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NATAL JOINT MUNICIPAL FUNDS

PRESENTATION TO THE MEMBERS’ INFORMATION MEETING 2 MARCH 2018 Arthur Els

NATAL JOINT MUNICIPAL FUNDS Agenda

• Provident Fund
• Superannuation Fund
• Retirement Fund

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND

INTERIM ACTUARIAL VALUATION AS AT 31 MARCH 2017 Arthur Els

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Membership

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Assets R’000

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Developments during valuation period

• Investment return of 5.8%.
• Unallocated assets of 5.3% from 2016 valuation
• Total bonuses 8.8% compound
• Balance of 3.5% applied in subsequent bonuses

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Bonuses declared over 12 months

• 1. Cost of this bonus included in the previous interim valuation results

Month Interim bonus Investment Reserve April 20161 1.0% 7.0% May 2016 1.5% 7.0% June 2016 1.5% 7.0% July 2016 1.5% 7.0% August 2016 0.5% 7.0% September 2016 0.5% 7.0% October 2016 0.5% 7.0% November 2016 0.5% 7.0% December 2016 0.5% 7.0% January 2017 0.5% 7.0% February 2017 0.0% 7.0% March 2017 0.0% 7.0% Subtotal 8.82%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Returns earned vs bonuses from 2000 to 2017

• 20.0

0.0 20.0 40.0 60.0 80.0 100.0

45.8 17.9 5.3 1.0 10.8 22.3

• 3.0

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Asset composition (%)

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Investment strategy

Local Equities 45.0% Foreign Equities 20.0% Cash 3.0% Fixed interest bonds 22.0% Property 10.0% Strategic asset allocation

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND

31 March 2017 31 March 2016 R'000 R'000 Total assets per Financial Statements 3 486 263 3 016 932 Liabilities: Member Share Account: As per Financial Statements 3 123 341 2 626 565 Actuarial adjustment1 3 524 5 036 Bonus for April following valuation date 26 316 Subtotal 3 126 865 2 657 917 Reserves and Accounts: Risk & Expense Reserve 22 793 20 196 Investment Reserve 218 881 186 054 Subtotal 241 674 206 250 Total liabilities, reserves and accounts 3 368 539 2 864 167 Unallocated assets 117 724 152 765 Funding level 103.5% 105.3%

Valuation Results

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Contribution Rate

Category A Category B Category C Retirement contributions Member contributions 5.00% 7.00% 9.25% Employer contributions 6.00% 9.90% 14.25% Total 11.00% 16.90% 23.50% Risk and expense contributions Employer: 3.75% 3.75% 3.75% Percentage of members contributing at these rates: 31 March 2017 35.00% 21.09% 43.91% 31 March 2016 41.20% 23.41% 35.39%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Risk Reserve contribution assessment

31 March 2017 31 March 2016 Risk and expense contributions 3.75% 3.75% Less: Death benefit cost 0.97% 1.00% Expenses 0.83% 1.10% Excess contribution 1.95% 1.65%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Risk Reserve sufficiency

Available contributions sufficient to meet costs and expenses Per Trustee decision, excess used to enhance retirement benefits

Year following 31 March 2017 Risk and expense contributions 3.75% Less: Death benefit cost 1.89% Expenses 1.00% Excess contribution 0.86%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Recommendations and decisions

• No final bonus as at the valuation date.
• Retain Risk & Expense Reserve of R 22 793 000 in line

with PF117

• Investment Reserve remains at 7%
• Continue education programme on benefit of higher

contributions towards retirement

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Conclusion

• Fund financially sound
• Contribution towards risk and expenses sufficient

benefits

• Asset composition appropriate
• Investment strategy suitable
• Fund self insurance arrangement appropriate

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Developments after valuation date

• Investment earnings to Jan 2018: 10%
• February likely to be negative
• Plus 3.5% c/f per valuation
• Bonuses to Jan 2018: 7.7%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Bonuses declared since 1 April 2017

