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, 1999 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 on the completeness and accuracy of the actuarial valuation and subsequent shadow valuation on which the pension liability of $493.9 million has been based. Accordingly, I was unable to determine whether any adjustments might be necessary to the obligations for pension benefits as disclosed in note 5 to 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, 1999 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 August 31, 2000 Larry T. Dennis, C.A. Auditor 222 PUBLIC SERVICE SUPERANNUATION FUND STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS MARCH 31, 1999 1999 1998 $ $ 169,475,945 63,616,265 17,415,221 163,638,873 70,596,522 8,410,604 250,507,431 242,645,999 1,741,808 7,722,052 94,926 1,446,377 1,420,601 44,135 9,558,786 2,911,113 11,677,287 3,868,471 271,743,504 249,425,583 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 Consolidated Fund of the Government of Bermuda (note 3) 6,511,432 344,893 6,304,118 359,768 14,828,451 7,656,545 Total liabilities 21,684,776 14,320,431 250,058,728 235,105,152 NET ASSETS AVAILABLE FOR BENEFITS The accompanying notes are an integral part of these financial statements. 223 PUBLIC SERVICE SUPERAFNFNUATION FUND STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED MARCH 31, 1999 1999 1998 $ $ INCREASE IN ASSETS Investment income Gain on sale of investments Interest Dividends 11,952,710 4,038,194 2,190,955 21,552,975 4,164,220 2,407,350 18,181,859 28,124,545 Change in fair value of investments 4,827,347 23,503,146 Contributions Employees' Government's Government special payment 9,936,333 9,936,332 500,000 9,462,803 9,462,803 500,000 20,372,665 19,425,606 43,381,871 71,053,297 17,815,709 6,397,320 1,486,221 471,929 186,693 172,170 16,713,155 4,117,320 1,517,050 324,703 172,491 236,906 26,530,042 23,081,625 1,145,239 753,014 1,104,465 1,348,603 Total decrease in assets 28,428,295 25,534,693 INCREASE IN NET ASSETS 14,953,576 45,518,604 NET ASSETS AVAILABLE FOR BENEFITS, BEGINNING OF YEAR 235,105,152 189,586,548 NET ASSETS AVAILABLE FOR BENEFITS, END OF YEAR 250,058,728 235,105,152 Total increase in assets DECREASE IN ASSETS Pension benefits Monthly payments Lump sum payments Refunds Transfers to other plans Interest on refunds Capital sum payments Administrative expenses (note 4) Interest expense The accompanying notes are an integral part of these financial statements. 224 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FPNANCIAL STATEMENTS MARCH 31, 1999 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, a 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. 225 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1999 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) Act, 1972, 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 financial statements have been prepared in conformity 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, 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. (b) Investments Investments comprise holdings in securities, bonds and treasury bills. Investments are valued using close of business mid-market prices. 226 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FPNANCIAL STATEMENTS MARCH 31, 1999 ACCOUNTING POLICIES (continued) (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. (d) 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 and expenses during the year. Actual results could differ from these estimates. DUE TO THE CONSOLIDATED FUND OF THE GOVERNMENT OF BERMUDA Due to the Consolidated Fund of the Government of Bermuda represents the net position of contributions received and expenses paid by the Consolidated Fund on behalf of the Fund which has not yet been settled. The rate of interest accruing on the balance is 7% per annum. 4. ADMINISTRATIVE EXPENSES 1999 $ Investment fees Salaries and office expenses Audit fees Actuarial fees 1998 $ 933,268 161,971 33,000 17,000 1,145,239 227 951,360 124,855 27,250 1,000 1,104,465 PUBLIC SERVICE SUPERAFTNUATION FUND NOTES TO THE FPNANCIAL STATEMENTS MARCH 31, 1999 5. 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 completed as of March 31,1999 by Abbott Associates, a firm of consulting actuaries. A shadow actuarial valuation report for March 31, 1999 was completed by a different firm of consulting actuaries, Momeau Sobeco. The shadow valuation report resulted in a $74,180,700 adjustment to the actuarial present value of accrued pension benefits as detailed in the original valuation report. The actuarial present value of benefits as at March 31, 1999 and the principal components of changes in actuarial present values during the year, were as follows: 1999 $ '000 Actuarial present value of accrued pension benefits, beginning of year Interest accrued on benefits Benefits accrued Benefits paid Experience loss 381,800 30,792 25,907 (26,530) 7,737 Actuarial present value of accrued pension benefits, end of year 419,706 Adjustment resulting from shadow valuation 74,181 Adjusted actuarial present value of accrued pension benefits, end of year 493,887 Net assets available for benefits 250,059 Deficiency of net assets over actuarial present value of accrued pension benefits 243,828 228 PUBLIC SERVICE SUPERANNUATION FUND NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 1999 OBLIGATIONS FOR PENSION BENEFITS (continued) 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: 1999 8% 6% Asset rate of return Salary escalation rate 1998 8% 6% The actuarial value of net assets available for benefits has been determined using fair values. RELATED PARTY TRANSACTIONS The Government of Bermuda provides accounting and certain administrative services to the Fund. Significant expenses are as follows: 1999 1998 $ $ Interest Expense 753,013 1,348,603 Salaries and office expenses 161,000 124,000 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. 7. COMPARATIVE FIGURES Certain of the 1998 figures have been restated to conform with the 1999 financial statement presentation. 229