Guidelines Actuarial Work for Social Security Edition 2016 Copyright © International Labour Organization and International Social Security Association 2016 First published 2016 Short excerpts from this work may be reproduced without formal authorization, on condition that the source is indicated. It is also important that individual guidelines should be seen as one element of the section of the full document to which they belong. They should therefore be considered in conjunction with other individual guidelines from that section (and more generally the full document) to ensure that the context of the individual guideline is fully appreciated. For rights of reproduction or translation of the work in its entirety, application should be made to ILO Publications (Rights and Licensing), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office and International Social Security Association welcome such applications. ILO; ISSA Guidelines on actuarial work for social security / International Labour Office; International Social Security Association. Geneva: ILO, 2016 Social security administration, actuarial, management development, good practices. ILO ISBN: 9789221312284 (print); 9789221312291 (web pdf) ISSA ISBN: 9789284312276 (web pdf) Also available in French, German and Spanish. Forthcoming in Arabic, Chinese and Russian. 02.14.01 ILO Cataloguing in Publication Data The designations employed in ILO and ISSA publications and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the ILO or ISSA concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. 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Printed in Switzerland Contents Introduction 1 Scope and Objectives 1 Structure of the ISSA-ILO Actuarial Guidelines 4 Supporting Material 4 A. Valuation of Social Security Schemes 5 Guideline 1. The need for carrying out actuarial valuations 6 Guideline 2. Data 7 Guideline 3. Assumptions 10 Guideline 4. Valuation methodology 13 Guideline 5. Projection model 15 Guideline 6. Determining the value of the social security scheme’s assets 17 Guideline 7. Reconciliation 18 Guideline 8. Uncertainty of results 19 Guideline 9. Reporting 21 Guideline 10. Operational control 22 Guideline 11. Independent expert review 23 Guideline 12. Following the recommendations of the operational audit and independent expert review 25 B. Operational Management of Social Security Systems 26 Guideline 13. Determination of benefit entitlements 27 Guideline 14. Determination of actuarial factors 29 Guideline 15. Determination of rate of return to be credited to provident fund accounts and the resulting financial implications 31 Guideline 16. Determination of rate of return to be credited to notional accounts and resulting financial implications 33 Guideline 17. Supervision of individual funded accounts 34 Guideline 18. Determination of rate of conversion of lump sums to income 36 Guideline 19. Automatic adjustment mechanisms 38 C. Investment Issues 39 Guideline 20. Investment governance 40 Guideline 21. Taking into account liabilities in the investment process 42 Guideline 22. Investment management processes 44 INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION i Guideline 23. Input into the valuation of assets and benefit calculations 46 Guideline 24. Investment reporting 48 D. Reporting, Communication and Disclosure 49 Guideline 25. Communication between board members, management and the actuary 50 Guideline 26. Reporting process considerations 51 Guideline 27. The social security institution’s responsibilities with respect to actuarial reporting and communication of changes in scheme’s provisions 53 Guideline 28. Technical and non-technical communication of actuarial information 54 E. Risk Management and Analysis 56 Guideline 29. Risk management framework 57 Guideline 30. Identification of risk 60 Guideline 31. Measurement of risk 61 Guideline 32. Mitigation of risk 63 Guideline 33. Actuarial input into the management of scheme risks 65 Guideline 34. Actuarial input into the management of operational risks faced by the social security institution 68 F. Regulatory Issues, Standards and Professional Guidance 70 Guideline 35. Compliance with regulatory requirements 71 Guideline 36. Compliance with actuarial standards 73 Guideline 37. Compliance with accounting standards 75 Guideline 38. Compliance with requirements of national and international statistical reporting 77 Guideline 39. Other professional standards and guidance 79 G. Policy and Strategy Issues 81 Guideline 40. Designing a new social security scheme 82 Guideline 41. Valuation and costing of a new social security system 84 Guideline 42. Funding and financing considerations 87 Guideline 43. Sustainability considerations 89 Guideline 44. Benefit adequacy 91 Guideline 45. Coverage 93 Guideline 46. Implications of changes and reforms in benefits and financing 96 ii INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION H. Actuarial Expertise, Staffing and Training within the Social Security Institution 98 Guideline 47. Independence of the actuary 99 Guideline 48. The choice between the use of external or internal actuarial expertise 101 Guideline 49. Qualifications 103 Guideline 50. Staffing and infrastructure 105 Guideline 51. Developing and maintaining professional expertise 106 Acknowledgements 107 INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION iii Guidelines on Actuarial Work for Social Security Introduction These Guidelines on Actuarial Work for Social Security (hereafter referred to as ISSA-ILO Actuarial Guidelines) have been produced jointly by the International Social Security Association and the International Labour Organization. Scope and Objectives These guidelines are written for actuaries and other social security professionals undertaking actuarial work for social security schemes, as well as social security institutions, policy-makers and other stakeholders overseeing or reviewing actuarial work. The objectives of the guidelines are to provide guidance to these different stakeholders in their work as it relates to the planning, management, financing and provision of social security benefits. The guidelines are structured to provide a list of issues to consider and recommendations in the carrying out of these duties. These duties will vary according to the stakeholder concerned and may include performing