Guideline 43. Sustainability considerations

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As a part of sound social security scheme governance, the social security institution continually monitors the sustainability of a social security scheme.

The notion of sustainability may encompass not only financial but social and political sustainability. Public trust and confidence in the design, implementation and operation of the scheme are a major factor contributing to the sustainability of the scheme.

This guideline provides guidance about the sustainability considerations that should be into account to ensure the good governance of a social security scheme. It should be read in conjunction with Guideline 1 of these Guidelines and Section B.4 of the ISSA Guidelines on Good Governance.

Guideline code

ACT_05000

Mechanism

The social security institution should follow the legislative requirements regarding the frequency of the actuarial review.
The law governing social security retirement schemes usually requires that actuarial reviews of a social security system should be undertaken periodically, for example, at least every three or five years.
In the absence of legislative requirements, the social security institution should establish and follow an internal policy on the frequency of actuarial reviews. In addition, where data and resources allow it and depending on the nature of scheme benefits and the financial size of liabilities, valuations should be carried out more frequently if it is felt this adds value to stakeholders and the management of the social security scheme.
A social security institution which manages schemes for benefits other than pensions, including health care, employment injury and unemployment insurance schemes, should carry out actuarial reviews on an annual basis.
Automatic adjustment mechanisms should provide a safety net to maintain the sustainability of the social security system without excluding stakeholders from decisions (see also Guideline 19). In this regard:

Such mechanisms may depend on demographic ratios of the scheme, economic parameters and/or combinations of these;
The social security institution should perform a detailed analysis of the impacts of the application of such mechanisms on affordability, adequacy and sustainability of the social security scheme;
The actuary should be involved in the design, assessment and application of automatic adjustment mechanisms.

Even if contributors to a social security scheme generally accept that the first generations of pensioners of the scheme receive benefits that exceed the value of their contributions, it is important for the social security institution and other stakeholders to set the level of benefits and contributions in such a way as to maintain an acceptable relationship between benefits and contributions for future generations. Intergenerational equity may influence the choice of a financing strategy and the level of reserves. The actuary should develop appropriate measures of intergenerational equity. For example, these measures may include the following or a combination of them:

Internal rate of return for different cohorts;
Ratio of present value of benefits to present value of contributions over a contributor’s lifetime;
Ratio of present value of total contributions to annual value of the pension.

The measures used by the social security institution to assess the sustainability of the social security scheme should be consistent with the programme objectives and financing approach. For example, for PAYG and partially funded schemes, the social security institution should assess sustainability by taking into account present and future contributions of workers and employers, state subsidies, investment income, and benefits of present and future contributors (i.e. an open group valuation).

Parent

G. Policy and Strategy Issues

Structure

Principles

Social security institutions should undertake periodic actuarial reviews of the schemes for which they are responsible. The major purpose of actuarial reviews is to establish the contribution rates in future years to meet the cost of the benefits provided under the scheme, to provide financial projections of the impact of changes in benefits and contributions as needed, and to assess risks to which schemes are exposed. Guideline 1 provides additional information.
The social security institution should develop financial indicators to measure a sufficient level of funding that ensures the sustainability of the scheme. These indicators as well as the rationale for the choice should be documented.
The social security institution may consider the introduction of automatic adjustment mechanisms aimed at maintaining the sustainability of the programme. Automatic adjustment of certain parameters (e.g. benefit indexation, benefit reduction, contribution rates) could be established, depending on the demographic and financial status of the scheme and on the basis of discussions and decisions of stakeholders.
The social security institution with the assistance of the actuary should periodically assess the level of intergenerational transfer present in the social security scheme. The extent of intergenerational transfer depends on the demographic and economic context as well as the financing approach adopted by the scheme. For example, under a pure PAYG system, current contributions are fully used to pay for benefits of previous generations, which implies intergenerational transfers. PAYG approaches with smoothed contribution rates over a certain time period imply a certain amount of pre-funding of benefits, which reduce such transfers. Intergenerational transfer may be intentional and (implicitly) accepted by the scheme’s participants. For example, contributors to a social security pension scheme may generally accept that the first generation of pensioners of the scheme will receive relatively larger benefits in relation to their own contributions because the initial contributions were lower due to lower general standard of living compared with future generations. However, an excessive level of intergenerational transfer may lead to social and political unsustainability of the scheme. The actuary should assess the level and nature of such transfers to contribute towards appropriate decision-making.

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