Office of the Auditor Hemisphere House 9 Church Street Hamilton HM 11, Bermuda Tel: (441)296-3148 Fax: (441) 295-3849 Email: auditbda@ibl.bm AUDITOR'S REPORT To the Minister of Finance I have audited the statement of net assets available for benefits of the Public Service Superannuation Fund as at March 31, 1998 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. Except as explained in the following paragraph, 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. I have been unable to obtain adequate assurance that the actuarial valuation on which the obligation for pension benefits was based, was performed in accordance with the relevant professional standards. Accordingly, I was unable to determine whether any adjustments might be necessary to the obligation for pension benefits of $381.8 million (and $364.9 million in 1997) as disclosed in note 6 of the financial statements. In my opinion, except for the effect of adjustments, if any, which I might have determined to be necessary in respect of the pension obligation referred to in the preceding paragraph, these financial statements present fairly, in all material respects, the financial position of the Public Service Superannuation Fund as at March 31, 1998 and the changes in its net assets available for benefits for the year then ended in accordance with accounting principles generally accepted in Bermuda and Canada. Hamilton, Bermuda June 21, 2000 Larry T. Dennis, C.A. Auditor 283 PUBLIC SERVICE SUPERANNUATION FUND STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS MARCH 31, 1998 1998 1997 $ $ 163,638,873 70,596,522 8,410,604 142,357,998 49,525,924 7,262,303 242,645,999 199,146,225 1,446,377 1,420,601 44,135 1,075,246 5,244,171 28,674 2,911,113 6,348,091 3,868,471 1,073,437 249,425,583 206,567,753 6,304,118 359,768 259,500 7,656,545 16,721,705 14,320,431 16,981,205 235,105,152 189,586,548 ASSETS Investments Equities Bonds Money market funds Receivables Accrued interest and dividends Investment sales receivable Contributions receivable Cash and deposits Total assets LIABILITIES Investment purchases payable Accounts payable and accrued expenses Due to the Government of Bermuda Consolidated Fund (note 4) Total liabilities NET ASSETS AVAILABLE FOR BENEFITS The accompanying notes are an integral part of these financial statements. 284 PUBLIC SERVICE SUPERANNUATION FUND STATEMENT OF CHANGES PN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED MARCH 31, 1998 1998 1997 $ $ PNCREASE IN ASSETS Investment income Gain on sale of investments Interest Dividends 21,552,975 4,164,220 2,407,350 28,124,545 Change in fair value of investments 14,353,505 3,741,597 1,973,360 20,068,462 23,503,146 Contributions Employees' Goverrrmenfs Government special payment (244,030) 9,462,803 9,462,803 500,000 19,425,606 18,612,744 71,053,297 38,437,176 16,713,155 4,117,320 236,906 15,637,538 4,533,684 254,766 21,067,381 20,425,988 1,804,628 1,104,465 1,348,603 209,616 1,422,106 1,006,160 958,704 150,933 25,534,693 Total increase in assets 9,056,372 9,056,372 500,000 23,963,891 "°45,518,604 14,473,285 189,586,548 175,113,263 235,105,152 189,586,548 DECREASE PN ASSETS Pension benefits Monthly payments Lump sum payments Capital sum payments Refunds Administrative expenses (note 5) Interest expense Interest on refunds Total decrease in assets INCREASE PN NET ASSETS NET ASSETS AVAILABLE FOR BENEFITS, BEGPNTNING OF YEAR NET ASSETS AVAILABLE FOR BENEFITS, END OF YEAR The accompanying notes are an integral part of these financial statements. 285 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1998 1. DESCRIPTION OF PLAN The Public Service Superannuation Fund ("the Fund") was established on April 1, 1982 by the Public Service Superannuation Act, 1981 ("the Act") and its subsequent amendments. The purpose of the Fund is to provide retirement pensions for the employees of the Government of Bermuda and the employees of various quasi autonomous nongovernmental organizations. The Fund derives its revenues from contributions received from members and the Government, and from invested contributions managed in accordance with the Public Funds Act, 1954. The following description of the Plan is a summary only. For more complete information, reference should be made to the relevant legislation. (a) General The Plan is a contributory, defined benefit pension scheme covering public service officers and other employees of Governmental and certain quasi-governmental agencies. Contributions are 5% of salary with Government contributing a like amount. (b) Service pensions A service pension is available with a minimum of eight years credited service. Subject to exceptions as outlined in the Act, it is based on the number of years of service times 1.5% of the salary payable immediately preceding the date of retirement. Additional benefits to special groups such as police, prison wardens, fire service and regiment employees are provided. (c) Disability pensions A disability pension is available to members with a minimum of eight