Subsidized Schools Provident Fund
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Annual Report 2018
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OTHER INFORMATION
Funds Section Education Bureau
Ms LAM Wing-hop, Sandy Senior Accounting Officer
Room 1517, 15/F Wu Chung House 213 Queen’s Road East
Wanchai Hong Kong
Secretary
Ms HON Hin-yan Education Officer
School Administration Division Education Bureau
5/F, East Wing, Central Government Offices 2 Tim Mei Avenue
Tamar Hong Kong
Treasurer
Ms LEUNG Yin-fun, Fanny
Assistant Director of Accounting Services The Treasury
Room 2701, 27/F, Immigration Tower 7 Gloucester Road
Wanchai Hong Kong
Auditor
Mr John CHU, JP Director of Audit
26/F, Immigration Tower 7 Gloucester Road Wanchai
Hong Kong
CONTENTS PAGE
Foreword 1
Board of Control 4
Investment Sub-committee 7
Chairman’s Report 9
Treasurer’s Report 11
Number of Contributors (2009 – 2018) 17
Dividend Declared and Investment Return (2009 – 2018) 18
Net Assets (2009 – 2018) 19
Spread of Net Assets 20
Report of the Director of Audit 21
Balance Sheet 24
Income and Expenditure Account 25
Reserve Fund 26
Statement of Changes in Net Assets Available for Benefits 27
Statement of Cash Flows 28
Notes to the Financial Statements 29
FOREWORD
The Fund
The Subsidized Schools Provident Fund (The Fund) is governed by the Subsidized Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279). The Fund is a defined contribution retirement scheme established to provide for payments upon retirement, resignation, dismissal, termination of contract or death of contributors. Contributors refer to teachers in subsidized schools and also, with effect from 19 May 2000, teachers in Direct Subsidy Scheme (DSS) schools who contribute to the Fund.
Board of Control
The complete administration and control of the Fund, subject to the Fund Rules, is vested in the Board of Control, the composition of which is as follows:
Chairman : elected from among the 18 other members Vice-chairman : elected from among the 18 other members Permanent Secretary for Education or his representative
Director of Accounting Services or his representative Eighteen other members :
(a) 4 appointed by the Subsidized Primary Schools Council,
(b) 4 appointed by the Hong Kong Subsidized Secondary Schools Council,
(c) 1 appointed by the Hong Kong Special Schools Council,
(d) 4 elected from the representatives of teachers of the subsidized primary schools,
(e) 4 elected from the representatives of teachers of the subsidized secondary schools, and
(f) 1 elected from the representatives of teachers of the special schools.
Meetings of the Board of Control
The Board holds an annual general meeting to receive and consider the annual financial statements of the Fund and to declare the annual dividend for contributors. It also holds other meetings during the year as and when required. Fourteen members form a quorum. All matters arising before any meeting of the Board are determined by a majority of the members present and voting thereon.
- 2 - Contributions and donations
Contributors’ contributions and the matching donations from the Government and DSS schools are made monthly to the Fund according to the following scale as a percentage of a contributor’s basic salary, including any approved allowance:
No. of years of continuous contributory service
Teacher’s contribution
Donations from the Government and
DSS schools
% %
Less than 10 5 5
10 to less than 15 5 10
15 or more 5 15
Benefits
Contributors are entitled to a lump sum payment when they cease to be contributors to the Fund. Subject to certain exceptions laid down in the Fund Rules, the amount of payment is determined as follows:
Length of contributory service Benefits
10 years or more All accumulated contributions and donations from the Government and DSS schools and dividends thereon.
5 years to less than 10 years All accumulated contributions and dividends thereon and 10% of the donations from the Government and DSS schools and dividends thereon for each complete year of contributory service.
Less than 5 years All accumulated contributions and dividends thereon.
Statement of provident fund account balance
Each contributor is provided by the Treasurer of the Fund with a statement of provident fund account in September and March each year. These statements show the balance standing to the credit of each contributor’s account at the previous 31 August and 28 February (or 29 February as appropriate) respectively. The March statement incorporates the latest annual dividend declared by the Board for the year ended the previous 31 August. The supervisor of each school also maintains a provident fund account for each contributor in his school and these accounts are available for inspection by contributors.
Payments to outgoing contributors
Except for the peak months of August and September, payments of benefits to the outgoing contributors are made by the Fund within 23 working days from the date of receipt of the outgoing contributor’s application by the Permanent Secretary for Education or the effective date of ceasing to be a teacher, whichever is later. Payments are made by the Fund within 28 working days for the two peak months. Both pledges are subject to the condition that the withdrawal application is correctly completed by the outgoing contributor.
Investment Management
The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under rule 5(4) of the Subsidized Schools Provident Fund Rules. The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary. All sum considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.
An Investment Sub-committee is formed by the Board and meets on a quarterly basis to:
(a) review the investments made and to verify that they were made within the approved framework and strategy of the Fund,
(b) interview investment managers regarding their performance and obtain their views on various financial markets, and
(c) discuss and formulate investment strategies for recommendations to the Board of Control.
Accounts and audit
Apart from other duties described in the Fund Rules, the Treasurer maintains proper accounts and records of all transactions of the Fund and prepares the annual financial statements for audit by the Director of Audit. The audited financial statements together with the auditor’s report are placed before the Board at the annual general meeting.