Month Interim bonus Investment Reserve April 2017 0.0% 7.0% May 2017 1.0% 7.0% June 2017 1.0% 7.0% July 2017 1.0% 7.0% August 2017 0.0% 7.0% September 2017 0.0% 7.0% October 2017 0.0% 7.0% November 2017 1.5% 7.0% December 2017 1.5% 7.0% January 2018 1.5% 7.0% February 2018 1.5% 7.0% March 2018 1.5% 7.0% Subtotal 10.99%

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Developments after valuation date

• Investment earnings to Jan 2018: 10%
• February likely to be negative
• Plus 3.5% c/f per valuation
• Bonuses to Jan 2018: 7.7%
• Trustees investigating creation of pensioner account

for retirees

Questions? KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND

Thank You KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND

NATAL JOINT MUNICIPAL PENSION FUND (SUPERANNUATION)

STATUTORY ACTUARIAL VALUATION AS AT 31 MARCH 2017 Arthur Els

NJMPF – SUPERANNUATION FUND Membership

NJMPF – SUPERANNUATION FUND Assets R’000

• 10.0

10.0 30.0 50.0 70.0 90.0

39.2 24.2 4.9 4.6 26.7

• 0.7

NJMPF – SUPERANNUATION FUND Asset composition (%)

NJMPF – SUPERANNUATION FUND Investment returns

• 1. Including the release of the investment reserve

Date Investment return 31 March 20151 14.92% 31 March 2016 5.86% 31 March 2017 6.01%

NJMPF – SUPERANNUATION FUND Average salary increases

Date Salary Increase (p.a.) 31 March 2015 8.07% 31 March 2016 8.60% 31 March 2017 8.11%

NJMPF – SUPERANNUATION FUND Pension Increases

Date Pension Increase CPI for year to 31 March Average CPI for year to previous 31 Dec 1 July 2015 6.07% 4.0% 6.07% 1 January 2016 8.33% 1 July 2016 4.68% 6.3% 4.58% 1 July 2017 6.84% 6.1% 6.76%

• 1. CPI changed from average to year-on-year wef 2017

Pensioners - Developments over 3-year valuation period

• Suspended pensioner data exercise implemented
• Special 8.33% increase granted 1.1.2016 in lieu of 13th

cheque NJMPF – SUPERANNUATION FUND

NJMPF – SUPERANNUATION FUND Results: Pensioner Memorandum Account

31 March 2017 31 March 2014 R'000 R'000 Memorandum Account: Pensioners Assets: 5 245 567 4 005 403 Liabilities and Reserves: Accrued liability 4 253 217 2 945 052 Additional liability: suspended pensioners Risk Reserve 93 484 68 859 Solvency Reserve 612 357 313 026 Balance of assets 286 509 678 466 5 245 567 4 005 403 Funding level 105.8% 120.4%

NJMPF – SUPERANNUATION FUND Conclusion: Pensioners

• Memorandum Account is fully funded
• Grant prescribed minimum pension increase to

qualifying pensioners in terms of the Act

NJMPF – SUPERANNUATION FUND Financial Position: Active members

31 March 2017 31 March 2014 R'000 R'000 Active members Assets: 5 808 471 4 505 433 Liabilities and Reserves: Accrued liability 5 011 966 4 179 439 Risk Reserve 68 430 85 027 Contribution reserve 21 221 59 871 Prescribed minimum benefits 382 436 146 190 Solvency Reserve: Active members 324 418 34 906 5 808 471 4 505 433 Surplus/(Deficit) Funding level (after Solvency Reserve) 100.0% 100.0% Funding level 100.0% 100.0%

NJMPF – SUPERANNUATION FUND Solvency Reserve

Members Pensioners R' 000s R' 000s Liability: Solvency Reserve assumptions 6 468 162 4 865 574 Liability:Valuation assumptions 5 394 402 4 253 217 Solvency Reserve 1 073 760 612 357