years credited service. The amount of the disability pension is determined by the level of salary paid at the date of disability and the extent of the disability. (d) Capital benefit A capital benefit is payable to the nominated beneficiary in the event of the death of a Plan member. The amount of the capital benefit is determined as the sum of one year's salary, plus the return of the employee's contributions with interest at 4% per annum. The member must have a minimum of one year credited service. (e) Survivors' pensions A survivor pension is paid to a spouse, n dependent child, or a nominee of a member who has a minimum of eight years credited service. The amount of the pension is equal to one half of the employee's pension payable at the date of death, plus a child's pension of the other half payable in equal shares to children under 18 and dependent children under 21. 286 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1998 1. DESCRIPTION OF PLAN (continued) (f) Lump sum benefits A Plan member may elect to receive as a lump sum up to eleven and one-half times 25% of the service pension payable at the time of retirement. The lump sum payment is then taken into consideration in the determination of future service pension benefits. (g) Withdrawal refunds Subject to certain lock-in provisions, an amount equal to the total of contributions in the Plan with interest thereon is payable to the Plan member, on termination of employment. (h) Pension increases The Pensions (Increase) Amendment Act, 1987, allows for the increase in the determination of pension benefits subject to cost of living increases which are calculated by reference to the Retail Price Index. Pensions are reviewed every two years. 2. ACCOUNTING POLICIES The accompanying financial statements are prepared in accordance with accounting principles generally accepted in Bermuda and Canada. The preparation of financial statements in conformity 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 and expenses during the year. Actual results could differ from these estimates: The significant accounting policies are as follows: (a) Basis of Presentation These financial statements are prepared on the going concern basis, meaning 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. They present the aggregate financial position of the Fund as a separate financial reporting entity independent of the Government of Bermuda and its employees. 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 pension obligations. Section 7 (6) of the Public Service Superannuation Act, 1981 provides that if at any time the Fund is insufficient to meet the payments chargeable against it, the deficiency shall be made up out of the Consolidated Fund. 287 PUBLIC SERVICE SUPERAFTNUATION FUND NOTES TO THE FPNANCIAL STATEMENTS MARCH 31, 1998 2. ACCOUNTING POLICIES (continued) (b) Investments Investments comprise holdings in securities, bonds and treasury bills and are stated at fair value. (c) 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. 3. INVESTMENTS Investments in bonds and equities are valued using published mid-market quotations. 4. DUE TO THE GOVERNMENT OF BERMUDA CONSOLIDATED FUND Due to the Government of Bermuda Consolidated Fund represents the net position of contributions received and expenses paid by the Government of Bermuda on behalf of the Fund which has not yet been settled. The rate of interest accruing on the balance is 7% per annum. 5. ADMINISTRATIVE EXPENSES 1998 $ Investment fees Salaries and office expenses Audit fees Actuarial fees 1997 $ 951,360 124,855 27,250 1,000 1,104,465 288 819,557 149,255 25,000 12,348 1,006,160 PUBLIC SERVICE SUPERALTNUATION FUND NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1998 6. OBLIGATIONS FOR PENSION BENEFITS The present value of accrued pension benefits was determined using the projected benefit method prorated on service and administrator's best estimate assumptions. An actuarial valuation was made as of March 31, 1995 by Abbott Associates, a firm of consulting actuaries, and was then extrapolated to March 31, 1998. As at March 31, 1998 the accrued pension benefit liability due to past service was estimated to be $381.8 million (1997 - $364.9 million); the net assets are $235.1 million (1997 $189.6 million), resulting in a net accrued pension benefit liability of $146.7 million (1997 -$175.3 million). The assumptions used in determining the actuarial value of accrued pension benefits were developed by reference to expected long-term market conditions. Significant long-term actuarial assumptions used in the valuation were: 1998 1997 8% 6% 8% 6% Asset rate of return Salary escalation rate The actuarial value of net assets available for benefits has been determined using fair values. 7. RELATED PARTY TRANSACTIONS The Government of Bermuda provides accounting and certain administrative services to the Fund. Significant expenses are as follows: 1998 1,348,603 Salaries and office expenses 289 958,704 124,000 Interest expense 1997 146,136