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33
Loxpox, 13th July, 1904.
which had the effect of continuously increasing the surpluses and of throwing on the Government a larger burden than was reasonable or necessary, On the other hand if there were at any time a deficit, the fund system would tend to increase that deficit, since the Government contribution would then be calculate on a balance smaller than that needed to meet the future liabilities of the fund, and the Government contribution would therefore be less than the amount required to maintain an equilibrium between the assets and liabilities. Thus the normal condition of the fund must be one of more or less unstable equilibrium, and this unsatisfactory condition would be intensified through the sanall size of the Hongkong Fund.
12. Besides those indicated above, the policy recommended has other advantages. The necessity for periodic costly and troublesome valuations is avoided. Moreover the experience of other colonies has shown that where distinct funds with separate accounts exist it is difficult to satisfy the members, who when the assets of the Fund have reached a consider- able figure are apt to think that the pensions can be considerably increased or the contribu- tious reduced. On this question of the necessity of the income of a fund in its early years largely exceeding its outgoings if it is to remain solvent, I do not think that I can do better than refer you to the enclosed copy of a memorandum on the subject by Messrs. T. E. Yorso and G. H. RYAN, the actuaries to the Ceylon Find. If on the other hand the Fund should on valuation show a deficit, as has occurred in some colònies, hardship and dissatisfaction are Table to be caused by the reduction of pensions which would necessarily follow. It is therefore much more satisfactory for all parties that the Government should take the responsibility and guarantee pensions which will not be liable to either increase or decrease, and there is I think sufficient reason for being satisfied that the pensions which the new Ceylon Tables will provide will on the one hand be fair, to the contributors and recipients, and on the other hail not throw an unreasonable burden on the trovernment.
13. If this course is adopted any surplus which may be disclosed by the valuation which would be made would be devoted wholly to the benefit of members of the fund in the shape of increases to the prospective pensions of the widows and orphaus of the contributors to the fund at the date of the valuation, and of former contributors who had ceased to contribute on attaining the age of 65 or on leaving the service, as well as of increases to the existing pensions of the widows and orphans of those who have died since the 31st of December 1900— the date of the last valuation-in such shares and proportions: as shall be recommended by the Actuary. Whether the members of the Fund have any legal claim under the original ordinace to participate in the whole or indeed in any part of such surplus may be a matter of argument. It was however recognised that if the Government took over the Fund it was desirable that the contributors should not feel that they had a grievance in being deprived of the surplus (if any) and my predecessor agreed that the whole of it should be assigned to them, so the question as to their legal rights is somewhat academic. I would however point out that, if the Fund is not taken over, it is practically certain that the actuary will advise that it would not be prudent to distribute the whole of the surplus which a valuation might disclose, but a substantial portion- such as one quarter, as in the case of Ceylon, would have to be retained, in order to form a reserve against possible adverse fluctuations in the future.
14. For the reasons which I have given above I must ask that this matter may be reconsidered, an that Hongkong may be brought into line with the neighbouring administra- tions of the Straits Settlements and Federated Malay States. In order to leave the field clear for further consideretion of the matter and because without a further Report from the Actuary I am unable to sanction the adoption of the Tables attached to the Ordinance while the landl is continued, I have felt it necessary to advise His Majesty to exercise his powers of disallowance in respect of Ordinance No. 17 of 1906 and it is disallowed accordingly. I informed you of the disallowance in my telegram of the 12th instant.
Governor
SIR M. NATHAN, KCMG.,
I bave, &c.,
(Signed) ELGIN.
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 valueices and misleading. A fund must obviously he 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, e.. 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 (6) to increase the contribution, or (e) to adopt both experlients.
3. The actuarial valuation of the assets and abilities of a Fund of this description is a complicated process, the details of which can hardly be clearly understool 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 obscurel.
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 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 agel (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 pensions would be payable for very many years after the last contribution ind been received. It is obvious that these pension payments could only be met if a large sum bad 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 (6) 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 (4) that the amount of the Fund necessary when all contributions had ceased, to meet the continning pensions would depend to a great extent on the future income front 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 1993. This Fand may be taken as a type of the operations which are proceeding within the Ceylon Wives' and Orphaus' Pension Fund where members have been admitted year by year in varying numbers and at various ages and pay varying mul increasing amounts of contribution.
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