SUBSIDIZED SCHOOLS PROVIDENT FUND BOARD OF CONTROL
Back Row
(From Left to Right)
Front Row
(From Left to Right)
1. Ms LEUNG Pui-yee 1. Mr CHENG Sau-leung, Don 2. Ms CHEUNG Yee-may 2. Mr FUNG Ka-chun, Chris 3. Ms HO Hoi-yiu, Helen 3. Mr TAM Kim-hung
4. Mr WONG Yuen-ho 4. Mr LEUNG Tsz-wing, Dennis 5. Mr LAU Chun-hung 5. Mr LAM Yat-fung, James
6. Mr WONG Ting-hong 6. Mr WONG Shing-hei, Charlix, JP 7. Ms CHAN Siu-ping 7. Ms LEUNG Yin-fun, Fanny (Treasurer)
8. Ms HO Kit-ying 8. Ms CHUNG Lai-kam
9. Ms HON Hin-yan 9. Mr WONG Kwan-bo, Remy
Not in the picture
1. Mr CHAN Chi-wai, Ringo 2. Mr CHEUNG Fu-wing 3. Mr KAM Wing-tim
SUBSIDIZED SCHOOLS PROVIDENT FUND BOARD OF CONTROL
1.9.2017 – 31.8.2018
Chairman
Mr LAM Yat-fung, James Lions College SC
Vice-Chairman
Mr LEUNG Tsz-wing, Dennis SKH Lam Woo Memorial Secondary School ES
Members
Mr CHAN Chi-wai, Ringo Buddhist Mau Fung Memorial College SC
Mr CHAN Chi-yuen, Stanley Po Leung Kuk Vicwood K.T. Chong No.2 Primary School PC
Ms CHAN Siu-ping Ko Lui Secondary School ES
Mr CHENG Sau-leung, Don Hong Kong Juvenile Care Centre Chan Nam Cheong Memorial School ESP
Mr CHEUNG Fu-wing GCEPSA Whampoa Primary School EP
Ms CHUNG Lai-kam
(From 2.1.2018) Po Kok Primary School PC
Mr FUNG Ka-chun, Chris HHCKLA Buddhist Wong Cho Sum School EP
Mr FUNG Suk-kai Catholic Mission School EP
Ms HO Kit-ying PLK Lee Shing Pik College ES
Mr HO Wing-chung
(Up to 1.1.2018) Laichikok Catholic Primary School PC
Mr KAM Wing-tim
(From 2.1.2018) SKH St. John's Primary School PC
Mr KWONG Yiu-chung
(Up to 1.1.2018) S.T.F.A. Wu Siu Kui Memorial Primary School PC
Mr LAU Chun-hung LST Yu Kan Hing Secondary School SC
Mr TAM Kim-hung True Light Girls’ College SC
Ms TSANG Bik-har PLK Wong Wing Shu Primary School PC
Mr WONG Kwan-bo, Remy Ebenezer School SP
Mr WONG Ting-hong Cotton Spinners Association Secondary School ES
Mr WONG Yuen-ho Man Kiu Association Primary School EP
Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board
Mr SIU Man-tat, Martin, JP (Up to 2.1.2018)
Director of Accounting Services
Mr WONG Shing-hei, Charlix, JP
(From 3.1.2018) Director of Accounting Services
Note
PC Appointed by Subsidized Primary Schools Council
SC Appointed by Hong Kong Subsidized Secondary Schools Council SP Appointed by Hong Kong Special Schools Council
EP Elected teacher representatives of subsidized primary schools
SUBSIDIZED SCHOOLS PROVIDENT FUND BOARD OF CONTROL
From 1.9.2018
Chairman
Mr LAM Yat-fung, James Lions College SC
Vice-Chairman
Mr LEUNG Tsz-wing, Dennis SKH Lam Woo Memorial Secondary School ES
Members
Mr CHAN Chi-wai, Ringo Buddhist Mau Fung Memorial College SC
Ms CHAN Siu-ping Ko Lui Secondary School ES
Mr CHENG Sau-leung, Don Hong Kong Juvenile Care Centre Chan Nam Cheong Memorial School
ESP
Mr CHEUNG Fu-wing GCEPSA Whampoa Primary School EP
Ms CHEUNG Yee-may
(From 15.9.2018) Yaumati Kaifong Association School PC
Ms CHUNG Lai-kam Po Kok Primary School PC
Mr FUNG Ka-chun, Chris Lions Clubs International Ho Tak Sum Primary School EP Ms HO Hoi-yiu, Helen
(From 15.9.2018) Aberdeen St. Peter’s Catholic Primary School PC
Ms HO Kit-ying PLK Lee Shing Pik College ES
Mr KAM Wing-tim SKH St. John’s Primary School PC
Mr LAU Chun-hung LST Yu Kan Hing Secondary School SC
Ms LEUNG Pui-yee Free Methodist Mei Lam Primary School EP
Mr TAM Kim-hung True Light Girls’ College SC
Mr WONG Kwan-bo, Remy Ebenezer School SP
Mr WONG Ting-hong Cotton Spinners Association Secondary School ES
Mr WONG Yuen-ho Man Kiu Association Primary School EP
Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board
Mr WONG Shing-hei, Charlix, JP Director of Accounting Services
Note
PC Appointed by Subsidized Primary Schools Council
SC Appointed by Hong Kong Subsidized Secondary Schools Council SP Appointed by Hong Kong Special Schools Council
EP Elected teacher representatives of subsidized primary schools ES Elected teacher representatives of subsidized secondary schools ESP Elected teacher representative of special schools
SUBSIDIZED SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE
1.9.2017 – 31.8.2018
Chairman Mr TAM Kim-hung True Light Girls’ College
Members
Mr CHAN Chi-wai, Ringo Buddhist Mau Fung Memorial College
Mr CHAN Chi-yuen, Stanley Po Leung Kuk Vicwood K.T. Chong No.2 Primary School Ms CHAN Siu-ping Ko Lui Secondary School
Mr CHENG Sau-leung, Don Hong Kong Juvenile Care Centre Chan Nam Cheong Memorial School
Mr CHEUNG Fu-wing GCEPSA Whampoa Primary School Mr FUNG Ka-chun, Chris HHCKLA Buddhist Wong Cho Sum School Mr FUNG Suk-kai Catholic Mission School
Ms HO Kit-ying PLK Lee Shing Pik College
Mr KAM Wing-tim (From 2.1.2018)
SKH St. John's Primary School
Mr KWONG Yiu-chung (Up to 1.1.2018)
S.T.F.A. Wu Siu Kui Memorial Primary School Mr LAM Yat-fung, James Lions College
Mr LAU Chun-hung LST Yu Kan Hing Secondary School
Mr LEUNG Tsz-wing, Dennis SKH Lam Woo Memorial Secondary School Ms TSANG Bik-har PLK Wong Wing Shu Primary School Mr WONG Kwan-bo, Remy Ebenezer School
Mr WONG Ting-hong Cotton Spinners Association Secondary School Mr WONG Yuen-ho Man Kiu Association Primary School
