Understanding the Pension Scheme: Part 3
Quote:
Originally Posted by
Snoopy
I must say that I am finding this pension scheme representation in the books all rather baffling....
I am taking another dive into AR2017 to make some sense of things.
Various 'Actuarial Assumptions' (p62) are made about valuing the pension scheme assets. The present value of plan assets is $71.105m. This I expect is discounted by the listed discount rate of 2.97%. However we are told that inflation (and hence they say pension payments?) are forecast to increase at 2% each year. This means the apparent book value of the pension scheme will be eaten up faster in the future. So we need an additional discount factor to account for this.
We are told that the 'weighted average duration of the defined benefit obligation' is 8.5 years.
This means the undiscounted current balance should be calculated as follows:
UCB x [(1-0.0297)(1-0.02)]^8.5 = $71.106m => UCB x (0.9509)^8.5 = $71.106m => UCB = $109.09m
It seems reasonable to assume that this 'cash balance' will include some assumptions on likely earnings of the portfolio into the future, before it is ultimately redeemed. However, although we are told the superannuation investment has gone from a 79%/19%/2% Equities/Fixed Interest/Cash to 64%/28%/8% Equities/Fixed Interest/Cash, there is no mention of what the expected return on any of these investment categories is.
$109.09m - $71.106m = $37.984m
So take out the 'time value of cash' adjustments and we are looking at a percentage increase in portfolio value of around 50% over 8.5 years. That sounds do-able, albeit investment conditions would have to remain favourable for 8.5 years to achieve such a target. Perhaps this is why the actuarial calculations are telling PGW to top up? Or perhaps I have got the whole thing completely wrong!
SNOOPY