Office of the Chief Actuary
Office of the Superintendent of Financial Institutions
During the 2011-2013 triennium, the Technical Commission on Statistical, Actuarial and Financial Studies (the TC ACT or the Commission) coordinated a subproject “Supporting sustainability” of one of the four priority areas identified by the International Social Security Association (ISSA): “Proactive and preventative approaches in social security”. Within this framework the TC ACT cooperated closely with the Technical Commission on Investment of Social Security Funds (TC INVEST), the Technical Commission on Medical Care and Sickness Insurance (the TC MCSI) and the Technical Commission on Old-Age, Disability and Survivorship Insurance (the TC IVS). The following themes for the subproject “Supporting the sustainability” have been addressed during the past triennium:
- Asset and Liability Management (ALM) of pension schemes as a proactive and preventive tool (a joint project of the TC ACT and the TC INVEST)
- Sustainability of health care financing (a joint project of the TC ACT and the TC MCSI)
Intergenerational sustainability (encompassing both financial and political sustainability)
- Promoting a fair intergenerational balance (a joint project of the TC ACT and the TC IVS)
Within the framework of these subprojects, the TC ACT has participated in the organization of three international events and has conducted a number of international surveys. The Commission actively cooperated with international organizations such as the International Labour Office (ILO), the Organisation for Economic Co-operation and Development (OECD), the World Bank and the International Actuarial Association (IAA).
To advance projects identified for the 2011-13 triennium, the Technical Commission on Statistical, Actuarial and Financial Studies has organized the 17th International Conference of Social Security Actuaries and Statisticians that took place in Berlin, Germany in May June 2012, as well as participated in the organizations of the International Seminar in Abu Dhabi, United Arab Emirates, March 2012, and the Technical Seminar in Muscat, Oman, February 2013.
The International Seminar in Abu Dhabi, (United Arab Emirates (UAE)), entitled “Social Security: Coping with the Challenges of Sustainability” was jointly organized by the TCs ACT, INVEST and IVS with an objective to analyze and review proactive and preventive social security policies and practices that help ISSA member institutions to address sustainability challenges. The Seminar addressed four themes: “Proactive and preventive social security in the region”, “Update on the ISSA Guidelines for the Investment of Social Security Funds”, “Introducing flexible approaches to retirement” and “Asset and Liability management of pension schemes as a proactive and preventive tool”. The event concluded with a roundtable discussion: “Innovations in the sustainability of social security schemes”. This Seminar gathered over 200 delegates from more than 50 countries.
The 17th International Conference of Social Security Actuaries and Statisticians took place over 2.5 days in Berlin, Germany, in May-June 2012, at the invitation of the German Federal Pension Insurance. This Conference hosted more than 200 delegates from about 75 countries around the world. The conference has focused on four themes: “Eliminating poverty in old-age: is social security the answer?”, “The impact of economic conditions on the financial sustainability of social security schemes”, “Actuarial and financial reporting for social security schemes and its legal implications” and “Financial sustainability and affordability of health care systems”.
The Technical Seminar entitled “Proactive and Preventive Approaches in Social Security – Supporting Sustainability” took place in Muscat, Oman, in February 2013 and was jointly organized by the TC ACT, INVEST and IVS. The seminar assembled about 180 delegates from more than 40 countries and addressed five topics: “Social security trends in the region”, “Asset and Liability Management of pension schemes as a proactive and preventive tool”, “Health care financing”, “Intergenerational sustainability” and “Focus on Reserve Funds: Presentations on the ISSA Investment Guidelines and on the ISSA Reserve Fund Monitor project”.
These three events brought together more than 60 brilliant speakers from about 30 countries, as well as international organizations, and the highly professional audience from all around the world. Not only were the scheduled sessions and floor discussions thought-provoking and inspiring, but informal discussions also continued during breaks and social events. Sometimes competing views were presented during these events providing additional dimensions to discussions.
