Actuarial factors are determined in accordance with generally accepted actuarial principles. There is no unjustified or unfair discrimination in the calculation of factors.
This guideline refers to the calculation of factors used to determine benefit entitlements in defined benefit schemes. These factors include but are not limited to early and late retirement factors, conversion rates of lump sum to periodical payments and vice versa as well as the determination of total and partial disability benefits and other social security benefits.
Guideline code
ACT_01600
Mechanism
Mechanism
- Gender-neutral actuarial factors should be calculated by using a unisex mortality table, which is produced as an appropriate weighted average of male and female tables reflecting the gender distribution of the scheme’s participants.
- In order to be cost-neutral, actuarial factors should be calculated using the same assumptions as those used in the actuarial valuation.
- Future improvements in mortality rates are usually taken into account in the actuarial valuation. Using the same mortality improvement assumptions for the calculation of actuarial factors would imply using different dynamic factors for different cohorts and may be too complex to implement for the administration of the scheme. To simplify the administration, mortality rates used for the calculation of actuarial factors could be kept constant for a given number of years. The cost implications of such an approach should be assessed.
- In case actuarial factors are not cost-neutral to the scheme, the financial impact of using this approach compared to the use of cost-neutral factors should be communicated to the stakeholders in order for them to make an informed decision on assumptions to be used.
- While it is important to reflect appropriately the current economic and demographic environment in assumptions used, it is likely that the institution and/or policy-makers will seek to ensure stable factors over time. Therefore, factors used could differ from true cost-neutral rates at certain points and the actuary needs to assess the impact of these differences on the financing of the scheme.
- In certain funded systems, an amount paid out when a beneficiary leaves the system, reflecting the accrued rights in the system, needs to be determined. In some instances, an adjustment to take into account market conditions will be made. The actuary should advise which factors to apply in determining the benefit pay-out.
Structure
Principles
- The actuarial factors should be based on assumptions and methodology that follow applicable actuarial standards. There should be no unjustified discrimination in the calculation of factors.
- Actuarial factors should be based on the appropriate gender basis and not result in unjustified gender discrimination. When actuarial factors are not gender-neutral, the actuary should inform the social security institution of the impact of using sex-distinct actuarial factors on the benefits provided to male and female beneficiaries and more specifically the impact on benefit adequacy. When such factors are gender-neutral, the actuary should assess any material implications for the financing of the scheme and any adverse incentives that gender-neutral factors may create.
- Actuarial factors should be, in principle, cost-neutral. However, there may be instances where a policy decision is made by stakeholders to use actuarial factors that are not cost-neutral (for example, early/late retirement factors used to support certain employment policy objectives). In addition, legislation and/or actuarial standards may prescribe use of the assumptions for particular types of calculations (e.g. calculation of the lump-sum entitlements). In such cases, the actuary should assess the cost implications of the use of factors which are not cost-neutral.
Title HTML
Guideline 14. Determination of actuarial factors
Type
Guideline_1
Weight
19