We pride ourselves in understanding our clients’ needs, going the extra mile and delivering promptly

At ARCH, a competitive price and superior quality come standard; service delivery is paramount.

ARCH’s core actuarial services are detailed below.  Our specialities are (1) Data mining and statistical analysis, (2) Damages or third party claim calculations and reports, (3) Long-term employee benefit valuations and reports for financial statements, and (4) Independent retirement fund consulting and valuations.

ANALYTICS

ARCH Analytics, a division of ARCH Actuarial Consulting, provides insights to business and researchers through directed data mining and statistical analysis.

Statistical analysis in research

In a developing country like South Africa, research is key. Its empirical powers are used to form the underlying principles of policies and help in the design of effective intervention programmes.

Since 2001 ARCH has been applying its statistical know-how and technical skills towards the design, analysis, reporting and journal publication of research data gathered by the broader scientific community, particularly in the field of public health research.

Our services include:

  • Consulting at the initial stages of research proposals and planning, mainly on sampling methodology and target sample size
  • Primary and secondary analysis of research data
  • Assisting with the presentation of findings
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  • Assisting with the preparation of research reports and co-authoring of papers for publication in scientific journals

In this regard we have assisted the Human Sciences Research Council, the Medical Research Council and the National Department of Health amongst others.

ARCH uses a range of statistical packages, including SPSS, Epi-info, SUDAAN and SAS.

Analytical solutions for businesses

Analytics can unveil hidden patterns in data, empowering organisations to make better-informed decisions. Appropriate analysis of existing datasets can yield insights into external conditions and internal processes, giving decision-makers a significant competitive edge.

The volume, variety and speed of flow of data generated by organisations continue to reach unprecedented levels, presenting two quite different dangers: ignoring the data, and dredging the data – misusing data mining techniques to yield misleading results. We apply statistical know-how and detection theory techniques to filter out noise that will distract your business from the real information, and to help you probe your data in a careful, considered fashion, to look behind the numbers and to uncover the valuable information contained in your business’s data.

The objectives and benefits of our data analytics offering can be illustrated as follows:

The same datasets can further be used to create, test and validate predictive models. These are useful inputs for formulating strategies and drawing up informed business plans and interventions.

Past statistical publications

ARCH Analytics has been involved in the production of all three South African National Youth Risk Behaviour Surveys (YRBS) which produced nationally and provincially-representative datasets on the prevalence of behaviours that place South African high school learners at risk, and tracked changes in the prevalence of these behaviours over time.

RETIREMENT FUND CONSULTING

ARCH is not a registered Financial Service Provider.  This ensures that any conflicts of interest are avoided, that our advice is not affected by potential commissions or other rewards, and that other employee benefit brokers and benefit consultants can contract us to give independent actuarial advice.

Our pension fund 1 consulting and valuation services include the following:

  • Statutory pension fund valuations

In terms of Section 16 of the Act, unless exempted from actuarial valuation, a registered fund must be actuarially valued at least every three years.  The statutory valuation assesses the fund’s financial position, the need for and appropriate level of any contingency reserves, and the contributions required to meet future benefits.  It recommends what use surpluses should be put to, or, if there is a deficit, how this should be amortised.  The valuation tracks the experience of the fund’s membership and investments and reconciles the movement in the liabilities since the last valuation.  The valuator is then also responsible for providing regular actuarial services during the inter-valuation period, including individual benefit calculations, costing benefit improvements, recommending pension increases, and conducting interim valuation reports.

  • Defined benefit fund conversions

In the 1990s there was a tidal wave of conversions from defined benefit (DB) to defined contribution (DC) arrangements.  Members were disgruntled because of poor withdrawal benefits, and employers were willing to accede to members’ conversion requests because it meant that they would no longer face an open-ended liability risk.  Sadly, many conversions failed to compensate members adequately for the investment risk that individuals were now adopting, and for the potential shortfall in their ultimate retirement benefits.  The Act was subsequently amended to provide for minimum benefits on exit, but there are still DB funds wishing to convert to a DC arrangement.

  • Defined contribution fund valuations

Many DC funds have contingency reserves, compelling them to submit a valuation report to the registrar.  Other DC funds appreciate the benefit of an investigation into their financial affairs as it provides a check on the underlying functions of its service providers (e.g. have investment returns been equitably distributed?).

