At the inception of a scheme the social security institution carries out an actuarial valuation in order to address the level of protection that can be provided with a given level of financial resources and what financial resources are necessary to provide a given level of protection. The social security institution considers the factors affecting the analysis that are identified through the actuarial assessment of a new social security system.
Key design parameters of the scheme, such as the minimum and maximum earnings subject to contribution, the type and level of benefits provided including the benefit formulae, eligibility requirements, retirement ages, the indexation of benefits and the schedule of contribution rates, determine the average benefit level as well as respective benefit levels for different income groups and generations and, at the same time, the cost of the scheme.
The difficulty of evaluating the costs of a new scheme relates to the high level of uncertainty associated with the development of assumptions that cannot be based on the scheme’s specific experience and reliable data. At the same time, the success of the new scheme and its good governance rely on decisions having a solid factual basis and on the conclusions and recommendations of actuarial valuations. This guideline should be read in conjunction with the guidelines in Part A.
- Data collection and analysis procedures should follow Guideline 2.
- The assumptions of the actuarial valuation of a new scheme could be set by relying on past general economic and demographic statistics and/or using experiences of social security schemes in other countries with similar characteristics. The judgement of the actuary is essential in respect of the relevance of data and assumptions to be used for the valuation.
- In the valuation the actuary should demonstrate that demographic changes such as ageing of the scheme could result in long-term substantial financial and/or design implications.
- The actuarial valuation of a new social security scheme should provide a projection of the scheme’s expenditure based on different scheme parameter options and financing methods proposed by stakeholders, and provide recommendations on the schedule of contribution rate changes under each option.
- The social security institution should provide necessary quantitative information to stakeholders to enable them to make informed decisions, paying due attention to the right balance between benefit adequacy and affordability.
- As in the actuarial valuation of an existing social security scheme, relevant indicators should be explained and provided to decision-makers to facilitate decision-making. These indicators may include the following:
- Legal and effective coverage rate;
- Demographic dependency ratio;
- Financial ratio (replacement rate);
- PAYG cost rate;
- General average premium;
- Reserve ratio;
- Year when reserve fund is exhausted;
- Current and projected actuarial balance sheet and funding ratio on a basis that is consistent with the programme’s financing (e.g. on an open group basis for PAYG and partially funded programmes);
- Income, expenditure and reserves as a percentage of GDP;
- Utilization rate for health schemes;
- Average claim per capita for health schemes.
- The horizon for the actuarial projection of a new scheme should be consistent with the scheme’s design and objectives. For example, for a pension scheme, this horizon should be 75 years or more so that most of the current contributors will finish receiving benefits within the projection period. This issue is closely related to determining the financing mechanisms or, alternatively, the methodology for setting the level of reserves to meet the scheme’s future benefit obligations. In making decisions, the actuary should consider Guideline 4.
- The actuary should use best-estimate assumptions in order to assess the long-term financial implications of different design options, taking into account views of stakeholders. In determining assumptions, the actuary and the social security institution should take into account Guideline 3.
- Due to the high degree of uncertainty of the actuarial valuation of a new scheme, it is essential that the actuary should carry out extensive sensitivity analysis of the scheme based on a wide range of different assumptions. The actuary and the social security institution should refer to Guideline 8.
- The social security institution should examine the financial viability of the scheme under various economic and demographic scenarios and provide information to the stakeholders of the risk that the scheme may face in a different socio-economic context in the future. In this process, the actuary and social security institution should refer to Guideline 33.
- The social security institution should put in place mechanisms for data collection and analysis as an important part of the implementation of a new social security system. Reference should be made to the ISSA Guidelines on Information and Communication Technology.
- The social security institution should communicate to stakeholders that there could be long-term substantial cost increases due to the ageing of the scheme. This process may result in future changes to contribution rates and/or benefits.
- The provision of quantitative information to stakeholders is essential for making informed decisions.
- Various stakeholders, namely tripartite partners comprised of government, workers and employers, may express their views on the benefit design and the financing structure and resources, especially the contribution rates, of the new scheme. The social security institution should ensure that these views are actuarially assessed and their financial implications communicated to stakeholders.
- The valuation of a new social security scheme should be based on the best-estimate assumptions of the actuary. In the case where assumptions are prescribed by legislation or by other authorities, the set of results based on the actuary’s best-estimate assumptions should be presented to stakeholders in addition to the results based on prescribed assumptions.
- The initial valuation of a new scheme is crucial for ensuring future adequacy of benefits and sustainability of the scheme. Hence, the social security institution should ensure that an actuary performing the initial valuation possesses the required qualifications as described in Guideline 49.
- The social security institution should recognize that there is a high degree of uncertainty in the actuarial valuation of a new scheme and should communicate this uncertainty to stakeholders.