actuarial calculations, providing or formulating policy advice, supervision, reporting, management and communication. The main objectives are therefore to: ¡ Promote good practice in relation to actuarial work undertaken by, and for, social security institutions and to support efforts to improve accuracy, consistency and comparability of actuarial work; ¡ Provide guidance for the procedures carried out by actuaries in their work; ¡ Facilitate the work of institutions in their governance procedures relating to actuarial work; ¡ Improve the efficiency of actuarial procedures; ¡ Provide practical assistance to institutions to facilitate their compliance with actuarial standards; ¡ Provide guidance to individuals or bodies responsible for policy issues and regulation on actuarial involvement. The ISSA-ILO Actuarial Guidelines, and Existing and Future Professional Standards This document provides a series of recommendations regarding the principles, structures and processes that should be put in place and undertaken to meet the objectives referred to above. It therefore seeks to assist actuaries in their efforts to meet international and national standards as well as regulatory requirements. However, the ISSA-ILO Actuarial Guidelines are not legally binding; they should be considered as identifying and detailing good practice in respect of the wider objective of improving the carrying out and monitoring of actuarial work. It should also be noted that it is not the goal of the guidelines to duplicate or replace the International Standards of Actuarial Practice (ISAP) of the International Actuarial Association (IAA), in particular No. 2 (ISAP 2) on social security, or any relevant national actuarial standards. Rather it is to assure that social security institutions provide actuaries and other social security professionals performing actuarial work with the tools necessary for compliance with ISAP 2 as well as other good practices in relation to social security actuarial work. INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION 1 Guidelines on Actuarial Work for Social Security Definitions of “Actuarial Work” and “Actuary” The ISSA-ILO Actuarial Guidelines seek to provide support for actuarial work carried out in the areas considered as traditional actuarial domains as well as in other areas where actuarial involvement is either widespread or recommended. In this context, actuarial work for the purpose of these guidelines therefore includes: ¡ Actuarial activities such as preparing actuarial valuations of social security systems; work related to national accounts and national and/or international accounting reporting; assessing sustainability impacts of proposed changes; and performing actuarial calculations necessary for determination of benefit entitlements and funding measures. These tasks may include calculations of liabilities, projection of cash flows and determination of various actuarial factors and legislation or other regulations that often require these tasks to be carried out by qualified actuaries; ¡ Actuarial input in areas such as investment management, policy development, risk management, communication, governance, considering impact on individuals and evaluation of fairness and equity between cohorts and other groups where actuarial skills and competencies can add value to the social security institution or governing body. Unless specified otherwise, an actuary for the purpose of these guidelines means: ¡ An actuary employed directly by a social security institution as well as a consulting actuary who provides reports, advice or other input to institutions on a contractual basis and who has a recognized actuarial qualification at the national or international level (reference should be made to Guideline 49); or ¡ A professional without a recognized actuarial qualification (e.g. statisticians and economists) who carries out actuarial work. These guidelines recognize that in some situations, various professionals other than actuaries may be involved in performing actuarial work. However, it is important that social security professionals without actuarial affiliation involved in providing actuarial services to social security institutions possess relevant qualifications and follow relevant rules of professional conduct as described in Guideline 49. Promotion of Actuarial Qualifications, Recognition and Professional Development While these guidelines seek to provide support to both actuaries and non-actuaries involved in actuarial work, it is important for social security institutions to promote development of the national actuarial profession and to acknowledge the value of a recognized actuarial qualification and continuing professional development (see Guideline 51). Furthermore, even if each country may set their own requirements regarding qualifications, experience and competencies for professionals carrying out the actuarial work referred to in this document (and whether they are considered a “fit and proper” person to carry out the tasks assigned), these guidelines encourage those supervising actuarial work to set qualification requirements recognizing the importance of the actuarial profession. The regulators and supervising authorities should consider qualifications specific to the social security scheme when defining competencies required for carrying out actuarial work. The guidelines also encourage those carrying out actuarial work to comply with qualification requirements, undertake continuing professional development and adopt behaviours consistent with the minimum code of conduct of the IAA or that of the actuarial association of which the actuary is a member. Part H and the associated supporting material provide more details. 