303
LONDON, 13th July, 1904.
CEYLON WIDOWS' AND ORPHANS' PENSION FUND,
MEMORANDUM by the ACTUARIES on the REPORT of the Directors of the Fund dated 16th March, 1904, and on the Minute in Executive Council by the Auditor General enclosed with the despatch from Ceylon dated 14th April, 1904.
1. The rapid growth of the corpus of the Fund in not an abnormal or unexpected event but is a necessary consequence of the scheme which was adopted at the initiation of the Fund. The consideration of the amount of the Fund by itself is valueless and misleading. A fund must obviously be regarded in relation to the value of the liabilities which it is intended to provide, and hence the solvency of an institution of this nature can only be determined by comparing the amount of the Fund at any stage with the value of the present and future liabilities at this stage, ie., with the Reserve, as it is technically termed, obtained on approved actuarial principles or the provision requisite to meet the recurrent demands to the end.
2. If there had not been a large balance of income over outgo year by year, or if such balance had not been accumulated at a high rate of interest, the Fund would now be insolvent. That is, the present value of its liabilities would exceed the present value of the future contributions plus the balance in hand, and it would be necessary (a) to reduce the pensions (current and prospective) or (b) to increase the contribution, or (c) to adopt both expedients.
3. The actuarial valuation of the assets and liabilities of a Fund of this description is a complicated process, the details of which can hardly be clearly understood without special professional training; but it will be apparent from a consideration of the important features of the working of the Fund, that a large accumulation of capital is necessary to enable the Fund to meet its future liability for pensions. These important features are set out in the following paragraphs, all reference to such incidents as the withdrawal of contributors before the completion of their period of contribution being avoided in order that the main arguments may not be obscured.
4. An outstanding feature of the scheme is the provision that a member's contribution shall cease on his attaining the age of 65 or on his completing 35 years of membership, while the liability of the Fund to pay a pension to his widow may arise either during his perio t of contribution or after he has ceased to contribute. If therefore the admission of new members were stopped, the income of the Fund from contributions would diminish as the members completed their respective periods of contribution, and at end of 35 years no more contributions would be payable, a considerable proportion of the members would survive the 35 years and would be aged (say) 55 and upwards. Many of these survivors would have wives and children, so that additions would continue to be made year by year to the list of pensioners, and pensious would be payable for very many years after the last contribution had been received. It is obvious that these pension payments could only be met if a large sum had been put by during the period for which contributions were payable by the members.
5 The extremely important influence of the action of compound interest in all financial operations extending over long periods of time is universally recognised, and it is unnecessary to do more than call attention to the facts (a) that the amount of the Fund at the end of the 35 years would be greatly affected by the rate of interest which the balances in hand had carned year by year, and (6) that the amount of the Fund necessary when all contributions had ceased, to meet the continuing pensions would depend to a great extent on the future income from interest earnings that could be set against the pension payments.
6. In Appendix A to this Memo. is set out in detail the growth of a fund derived from the uniform contributions of 1,000 members, assumed to enter at age 35 with wives aged 30. the calculations involved being based on the same foundations as the Tables prepared by us and dated July 1903. This Fund may be taken as a type of the operations which are proceeding within the Ceylon Wives' and Orphans' Pension Fund where members have been admitted year by year in varying numbers and at various ages and pay varying and increasing amounts of contribution.