During the 2011-2013 triennium, the Technical Commission on Statistical, Actuarial and Financial Studies has supported two important international surveys: “Comparison of demographic and economic assumptions used in actuarial valuations of 24 social security schemes” prepared and conducted by the Régie des rentes du Québec (Canada), and the “Survey on actuarial and financial reporting for social security schemes and its legal implications” prepared and conducted by the Office of the Chief Actuary in Canada in cooperation with ISSA secretariat. This survey covered thirty two countries. The reports on the findings of both surveys were presented at the 17th International Conference for Social Security Actuaries and Statisticians, Berlin, Germany.
Project 1: Asset and Liability Management of pension schemes as a proactive and preventive tool
The first project of the Commission has addressed asset-liability management of social security funds and was conducted in cooperation with TC INVEST. Asset-liability management is an approach to manage investments that consider assets and liabilities together and to provide an integrated approach to manage various risks. Its purpose is to measure and understand risks as well as to make it transparent to decision makers. The aim of ALM for pension schemes is to ensure coordination between a pension scheme’s liabilities and its assets to ensure the sustainability of such schemes. In particular, it includes assessing the impact of key parameters on the medium to long-term financial situation of pension schemes and determining strategic asset allocations that meet the needs of funds in terms of the expected benefits. This is a key element of any proactive and preventive strategy as it is aimed at promoting early intervention and reducing risks.
The theoretical background for this project was laid out by Martin Lunnon (Vice-Chair of TC ACT) and Chris Bull from UK Government Actuary’s Department (GAD) who presented “An introduction to asset-liability management for social security funds” at the international seminar in Abu Dhabi in March 2012 and at the technical seminar in Muscat in February 2013. Further, a targeted international survey lead by the GAD was sent to selected social security organizations. The survey asked social security arrangements to identify use, if any, of asset-liability management techniques, barriers to the use of such techniques, and examples of its successful implementation.
The sessions on the ALM held during the International Seminar in Abu Dhabi and Technical Seminar in Muscat allowed several social security organizations to discuss the practical applications of ALM to their pension schemes. Countries experiences included:
- Morocco: presented by Mr. Belrhiti and Mr. Kamali
- Oman: presented by Mr. Al-Mawali and Mr. Al-Harthy
- Kingdom of Bahrain: presented by Mr. Al-Khalifa
- Sweden: presented by Mr. Settergren
ALM is a part of the wider risk management. To quote Mr. Lunnon and Mr. Bull paper:
“Within the broader theory of risk management, asset-liability management deals with (many of the most significant) risks that arise from the activity of holding assets to meet claims. The activity of holding assets is self-evidently one which can bring rewards while having risks, and ALM provides a framework for balancing risks and rewards. It allows quantification of the risks that holding certain types of assets may impose on the institution and the rewards for so doing. Thus it provides a strong framework for “treating” the risks associated with holding assets by providing a methodology for making decisions about which assets to hold in order to strike an ideal risk-reward trade-off, and thereby to maximise the benefit to the institution of holding assets.”
Risks addressed by the ALM depend on a particular social security arrangement and may include market risk (interest rate, inflation, currency risks etc.), liquidity risk, credit risk, etc. Another risk that could be addressed by the ALM and which is very important for social security arrangements is demographic risk (especially longevity risk). ALM should be based on models that take into consideration social security program objectives.
The following presents some of the important considerations explored by GAD and related survey, and provides examples of applications based on countries experiences presented at ISSA events.
ALM for pay-as-you-go and prefunded social security arrangements
Even if social security pension scheme is financed on the pay-as-you-go basis, it is impossible to set-up the contribution rate to match exactly benefits to be paid in a given year. As such, some assets is needed to ensure liquidity, to set-up a buffer fund against short-term fluctuations in benefits outgo or contributions inflow, and/or to ensure a reasonably stable contribution rate. In large social security arrangements such assets may be sizeable enough that it warrants the use of ALM. The example of such situation is Sweden, as discussed by Mr. Settergren in Abu Dhabi.
For funded social security arrangements (either fully or partially) it is important to have a clear understanding of the nature of liabilities that are backed by assets, and therefore are examined during the ALM exercise. It could be liabilities for an abnormally big cohort, liabilities for particular benefits, etc. For example, as described by Mr. Belrhiti and Mr. Kamali in Régime collectif d'allocation de retraite of Morocco, the old-age fund is fully funded, while death benefits and family allowances are financed on a pay-as-you-go basis.