Mr SIU Man-tat, Martin, JP (Up to 2.1.2018)
Director of Accounting Services Mr WONG Shing-hei, Charlix, JP
(From 3.1.2018)
Director of Accounting Services
Treasurer
Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services
Secretary
Ms TSE Yuk-lin, Cathy Treasury Accountant
SUBSIDIZED SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE
From 1.9.2018
Chairman Mr TAM Kim-hung True Light Girls’ College
Members
Mr CHAN Chi-wai, Ringo Buddhist Mau Fung Memorial College Ms CHAN Siu-ping Ko Lui Secondary School
Mr CHENG Sau-leung, Don Hong Kong Juvenile Care Centre Chan Nam Cheong Memorial School
Mr CHEUNG Fu-wing GCEPSA Whampoa Primary School
Mr FUNG Ka-chun, Chris Lions Clubs International Ho Tak Sum Primary School Ms HO Hoi-yiu, Helen
(From 15.9.2018) Aberdeen St. Peter’s Catholic Primary School
Ms HO Kit-ying PLK Lee Shing Pik College
Mr KAM Wing-tim SKH St. John’s Primary School Mr LAU Chun-hung LST Yu Kan Hing Secondary School Mr LAM Yat-fung, James Lions College
Ms LEUNG Pui-yee Free Methodist Mei Lam Primary School Mr LEUNG Tsz-wing, Dennis SKH Lam Woo Memorial Secondary School Mr WONG Kwan-bo, Remy Ebenezer School
Mr WONG Ting-hong Cotton Spinners Association Secondary School Mr WONG Yuen-ho Man Kiu Association Primary School
Mr WONG Shing-hei, Charlix, JP Director of Accounting Services
Treasurer
Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services
Secretary
Ms TSE Yuk-lin, Cathy Treasury Accountant
CHAIRMAN’S REPORT
(Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.) Dividend
I am pleased to report that at the annual general meeting held on 21 January 2019, the Board of Control (BoC) declared a guaranteed dividend of 5% for contributors for the year ended 31 August 2018.
Contributors’ Account
During the year, 3,517 new contributors joined the Fund and 1,776 withdrew from it.
These figures include 36 transfers in from and 49 transfers out to the Grant Schools Provident Fund. The total number of contributors increased by 1,741 or 4.80% to 37,995.
The balance of the contributors’ account increased by HK$3,284.8 million or 4.80% to HK$71,659.8 million. The service profile of contributors who withdrew from the Fund during the year was as follows:
2018 2017
Below 10 years 34% 39%
10 to 15 years 7% 8%
Above 15 years 59% 53%
Net Assets and Management Cost
As at 31 August 2018, the net assets of the Fund amounted to HK$89,322.9 million.
The cost of managing the Fund by way of supervision fee paid to Government, fees of investment managers, fees of custodians, investment transaction costs and other operating expenses was HK$193.3 million - equivalent to 0.22% of the Fund’s net assets.
Major Activities of the Board of Control
At the annual general meeting held on 25 January 2018, the BoC adopted the annual statement of accounts of the Fund and declared a dividend of 5% for the year ended 31 August 2017.
The BoC also approved the following matters during the year ended 31 August 2018:
(a) the Fund’s investment plan for the year;
(b) the Fund’s supervision fee budget for the year; and
(c) appointment of an investment consultant to conduct the investment strategies review.
Vote of Thanks
Mr CHAN Chi-yuen, Stanley, Mr FUNG Suk-kai, Mr HO Wing-chung, Mr KWONG Yiu-chung, Mr SIU Man-tat, Martin, JP and Ms TSANG Bik-har ceased to be members of the BoC during or at the end of the year. On behalf of the BoC, I thank them for their invaluable contributions to the work of the BoC in the past year.
Financial Highlights for the year ended 31 August 2018
2018 2017 Changes
Contributors’ Account (a) 71,659.8 68,375.0 +4.80%
Net Assets (b) 89,322.9 83,956.0 +6.39%
Management Cost
(as a percentage of net assets)
193.3 (0.22%)
167.2 (0.20%) Reserve Level at year end (%)
- before the year’s dividend [(b)-(a)]/(a) above
24.65 22.79
- after the year’s dividend 18.72 16.95
Investment Return for the year (%) 6.64 12.74
Total Dividend Declared (%) 5.00 5.00
Number of Contributors 37,995 36,254 +4.80%
Performance Indicator
2018 2017
Proportion of cases of withdrawal paid within 23 working days for October to July, or 28 working days for peak months of August and September
99.66% 99.92%
LAM Yat-fung, James
Chairman Board of Control
Subsidized Schools Provident Fund
21 January 2019
SUBSIDIZED SCHOOLS PROVIDENT FUND
TREASURER’S REPORT FOR THE YEAR ENDED 31 AUGUST 2018 (Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.)
1. FINANCIAL STATEMENTS
The financial statements of the Fund have been drawn up in accordance with accounting treatments stipulated in the Fund Rules and accounting principles generally accepted in Hong Kong.
2. FINANCIAL RESULTS
(i) Overall Surplus
The Fund recorded an overall surplus of HK$5,471.8 million for the year as follows:
Operating surplus 1,724.8
Net realised and revaluation gains 3,747.0
Overall surplus 5,471.8
(ii) Investment Return
The overall surplus represented an investment return of 6.64% (2017:
overall surplus of 12.74%) of the Fund for the year.
