Correspondence
Back to CorrespondenceThis exchange of correspondence has been received from a member and, in view of the subject matter, might be of interest to viewers. We are advised that the Company concerned is happy for the exchange to be viewed by a wider audience.
[copy of letter received by NZSA member Oliver Saint]
The New Zealand Refining Company Limited
Petroleum Refiners Marsden Point, Private Bag 9024, Whangarei, New Zealand.
Telephone +64-9-432 8311, Facsimile +64-9-432 8035
15 April 2009
Mr Oliver Saint
Southbank Analysts Limited
PO Box 32 120
Devonport
Auckland
Dear Mr Saint
Annual Report
Thank you for your letter dated 31 March 2009.
As a company we value feedback on our 2008 Annual Report. Your feedback will provide us with an opportunity to identify areas where we can improve future communications to help ensure that we continue to meet the needs of our various stakeholder groups.
We appreciate the comments that you have made with regard to both the remuneration of Directors attending Audit Committee meetings and the disclosures that have been made surrounding the Company’s defined benefit pension plan. I would like to take this opportunity to respond to the various points that you have made and offer further information as follows:
Remuneration of Audit Committee Members
We note your comments regarding the level of remuneration Directors receive for attending to matters of the Audit Committee. The Directors do not consider that the level of remuneration restricts the amount of time and effort spent on Audit Committee matters and are currently comfortable with the level of remuneration being offered.
Defined Benefit Pension Plan
The detailed disclosures made by the Company within the 2008 Annual Report (please refer to Note 13) meet the requirements of the New Zealand equivalent International Accounting Standard number 19 “Employee Benefits”.
As you are no doubt aware, the valuation of the defined benefit pension plan for financial
reporting purposes must follow the methodology prescribed by the International Accounting Standards. This resulted in the pension fund liability of $40.7 million being recorded on the Company’s 31 December 2008 balance sheet and an actuarial loss of $50.6 million being charged to the Statement of Total Recognised Income and Expenditure for the year.
The Company acknowledged that the quantum of the actuarial loss and the resultant pension fund liability would warrant special commentary by the Directors and for this reason a paragraph was included within the profit announcement released to the New Zealand Stock Exchange on 17 February 2009. (The content of this market announcement was not repeated within the Chairman’s Statement included in the Annual Report.)
The main point that the Directors wanted to highlight was the fact that the Pension Funds’ current actuarial deficit, as measured by the Actuary in accordance with the Superannuation Schemes Act 1989, would have be in the vicinity of only $5 to $7 million, excluding contribution tax, for the same period.
This is significantly different to the “liability” reported within the Company’s financial statements using the accounting valuation methodology.
The accounting valuation results in a much greater deficit because of differing discount rates used to value the liabilities of the fund. For example, the Actuary utilises the long term historic return of similar structured funds (typically 5-5.5% pa) in order to discount future liabilities back to today’s dollars. However, the accounting valuation methodology uses the Government Bond rate (3.5% to 31 December 2008) in order to discount future liabilities. Because the discount factor for accounting purposes is significantly less than the “expected return” under the traditional actuarial method, the liability is significantly higher and therefore the deficit higher or surplus lower.
The liability established for accounting purposes is also “grossed-up” for Specified
Superannuation Contributions Withholding Tax (SSCWT), currently 33%.
It is important to note that the accounting valuation is not used to determine the Company contributions to the Fund in order to meet future Pension Fund obligations. Rather the contribution level is set on the advice of the Actuary following the results of a full actuarial valuation. The Company is currently contributing at the rate recommended by the Actuary.
In Attachment I, I have responded to each of the specific questions raised in your letter.
Conclusion
Accounting for Defined Benefit schemes has attracted much more attention following the
adoption of International Accounting Standards, and particularly in view of the current market volatility.
Whilst the Directors are disappointed by the reported losses, they accept that it is “normal” and understand that the probability for a loss is about 20% or 1 in every five years. Of course we hope that the markets will recover sooner rather than later.
I trust that this provides you with the additional information that you require in order to assess and analyse the Company’s financial result.
Please feel free to contact me if you require any further information or have any points for clarification.
Thank you once again for taking the time to convey your comments to us and I will
look forward to meeting with you soon.
Kind regards
Dennis Martin
Company Secretary
Petroleum Refiners Marsden Point, Private Bag 9024, Whangarei, New Zealand.
Telephone +64-9-432 8311, Facsimile +64-9-432 8035
Attachment I
The New Zealand Refining Company Limited
Answers to questions raised by Southbank Analysts Limited-
Re The New Zealand Refining Defined Benefit Plan
* Who is responsible for administering the Fund?
The New Zealand Refining Pension Fund was established by Deed of Trust in 1963 and was closed to members on 31 December 2002. The Pension Fund is managed by five Managing Trustees appointed by the Company and including the:
-CEO
-CFO
-Accounting Manager, together with a
-Member representative, and
-A pensioner representative.
All accounting/administration functions are carried out in-house under the direction/supervision of the Managing Trustees.
* Does the same Group also administer the Defined Contributions Fund?
The Company does not have any involvement in the administration of the Defined Contributions Fund. Involvement is limited to the deduction of employee contributions through the payroll system and the payment of a Company contribution for those eligible employees. The contributions are paid directly to Tower who administer the scheme and deal directly with participating employees.
*Has the Board monitored the performance of the Fund since its inception?
The Board is provided with a copy of the triennial actuarial valuation completed by the Fund’s Actuary, Mercers, pursuant to the requirements of the Superannuation Schemes Act 1989. In addition the Trustees of the Fund will correspond with management and the Board if, and when, anything significant occurs. For example, the Trustees had informed the Company of the Funds poor investment performance in 2008.
* What has the performance been in comparison to other Funds?
The Pension Fund’s returns (net of tax and investment management expenses) achieved over the last four years are:
Year ended Annual Return
31 March 2005 6.4%
31 March 2006 16.7%
31 March 2007 6.3%
31 March 2008 (1.9%)
* How many employees belong to the Fund?
At 31 December 2008, the Pension Fund had 163 contributing members and 149 pensioners.
* Do the employees receive an inflation adjusted pension from the Fund?
The Trust Deed permits the Trustees to grant pension increases in certain circumstances. In particular these increases can only be granted if they do not prejudice the rights and benefits of members. No pension increases have been granted in the last 15 months.
* Is the Fund open to spouses after the death of the employee?
The Fund has two categories of membership. Category A (for members who joined prior to 1 January 1996) provides for a spousal benefit. There is no spousal benefit for Category B members (those members who joined the Fund between 1996 and 2002).
Further Information
If you are interested in viewing a copy of the Trust Deed and the Pension Funds financial
statements which are filed with the Government Actuary, then you can view this information online at http://www.companies.govt.nz by searching “other Registers, superannuation Schemes, file number #1801864.
[ENDS]