculated by applying age-based factors to the amount of two and a half times the member's accumulated basic member contributions and interest. Member’s basic contributions, employer productivity contributions and interest can be taken as a lump sum or an additional non-indexed lifetime pension. This benefit is determined by the value of contributions and investment returns, and in the case of the non-indexed pension by applying age-based factors. |
PSS |
The types of benefits payable are a lifetime indexed pension (indexed in January and July in line with changes in the CPI) and a lump sum payment. On retirement a lump sum benefit is payable which is calculated based on the member’s length of contributory membership, their rate of member contributions and final average salary (average of a member’s superannuation salary on their last three birthdays). Where a member preserves their benefit in the scheme, generally the member’s lump sum benefit at that time is crystallised with the funded component of the benefit accumulating with interest and the unfunded component accumulating with changes in the CPI, until the benefit becomes payable. Generally members can convert 50% or more of their lump sum to a lifetime indexed pension. The indexed pension is calculated by applying age-based factors to the amount of the lump sum to be converted to a pension. |
PCSS |
The benefit payable is a lifetime pension or lump sum depending on length of service and additional offices held. Where a retiring member has sufficient parliamentary service to meet the pension qualification period for a lifetime pension (which is payable as set out in the Act), pension benefits are expressed as a percentage of the superannuation salary applicable for the PCSS and are indexed by movements in that superannuation salary. A PCSS member who qualifies for a pension can also elect to convert up to half of their benefit to a lump sum. Lump sum benefits are payable to PCSS members who do not have sufficient parliamentary service to qualify for a lifetime pension. |
G-GPS |
The benefit payable is a lifetime pension equal to 60% of the salary of the Chief Justice of the High Court of Australia. There is no minimum qualification period. |
JPS |
The benefit payable is a lifetime pension equal to 60% of the judicial salary, payable where a judge has 10 or more years’ service and is 60 years of age or older. Provisions are made for part pension (pro-rated based on length of service) where a judge retires on reaching the maximum retirement age with at least 6 years but less than 10 years service. |
FCCJDDS |
Federal Circuit Court Judges who retire due to permanent disability are provided with a pension equal to 60% of the salary the Judge would have received if they had not retired, and is payable until the earlier of the Judge attaining age 70, or his/her death. In addition, a Judge continues to receive employer superannuation contributions in respect of this pension until they reach age 65. |
Generally, benefits may also be payable to any surviving eligible spouse and children on the death of a member or pensioner.
Regulatory Framework
The following table details the enabling legislation for each of the individually disclosed defined benefit schemes and whether the scheme must comply with the requirements of the Superannuation Industry (Supervision) Act 1993, as well as a number of other Acts.
Scheme |
Enabling Act |
Period open to new members |
Regulatory requirement |
CSS |
Superannuation Act 1976 |
1 July 1976 to 30 June 1990 |
Compliance with the Superannuation Industry (Supervision) Act 1993 required for these schemes. |
PSS |
Superannuation Act 1990 |
1 July 1990 to 30 June 2005 |
|
1922 Scheme |
Superannuation Act 1922 |
1 July 1922 to 30 June 1976 |
These schemes are exempt from Superannuation Industry (Supervision) Act 1993. |
PCSS |
Parliamentary Contributory Superannuation Act 1948 |
Up to 8 October 2004 |
|
G-GPS |
Governor-General Act 1974 |
To present |
|
JPS |
Judges’ Pensions Act 1968 |
To present |
|
FCCJDDS |
Federal Circuit Court of Australia Act 1999 |
To present |
Governance
The Commonwealth Superannuation Corporation (CSC) was established under the Governance of Australian Government Superannuation Schemes Act 2011 and is the trustee for the CSS and PSS. CSC is responsible for:
- providing administration services for each scheme
- management and investment of scheme assets
- compliance with superannuation taxation and other applicable laws
- compliance with relevant legislation including the Governance of Australian Government Superannuation Schemes Act 2011.
CSC is supported by a custodian and other specialist providers.