(iii) Asset Cover/Reserve Level - Before the year’s dividend
The financial strength of a defined-contribution scheme is measured in terms of its asset cover (or reserve level), i.e. the adequacy of its assets to meet the benefits payable to scheme members.
The Fund’s net assets covered its liability (represented by the year-end balance of the contributors’ account before provision for the year’s dividend) by 1.25 times, providing a reserve level of 24.65% as follows:
Net Assets (a) 89,322.9 Less: Contributors’ Account (b) 71,659.8
(before the year’s dividend)
Reserve (c) 17,663.1
Asset Cover (a)/(b) 1.25 times (2017: 1.23 times) Reserve Level (c)/(b) 24.65% (2017: 22.79%)
3. DIVIDEND CALCULATION FOR THE YEAR
The Board has agreed to determine each year’s annual dividend on the basis of the level of reserve held by the Fund at year end and the investment return actually achieved on the Fund’s assets during the year by way of a dividend formula.
The dividend formula comprises two components:
〈--- (a) ---〉 〈--- (b) ---〉
(Reserve Level - 40%) ÷ (1 + 40%) + (Fund Return × Adjusted Reserve Level) where Reserve Level refers to Pre-dividend Reserve Level and the total dividend is subject to a minimum of 5%.
(a) - provides for releasing the excess over the target Pre-dividend Reserve Level of 40%. This component will be zero if the Reserve Level is 40% or less.
(b) - provides for releasing a portion of investment return based on the Reserve Level. If the Reserve Level is 40% or less, then the Adjusted Reserve Level is simply the Reserve Level. If the Reserve Level is above 40%, then the Adjusted Reserve Level is 40%.
The dividend formula comes up with a dividend rate of 1.64%. Since the calculated annual dividend is below 5%, the dividend for this year shall be the guaranteed 5%. The dividend calculation has been audited by the Director of Audit.
4. DECLARATION OF THE GUARANTEED DIVIDEND AND TRANSFER FROM THE RESERVE FUND
I recommend that the Board:
(a) transfer a sum of HK$1,855.9 million from the Reserve Fund to the Income and Expenditure Account in accordance with rule 11(3) of the Subsidized Schools Provident Fund Rules, and
(b) declare a guaranteed dividend of HK$3,580.7 million out of the Income and Expenditure Account which will be distributed as follows:
(i) a credit of 5% in respect of each contributor’s account which is open for the entire financial year commencing 1 September 2017 as the guaranteed dividend in accordance with rule 12(1), and
(ii) a credit of pro rata dividend in respect of each contributor’s account
which is not open for the entire financial year commencing 1 September 2017 in accordance with rule 14.
The above appropriations have been incorporated in the financial statements.
5. ASSET COVER / RESERVE LEVEL - After the year’s dividend
After provision for the total dividend of 5% for the year, the asset cover of the Fund stood at 1.19 times and the level of reserve at 18.72% as follows:
Net Assets (a) 89,322.9
Less:
Contributors’ Account
(after the year’s dividend):
Contributors’ Account 71,659.8
Provision for the year’s dividend 3,580.7
(b) 75,240.5
Reserve (c) 14,082.4
Asset Cover (a)/(b) 1.19 times (2017: 1.17 times) Reserve Level (c)/(b) 18.72% (2017: 16.95%)
6. INVESTMENT OBJECTIVE AND CRITERIA
The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.
The Fund is governed by an investment framework approved by the Financial Secretary. The framework sets down broad limits for various classes of investment and defines the quality or credit rating of individual types of securities permitted for investment. All investment decisions of the Fund are made within this framework.
7. INVESTMENT RESPONSIBILITIES
Each year the Board of Control approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.
Investment of funds is the responsibilities of the Treasurer and the Fund’s external investment managers. The Treasurer has the additional responsibility of providing investment guidelines to the investment managers and, with the assistance of the custodians, ensuring that their activities are in compliance with these guidelines.
8. INVESTMENTS
As at 31 August 2018, the Fund’s investment portfolios amounted to HK$88,774.9 million of which HK$76,647.5 million or 86.34% was placed under the management of external investment managers. The distribution of the investments in proportion terms was as follows:
Investments
Managed by Treasurer
Managed by Investment
Managers Overall
% % %
Equity securities listed in Hong Kong - 19.89 19.89 Debt securities denominated in Hong
Kong dollar - 9.38 9.38
Hong Kong dollar fixed deposits 8.76 - 8.76 Equity securities listed outside Hong
Kong - 38.26 38.26
Debt securities denominated in currencies other than Hong Kong dollar
- 18.36 18.36
Fixed deposits denominated in currencies other than Hong Kong dollar
4.90 - 4.90
Call deposits and balances with
custodians denominated in currencies other than Hong Kong dollar
- 0.42 0.42
Trading financial instruments
- assets - 0.05 0.05
- liabilities - (0.02) (0.02)
13.66 86.34 100.00
The Fund’s external investment managers were as follows:
Baillie Gifford Overseas Limited BOCHK Asset Management Limited BlackRock Financial Management, Inc.
First State Investments (Hong Kong) Limited Hang Seng Investment Management Limited
HSBC Global Asset Management (Hong Kong) Limited MFS International (U.K.) Limited
Northern Trust Global Investments Limited
Schroder Investment Management (Hong Kong) Limited State Street Global Advisors Asia Limited
Wellington Management Company LLP
The ten single largest securities holdings in the Fund’s investment portfolios were:
Equities
HSBC Holdings plc 1,951.3
Tencent Holdings Limited 1,776.3
AIA Group Limited 1,160.4
China Construction Bank Corporation Limited 944.1
Amazon.com, Inc. 902.5
Industrial and Commercial Bank of China Limited 753.9
Alphabet Inc. 658.9
Microsoft Corporation 592.4
Ping An Insurance (Group) Company of China, Ltd. 574.6
China Mobile Limited 515.9
9. AUDITED FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended 31 August 2018 have been audited by the Director of Audit. The audited financial statements together with the auditor’s report will be placed before the Board at the annual general meeting to be held on 21 January 2019.
