The social security institution involves the actuary in the processes which determine an appropriate value to place on the scheme’s assets.
Placing an appropriate value on assets is important and may be required for a number of different reasons, including the need to assess the financial situation of a social security system and to determine benefit amounts.
In certain programmes, the value of benefits of current and/or future beneficiaries is directly or indirectly related to the value placed on assets.
The determination of assets value may also trigger the application of any automatic adjustment mechanism (see Guideline 19 on automatic adjustment mechanisms).
This guideline should be read in conjunction with Guideline 6 which covers issues related to the valuing of assets for valuation purposes.
Guideline code
ACT_02600
Mechanism
Mechanism
- The valuation of the assets requires collecting relevant information at the assessment or valuation date. This will require close coordination amongst the different stakeholders involved in the investment process (e.g. custodians, investment managers) both within and outside the organization. The data required will include information on assets held, income generated in the measurement period, price or value of assets at measurement date and any tax information.
- Mark to market (MTM, or fair value) accounting should be undertaken where possible to value assets. While market values are likely to be used for the value placed on the majority of assets, alternative approaches where there is no market or a market that is very illiquid will be required (e.g., infrastructure and private equity). Where the asset value is determined through a discounted cash flow approach, the assumptions, methodology and calculations should be verified. Where neither approach is possible or deemed not appropriate, alternative approaches should be considered. In such a situation it is important that the assumptions and methodology underlying the calculations are set down and that a peer review process exists to verify the value placed on assets. Future valuations of assets should assess retrospectively the accuracy of alternative approaches used, if possible. External expertise may be required depending on the internal resources available within the social security institution.
- The actuary may be required to verify whether the values placed on the assets by another party are appropriate. It is important that the actuary liaises with other stakeholders to ensure this review and verification are properly carried out.
- In programmes where part or all of provision is provided by provident fund or defined contribution elements, actuarial input may be required to recommend rates of return to credit or assess the implications of crediting certain rates of return to individual accounts or entitlements. Guidelines 15 and 17 cover issues relating to the determination of returns credited to provident fund and defined contribution accounts respectively.
- The role of the actuary involved in the investment process will be to provide information regarding returns achieved on assets held (capital appreciation, income and dividends) as well as regarding liquidity issues and volatility of returns. Coordination and discussion regarding the credited amount to individual accounts is important, given the significant implications of such decisions on scheme adequacy and sustainability.
- In the case of provident funds and defined contribution schemes where returns credited are set down in regulations or legislation or are smoothed, there will be a difference between amounts credited and the return on underlying assets. In this situation it is important that the implications of this difference are analysed appropriately.
- The setting up of investment reserves requires actuarial analysis (for example, what proportion of excess return above a stated minimum needs to be reserved and what proportion can be credited to accounts). Appropriate methodology and assumptions should be used to input into this decision-making process as well as determining whether current reserves held are sufficient.
Parent
Structure
Principles
- The responsibilities regarding those involved in the process of the valuation of assets should be defined and documented. A peer review and reporting process should also be put in place, monitored and reviewed regularly.
- The methodology and assumptions chosen in the valuation of assets should be discussed, justified, documented, and disclosed. The method may vary according to the aim of the valuation (e.g. assessing the sustainability of the programme, application of automatic adjustment mechanism, asset liability modelling, financial reporting, etc.). Valuations should be carried out in accordance with international and national standards and any relevant legislation.
- Actuarial input into the value placed on assets will also be required in defined contribution and provident fund schemes in respect of what credit to declare on individual accounts. In order to undertake these tasks effectively, it is important that appropriate valuation techniques are used and that an appreciation of risk and reserving requirements is incorporated into the analysis.
Title HTML
Guideline 23. Input into the valuation of assets and benefit calculations
Type
Guideline_1
Weight
29