What are the objectives of ALM?
Prior to engaging into the ALM exercise, a social security institution should define ALM objectives. The survey conducted by GAD found that the main reasons for using an ALM process were to set the investment policy and to balance risks and rewards. As stated by Mr. Al-Khalifa (Kingdom of Bahrain), the strategic objective could often be formulated as: “To derive optimal assets allocation that will be expected to minimize the risk of having to reduce benefits (or to increase contributions), ensuring long-term sustainability.” Another objective was formulated by Mr. Al-Harthy: “To provide the key stakeholders with greater insight into the financial dynamics of the overall fund”.
As stated by GAD, consideration needs to be given to how ALM can be most effectively used by organisations. In particular, it includes the governance framework in which ALM will operate. Given that in many cases the decisions resulting from the use of ALM are fundamental to the success of the fund, ultimate responsibility often rests at board level. For example, as stated by Mr. Al-Mawali (Oman), the ALM for the Oman’s Public Authority for Social Insurance (PASI) is overseen by the internal Investment Committee and Executive Investment Committee, and approved by the board of directors and Ministry of Finance.
If some part of the work is to be outsourced to external parties (like in case of PASI) then consideration needs to be given to the degree of control retained and how the quality of the delivered product will be ensured. In the case of Oman, it is done through the review of the ALM by Investment and Risk departments of PASI.
Given the unique nature of social security funds, in many cases, the ALM is done internally or by the organization responsible for investment of the social security funds (for example Caisse de Dépôt et de Gestion, Morocco).
Thought should be given to how any model will be used, for example, whether the ALM process will be continuous or carried out at regular intervals, perhaps to fit in with scheme valuations. For example, in case of PASI, ALM exercises are carried out every three years.
Type of models
Two possible modelling approaches for ALM may be broadly categorized as scenario analysis or stochastic simulations. Scenario analysis considers a number of alternative projections in addition to the one which is considered most likely. These are chosen to reflect different possible “states of the world”. As an example, a scenario may be to model a recession; this may impact on asset returns and also impact on the amount of social security contributions received or benefits paid. Stochastic simulation aims to produce a distribution of expected outcomes by carrying out a large number (normally thousands) of “what if” scenarios. This allows the likelihood of different outcomes to be quantified. It can also help to understand the interaction between different risks and the complicated dynamics of schemes which may not be immediately obvious.
These approaches can be complementary, with institutions undertaking stochastic simulation to show the range of likely outcomes as well as scenario analysis to provide an understanding of how the scheme would be affected with a set of specific extreme events. In addition, while stochastic simulations may be used to analyse investment outcomes, testing of liabilities may be done using scenario analysis. Countries experiences presented during the triennium events covered models using scenario testing (e.g.: Morocco) as well as stochastic simulations (e.g.: Kingdom of Bahrain).
Setting key risk metrics
One of the first stages of an ALM study is generally to understand how the risks will impact on the scheme given the current investment strategy. This may mean looking (alternatively) at how the risks impact on:
- the funding level of the scheme;
- the contributions required;
- the ability to pay benefits.
Social security organisations could typically be concerned with the possibility that contribution rates had to increase (or had to increase more steeply or earlier than previously intended) in order to continue to meet benefit payments, or that discretionary benefits such as increases to pensions, could not be awarded.
As mentioned in the presentation from Kingdom of Bahrain, possible metrics that could be assessed include reserve ratios, accumulated reserves as percentage of GDP, contribution rates, etc. Presentation from Sweden emphasizes that for defined contributions as well as for notional defined contribution schemes benefits levels are important.
What is the covered time horizon?
One important consideration of any ALM is the selection of the covered time horizon. The time horizon needs to cover the period over which the institution could face adverse possible outcomes as a result of a mismatch between assets and liabilities. The ALM time horizon is usually between 10 and 20 years (e.g. 3-10 years for Oman). These periods are quite short in social security terms, since social security projections deal with longer periods such as 75 years.