LEUNG Yin-fun, Fanny
Treasurer Subsidized Schools Provident Fund
10 January 2019
SUBSIDIZED SCHOOLS PROVIDENT FUND Spread of Net Assets as at 31 August 2018
.
- 20 -
Equity securities listed in Hong Kong HK$17,654 million (19.76%) (2017: 21.27%)
Hong Kong dollar deposits, net trading financial instruments and net accounts receivable HK$8,349 million (9.35%) (2017: 9.07%)
Equity securities listed outside Hong Kong HK$33,967 million (38.03%) (2017: 36.11%)
Deposits denominated in currencies other than
Hong Kong dollar HK$4,720 million (5.28%) (2017: 3.98%) TOTAL: HK$89,323 million
(2017: HK$83,956 million)
- 20 -
Debt securities denominated in currencies other than
Hong Kong dollar HK$16,304 million (18.25%) (2017: 19.80%) Debt securities denominated
in Hong Kong dollar HK$8,329 million (9.33%) (2017: 9.77%)
Report of the Director of Audit
Independent Auditor’s Report
To the Board of Control, Subsidized Schools Provident Fund
Opinion
I certify that I have audited the financial statements of the Subsidized Schools Provident Fund set out on pages 24 to 47, which comprise the balance sheet as at 31 August 2018, and the income and expenditure account, reserve fund, statement of changes in net assets available for benefits and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In my opinion, the financial statements of the Subsidized Schools Provident Fund are prepared, in all material respects, in accordance with rule 16(1) of the Subsidized Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279) and the accounting policies set out in note 2 to the financial statements.
Basis for opinion
I conducted my audit in accordance with rule 16(2) of the Subsidized Schools Provident Fund Rules and the Audit Commission auditing standards. My responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of my report. I am independent of the Subsidized Schools Provident Fund in accordance with those standards, and I have fulfilled my other ethical responsibilities in accordance with those standards. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.
- 22 -
Responsibilities of the Treasurer, Subsidized Schools Provident Fund for the financial statements
The Treasurer, Subsidized Schools Provident Fund is responsible for the preparation of the financial statements in accordance with rule 16(1) of the Subsidized Schools Provident Fund Rules and the accounting policies set out in note 2 to the financial statements, and for such internal control as the Treasurer, Subsidized Schools Provident Fund determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Treasurer, Subsidized Schools Provident Fund is responsible for assessing in conjunction with the Board of Control, Subsidized Schools Provident Fund the ability of the Subsidized Schools Provident Fund to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.
Auditor’s responsibilities for the audit of the financial statements
My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Audit Commission auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with the Audit Commission auditing standards, I exercise professional judgment and maintain professional skepticism throughout the audit. I also:
— identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
— obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Subsidized Schools Provident Fund’s internal control;
— evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Treasurer, Subsidized Schools Provident Fund; and
— conclude on the appropriateness of the Treasurer, Subsidized Schools Provident Fund’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Subsidized Schools Provident Fund’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Subsidized Schools Provident Fund to cease to continue as a going concern.
John Chu Audit Commission
Director of Audit 26th Floor
Immigration Tower
7 Gloucester Road
10 January 2019 Wanchai, Hong Kong
- 24 -
SUBSIDIZED SCHOOLS PROVIDENT FUND
BALANCE SHEET AS AT 31 AUGUST 2018
(Expressed in millions of Hong Kong dollars)
2018 2017
Note ASSETS
Cash at banks 196.9 287.6
Investments:
Deposits with banks and other 4 12,496.7 10,451.9
financial institutions
Securities 5 76,254.3 73,001.3
Trading financial instruments 6 45.3 32.1
Receivables and other assets 7 738.0 572.8
LIABILITIES
Trading financial instruments 6 (21.4) (55.9)
Payables and other liabilities 8 (386.9) (333.8)
NET ASSETS AVAILABLE FOR BENEFITS 89,322.9 83,956.0
Representing:
Contributors’ account 9 71,659.8 68,375.0
Reserve fund 10 14,082.4 12,167.0
Provision for guaranteed dividend 11 3,580.7 3,414.0
89,322.9 83,956.0
The notes on pages 29 to 47 form part of these financial statements.
LEUNG Yin-fun, Fanny LAM Yat-fung, James
Treasurer Chairman
Board of Control Subsidized Schools Provident Fund
10 January 2019
SUBSIDIZED SCHOOLS PROVIDENT FUND
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in millions of Hong Kong dollars)
2018 2017 Note
INCOME
Interest income 12 786.9 684.2
Dividend income 13 1,129.7 1,022.6
Other income 14 1.5 1.9
1,918.1 1,708.7
EXPENDITURE
Supervision fee 15 (20.6) (20.0)
Fees for investment managers (131.9) (117.5)
Fees for custodians (15.0) (14.2)
Investment transaction costs (24.8) (13.8)
Other operating expenses (1.0) (1.7)
(193.3) (167.2)
OPERATING SURPLUS FOR THE YEAR 1,724.8 1,541.5
PROPOSED APPROPRIATION FROM 18 1,855.9 1,872.5
RESERVE FUND
PROVISION FOR GUARANTEED DIVIDEND 11 (3,580.7) (3,414.0)
BALANCE AT THE END OF THE YEAR - -
The notes on pages 29 to 47 form part of these financial statements.
.
- 26 -
SUBSIDIZED SCHOOLS PROVIDENT FUND
RESERVE FUND FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in millions of Hong Kong dollars)
2018 2017 Note
Unclaimed contributors’ account balance 16 - 0.1
Donations and dividends transferred from 17 24.0 21.2
contributors’ account
Net realised and revaluation gains/(losses) on:
- securities 3,644.3 7,879.1
- trading financial instruments 80.5 (132.8)
- cash and deposits with banks and other 22.2 33.8
financial institutions
3,747.0 7,780.1
Proposed appropriation to income and 18 (1,855.9) (1,872.5)
expenditure account
Dividends over/(under)-provided in previous year 0.3 (0.9)
1,915.4 5,928.0
Balance brought forward from previous year 12,167.0 6,239.0
BALANCE CARRIED FORWARD 14,082.4 12,167.0
The notes on pages 29 to 47 form part of these financial statements.