  • Valuations for financial statement purposes

In terms of the accounting standards IAS 19 and GRAP 25, employers are required to recognise their obligations to pension funds, in their financial statements.  These valuations are conducted in accordance with the relevant professional guidance and using assumptions prescribed by the accounting statements.  (See also Employee Benefit Valuations.)

  • Independent reviews

Fund trustees or sponsoring employers often request an independent view or a review of significant events (e.g. a conversion exercise, or a valuation for financial statement purposes).

  • Surplus apportionments

In 2001 the Pension Funds Second Amendment Act required all funds to reassess their surplus position, after making provision for minimum benefits (past and future) so as to equitably share that surplus, if any, amongst stakeholders.  Most of these surplus apportionment valuations have now been completed, but some funds continue to generate surpluses, requiring apportionment plans.

  • Valuation exemption certificates

Section 17 of the Act permits funds to get an exemption from valuation, where a valuator is of the opinion that such valuation is unnecessary (i.e. where members’ benefits are limited to the available assets).  A triennial certificate is submitted and must be approved by the registrar.

  • Benefit statement figures and projections

DB funds should communicate members’ benefits at least annually, including actuarial reserves, minimum individual reserves, and projected pensions as a percentage of final salary (replacement ratio).  DC funds must also reflect members’ minimum individual accounts and should be projecting benefits to retirement to ascertain what further contributions might be necessary to ensure a more acceptable replacement ratio.

  • Section 14 certificates

These forms are required from the fund’s valuator to confirm that the transfer of assets and liabilities between funds is fair, i.e. that it does not prejudice remaining, transferring, or receiving fund members.

  • Unit pricing

We support administrators by calculating a fund’s investment return, where that fund is invested in different portfolios, with varying monthly cash flows.

  • Schedule HB certificates

These certificates summarise the fund’s assets and liabilities and are included in their annual financial statements.

Notes:

  1. In this sense, as per the Pension Funds Act (the Act), “pension fund” includes provident, retirement, preservation, umbrella and unclaimed benefit funds.

replacement-ratios-with-ageA retirement fund member’s expected pension, as a % of their final salary, is called their replacement ratio.  Ideally, this should aim to exceed 75%, enabling a comfortable retirement.

This diagram shows the replacement ratios of a fund with 600 employees.  On average, those under 32 years of age can expect to enjoy pensions equal to or greater than their final salary.  Members closer to retirement would need to make additional contributions to enjoy a similar pension level.

These statistics and recommendations are provided as part of a typical report on benefit projections for defined contribution funds.

THIRD PARTY CLAIMS AND OTHER COMPENSATION CALCULATIONS

When someone needs to receive lump sum compensation at one point in time in return for cash flows at future points in time, it helps to have actuarial input.

In the case where a claimant, say, requires a lump sum now in return for several years of future income she has lost, an actuary takes into account factors necessary to arrive at a fair value – one that if awarded to the claimant is expected to leave them unaffected by the loss. One cannot arrive at this fair value without allowing for, inter alia:

  • The fact that the current rate of income lost would have escalated in future
  • The fact that the claimant will enjoy investment returns on the award
  • The possibility that the claimant may die in any given future year

This type of calculation is often needed by legal practitioners in the Personal Injury field, most often relating to motor vehicle accidents (MVA) that give rise to claims against a third party for losses of earnings by claimants injured on the road, and losses of support by the surviving dependants of road-users involved in fatal accidents.

Certain aspects of these calculations are guided by the Road Accident Fund (RAF) Act 56 of 1996 and the Assessment of Damages Act 9 of 1969.

In addition to loss of earnings and loss of support calculations in RAF matters, we apply similar actuarial methods and techniques across a broad range of matters all involving compensation for lost income by way of a lump sum.  These calculations and reports include the following:

  • Loss of earnings and loss of support arising from incidents other than an MVA, such as wrongful arrest, wrongful death, incidents & accidents at places of business
  • Loss of maintenance and claims against deceased estates
  • Capitalisation of expected future medical and related expenses
  • Claims for medical negligence and malpractice
  • Accrual calculations in divorce matters
  • Inflation and interest adjustments
  • Wrongful dismissal claims against employers

ARCH was appointed as a service provider to the Road Accident Fund in 2004 and has received thousands of instructions from the Fund itself, from attorneys acting on the Fund’s behalf, and from plaintiff attorneys.