Communication of results:
The importance of communicating ALM results to decision makers so that these findings could be translated into tangible decisions should not be underestimated. Meaningful communication is often a challenge due to the complex nature of ALM models. Presentations from Oman, Kingdom of Bahrain, Morocco and Sweden, all emphasized the importance of communication. At the same time, as could be seen from these presentations, social security institutions possess highly sophisticated communication tools in this respect.
It is especially difficult to communicate results of stochastic simulations. The way suggested by Mr. Al-Khalifa is to present samples grouped by the level of probability (for example, central, good and poor, very good and very poor).
The ALM is an invaluable tool for supporting the long-term sustainability of social security programs. It improves the understanding of the risks faced by schemes and ways these risks could be addressed. As Mr. Al-Malawi said in Oman: “After the financial crisis, ALM is not an optional function. All social security institutions irrespective of size need to develop an ALM.”
Project 2: Sustainability of health care financing
The project “Sustainability of health care financing” was undertaken jointly by the TC ACT and TC MCSI. While current demographic and economic changes have implications on both pension and health care schemes, addressing financial sustainability of health systems entails a somewhat distinctive approach. The functioning of the health care system has a significant impact on society and its general well-being, and is reflected in the economic growth of the country. In fact, the health status of the population affects the workforce, which in turn has big implications on labour productivity, one of the main determinants of economic growth.
Health care expenditures are characterized by a high level of uncertainty. Setting up a universal health care scheme is a response to the need for insuring against potentially large healthcare costs. However, this need is highly uncertain, which makes the demand for these services also uncertain, and therefore difficult to predict. This demand is affected not only by the need for health services, but also by their availability and affordability. Ensuring the right to health for the population requires setting up a universal health care scheme that is inclusive and works on closing all coverage gaps for the low, middle and high income sections of the population.
During the 2011-2013 triennium, health care systems were discussed at two international events: the 17th International Conference of Social Security Actuaries Statisticians in Berlin and the Technical Seminar in Muscat. Along with a paper by Ibrahim Muhanna (Lebanon) and an overview paper presented by Marc Pearson (OECD), the following countries experiences were discussed:
- Germany: presented by Mr. Ballast (past vice-chair of TC MCSI) and Mr. Mohr
- China: presented by Mr. Liu and Mr. Huo
- Japan: presented by Mr. Sato
- Mali: presented by Mr. Seidyna Oumarou
Several aspects of the sustainability of health care systems were addressed at these events, such as factors affecting the level of health care expenditures, financing approaches, as well as recent trends around the world.
As Mr. Pearson stated in his paper, drivers of the cost of health care systems are impacted by both demand and supply sides. On the demand side, the cost is driven up by demographic changes (i.e. aging of the population), income, and consumers’ behaviour (as was noted by Mr. Muhanna, changes in utilization patterns can be caused by a higher demand for services due to better consumer information and improvements in service quality). On the supply side, technological progress, advanced treatment practices and heath care productivity affect the cost of services. At the same time, as it was noted in several presentations, the exact impact of all these factors is difficult to quantify.
It is well documented that medical expenditures increase with age. For example, as it was shown by Mr. Sato, in Japan, annual medical expenditures for age group 80-84 are 2.5 times higher than expenditures for age group 60-64. Moreover, the demographic projections for the coming decades show an overall tendency towards aging even for populations considered currently young and middle-aged. For example, as Mr. Liu noted, in China, the percentage of population over age 60 is expected to almost triple over the next four decades. Analysis carried by Mr. Muhanna in his report demonstrates that the shift towards aging populations is accompanied with an increase in unit costs and even a faster increase in the medical inflation.