NJMPF – SUPERANNUATION FUND Required rate of contribution

31 March 2017 31 March 2014 Required rate Future service benefits 29.90% 30.34% Expenses 1.20% 1.25% Total 31.10% 31.59% Actual rate Local Authorities 21.63% 21.63% Members 9.25% 9.25% Total 30.88% 30.88% Shortfall/excess in contributed rate

• 0.22%
• 0.71%

Surcharge payable by local authorities 0.0% - 9.5% 9.50%

NJMPF – SUPERANNUATION FUND Surcharge

• Fund assets insufficient for full Solvency Reserve for

active members

• If no Solvency Reserve held, Fund has little protection

against adverse experience

• I recommend that:
• Fund holds full Solvency Reserve to protect

members

• Continue to pay surcharge to fund shortfall

NJMPF – SUPERANNUATION FUND Recommendations: Active members

• Aim to build up the Solvency Reserve
• Continue to pay current surcharge
• Retain Risk Reserve of R 161 914 000 in line with

PF117

• Retain Contribution Reserve of R 21 221 000 to cover

small deficit in contribution rate

NJMPF – SUPERANNUATION FUND Conclusion

• Fund financially sound for FSB purposes (before

allowing for Solvency Reserve)

• Not fully funded on financial soundness basis

(incorporating full Solvency Reserve) – steps taken

• Asset composition date appropriate to nature of the

liabilities

• Investment strategy suitable
• Reinsurance arrangements appropriate

NJMPF – SUPERANNUATION FUND Developments after valuation date

• Investment earnings:
• to Jan 2018: 10%
• to end March 2018: 12%?
• Bargaining Council salary increase 1.7.2017: 7.36%
• Thus for 2017/18 I expect:
• Investment earnings sufficient to cover liabilities
• Positive outcome on financial condition of Fund

Questions? NJMPF – SUPERANNUATION FUND

Thank You NJMPF – SUPERANNUATION FUND

NATAL JOINT MUNICIPAL PENSION FUND (RETIREMENT)

INTERIM ACTUARIAL VALUATION AS AT 31 MARCH 2017 Arthur Els

Developments during valuation period

• Spread 13th pension cheque wef 1.1.2016 (8.33%

increase)

• Pension increases based on year-on-year CPI from 2017

Suspended pensioner data exercise

• Surcharge increased to 21.65% wef 1 Jan 2017
• Offset by reduction in Super Fund surcharge

NJMPF – RETIREMENT FUND

NJMPF – RETIREMENT FUND Membership

NJMPF – RETIREMENT FUND Assets R’000

NJMPF – RETIREMENT FUND Asset composition (%)

NJMPF – RETIREMENT FUND Investment returns during valuation period

Year ending 31 March Investment Returns 2017 6.2%

NJMPF – RETIREMENT FUND Salary increases during valuation period

Year ending 31 March Average salary increases 2017 7.1%

NJMPF – RETIREMENT FUND Pension increases

• 1. CPI changed from average to year-on-year wef 2017

Date Pension Increase CPI for year to 31 March Average CPI for year to previous 31 Dec 1 January 2016 8.33% 1 July 2016 4.68% 6.3% 4.58% 1 July 2017 6.84% 6.1% 6.76%

NJMPF – RETIREMENT FUND Results: Pensioner Memorandum Account

31 March 2017 31 March 2016 R'000 R'000 Memorandum Account: Pensioners Assets: 2 372 907 2 243 461 Liabilities and Reserves: Accrued liability1 1 878 323 1 749 214 Risk Reserve 45 264 41 531 Solvency Reserve 289 733 239 152 Balance of assets 159 587 213 564 2 372 907 2 243 461 Funding level 107.2% 110.5%

NJMPF – RETIREMENT FUND Conclusion: Pensioners

• Memorandum Account fully funded, incorporating:
• Full Solvency Reserve
• Trustees investigating possible merger with Super Fund

memo account after 2020

NJMPF – RETIREMENT FUND Results: Active Members

31 March 2017 31 March 2016 R'000 R'000 Active members Assets: 1 508 053 1 492 772 Liabilities and Reserves: Accrued liability 1 452 749 1 458 605 Mortality reserve Risk Reserve 28 848 29 359 Prescribed minimum benefits 216 841 249 678 1 698 438 1 737 642 Surplus/(Deficit)