The PCSS is administered by Finance on behalf of the Minister for Finance. The Parliamentary Retiring Allowances Trust (the Trust) has responsibility for matters where discretion has been given under the Parliamentary Contributory Superannuation Act 1948. The Trust consists of five trustees - the Minister for Finance (or a Minister authorised by the Minister for Finance) who is the presiding trustee, plus two Senators and two Members of the House of Representatives appointed by their respective Houses.
The enabling Acts for the ‘other’ defined benefit superannuation schemes confer certain powers to the Secretary of Finance in relation to administration of each scheme. Day-to-day administration of the schemes is undertaken by Finance.
C3.3 Risks and assumptions
The schemes are exposed to interest rate risk, investment risk, longevity risk and salary risk. The following pages identify and explain the amounts reported in these financial statements and detail the principal actuarial assumptions underpinning each of the major schemes, including an analysis of the sensitivity of changes in these assumptions to the amounts reported in the financial statements.
Composition of scheme assets
The fair value of scheme assets for CSS and PSS at 30 June 2019 is $21.8 billion (30 June 2018 was $21.5 billion). The assets are diversified in the following sectors:
CSS |
PSS |
|
Australian equities |
24% |
24% |
International equities |
26% |
26% |
Private capital |
6% |
6% |
Property and infrastructure |
11% |
12% |
Corporate bonds |
4% |
5% |
Alternative strategies |
15% |
15% |
Cash and sovereign bonds |
14% |
12% |
This includes $361.3 million (2018: $345.3 million) of Australian Government bonds.
Key judgements and estimates
CSS, PSS, and PCSS
Assumptions have been made regarding rates of retirement, death (for active, preserved and pension members), mortality improvements, invalidity, resignation, retrenchment, retention and take up rates of pensions in the scheme. Assumptions have also been made for the ages of spouses and rates of member contributions. These assumptions are consistent to those used within the 2017 Long Term Cost Reports (LTCRs).
Membership data as at 30 June 2018 has been rolled forward to 30 June 2019 by making allowance for estimated investment earnings, contributions, salary increases, benefit payments and benefit accruals, using the actuarial assumptions from the LTCRs where other information is not available. The defined benefit obligation calculated is based on the rolled forward membership data that was then adjusted to reflect the difference between expected benefit payments and actual benefit payments to 30 June 2019.
The fair value of scheme assets as at 30 June 2019 (CSS and PSS only) were estimated using the unaudited net scheme assets available to pay benefits at 31 May 2019 rolled forward to 30 June 2019 with cash flow items provided by the CSC. An estimate of the actual rate of investment return earned by the scheme during June 2019 was used in determining the fair value of scheme assets.
Other Schemes (G-GPS, JPS and FCCJDDS)
Membership data as at 31 May 2019 has been rolled forward to 30 June 2019. Other actuarial assumptions are consistent to those used within the LTCRs.
Key actuarial assumptions
The key actuarial assumptions for the defined benefit obligation are set out in the table below:
CSS |
PSS |
Other |
|
Discount rate |
1.7% |
1.9% |
1.9% |
Salary growth rate up to June 2023 |
2.0% |
2.0% |
4.0% |
Salary growth rate from July 2023 |
3.5% |
3.5% |
4.0% |
Expected pension increase rate |
2.5% |
2.5% |
2.5% |
Maturity profile (years) |
14.1 (CSS 1976) |
22.4 |
16.7 (PCSS) |
8.1 (CSS 1922) |
9.0 (G-GPS) |
||
15.7 (JPS) |
|||
1.0 (FCCJDDS) |
Process used to determine actuarial assumptions
Discount rate |
The relevant Australian Government Treasury Bond rates were used for the calculation of defined benefit obligation. |
Salary Growth rate |
For the CSS and PSS the short-term rate use is based on the government's current workplace bargaining policy plus assumed promotional increases. The long-term rate thereafter is determined by taking into consideration the duration of the salary linked liabilities, economy-wide wage growth, productivity growth and inflationary expectations plus assumed promotional increases. The assumed rate for future salary increases has been determined having regards to the average expected long-term outlook for the national wage inflation. The long-term rates are consistent with those used in the LTCRs for the schemes. |
Expected pension increase rate |
For the CSS and PSS pensions are increased in line with changes in the CPI. For Other Schemes the assumed rate for the pension increases has been determined having regards to the average expected long-term outlook for the national wage inflation. |
Maturity profile |
This reflects the weighted average duration of each schemes defined benefit obligation as at 30 June. |
Sensitivity analysis for significant actuarial assumptions
Finance has conducted a sensitivity analysis to quantify the impact of changes in the key underlying assumptions on the defined benefit obligation. The defined benefit obligation has been recalculated by changing the assumptions as outlined below, whilst retaining all other assumptions.