While technological advances in medicine are in general beneficial, there always exists a potential for inappropriate use of expensive technologies. In the past, approximately half of the long-term growth in health care spending has been associated with technological advances. In Japan, as discussed by Mr. Sato, technological advances are responsible for about 60 per cent of the rate of growth in medical expenditures. The question asked by Mr. Ballast and Mr. Mohr is whether medical progress is really of more benefit to mankind. Below is an example provided in their paper on how this question could be addressed:
“For years Germany has suffered from the following problem: the almost completely unregulated access to the pharmaceutical market has led to a situation where so called pseudo-innovations […] being brought onto the market at markedly higher prices and forcing out older products which were just as effective. Benefit for the patients was close to zero, the damage to those paying contributions, however, was considerable. Measures are now being taken to counteract this in Germany. Under the reorganisation legislation governing pharmaceutical markets a new procedure has been implemented that examines new pharmaceutical products for their additional benefit. If no additional benefit can be found then the product cannot be prescribed at a higher price.”
German contribution emphasized strongly that in order to be sustainable, a health care system should be based on solidarity. That is, “premiums and health risks are not linked and that care is provided regardless of the premium paid according to the treatment needed based on the possibilities available under the statutory care framework”. In order for the solidarity principle to be viable, a program should cover a wide segment of population, which allows risks pooling. The extension of coverage is a problem faced by countries with large informal sector. For example, as Mr. Seidyna Oumarou said in his presentation, only 16.3 per cent of population of Mali is covered by the “Assurance-Maladie Obligatoire”. It should be noted, that the program in Mali is only about a decade old, and its implementation constitutes one of the most important steps in introducing social security protection in this country.
The problem of coverage is not limited to countries with informal sector. In Germany, as written by Mr. Ballast and Mr. Mohr, high earning individuals are no longer required to take out compulsory insurance. “It is a deplorable fact that many people with positive contribution margins are thus “exempted” from solidarity with the rest of society. In this way the statutory health insurance (SHI) system, which is based on solidarity, loses billions that could be invested sensibly in good care. Given such a situation it is therefore all the more gratifying that as many as 5 million people who are not legally required to take out insurance nevertheless voluntarily decide to do so with a statutory health insurance fund.”
China serves an excellent example of an extremely successful extension of health care coverage, as recognized by the 2012 ISSA Good Practice Award. In their presentations, Mr. Huo and Mr. Liu explained that the extension and improvements of the Chinese health insurance scheme, which covered 95 per cent of urban employees, non-remunerated urban residents, and rural residents by the end of 2011, has been implemented through strengthened local health-care facilities, the introduction of a unified information system and social security card scheme, improved integration of existing health insurance schemes and enhanced adequacy of benefits and service quality. As stated by ISSA Secretary General Hans Horst Konkolewsky: “This unprecedented extension of social security in the world’s most populous nation merits international approbation, both for the exceptional scope of the changes to the health system, and for the determination of the responsible institution and authorities”.
Triennium events participants presented varied views on which financing approaches should be used for health care systems. German report argues that since the capital markets cannot be trusted, prefunding of a health care system would expose it to incalculable risks. Thus, it is concluded that health care systems should be financed on a pay-as-you-go approach, as done in Germany. In Mali, as presented by Mr. Seidyna Oumarou, the health care scheme is financed mainly on a pay-as-you-go basis from employees and employers contributions. However, the system owns three reserve funds that protect it from economic fluctuations.
The hybrid approach is developed in the report prepared by Mr. Muhanna. His model proposes to prefund health care for the elderly within a hybrid model, i.e. health care for the population below retirement age would be funded with the pay-a-you-go model while it would be partly pre-funded for the elderly.
In the future, as Mr. Pearson has stated in his report, health spending will be a greater part of economy that it is now, and will become one of the major drivers of economic growth. As such, a distinction should be made between economic and fiscal sustainability of health care. Currently, many countries are facing fiscal unsustainability. To quote Mr. Pearson: “Fiscal sustainability needs to be restored in the short term and once this is done, there will still remain the longer term challenge of ensuring economic sustainability, which requires a different agenda of policies – to ensure value for money.”
