The social security institution regularly assesses the level of protection offered by the scheme through the actuary's analysis of the replacement rate and other relevant adequacy measures. When assessing benefit adequacy of a pension scheme, the social security institution considers retirement income from other sources, such as any universal non-contributory pension, mandatory or voluntary occupational or individual pension plans, and/or legislated end-of-service payments.
Inflation, salary increases and the regularity of the adjustment of the scheme's parameters (such as a salary ceiling used for benefit calculations) affect adequacy of benefits. For instance, a salary ceiling used to determine benefits that is not periodically adjusted at least in line with average wage increases will gradually make benefits less significant for high or medium wage earners.
The ILO has several legal instruments, such as the Social Security (Minimum Standards) Convention, 1952 (No. 102) and Recommendation concerning National Floors of Social Protection, 2012 (No. 202), which provide guidance for ensuring benefit adequacy as well as the scope and extent of coverage for all nine branches of social security, namely medical care, sickness, unemployment, old age, employment injury, family, maternity, invalidity and survivors' benefits.
- The actuary should calculate actual scheme replacement ratios under different scenarios, and compare them with the theoretical replacement rate of the scheme's provisions.
- The actuary should analyse the average amount of benefits and the distribution of benefit amounts in relation to relevant indicators such as average insurable earnings, the national average wage, the minimum wage, the minimum subsistence level and the poverty line in order to analyse and assess the adequacy of benefit provisions. The average amount of benefits for different profiles of beneficiaries, for example by gender and by career profiles, should also be analysed as far as possible.
- It is particularly important that the actuary assesses the risks associated with any lump-sum payments (for example from defined contribution schemes), and the impact of the prevailing and future socio-economic environment on benefit adequacy. This can be undertaken by analysing the possible replacement level through the conversion of the lump-sum amount into periodical payments based on different economic and demographic assumptions (such as inflation, wage increases, rate of return on investments and life expectancy) at the time of retirement. Guideline 18 provides more details of lump-sum conversions to income.
- The social security institution should use adequate adjustment mechanisms in order to avoid gradual erosion of the real benefit value. For example, past earnings used for benefit calculations could be adjusted in line with average wage increases in the intervening period and benefits in payment in line with average wage increases or inflation.
- The social security institution should refer to ILO Convention, 1952 (No. 102) to ensure that the rates of current periodical payments in respect of old age, employment injury (except in case of incapacity for work), invalidity and death of the breadwinner comply with its requirements and ensure that these rates are regularly reviewed. The social security institution should also refer to ILO Recommendation No. 202.
- The social security institution should initiate and/or support initiatives that are aimed at providing adequate benefits to the current and future covered populations.
- The social security institution should take into account the actuary’s analysis and observations on the attainment of the earnings replacement objectives of the scheme.
- Retirement income from sources other than the social security pension scheme should be considered when assessing the benefit adequacy of a social security pension scheme.
- The actuary should assess the evolution of replacement rates and/or other relevant indicators (e.g. pension wealth) for different classes of earnings and different career histories, and should signal any evolution of benefit adequacy likely to be contrary to the objectives of the scheme. Such evolution may be due to an irregular or insufficient adjustment of the scheme’s parameters (for example, benefit adjustments in line with inflation or salary increases) or from external trends.
- In the case of a country which has not ratified ILO Convention No. 102, the social security institution should work with stakeholders towards advancing the process of ratification. Actuaries should provide the social security institution with any necessary information of an actuarial nature that could help to advance the ratification process.
- ILO Convention No. 102 requires ratifying member States to implement at least three out of the nine branches of social security, with at least one of those three branches covering a long-term contingency or unemployment.
- The ILO Conventions are binding upon those member States which have ratified the Convention.