We are prepared to receive payment on settlement, provided that the merits of the matter have been conceded prior to our being instructed, and we work to an average turnaround time of one to three days, from receiving an instruction to completing a calculation and report.

Loss of Earnings

For a hypothetical personal injury claimant aged 20, what she could have earned and what she can now earn are represented by the blue and red columns in this graph. The trend is upwards due to general earnings inflation, and also expected promotions specific to the claimant, usually informed by an industrial psychologist’s assessment and report.

The difference between the uninjured and injured columns, once we allow for income tax, represents the loss she may suffer in each future year, should she survive to that year. Her decreasing chance of surviving to each future year is shown as the curve in the graph.

After adjusting for the probability of survival, and for limits imposed by the RAF Amendment Act cap if applicable, we adjust further for investment returns to take into account the fact that the loss award is being paid years in advance of when the loss is expected to be suffered.

HEALTH CARE SUBSIDY AND OTHER EMPLOYEE BENEFIT VALUATIONS

The retirement fund suite of actuarial services is detailed under the RETIREMENT FUND CONSULTING section above.

This section refers to the employee benefit valuations conducted for financial statement purposes, e.g. in terms of International Accounting Standard 19 (IAS 19) or Generally Recognised Accounting Practice 25 (GRAP 25) 1.  Actuarial valuations are required for defined benefit plans 2 and include the following:

  • Post-employment or post-retirement medical aid subsidy valuations (PEMA or PRMA valuations)

A liability exists when an employer is obliged to subsidise an employee’s medical aid contributions at retirement (or their dependants’ contributions on death).  This is the most common long-term employee benefit valuation for financial statements.  These future employer payments are unknown as they depend on which employees remain until retirement; which medical option they will be on; what the contribution will be at retirement and annually thereafter; and they depend on how long the member and/or their spouse survives.

  • Long-service award valuations (LSA)

Some employers offer employees gifts and/or bonuses, as a percentage of annual salary, at employment milestones, e.g. 5, 10, 15 etc. years of service.

  • Ex-gratia benefit valuations

These are compensatory or top-up pension benefits granted to members who were not pension fund members before a certain past date, often because they were denied membership prior to 1994.

  • Unused leave valuations
  • Disability benefit valuations
  • Retirement fund valuations
  • Multi-employer Plan Notes

Where the assets of various entities’ pension fund benefits are pooled and the benefits are not linked to the member’s entity, a Multi-employer Plan Note is required.  These can be in respect of DB or DC plans.  ARCH provides a Note for transcription to the financials which includes details of the entity’s participation and of the relevant DB plans’ funding levels and assumptions used.

  • Buy-out valuations and consulting

Entities may wish to reduce or remove the open-ended DB plan liability they face by either (1) compensating beneficiaries, (2) enhancing pensions or purchasing annuities in lieu of the subsidy, or (3) implementing a plan asset to offset the liability in the financials. The assumptions used for accounting purposes may not be suitable under these circumstances.  Various options and their impact are discussed with the employer, and then quantified, before offers are made and carefully communicated to participants.

Notes:

  1. Although very similar, IAS 19 is used by corporates, i.e. profit-oriented entities, whereas GRAP 25 is applied by most public entities, where service delivery is the primary objective.
  1. We are sometimes asked why the employer’s subsidy of the medical aid contributions is not classified as a defined contribution (DC) plan.  A DC plan is defined as one where an entity pays fixed contributions into a separate fund and has no obligation to pay further contributions.  For example, 10% of salaries to a pension fund, whilst in-service.  Benefits are limited to the contributions paid plus investment returns less expenses.  An entity must recognise contributions to such a plan when an employee renders service in exchange for those contributions.  All other plans are defined benefit (DB) plans.  These may or may not be funded.  In this case an entity has agreed to provide certain benefits to current and former employees, and it must recognise the present value of that obligation, net of the fair value of any qualifying plan assets, in its financials.  An actuarial valuation is conducted to estimate and report on these liabilities.

yield-curve

The primary driver used to determine the actuarial or present value of future cash flows is the discount rate (i.e. the expected return on investments).

This is generally derived by considering risk-free yields (e.g. government bond fixed-interest yields).

Future medical and CPI inflation is estimated by comparing fixed-interest yields to real yields (e.g. index-linked yields).

This diagram illustrates the divergence between these yields, and hence the increase in expected inflation over the longer term.

We use these curves, which the JSE updates daily, to construct the economic indices for our valuations.

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