CSS |
PSS |
Other |
||
Assumption |
Movement |
$'000 |
$'000 |
$'000 |
Discount rate1 |
+ 0.5% |
(6,385,445) |
(15,283,379) |
(244,276) |
- 0.5% |
7,126,519 |
17,795,221 |
275,059 |
|
Salary growth rate |
+ 0.5% |
80,680 |
3,196,461 |
260,054 |
- 0.5% |
(108,933) |
(3,000,098) |
(234,031) |
|
Pension increase rate |
+ 0.5% |
5,727,773 |
12,242,286 |
n/a |
- 0.5% |
(5,215,984) |
(10,924,528) |
n/a |
1 An increase in the discount rate between financial years generates a decrease in the defined benefit obligation and a gain in OCI. Conversely, a decrease in the discount rate between financial years causes an increase in the defined benefit obligation and a loss to OCI.
CSS |
PSS |
Other |
Total |
|
30 June 2019 |
$'000 |
$'000 |
$'000 |
$'000 |
Reconciliation of the present value of the defined benefit obligation |
||||
Value at beginning of the year |
85,515,007 |
116,390,016 |
2,691,057 |
204,596,080 |
Current service cost |
115,268 |
2,842,106 |
51,543 |
3,008,917 |
Interest expense |
2,418,143 |
3,575,243 |
81,891 |
6,075,277 |
Contribution from scheme participants |
36,719 |
524,331 |
- |
561,050 |
Productivity contribution |
11,131 |
167,236 |
- |
178,367 |
Actuarial losses/(gains) in liabilities arising from: |
||||
Changes in financial assumptions |
13,862,530 |
31,875,054 |
540,946 |
46,278,530 |
Liability experience |
(56,902) |
726,046 |
(7,143) |
662,001 |
Benefits paid |
(4,125,905) |
(2,237,026) |
(98,468) |
(6,461,399) |
Taxes, premiums and expenses paid |
(1,770) |
(25,382) |
- |
(27,152) |
Closing value of the defined benefit obligation |
97,774,221 |
153,837,624 |
3,259,826 |
254,871,671 |
Reconciliation of the fair value of plan assets |
||||
Value at beginning of the year |
2,619,759 |
18,909,288 |
- |
21,529,047 |
Interest income |
70,369 |
578,635 |
- |
649,004 |
Actual return on scheme assets less interest income |
39,368 |
768,773 |
- |
808,141 |
Contribution from scheme participants |
36,719 |
524,331 |
- |
561,050 |
Productivity contribution |
11,131 |
167,236 |
- |
178,367 |
Net appropriation from the CRF |
3,621,283 |
862,153 |
98,468 |
4,581,904 |
Benefits paid |
(4,125,905) |
(2,237,026) |
(98,468) |
(6,461,399) |
Taxes, premiums and expenses paid |
(1,770) |
(25,382) |
- |
(27,152) |
Closing fair value of plan assets |
2,270,954 |
19,548,008 |
- |
21,818,962 |
Reconciliation of the defined benefit liability |
||||
Value at beginning of the year |
82,895,248 |
97,480,728 |
2,691,057 |
183,067,033 |
Current service cost |
115,268 |
2,842,106 |
51,543 |
3,008,917 |
Net interest |
2,347,774 |
2,996,608 |
81,891 |
5,426,273 |
Actual return on scheme assets less interest income |
(39,368) |
(768,773) |
- |
(808,141) |
Actuarial losses/(gains) in liabilities arising from: |
||||
Changes in financial assumptions |
13,862,530 |
31,875,054 |
540,946 |
46,278,530 |
Liability experience |
(56,902) |
726,046 |
(7,143) |
662,001 |
Net appropriation from the CRF |
(3,621,283) |
(862,153) |
(98,468) |
(4,581,904) |
Closing value of the net defined benefit liability |
95,503,267 |
134,289,616 |
3,259,826 |
233,052,709 |
The fair value of CSS and PSS scheme assets relates to investments in the Pooled Superannuation Trust (PST).
