In determining the rate of return to be credited to provident fund accounts of beneficiaries the actuary considers relevant factors, the impact of decisions on the sustainability of the scheme and the adequacy of benefits. The actuary uses his or her judgement in developing appropriate assumptions and methodology and in making recommendations.
While the key principle underlying the operation of provident funds is that the sum of provident fund accounts balances should broadly be equal to the total value of assets in the fund, a range of factors and the impact of varying policy aims means that the return credited will likely differ from the returns actually achieved on assets. The rate of return to be credited to provident fund accounts of beneficiaries depends on factors such as legislative requirements, the design of the scheme, the returns actually achieved on underlying assets, the smoothing policy and the amount of investment reserves held, if any. This guideline should be read in conjunction with Guidelines 6, 21 and 23.
- Where it is the responsibility of the actuary to recommend a rate of return to credit to accounts, the calculation for a given year of the rate should be equal to the actual rate of return of the fund, net of an allowance for expenses and any allocation to investment or other reserves. These recommendations should take into account the actuary’s view on the adequacy of current reserves and the proportion (if any) of the return achieved on scheme assets in the accounting year to be assigned to investment reserves.
- Where the credited rate of return is determined by scheme rules or legislative instruments, the actuary should determine the financial implications for the provident fund by considering the actual returns achieved on underlying assets, expenses and reserves. This is likely to include recommendations regarding the adequacy of investment reserves which may exist to manage fluctuations in underlying asset values. This is particularly important when the prescribed return to credit to accounts is materially different from the return achieved on underlying assets.
- In respect of beneficiaries who leave the scheme during the accounting period as a result of retirement or termination of membership, an appropriate credit should be awarded for the period between the end of the preceding year and the date of withdrawal. Given the difficulty of having the necessary data in advance for the calculation of the rate of return, the actuary should establish a procedure to estimate as precisely as possible the actual rate of return. The actuary should give consideration to whether a market adjustment factor should be applied in periods where there is a significant fall in the value of underlying assets in order to protect the fund. However, such a factor should only be applied in exceptional cases and where there is a voluntary departure from the provident fund scheme. The actuary should advise whether such a factor is necessary when there is a significant increase in the market value of assets.
- In assessing the adequacy of investment reserves at accounting year end and making relevant recommendations, the actuary should determine reserves using appropriate assumptions and methodology.
- Where the rate of return credited to provident fund accounts is guaranteed or set by legislative instrument or scheme rules and is not directly related to returns on underlying assets, the actuary will need to appropriately assess the resulting financing and adequacy implications.
- Where the rate of return credited to provident fund accounts is decided by the social security institution or governing authority on the recommendation of the actuary and/or other professionals, the actuary should use a methodology that ensures that his or her recommendations are appropriate. The actuary should provide recommendations on the rate of return to be credited and determine and declare any investment reserves required.
- The actuary should liaise closely with other professionals, in particular those involved in the investment function and the administration function, and ensure that the data used for calculations are appropriate.