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Note 20: Retirement Plan

2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m
10,792 10,464 Government Superannuation Fund (GSF) 11,004 12,441
(10) 1 Other funds 2 1
10,782 10,465 Total retirement plan liabilities 11,006 12,442

The Government operates a defined benefit superannuation plan for qualifying employees who are members of the Government Superannuation Fund (GSF). The members' entitlements are defined in the Government Superannuation Fund Act 1956. Contributing members make regular payments to GSF and in return, on retirement, receive a defined level of income. GSF is closed to employees who were not members at 1 July 1992.

The GSF obligation has been calculated by GSF's actuary as at 30 June 2017. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

Amounts recognised in the statement of financial position in respect of GSF are as follows:

Actual
30 June
2017
$m
30 June
2016
$m

Net GSF Obligation

 
Present value of defined benefit obligation 15,272 16,406
Fair value of plan assets (4,268) (3,965)
Present value of unfunded defined benefit obligation 11,004 12,441

Present value of defined benefit obligation

 
Opening defined benefit obligation 16,406 14,932
Expected current service cost 75 73
Expected unwind of discount rate 340 426
Actuarial losses/(gains) (675) 1,846
Benefits paid (874) (871)
Closing defined benefit obligation 15,272 16,406

Fair value of plan assets

 
Opening fair value of plan assets 3,965 4,087
Expected return on plan assets 194 220
Actuarial gains/(losses) 289 (182)
Funding of benefits paid by Government 690 703
Contributions from other entities 18 18
Contributions from members 27 33
Benefits paid (874) (871)
Other (41) (43)
Closing fair value of plan assets 4,268 3,965

Amounts recognised in the statement of financial performance in respect of GSF are as follows:

2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m

Personnel Expenses

 
Expected current service cost 75 73
Expected unwind of discount rate on GSF obligation 340 426
Expected return on plan assets (194) (220)
Contributions from members and funding employers (45) (51)
Other expenses 41 43
    Past service cost
212 214 Total included in personnel expenses 217 271

Net (Gains)/Losses on Non-Financial Instruments

 
(1,486) Actuarial (gain)/loss recognised in the year (964) 2,028
212 (1,272) Total GSF expense (747) 2,299

The Government expects to make a contribution of $741 million to GSF in the year ending 30 June 2018. In addition to its obligations to past and present employees, because GSF is liable for income tax, the Crown will be required to make additional contributions equivalent to the tax on future investment income.

The principal assumptions used for the purposes of the GSF actuarial valuations are as follows:

Actual
30 June 2017
%
30 June 2016
%

Summary of assumptions

 
For following year  
Discount rate 2.0% 2.1%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation 1.7% 1.5%
Beyond next year  
Discount rates between 2 and 21 years 2.4% to 4.6% 2.0% to 3.9%
Discount rates between 22 and 29 years 4.6% to 4.7% 3.9% to 4.3%
Discount rates between 30 and 38 years 4.7% to 4.8% 4.3% to 4.7%
Discount rate from 39 years onwards 4.8% 4.8%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation from years 2 to 12 1.7% 1.5%

Assumed inflation increases of 1.7% each year to year 20, then gradually increases, reaching 2.0% in year 31.

The defined benefit obligation decreased in the year to 30 June 2017 by $1,134 million, mainly due to an increase in the short and medium term discount rates over the year, which together have more than offset the impact of the increase in the Consumer Price Index assumptions over the same period.

The discount rate used to present value the pension cash flows associated with this obligation has a risk-free rate based on the market yield curve of New Zealand Government Bonds. Given the short-term nature of market data on Government Bonds in New Zealand, we also assume a single long-term equilibrium risk-free interest rate of 4.75% based on macroeconomic extrapolation. Discount rates are then smoothed over a minimum of 10 years from the end of the market yield curve to that long-term rate.

The major categories of GSF plan assets at 30 June are as follows:

Actual
30 June
2017
$m
30 June
2016
$m
Equity instruments 2,638 2,227
Other debt instruments 517 544
Cash and short term investments 220 348
Property 6 7
Other 887 839
Fair value of plan assets 4,268 3,965

The expected rate of return on the plan assets of 5.0% (2016: 5.0%) has been calculated by taking the expected long-term returns from each asset class, reduced by tax (using the current rates of tax). The actual return on plan assets for the year ended 30 June 2017 was 12.7%, or $490 million (2016: 1.0% or $38 million).

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