Office of the Auditor General Victoria Hall 11 Victoria Street Hamilton HM 11, Bermuda Tel: (441)296-3148 Fax: (441)295-3849 Email: auditbda@gov.bm Website: www.oagbermuda.gov.bm AUDITOR'S REPORT To the Minister of Finance I have audited the statement of net assets available for benefits of the Contributory Pension Fund as at July 31, 2003 and the statement of changes in net assets available for benefits for the year then ended. These financial statements are the responsibility of the Fund's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in Bermuda and Canada. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In my opinion, these financial statements present fairly, in all material respects, the financial position of the Contributory Pension Fund as at July 31, 2003 and the results of its operations for the year then ended in accordance with accounting principles generally accepted in Bermuda and Canada. Hamilton, Bermuda April 25, 2006 Larry T. Dennis, C.A. Auditor General 213 CONTRIBUTORY PENSION FUND STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS JULY 31, 2003 2003 2002 $ ASSETS Cash and deposits (note 5) Investments (note 3) Bonds Equities 40,990,805 36,157,520 175,667,296 537,016,918 198,221,341 442,507,671 753,675,019 676,886,532 15,901,373 2,369,002 14,546,878 2,552,524 2,655,237 1,560,970 2,030,550 19,831,345 21,785,189 773,506,364 698,671,721 2,722,225 1,612,007 2,610,179 1,499,328 4,334,232 4,109,507 769,172,132 694,562,214 Receivables Contributions - gross Accrued interest and dividends Due from Public Service Superannuation Fund Due from the Consolidated Fund of the Government of Bermuda (note 4) Total assets LIABILITIES Accrued benefits payable Accounts payable and accrued liabilities Total liabilities NET ASSETS AVAILABLE FOR BENEFITS The accompanying notes are an integral part of these financial statements. 214 CONTRIBUTORY PENSION FUND STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED JULY 31, 2003 2003 2002 $ $ INCREASE IN ASSETS Contributions Interest and dividends Miscellaneous investment income (note 6) 80,687,589 16,792,620 1,114,405 98,594,614 102,827,388 (42,841,227) 52,357,123 64,692,786 57,217,284 4,902,014 61,678,857 70,307,439 4,699,294 126,812,084 136,685,590 74,609,918 Total increase in assets 95,198,350 201,422,002 Current period change in fair value of investments 78,139,580 17,058,770 (84,328,467) DECREASE IN ASSETS Benefits paid Loss on sale of investments Administrative expenses (note 7) INCREASE (DECREASE) IN NET ASSETS NET ASSETS AVAILABLE FOR BENEFITS, BEGINNING OF YEAR 694,562,214 778,890,681 NET ASSETS AVAILABLE FOR BENEFITS, END OF YEAR 769,172,132 694,562,214 The accompanying notes are an integral part of these financial statements. 215 CONTRIBUTORY PENSION FUND NOTES TO THE FINANCIAL STATEMENTS JULY 31, 2003 1. AUTHORITY The Contributory Pension Fund ("the Fund") was established under The Contributory Pensions Act 1970 and its subsequent amendments. The purpose of the Fund is to provide old age pension, disability and death benefits for persons satisfying certain contribution, citizenship and/or residency requirements. Contributions to the Fund are compulsory for persons employed in Bermuda, the selfemployed and employers. This social insurance program enables members of the labour force to acquire and retain protection for themselves and their families against loss of income due to retirement, disability or death. If certain conditions are satisfied, the Fund also provides benefits to persons who have not contributed to the Fund. Benefits and expenses incurred in the administration of the Fund are financed from contributions made by the employees and employers noted above and from investment income. Funds are invested in accordance with the Public Funds Act 1954 and its subsequent amendments. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with accounting principles generally accepted in Bermuda and Canada and include the following significant accounting policies: (a) Basis of Presentation These financial statements are prepared on the going concern basis, under the assumption that the Fund will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations. The statements present the aggregate financial position of the Fund as a separate financial reporting entity independent of the Government of Bermuda. The financial statements show only the net assets available for benefits of the Fund and do not purport to show the adequacy of the Fund to meet future benefit obligations. (b) Revenue recognition Investment income is recorded on the accrual basis with dividends being recorded on the dividend record date. Realized gains and losses on disposal of investments are credited or charged to income on the transaction date. Change in fair value of investments reflect the difference between market and book values, and is calculated as at the year-end date and shown on the statement of changes of net assets available for benefits. Contributions received subsequent to the year-end but which are applicable to the current year are recorded as receivable. 