2 INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION Guidelines on Actuarial Work for Social Security Areas of Actuarial Involvement Legislation, regulation and/or internal rules and governance procedures are likely to influence the areas of actuarial involvement and the competence, qualifications and professionalism required to carry out the work. These guidelines cover the four situations where actuaries may be involved and/or where actuarial work is undertaken in respect of social security: ¡ Work which must (according to regulation or other legal instruments) be carried out by a recognized and qualified actuary; ¡ Work where the involvement of actuaries is important and actuaries are likely to play the principal role; ¡ Work where actuarial involvement and input is desirable; ¡ Work which requires actuarial techniques to be applied but in reality may be carried out by non-actuaries. The social security institution should determine for their own situation which elements of work fall under which of the four categories above. This should be properly documented and regularly reviewed. The decision will depend on a number of different factors both internal to the institution and external. These may include (but not be limited to): ¡ The regulatory and supervisory framework concerning the work in question; ¡ The materiality of the work undertaken, i.e. the impact it may have on the financial situation of the institution and/or the social security scheme; ¡ The actuarial resources and peer review processes existing within the institution; ¡ The development and resources of the national actuarial professional body; ¡ External (to the institution) actuarial resources available; ¡ Other professional resources available. Coordination with Other Professionals and Stakeholders As actuaries are becoming involved more widely in different aspects of social security institution management, there is increasing need for greater coordination and consultation with other professionals and stakeholders. These guidelines set out, for the different areas of involvement, where such coordination should be undertaken and, where necessary, formalized. Where the actuary is external to the organization, it is especially important that appropriate procedures should be put in place and followed to ensure that efficient and effective coordination is carried out. Independence of Function The social security institution and supervising authorities should seek to ensure and maintain the independence of the actuary. In practice, this means ensuring that the actuary has sufficient access to data, has choice over the most appropriate methodology and set of assumptions to use, and is not unduly influenced by external considerations or subject to internal pressure that may have an impact on results and recommendations. Supporting regulations and legislation should exist to secure this independence INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION 3 Guidelines on Actuarial Work for Social Security of function, as well as procedures to undertake where the independence is, or may be, compromised. More information is provided in Guideline 47. Structure of the ISSA-ILO Actuarial Guidelines The guidelines are comprised of eight separate parts: Part A, Valuation of Social Security Schemes Part B, Operational Management of Social Security Systems (including benefit calculations and determination of factors) Part C, Investment Issues Part D, Reporting, Communication and Disclosure Part E, Risk Management and Analysis Part F, Regulatory Issues, Standards and Professional Guidance Part G, Policy and Strategy Issues Part H, Actuarial Expertise, Staffing and Training within the Social Security Institution Within each part, individual guidelines cover the different elements of the subject area. Each individual guideline is structured as follows: Guideline. The guideline is stated as clearly as possible with a brief description of the key points underlying it set out in bold. Principles. This part sets out the principles underlying the guideline and appropriate structures to put in place to address the issue. Mechanism. This part sets out the steps and processes to be taken to ensure that the principles underlying the guideline are respected. The suggested mechanisms are designed to ensure appropriate controls, processes, communication and incentives which encourage good decision- making, proper and timely execution, and regular review and assessment. Supporting Material These ISSA-ILO Actuarial Guidelines include the principles that social security institutions should consider in relation to actuarial work undertaken for social security schemes. They are not intended either as a detailed actuarial manual or as standards of practice. Their goal is to guide social security institutions in the “what” to consider but not the question of “how”. Therefore, as part of the support to social security institutions, the ISSA and the ILO have developed supporting material, including manuals (such as the ILO document Internal guidelines for actuarial analysis of a national social security pension scheme), examples of good practice, external references and case studies that will assist social security institutions in translating these principles into practice. These supporting materials can be accessed in a separate document and via links on the website dedicated to the guidelines. 4 INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION Guidelines on Actuarial Work for Social Security A. Valuation of Social Security Schemes Valuations of a social security scheme are aimed at assessing their actuarial soundness. Soundness may be defined in a variety of ways and social security institutions should define measures of soundness appropriate to their situation and their scheme. As stated in the ISSA Guidelines on Good Governance (Guideline 59), a social security scheme should carry out regular actuarial valuations to monitor sustainability and other key elements. Guidelines in this part address the main elements of the actuarial valuation, the responsibilities of an actuary, and actions that a social security institution should undertake in order to ensure that actuaries can fulfil their professional duties. The approach undertaken will depend on whether the actuarial valuation model has been developed internally by the social security institution or whether a valuation is performed using a model developed externally. In this latter case, the approach will again vary according to whether the institution carries out the valuation itself or whether the external actuarial resource does so. Whereas this part focuses mainly on the first two cases, appropriate processes are also required when the valuation is undertaken externally and external advisers should be able to demonstrate compliance with the guidelines and with relevant actuarial standards of practice. INTERNATIONAL SOCIAL SECURITY ASSOCIATION – INTERNATIONAL LABOUR ORGANIZATION 5