Guideline 3. Assumptions

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Assumptions used for a valuation of a social security scheme are sufficient to value the scheme in accordance with its financing objectives and consistent with the overall socio-economic environment of the country. The development of assumptions combines the analysis of historical trends with a forward-looking approach. Social security institutions assign major responsibilities to an actuary in the assumption-setting process. An actuary provides an opinion on the extent to which the assumptions used for actuarial work are reasonable and appropriate both individually and on an aggregate basis.

By their nature, social security programmes cover wide segments of the population. Thus, economywide and nation-wide economic and demographic assumptions are often needed for the purpose of performing social security valuations. The development of the assumptions for social security valuations is often a joint exercise that involves inputs from many parties: experts from social security institutions, various governmental organizations and independent bodies of experts. Moreover, some of the assumptions may be prescribed by legislation or provided by various governmental organizations.

Guideline code

ACT_00400

Mechanism

The social security institution should provide the actuary with proper access to information and knowledge needed for developing assumptions. In particular, the social security institution should:

Facilitate access to national and international data on demographic and economic trends as well as short-term economic and financial forecasts from recognized national and international experts and organizations;
Ensure access to data on the social security scheme experience;
Facilitate cooperation of the actuary with national and international bodies of experts in areas relevant to developing assumptions.

In cases where the assumptions used for the analysis do not represent the actuary’s best estimates, the social security institution and other stakeholders should examine alternative results based on the actuary’s best-estimate assumptions and document these results.
Additional sets of assumptions demonstrating the uncertainty of results (as per Guideline 8) need to be developed.
In the case of legislated assumptions, the social security institution should request that an actuary perform assumption experience studies (e.g. mortality studies) in order to assess the appropriateness of such assumptions. These experience studies should be conducted on a regular basis. The social security institution should ensure that data for such studies are statistically credible.
For newly established social security schemes and/or other situations where there is a lack of the information needed to develop assumptions, the social security institution should explore ways to enter into agreements with other national and/or international social security schemes in order to obtain information that could meet the actuary’s requirements.
The actuary responsible for the analysis should comply with national and/or international actuarial standards of practice and/or other relevant guidance including IAA ISAP 2 that describe the assumption-setting process.

Parent

A. Valuation of Social Security Schemes

Structure

Principles

The social security institution should define the responsibilities for setting the assumptions. The role and responsibilities of an actuary in the process of setting the assumptions should be clearly defined.
The social security institution should guarantee the independence of the actuary and ensure that no parties exercise undue influence. In particular, if the assumptions used do not represent the actuary’s best estimates, alternative results based on best-estimate assumptions should be presented. Further, the justification for such a deviation from best estimate should be provided to the actuary if the impact is material.
The assumptions needed for the valuation of a social security system should be identified, justified and documented. These requirements should take into account the following:

Provisions of the social security scheme;
Factors affecting demographic and economic characteristics of the population covered by the social security scheme;
Funding policy of the social security scheme and investment policy, if applicable;
Any policies and/or agreements that may affect the financing of the scheme (e.g. agreements with health services providers, collective agreements, etc.);
Methodology used to value the social security scheme, including the definitions of actuarial measures to be assessed;
Valuation model requirements.

An actuary should assess the materiality of the various assumptions, that is, how significant are the magnitude and nature of the change in the valuation results when there are changes in the values of the different assumptions. This analysis should be used to determine the resources to devote in developing appropriate assumptions and alternative scenarios and, for example, indicating where broader estimations can be used. The resources (time, personnel and financial) spent to develop individual assumptions should be balanced against the likely impact on the accuracy and reliability of results.
The social security institution should ensure the access to relevant knowledge and sources of information necessary for the development of assumptions.
The process for developing assumptions as well as the rationale for the final assumptions should be documented. Documentation should include:

Socio-economic context of the assumption;
Analysis of past trends and experiences;
Methods used to develop assumptions;
Basis for the assumptions, e.g. historical experience, judgement, legislative requirements, use of external expertise, etc.;
Final assumptions;
Comparison of assumptions to national economic plans and forecasts and demographic projections if they exist;
Sources of information used for the assumption-setting process.

In the case of the assumptions prescribed by legislation (e.g. mortality rates, discount rates to be used for calculating actuarial reduction factors), the social security institution should ensure that these assumptions remain relevant in the context of the country’s demographic and economic environment. If this is not the case, the social security institution should initiate the process of reviewing and updating legislated assumptions.

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