Project 3: Promoting a fair intergenerational balance
Work on the project “Promoting a fair intergenerational balance” was conducted by TCs ACT and IVS and coordinated by Ole Beier Sørensen (chair of TC IVS) and Jean-Claude Ménard (chair of TC ACT). Country case studies were prepared by social security institutions in Canada, Denmark, France, Saudi Arabia and Uruguay, as well as by the International Actuarial Association (IAA) for Japan. These country case studies were presented at the Technical Seminar in Muscat, Oman, in February 2013. The following individuals participated actively in this project:
- Saudi Arabia:Nader Al-Wehibi (vice-chair of TC IVS)
- Denmark: Ole Beier Sørensen (chair of TC IVS) and Chresten Dengsoe (vice-chair of TC ACT)
- France: Danièle Karniewicz (vice-chair of TC IVS) and Sanvie Aqueruburu
- Canada: Jean-Claude Ménard (chair of TC ACT) and Assia Billig
- Uruguay: Luis Camacho (vice-chair of TC ACT)
- Japan: Junichi Sakamoto (IAA)
- ISSA Secretariat: Florian Léger
The final report entitled “Intergenerational equity: a condition for sustainable Social security?” summarizes findings of this project and is available on ISSA website.
Countries that participated in this project represent various demographics and have chosen different approaches in providing old-age benefits to their citizens. As such, they often face different challenges. At the same time, the question of intergenerational balance is relevant to all project’s participants, as well as to a majority of countries around the world.
Pension systems tie generations together and create an intergenerational interdependency. In principle this social contract is a perpetuum mobile – the young and active forego some of their production surplus in order to cater for the old in the expectation that future generations will do the same when they themselves are old. As Mr. Dengsoe stated, this social contract is the most precious element of any pension system.
The foundation of the social contract is social equity – a notion that all generations benefit and contribute to the contract at more or less the same rates, and in such a way that benefits and sacrifices match one another (with the possible amendment that the old may be allowed to share welfare gains in the overall economy). But as it is the case for any long-term contract, the intergenerational contract needs to be equitable in order to be sustainable. The sustainability of social contracts cannot be taken for granted if fairness between generations is not properly monitored and assessed.
In many countries around the world population is ageing, longevity and survival rates into old age are increasing rapidly, and fertility rates are decreasing. The average duration of the pension payout phase and the value of a given pension promise have been continually and substantially increasing during the second half of the 20th century. In other words, the “equity balance” shifts quite dramatically in favour of the old. If left unmitigated, pension costs will put a substantial strain on public finances. It could eventually limit the welfare development potentials for younger generations, thereby opening up intergenerational conflicts.
If a society does not have a formal pension system, caring for seniors occurs at the informal family and community level that mostly redistribute from younger to older. In that case intergenerational equity and the general well-being of the elderly become informal and highly dependent on family structures and their strength.
The project first investigated the possible definitions and measure of intergenerational equity and sustainability for social security systems. It was concluded that such definitions and measures vary by country, system design and goals, financing approach, etc. For example, as suggested by Mme Karniewicz one possible definition is: “In the long term each generation benefits of the same replacement rate (pension compared to wage) only through compulsory schemes, outside voluntary personal savings”. However, as pointed by Mr. Sakamoto, it is very hard to define the concept of the intergenerational equity and it may be more practical to use a broader definition.
Various mutually complementary measures may be used to evaluate intergenerational equity. For example, a far from exhaustive list for the second pillar systems discussed in country case studies is presented below. While these measures are not perfect, each of them enables policymakers to address different aspects of the intergenerational equity puzzle:
- Ratio of present value of benefits to present value of contributions over the life-time (France, Japan).
- The recuperation period: the ratio of present value of total contributions to annual value of the pension (France).
- Internal Rate of Return (IRR): the rate which balances out the present value of total contributions and the present value of total benefits (France, Canada, and Uruguay).
- Stability and affordability of the contribution rate for future generations (Canada and Japan).
- Full solvency (Denmark).
The project addressed either existing or contemplated policies aimed at restoring and maintaining the intergenerational equity. In order to be intergenerationally stable, social security systems need to evolve. As Mr. Dengsoe entitled his presentation: “If nothing moves, the equity balance will shift.” Some of the policies identified in the final report are:
- Diversification. Some countries, such as Denmark, Canada and Uruguay, consider the addition of different financing approaches as well as different systems designs as a way to improve the financial situation and adequacy of systems and therefore the intergenerational equity. As Mr. Ménard said in Oman, Canadian retirement income system is based on a diversified approach to savings and, thus, has capacity to adapt rapidly to changing conditions.
