The social security institution or other governing institution plays a role in the monitoring and surveillance of defined contribution schemes, as appropriate.
A funded defined contribution element is present in many retirement systems. However, social security institutions generally do not play a direct role in the management of this element of benefit provision. While issues relating to the design of systems are set out in Part G, this guideline refers to the supervision and policy aspects, including the setting of bases and methodology for determining returns that funds should credit to member accounts, review of providers and assessing adequacy of future benefits. This guideline should be read in conjunction with Guidelines 18 and 44.
Guideline code
ACT_01900
Mechanism
Mechanism
- The social security institution or overseeing institution should require the scheme’s providers to administer individual funded accounts in such a way that the account values are available on a daily basis and the calculations of returns (and associated expenses) are transparent and verifiable.
- The actuary may assist in developing the approaches that funds should use to determine returns. This includes how asset returns are to be determined and the calculation of charges reflecting expenses and other allowable charges of the fund.
- In respect of investment returns, the actuary may set down the basis under which underlying assets are to be valued, including approaches to take where there is no market value available for certain asset classes.
- In respect of expenses, the actuary may set down maximum charges (e.g. as a percentage of contribution amount and/or as a percentage of account value) that can be used. These considerations should take into account the overall policy objectives and appropriate assumptions regarding the future growth of accounts (e.g. investment return assumptions, contribution rates and salary increases) and the impacts of expenses on account values.
- In respect of investment limits, the actuary may input into the consideration of allowable investments, maximum percentage of total assets in one asset class and diversification criteria. The actuary should work with appropriate stakeholders (e.g. investment experts, policy-makers) to determine such investment limits, which should be reviewed on a regular basis.
- In respect of setting conversion rates either prescribed or not, appropriate mortality, investment and other assumptions should be used. However, other policy objectives may also be taken into account (e.g. benefit adequacy, simplification of approaches, etc.) in the determination of rates. Where conversion rates are not based on best estimates, an assessment of the impact on benefit levels and financing needs to be undertaken.
- In respect of benefit adequacy, the actuary should use appropriate assumptions and methodology to assess projected values of individual accounts. In determining the rate of conversion of individual accounts to income, the actuary should follow Guideline 18. The actuary should perform sensitivity analyses that should include, but not be limited to, sensitivity of outcomes to changes in the major assumptions such as rate of return, salary increases and mortality.
Structure
Principles
- The role of the social security institution, if any, is likely to be of a supervisory or policy nature. Responsibilities may include the determination of minimum absolute or relative rates of return to credit, the setting of maximum expense charges for defined contribution pension plans and investment restrictions for such funds, as well as the assessment of future benefit levels arising from individual funded accounts. The assessment and monitoring of the defined contribution schemes’ providers is likely to fall under the remit of other bodies although the social security institution may input into this process.
- Unless there are minimum rate of return guarantees, for any given period the rate of return credited to individual funded accounts should be equal to the actual return achieved on underlying assets net of all expenses. Contrary to the practice of provident funds, and in the absence of legal requirements, there is generally no inherent smoothing in the operation of individual funded accounts.
- The social security institution should assess on a regular basis the current and future projected level of benefits generated by individual funded accounts. This is likely to require consideration of all elements of the country’s retirement income system.
- Prescribed conversion rates of individual account balances to income may also be set by the governing institution, which will require actuarial input. While these rates need to be determined using appropriate assumptions, other policy objectives are likely to be taken into account in the consideration of the rates to use.
- The actuary should provide input where appropriate to the social security institution and other stakeholders, such as policy-makers and fund providers, in the administration requirements related to the management of individual funded accounts.
Title HTML
Guideline 17. Supervision of individual funded accounts
Type
Guideline_1
Weight
22