216 CONTRIBUTORY PENSION FUND NOTES TO THE FINANCIAL STATEMENTS JULY 31, 2003 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Investments Investments comprise marketable securities such as stocks, bonds, money market funds and private equity funds. All the investments are carried at market value. Unrealized gains and losses reflect the difference between market and book values and are included in the change in fair value of investments. (d) Translation of Foreign Currencies U.S. currency amounts are translated into Bermuda dollars at par. Investments and cash deposits denominated in other foreign currencies are translated into Bermuda dollars at the year-end exchange rates. Revenues and expenses are translated at the exchange rate in effect at the transaction date. (e) Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues earned and expenses incurred during the year. Actual results could differ from these estimates. 3. INVESTMENTS Investments in bonds and equities are valued using published mid-market quotations. 4. DUE FROM THE CONSOLIDATED FUND OF THE GOVERNMENT OF BERMUDA The amount of $1,560,970 (2002 - $2,030,550) represents the net position of Consolidated Fund contributions due to the Fund and expenses paid by the Consolidated Fund on behalf of the Fund, which has not been settled at the year-end. The rate of interest accruing on the balance is 7% per annum. 217 CONTRIBUTORY PENSION FUND NOTES TO THE FINANCIAL STATEMENTS JULY 31, 2003 5. CASH AND DEPOSITS Cash and deposits include: 2003 $ Cash and deposits held in investment portfolios Cash and deposits held in banks 2002 $ 29,785,465 11,205,340 28,103,360 8,054,160 40,990,805 36,157,520 MISCELLANEOUS INVESTMENT INCOME The amount of $1,114,405 relates to the Contributory Pension Fund's portion of a class action recovery in relation to the Cendant Corporation Securities Fraud. Cendant Corporation Securities were held by the Contributory Pension Fund during a portion of the period of fraudulent activity which took place from May 31, 1995 to August 28, 1998. The Contributory Pension Fund's holdings were sold on May 18, 1998. The settlement funds were issued on March 31, 2003. 7. ADMINISTRATIVE EXPENSES 2003 2,994,006 1,209,896 421,234 225,870 25,000 26,008 21i 3,160,874 1,017,112 297,909 190,730 20,000 12,669 4,902,014 Investment management fees Salaries and overhead Custodial fees Investment monitoring fees Audit fees Miscellaneous 2002 4,699,294 CONTRIBUTORY PENSION FUND NOTES TO THE FINANCIAL STATEMENTS JULY 31, 2003 8. OBLIGATION FOR PENSION BENEFITS The present value of accrued pension benefits was determined using the projected benefit method prorated on contributions and the administrator's best estimate assumptions. The most recent actuarial valuation was completed as of August 1, 2002 by the Actuary's Department of the Government of the United Kingdom. The actuarial valuation noted that the Fund accrued pension benefits of $2,080 million and accumulated assets of $694 million as of August 1, 2002. This represents a total estimated obligation for future pension benefits of $1,386 million as of that date. In accordance with generally accepted accounting principles, disclosure of the obligation for future pension benefits is required. For a private occupational pension fund the issue of solvency of the fund and security of benefits are impacted by the value of the accrued liability. However, the sustainability of a national social insurance scheme is customarily based on the adequacy of the current and projected contribution rate to provide for future benefits. Funding of the Scheme is on a pay-as-you-go basis where essentially contributions of the current workforce are used to meet the obligations to the current beneficiaries. For the fiscal year ending, July 31, 2003, net assets available for benefits are more than eleven times the current benefit payments. This is a relatively high level of funding when compared to national social insurance schemes of other countries. 9. RELATED PARTY TRANSACTIONS The Government of Bermuda provides accounting and certain administrative services to the Fund. Significant expenses are as follows: 2003 $ $ 101,600 ACG overhead 2002 92,500 These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 219