While effectively involved with governmental bodies in the design and implementation of a new social security scheme, the social security institution advises all parties involved with respect to design features of the new scheme and its actuarial and policy implications. The social security institution seeks the input of actuaries in this process.
In designing a new social security scheme, the involvement of all stakeholders, namely, representatives from the government, employers and workers, is essential. Members of society should be able to participate in the processes that will have a direct impact on their lives. The benefit design should be developed in line with the needs and rights of those intended to receive the benefits. Opportunities for stakeholders to be involved in the design process will contribute to enhancing their trust and support for the scheme through a sense of ownership, as well as increasing the likelihood that benefits are closely aligned with society’s needs.
The social security institution overseeing the design of a new social security scheme plays a critical role in this process by providing policy and actuarial expertise to all stakeholders. Actuaries are essential in evaluating the impacts of proposed designs of a new social security scheme.
- The contribution rate of a new scheme should be set by paying due attention to the roles of existing schemes. The resulting overall benefits and total contribution rate (if all schemes are taken into account) should strive to achieve a balance between overall benefit adequacy, the affordability of total contributions and the sustainability of the resulting system.
- In principle, the social security institution should set the contribution rate in such a way as to ensure that the desired benefit level will be attained after a standard career. It should also take into account the variation in career patterns of the covered population and the benefit objectives of the system for those who do not enjoy a full working career.
- The social security institution should refer to the ILO Conventions and Recommendations in the design of a new social security system.
- The actuary should develop indicators that illustrate the evolving demographic environment of a new social security scheme. For example, the dependency ratio (the ratio of the number of beneficiaries to the number of contributors), and changes in it, gives a good indication of the ageing process.
- The actuary should assess the cost of a new social security scheme under different financing approaches, for example, PAYG , partial funding and full funding. Recommendations as to the most appropriate financing approach should take into account, but are not limited to, the following factors:
- The current and expected future demographic characteristics of the covered population;
- The current and expected future economic environment of a country;
- The degree of development of national financial markets and access to international financial markets;
- The skills and expertise available internally and externally to manage assets;
- Any goals set by stakeholders for the use of a new system income, e.g. socially responsible investments;
- The financing approaches used by other parts of the social security system as well as by private schemes, if applicable. Such analysis should be undertaken in order to minimize impacts of future negative developments on the overall affordability and adequacy of the system.
- Recommendations on the structure and design of a provident fund scheme should take into account the setting of appropriate minimum rates of return and the possibility of withdrawing part of the benefit before normal retirement date (including the modalities and potential impacts of such withdrawals), as well as financing and adequacy considerations.
- While participating in the design of a new social security scheme, the social security institution should advise stakeholders on adequacy, affordability and different financing approaches for the options under consideration.
- In respect of a new social security scheme, the social security institution should assess its adequacy and affordability by considering it as part of a country’s overall social security system. Since private and public schemes coexist in many countries, such analysis may need to include private schemes.
- The social security institution should work with stakeholders to define what “adequacy” and “affordability” mean in the context of a particular country. In doing so, it should bring to the attention of the stakeholders international standards with respect to adequacy.
- The design of a new social security scheme, especially pension and health-care schemes, must take into account the demographic characteristics of the covered population. In particular, the impact of ageing on the scheme through decreasing fertility and mortality rates and the consequent transition of active contributors into pensioners should be considered.
- Other important aspects which should be taken into account in designing a new scheme include the impacts on savings and the incentive structure, on labour markets, on government finances and fiscal sustainability, and fairness between generations and different categories within each generation.
- An appropriate financing and funding policy of a new scheme should be established by taking into account the current economic and demographic environment as well as likely future trends.
- The social security institution should include actuaries in the discussions with stakeholders.