SUBSIDIZED SCHOOLS PROVIDENT FUND
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in millions of Hong Kong dollars)
2018 2017
Note
OPERATING SURPLUS FOR THE YEAR 1,724.8 1,541.5
Net realised and revaluation gains 3,747.0 7,780.1
Contributions from contributors 9 1,261.4 1,150.9
Donations from the Government and 9 2,975.9 2,755.4
Direct Subsidy Scheme schools
Net transfers from/(to) Grant Schools 9 8.7 (4.3)
Provident Fund
Withdrawals by ex-contributors 9 (4,350.9) (3,411.5)
Unclaimed contributors’ account balance 16 - 0.1
CHANGES IN NET ASSETS AVAILABLE 5,366.9 9,812.2 FOR BENEFITS
NET ASSETS AVAILABLE FOR BENEFITS 83,956.0 74,143.8 AT THE BEGINNING OF THE YEAR
NET ASSETS AVAILABLE FOR BENEFITS 89,322.9 83,956.0
AT THE END OF THE YEAR
The notes on pages 29 to 47 form part of these financial statements.
- 28 -
SUBSIDIZED SCHOOLS PROVIDENT FUND
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2018
(Expressed in millions of Hong Kong dollars)
2018 2017 Note
Cash flows from operating activities
Operating surplus for the year 1,724.8 1,541.5
Interest income 12 (786.9) (684.2)
Dividend income 13 (1,129.7) (1,022.6)
Net realised and revaluation gains 3,747.0 7,780.1
Increase in investments in securities (3,253.0) (8,953.0) Increase in investments in fixed deposits (2,293.6) (2,335.9)
with original maturities beyond three months
Change in trading financial instruments (47.7) 52.7
Increase in receivables and other assets (96.0) (92.7)
Increase/(Decrease) in payables and other liabilities 34.7 (41.9) Elimination of foreign exchange differences in 1.2 (1.6)
revaluation of cash and cash equivalents
Interest received 706.2 663.6
Dividends received 1,141.2 985.5
Net cash used in operating activities (251.8) (2,108.5)
Cash flows from financing activities
Contributions from contributors 1,261.4 1,150.9
Donations from the Government and Direct Subsidy 2,975.9 2,755.4 Scheme schools
Net transfers from/(to) Grant Schools Provident Fund 8.7 (4.3)
Withdrawals by ex-contributors (4,332.5) (3,407.8)
Net cash (used in)/from financing activities (86.5) 494.2
Net decrease in cash and cash equivalents (338.3) (1,614.3) Cash and cash equivalents at the beginning of the year 905.9 2,518.6 Effects of exchange rate changes on cash and cash (1.2) 1.6
equivalents
Cash and cash equivalents at the end of the year 19 566.4 905.9 The notes on pages 29 to 47 form part of these financial statements.
SUBSIDIZED SCHOOLS PROVIDENT FUND
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.)
1. LEGISLATION
The Subsidized Schools Provident Fund (the Fund) is a retirement scheme governed by the Subsidized Schools Provident Fund Rules (Fund Rules) made under section 85 of the Education Ordinance (Cap. 279).
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Financial reporting framework
The Fund has adopted a financial reporting framework incorporating the requirements of the Fund Rules and applicable requirements of Hong Kong Financial Reporting Standards (HKFRSs), which is a collective term that includes all applicable individual HKFRSs, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). A summary of the significant accounting policies adopted by the Fund is set out below.
(b) Basis of preparation of the financial statements
The measurement basis used in the preparation of the financial statements is historical cost except that investments in securities at fair value and trading financial instruments are stated at their fair value as explained in the accounting policies set out below (see note 2(c)).
The preparation of financial statements in conformity with the financial reporting framework (note 2(a)) requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenditure. The estimates and associated assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
There are no critical accounting judgements involved in the application of the Fund’s accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.
- 30 - (c) Financial assets and financial liabilities
(i) Initial recognition
The Fund classifies its financial assets and financial liabilities into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred. The categories are: trading financial instruments, securities at fair value, loans and receivables, and other financial liabilities.
Financial assets and financial liabilities are measured initially at fair value, which normally equals to the transaction price, plus transaction costs for loans and receivables and other financial liabilities that are directly attributable to the acquisition of the financial asset or the issue of the financial liability.
Transaction costs on trading financial instruments and securities at fair value are expensed immediately.
The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instruments. Regular way purchases and sales of financial assets are accounted for at trade date.
(ii) Basis of recognition of gains or losses
The Fund has adopted the requirements of Fund Rule 11 to recognise revaluation gains or losses arising from changes in fair value and realised gains or losses on derecognition of financial instruments in the reserve fund (see note 2(c)(iii) and (v)). This is different from the accounting treatment required under HKAS 39 Financial instruments: Recognition and measurement where such gains or losses are recognised in the income and expenditure account.
(iii) Categorisation
Trading financial instruments
These comprise forward currency contracts used by the Fund to manage its risks associated with foreign currency fluctuations. Such derivative financial instruments do not qualify for hedge accounting and are categorised as “trading”
under HKAS 39.
Trading financial instruments are carried at fair value, and presented as assets when the fair value is positive and as liabilities when the fair value is negative.
In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.
Securities at fair value
Securities at fair value consist of equity and debt securities managed by the Fund’s external investment managers (note 20(a)). These investments are designated upon initial recognition at fair value and carried at fair value under
HKAS 39. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised in the reserve fund as revaluation gains or losses in the period in which they arise.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This category includes cash at banks, deposits with banks and other financial institutions, and receivables and other assets.
Loans and receivables are carried at amortised cost using the effective interest method less impairment losses, if any (note 2(c)(vii)).