• 190 385
• 244 870

Funding level 88.8% 85.9%

NJMPF – RETIREMENT FUND Solvency Reserve

Members Pensioners R' 000s R' 000s Liability: Solvency Reserve assumptions 1 834 020 2 168 056 Liability:Valuation assumptions 1 669 590 1 878 323 Solvency Reserve 164 430 289 733

NJMPF – RETIREMENT FUND Required Rate of Contribution

31 March 2017 31 March 2016 Required rate Future service benefits 24.11% 24.09% Expenses 1.20% 1.20% Total 25.31% 25.29% Actual rate Local Authorities 18.37% 18.37% Members 7.00% 7.00% Total 25.37% 25.37% Shortfall/excess in contributed rate 0.06% 0.08% Surcharge Local Authorities 20.00% 15.85% Members 1.65% 1.65% Total 21.65% 17.50%

NJMPF – RETIREMENT FUND Surcharge

• Surcharge payable i.t.o. FSB “Scheme to Eliminate

Deficiency”

• Employer portion increased from 15.85% to 20% from

1.1.2017

• Overall surcharge for each local authority unchanged
• Increase in Ret F offset by reduction in surcharge to

Super F

• Expenses more than provided for – also funded from

surcharge

NJMPF – RETIREMENT FUND Recommendations: Active members

• Aim to build up the Solvency Reserve for active

member liabilities to full theoretical level

• Retain Risk Reserve of R 74 112 000 per PF117
• Retain contributions at current rate
• Local authorities, members continue paying surcharge
• f 21.65%

NJMPF – RETIREMENT FUND Conclusion

• Fund not in a sound financial position yet, but:
• Increased surcharge expected to eliminate deficit

by 2020

• Asset composition appropriate to the nature of the

liabilities

• Investment strategy suitable
• Reinsurance arrangements appropriate

NJMPF – RETIREMENT FUND Developments after valuation date

• Investment earnings:
• to Jan 2018: 10%
• to end March 2018: 12%?
• Bargaining Council salary increase 1.7.2017: 7.36%
• Thus for 2017/18 I expect:
• Investment earnings sufficient to cover increase in

liabilities

• On track to meet 2020 deadline

Questions? NJMPF – RETIREMENT FUND

Thank you NJMPF – RETIREMENT FUND

Effect on NJ Funds of losses:

• Steinhoff (equities)
• Resilient (property)

NJMPF FUNDS

• 20.0

0.0 20.0 40.0 60.0 80.0 100.0

45.8 17.9 5.3 1.0 10.8 22.3

• 3.0

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Asset composition (%)

School of Statistics and Actuarial Science 63

Source: Cambial communications

Equities - Steinhoff (Dec 2017)

School of Statistics and Actuarial Science 64

Historical returns on JSE – All sectors

School of Statistics and Actuarial Science 65

Recent fall in property returns – why?

Sunday Times 25.02.2018

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Investment strategy

Local Equities 45.0% Foreign Equities 20.0% Cash 3.0% Fixed interest bonds 22.0% Property 10.0% Strategic asset allocation

• 20.0

0.0 20.0 40.0 60.0 80.0 100.0

45.8 17.9 5.3 1.0 10.8 22.3

• 3.0

KWA-ZULU NATAL JOINT MUNICIPAL PROVIDENT FUND Asset composition (%)

NJMPF FUNDS

Impact of Steinhoff, Resilient losses

• Trustees, by design, invest in a range of assets
• No concentration of assets
• Overall impact of losses:
• Steinhoff - negative 1.3%
• Resilient – negative 1.0%
• Losses already allowed for in investment returns above
• Hence Steinhoff, Resilient losses have small impact

Thank You!

Arthur Els

NJMPF FUNDS