CSS |
PSS |
Other |
Total |
|
30 June 2018 |
$'000 |
$'000 |
$'000 |
$'000 |
Reconciliation of the present value of the defined benefit obligation |
||||
Value at beginning of the year |
85,330,627 |
104,949,301 |
2,495,412 |
192,775,340 |
Current service cost |
137,970 |
2,746,886 |
44,516 |
2,929,372 |
Interest expense |
2,490,486 |
3,639,645 |
85,678 |
6,215,809 |
Contribution from scheme participants |
43,528 |
551,536 |
- |
595,064 |
Productivity contribution |
12,319 |
182,610 |
- |
194,929 |
Actuarial losses/(gains) in liabilities arising from: |
||||
Changes in demographic assumptions |
161,056 |
(947,376) |
16,165 |
(770,155) |
Changes in financial assumptions |
945,300 |
6,750,306 |
150,415 |
7,846,021 |
Liability experience |
426,974 |
464,374 |
(6,530) |
884,818 |
Benefits paid |
(4,031,319) |
(1,919,616) |
(94,599) |
(6,045,534) |
Taxes, premiums and expenses paid |
(1,934) |
(27,650) |
- |
(29,584) |
Closing value of the defined benefit obligation |
85,515,007 |
116,390,016 |
2,691,057 |
204,596,080 |
Reconciliation of the fair value of plan assets |
||||
Value at beginning of the year |
2,791,270 |
17,631,802 |
- |
20,423,072 |
Interest income |
76,877 |
608,841 |
- |
685,718 |
Actual return on scheme assets less interest income |
154,293 |
1,018,529 |
- |
1,172,822 |
Contribution from scheme participants |
43,528 |
551,536 |
- |
595,064 |
Productivity contribution |
12,319 |
182,610 |
- |
194,929 |
Net appropriation from the CRF |
3,574,725 |
863,236 |
94,599 |
4,532,560 |
Benefits paid |
(4,031,319) |
(1,919,616) |
(94,599) |
(6,045,534) |
Taxes, premiums and expenses paid |
(1,934) |
(27,650) |
- |
(29,584) |
Closing fair value of plan assets |
2,619,759 |
18,909,288 |
- |
21,529,047 |
Reconciliation of the defined benefit liability |
||||
Value at beginning of the year |
82,539,357 |
87,317,499 |
2,495,412 |
172,352,268 |
Current service cost |
137,970 |
2,746,886 |
44,516 |
2,929,372 |
Net interest |
2,413,609 |
3,030,804 |
85,678 |
5,530,091 |
Actual return on scheme assets less interest income |
(154,293) |
(1,018,529) |
- |
(1,172,822) |
Actuarial losses/(gains) in liabilities arising from: |
||||
Changes in demographic assumptions |
161,056 |
(947,376) |
16,165 |
(770,155) |
Changes in financial assumptions |
945,300 |
6,750,306 |
150,415 |
7,846,021 |
Liability experience |
426,974 |
464,374 |
(6,530) |
884,818 |
Net appropriation from the CRF |
(3,574,725) |
(863,236) |
(94,599) |
(4,532,560) |
Closing value of the net defined benefit liability |
82,895,248 |
97,480,728 |
2,691,057 |
183,067,033 |
Visit
https://www.transparency.gov.au/annual-reports/department-finance/reporting-year/2018-2019-63