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees received or paid between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Other financial liabilities
These are financial liabilities other than trading financial instruments. They are carried at amortised cost using the effective interest method.
(iv) Fair value measurement principles
The Fund measures its investments in securities and trading financial instruments at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, in the most advantageous market for the asset or liability; and the Fund has access to these markets at the measurement date.
The fair value of an asset or a liability is measured with those assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.
The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable
- 32 -
inputs. The Fund measures fair values using the following fair value hierarchy that reflects the significance of inputs used in making the measurements:
Level 1 – fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – fair values are determined with inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 – fair values of financial instruments are determined with inputs that
are not based on observable market data (unobservable inputs).
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Fund determines whether transfers between levels in the hierarchy should be reflected in the financial statements by re-assessing categorisation (based on the level of input that is most significant and relevant to the fair value measurement as a whole) at the balance sheet date.
(v) Derecognition
A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.
The Fund uses the weighted average method to determine realised gains and losses to be recognised in the reserve fund on derecognition in accordance with Fund Rules 11(1)(a)(i) and 11(1)(b)(i).
A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or when it expires.
(vi) Offsetting
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously.
(vii) Impairment of financial assets
The carrying amounts of loans and receivables are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, an impairment loss is recognised in the reserve fund as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If in a subsequent period the amount of such impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the reserve fund.
(d) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents include cash at banks, deposits with banks and other financial institutions and short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity when placed or acquired.
(e) Contributions and donations
Contributions are received from contributors and donations are received from the Government and Direct Subsidy Scheme (DSS) schools. Contributions and donations are recognised on an accrual basis.
(f) Revenue recognition
(i) Interest income
Interest income is recognised in the income and expenditure account on an accrual basis, using the effective interest method.
(ii) Dividend income
Dividend income from equity securities is recognised in the income and expenditure account when the share price is quoted ex-dividend.
(iii) Other income
Other income is recognised in the income and expenditure account on an accrual basis.
- 34 - (g) Foreign currency translation
Foreign currency transactions during the year are translated into Hong Kong dollars using the spot exchange rates at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the closing exchange rates at the balance sheet date. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), all foreign currency translation differences are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.
3. CHANGES IN ACCOUNTING POLICIES
The HKICPA has issued a number of new and revised HKFRSs which are effective for the current accounting period. There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of these developments.
The Fund has not applied any new standard that is not yet effective for the current accounting period (note 22).
4. DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS
2018 2017 Fixed deposits denominated in:
- Hong Kong dollar 7,776.5 7,108.3
- US dollar 4,350.7 3,105.1
Call deposits and balances with custodians denominated in currencies other than Hong Kong dollar:
- US dollar 290.5 179.8
- other currencies 79.0 58.7
12,496.7 10,451.9
5. SECURITIES
(a) Details
2018 2017
Securities at fair value
Equity securities listed in Hong Kong 17,653.8 17,854.1 Equity securities listed outside Hong Kong 33,967.4 30,319.3 51,621.2 48,173.4 Debt securities denominated in:
-Hong Kong dollar 8,329.0 8,202.2
-US dollar 5,881.0 6,140.8
-other currencies 10,423.1 10,484.9
24,633.1 24,827.9 76,254.3 73,001.3
(b) Securities holdings exceeding 5% of the asset class as at 31 August
2018 2017
Fair % of Fair % of Issuer Class value class value class
United States Treasury Debt securities 2,775.5 11.27% 1,951.8 7.86%
Government of Japan Debt securities 1,353.6 5.50% 1,696.6 6.83%
Government of the Hong Kong Special Administrative Region
Debt securities 915.0 3.71% 1,616.3 6.51%
- 36 - 6. TRADING FINANCIAL INSTRUMENTS
2018 2017
Assets Liabilities Assets Liabilities Forward currency
contracts, at fair value
45.3 21.4 32.1 55.9
All these forward currency contracts would mature within one year and had a total notional amount of HK$30,661.4 million as at 31 August 2018 (2017: HK$30,152.5 million). The notional amounts of these contracts indicate the volume of outstanding transactions and do not represent the amounts at risk.
7. RECEIVABLES AND OTHER ASSETS
2018 2017
Interest and dividends receivable 397.7 328.5
Proceeds receivable from investments sold 340.3 244.3 738.0 572.8
8. PAYABLES AND OTHER LIABILITIES
2018 2017
Unsettled purchases of investments 305.3 271.7
Fees for investment managers 33.5 31.7
Amount due to the Government of the Hong Kong aa Special Administrative Region
20.6 20.0
Amount due to ex-contributors 24.3 5.9
Fees for custodians 3.1 3.1
Other creditors and accruals 0.1 1.4
386.9 333.8
All these liabilities are payable within one year.
9. CONTRIBUTORS’ ACCOUNT
2018
Contributions
Donations from the Government and DSS
schools Dividends Total Additions for the year 1,261.4 2,975.9 3,413.7 7,651.0 Net transfers from Grant Schools Provident
Fund 0.7 2.6 5.4 8.7
Withdrawals by ex-contributors (605.6) (1,385.2) (2,360.1) (4,350.9) Transfers to reserve fund in accordance with
Fund Rule 11(1)(a)(ii) - (20.2) (3.8) (24.0)
Net additions for the year 656.5 1,573.1 1,055.2 3,284.8 Balance brought forward from previous year 13,253.8 26,902.5 28,218.7 68,375.0 Balance carried forward 13,910.3 28,475.6 29,273.9 71,659.8
2017
Contributions
Donations from the Government and DSS
schools Dividends Total
Additions for the year 1,150.9 2,755.4 3,230.9 7,137.2 Net transfers to Grant Schools Provident
Fund (0.9) (1.7) (1.7) (4.3)
Withdrawals by ex-contributors (481.3) (1,079.4) (1,850.8) (3,411.5) Transfers to reserve fund in accordance with
Fund Rule 11(1)(a)(ii) - (18.2) (3.0) (21.2)
Net additions for the year 668.7 1,656.1 1,375.4 3,700.2 Balance brought forward from previous year 12,585.1 25,246.4 26,843.3 64,674.8 Balance carried forward 13,253.8 26,902.5 28,218.7 68,375.0
There were no donations from DSS schools for the year (2017: Nil).