- If people live longer they should work longer. The conclusion that was common for all project reports is that if people live longer they should work longer. Longer work period leads to a longer contribution period. At the same time, due to the increases in longevity, payment periods would not be necessarily reduced as compared to payment periods of older cohorts.
- Limiting early retirement incentives. As Mr. Al-Wehibi stated, in Saudi Arabia, early retirement pensions account for over 45 per cent of paid pensions. The question is who bears the cost?
- Provide sufficient reward for postponed retirement. It should be to the advantage of pension program participants to ask benefits at an older age. As Mr. Camacho writes in his report, even if the Uruguayan system provides additional higher accrual rate for additional years of service over 30 years, the performed analysis confirms that these incentives are insufficient.
- Strengthen eligibility requirements for benefits. The most widespread approach to increase working lives duration is to increase retirement age and/or to increase the duration of eligibility period necessary to receive a full and /or reduced pension. This route in its different variations is followed by Denmark, France, Canada and Uruguay, as well as many other countries around the world.
- Regularly monitor financial and intergenerational sustainability of pension systems. In order to maintain intergenerational equity, pension schemes need to be regularly evaluated and assessed. As stated in the “Survey on actuarial and financial reporting for social security schemes and its legal implications: Summary of findings and conclusions” presented at the 17th International Conference of Social Security Actuaries and Statisticians by Assia Billig and Florian Léger, the review process should be transparent, realistic assumptions should be used, and results should be timely and clearly communicated to stakeholders.
To conclude, no matter if it is a fully funded or a pay-as-you-go plan, no matter if it is a DB or a DC solution, no matter if it is a national public scheme or a private pension plan, the fact is that increased longevity will continue to put pressure on the financing of pension plans. If this issue is left unaddressed, it will affect intergenerational balances and eventually it may compromise system legitimacy and trust. The management of the risks associated with living longer requires resolving sometimes conflicting objectives: protecting seniors from poverty, preserving the sustainability of social security systems and avoiding substantial unintended intergenerational transfers. To that extent, reducing poverty of both seniors and young families should be addressed in parallel.
As suggested by Mr. Sakamoto, intergenerational equity and sustainability discussion cannot be limited to pension systems only. It needs to be considered within a broader framework encompassing spending on education and health, the national debt that will be left to future generations, quality of environment, as well as many other factors. This framework leads to a more general concept of the intergenerational justice meaning that coexisting generations are all treated equally by a society.
The concept of sustainability is a multifaceted one: it encompasses in particular financial, intergenerational, and political aspects. Its definition could vary from country to country, and from program to program. A strong social security system is a vital part of a society’s overall well-being. Its goal is to protect people at the most vulnerable times of life: when one suffers a work accident, loses a job, is sick, or reaches old age. To fulfil its mandate and remain sustainable and affordable, a social security system should be based on three key principles: intergenerational equity, solidarity, and responsibility.
Applying preventive and proactive strategies starts with identifying issues. Continuous and rigorous monitoring of social security systems, as well as transparency and accountability of this process are crucial for maintaining the financial health of programs, their intergenerational fairness, and public confidence. The stewards of systems have much more credibility if emerging problems are addressed in a timely and orderly manner. Social security professionals, play a central role in the monitoring process. They are responsible for developing assumptions and methodologies, and for determining the costs of programs. At the same time, communication is increasingly becoming an integral part of the mandate: it is very important to effectively convey findings and recommendations to policymakers in order for responsible public policies to be developed.
Accordingly, all social security professionals should continue to work for the public interest and to fulfil our responsibility toward society both as professionals and citizens.
The Technical Commission will continue to address the issues with respect to social security systems around the world. It will also continue to work in close cooperation with other ISSA Technical Commissions as it has done in the past. We hope that the Technical Commission’s past as well as future activities will help establish closer contacts between social security institutions around the world and promote further cooperation and knowledge exchange between countries.