- 38 -
An analysis of the withdrawals by ex-contributors is shown below:
2018 2017
Retirement 2,440.7 1,909.2
Resignation 1,788.5 1,388.9
Death and ill health 47.9 38.6
Others (such as contract termination and schools ceasing to be subsidized schools or DSS schools)
73.8 74.8
4,350.9 3,411.5
Vested contributors’ benefits as at 31 August 2018 amounted to HK$71,153.7 million (2017:
HK$67,920.5 million). This amount represents the sum which would be payable to contributors had all contributors left the Fund at that date.
10. RESERVE FUND
The reserve fund is maintained in accordance with Fund Rule 11.
11. PROVISION FOR GUARANTEED DIVIDEND
The amount represents the provision under Fund Rule 12 for the guaranteed dividend of 5% of the balance of the contributors’ account which was open for the entire financial year ended 31 August 2018 and Fund Rule 14 for payment of pro rata dividends in respect of contributors’
account which was not open for the entire financial year.
Fund Rule 12 provides that, where in any year the guaranteed dividend of 5% cannot be met by the Fund, the Financial Secretary may direct that an interest-free Government loan be paid to the Fund out of the general revenue to cover the balance of the guaranteed dividend which cannot be met. No such Government loan had been paid to the Fund for the year ended 31 August 2018 (2017: Nil) as the shortfall between the guaranteed dividend and the operating surplus was met by a transfer from the reserve fund (see note 18).
12. INTEREST INCOME
2018 2017
Interest income from:
Debt securities at fair value 601.1 573.4
Deposits denominated in:
- Hong Kong dollar 91.4 63.9
- US dollar 94.3 45.4
- other currencies 0.1 1.5
185.8 110.8
786.9 684.2
13. DIVIDEND INCOME
2018 2017
Dividend income from equity securities listed:
- in Hong Kong 562.9 524.5
- outside Hong Kong 566.8 498.1
1,129.7 1,022.6
14. OTHER INCOME
2018 2017
Tax refund - 1.8
Compensations 1.5 0.1
1.5 1.9
- 40 - 15. SUPERVISION FEE
This represents the provision for the supervision fee for the year ended 31 August 2018 payable to the Government of the Hong Kong Special Administrative Region under Fund Rule 5(5) in respect of the costs incurred in administering the Fund.
16. UNCLAIMED CONTRIBUTORS’ ACCOUNT BALANCE
This represents unclaimed contributors’ account balances which are transferred to the reserve fund in accordance with Fund Rule 14(2).
17. DONATIONS AND DIVIDENDS TRANSFERRED FROM CONTRIBUTORS’ ACCOUNT
Under Fund Rule 13, whenever a contributor with less than 10 years continuous contributory service ceases to be employed as a teacher in a subsidized school or DSS school (as the case may be), his account shall be closed and the payment due to him shall include a percentage of all Government donations and DSS school donations (if any) and all dividends that have been declared on such donations. Donations and dividends not payable to him are transferred to the reserve fund in accordance with Fund Rule 11(1)(a)(ii).
18. PROPOSED APPROPRIATION FROM RESERVE FUND / TO INCOME AND EXPENDITURE ACCOUNT
In accordance with Fund Rule 11(3) and subject to the approval of the Board of Control, it is proposed to transfer a sum of HK$1,855.9 million (2017: HK$1,872.5 million) from the reserve fund to the income and expenditure account. The transfer is to cover the shortfall of the operating surplus in meeting the provision of the 5% guaranteed dividend of HK$3,580.7 million (2017: HK$3,414.0 million).
19. ANALYSIS OF CASH AND CASH EQUIVALENTS
2018 2017
Fixed deposits with original maturities within three months
- 379.8
Cash at banks and call deposits and balances with
custodians 566.4 526.1
TOTAL 566.4 905.9
Reconciliation with the balance sheet:
Amounts shown in the balance sheet
Cash at banks 196.9 287.6
Deposits with banks and other financial institutions
12,496.7 10,451.9
12,693.6 10,739.5 Less: Amounts with original maturities beyond
three months
(12,127.2) (9,833.6) Cash and cash equivalents in the statement of cash
flows
566.4 905.9
20. FINANCIAL RISK MANAGEMENT
(a) Investment management and control
The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under Fund Rule 5(4). The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary. All sums considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.
The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.
Each year the Board approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.
- 42 -
The investment management and control of the Fund are set out in a documented risk management and investment strategy and reviewed on a regular basis by the Board.
(b) Market risk
Market risk is the risk that changes in market variables such as equity prices, interest rates and currency exchange rates may affect the fair value or cash flows of a financial instrument.
(i) Equity price risk
Equity price risk is the risk of loss arising from changes in equity prices. The Fund’s investments in equity securities are subject to the equity price risk inherent in all equity securities i.e. the value of holdings may fall as well as rise.
As at 31 August 2018, the equity securities were included in securities as shown in note 5. The risk is primarily addressed through diversification of investment portfolio in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.
It was estimated that, as at 31 August 2018, a 10% increase/decrease in the market bid prices of the equity securities, with all other variables held constant, would increase/decrease the revaluation gains recognised in the reserve fund for the year by HK$5,162.1 million (2017: increase/decrease the revaluation gains by HK$4,817.3 million).
(ii) Interest rate risk
Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.
Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since a substantial portion of the Fund’s debt securities and all of its deposits with banks and other financial institutions bear interest at fixed rates, their fair values will fall when market interest rates increase. Investments in debt securities are made in accordance with a documented risk management and investment strategy, and the Fund monitors the fair value interest rate risk on a continuous basis.