Professional Documents
Culture Documents
Jean-Claude Ménard
Chief Actuary
Assia Billig
Actuary
Office of the Chief Actuary
Office of the Superintendent of Financial Institutions
Canada
Florian Léger
Technical Specialist in Social Security
International Social Security Association
ISSA/ACT/CONF/17/BERLIN/2012/3b
Actuarial and financial reporting for social security
schemes and its legal implications
Survey on actuarial and financial reporting for social
security schemes and its legal implications: Summary of
findings and conclusions
Jean-Claude Ménard
Chief Actuary
Assia Billig
Actuary
Office of the Chief Actuary
Office of the Superintendent of Financial Institutions
Canada
Florian Léger
Technical Specialist in Social Security
International Social Security Association
I. Acknowledgments
We would like to express our gratitude to all those from 32 countries around the world who
spent their time answering this survey. Their names along with the social security
organizations they belong to can be found in Annex 1.
The questionnaire aims at investigating actuarial and financial reporting requirements and
frameworks by looking at characteristics of reporting organizations, at the report preparation
process, and at communication processes with respect to the results of the reports. The survey
also addresses actions taken by social security institutions and/or responsible authorities
following the completion of such reports, and legal implications of actuarial and financial
reporting.
A well-defined reporting process is a vital part of good governance for social security
programmes. Actuarial and financial reports based on sound data and appropriate
assumptions and methodology contribute to the financial sustainability of programmes.
Information presented in such reports can send early warning signals if a programme is
experiencing difficulties and help identify short-term and long-term trends that have a
potential to make the programme unsustainable. In turn reporting can trigger public and
stakeholder consultations regarding programme sustainability. In such a way, proper
reporting supports good governance principles of participation, predictability and dynamism.
Furthermore, keeping legislators systematically and timely informed of the financial status of
social security programmes promotes transparency and accountability of authorities with
respect to the social security. In particular, the regular submission of actuarial and financial
reports mitigates the risk of inactivity of decision makers in cases where action is needed.
Possible actions and measures triggered by financial and actuarial reports can be automatic,
for example in cases where self-adjustment mechanisms are embedded in a programme’s
design or ad hoc when the information presented in the reports necessitates certain actions to
be taken.
Box 1 reproduces Guideline 2 of the ‘ISSA Good Governance Guidelines for Social Security
Institutions: A Self–Assessment Toolkit’ concerning actuarial soundness with respect to the
conducting of an actuarial valuation. It should be noted that while the ISSA Guidelines focus
on actuarial valuation requirements, this survey is not limited to actuarial reports. The ISSA
Technical Commission on Statistical, Actuarial and Financial Studies recognizes that the
responsibility of assessing the financial sustainability of social security systems is not always
assigned to actuaries. While the involvement of actuaries in this process is advisable, in
several countries other social security professionals such as economists and statisticians play a
major role. The involvement of different professionals in the valuation process depends on
the country, legislative requirements and the nature of the programme.
The intention of the survey was to cover several social security branches, such as old-age,
health, unemployment insurance and work injury programmes. However, the majority of the
responses were received with respect to programmes covering old-age benefits, often in
combination with disability and survivor benefits. Throughout the report we identify
countries and programmes with best practices.
Box 1.
1. ISSA Good Governance Guidelines for Social Security Institutions: A Self –Assessment
Toolkit
The social security programmes should have regular actuarial valuations to monitor the
sustainability of each one over time.
Governance structure
The Board and/or Management should ensure regular actuarial valuations of the social
security programmes.
The actuarial reports should be submitted to the Board and Management as well as to the
competent external authority that exercises supervision and oversight on the social security
institution.
There should be an independent office that regularly conducts actuarial reviews and
actuarial valuations of the different programmes.
Governance mechanism
The social security institution should have access to the services of competent actuarial
services, whether internal or external, to conduct periodic actuarial reviews of the different
programmes.
The preparation of the actuarial valuation reports should comply with international
standards such as those prescribed by the International Actuarial Association.
The Board and/or the Management may have an independent validation of the actuarial
report.
The external authority may prescribe a time period for the Board and the Management to
act upon the findings and recommendations of the actuarial report.
Reports covering only work injury benefits are found in Canada (different provincial
schemes), Switzerland and Italy. Finally, two reports solely address rate setting for
unemployment insurance (Switzerland and Canada).
The surveyed Reports cover different types of arrangements in terms of financing, benefit
design (defined benefits, defined contributions, NDC) and pillars (although only compulsory
arrangements were surveyed). For example, Switzerland has provided a survey for its first-
pillar social insurance pension scheme (AVS) as well as for its second pillar fully funded
employer focused pension funds (PP).
The majority of the Reports are actuarial valuations. Sometimes the results of the actuarial
reports are included in the organization’s financial or annual statements (for example for
Singapore and the Canadian work injury programmes). 1
Most of the social security programmes included in the Survey fall under federal or state
jurisdiction. In Canada, where the provinces are given wide mandates with respect to social
programmes, the work injury programmes are governed by the relevant provincial laws. At
the same time the Canada Pension Plan (the second tier of the Canadian retirement income
system) is a joint responsibility of the federal and provincial law makers. Only two
programmes have indicated that they are governed at the municipal level only: the Local
Authorities Superannuation Fund (Zambia) and the medical insurance scheme in China.
Section 1. Highlights
• 50% of the surveyed Reports cover mainly old-age benefits
• The majority of the Reports are actuarial valuations
2. Participating organizations
The second section of the Survey looks at organizations responsible for the preparation of a
Report (“Reporting Organization”) and organizations responsible for monitoring of the
financial status of the social security programme (“Monitoring Organization”). The
responsibilities of a Reporting Organization often include data collection, setting of
assumptions, developing projection or valuation methodology, performing the actual
calculations and producing the Report. A Monitoring Organization is expected to analyse the
information presented in a Report and determine actions needed in order to restore the
financial health of the programme, if applicable. In some cases, a Monitoring Organization
has authority to implement necessary actions (e.g. setting premiums or contribution rates),
while in other cases the Monitoring Organization makes appropriate recommendations to
government.
This distribution of survey responses shows that countries around the world possess sufficient
technical expertise to prepare sustainability assessments of their social security systems. It is
interesting to note that the response from Paraguay mentions that until 2010 pension reports
were prepared by foreign professionals. Today the Social Insurance Institute (Instituto de
Previsión Social (IPS)) is strengthening its technical unit and is internally preparing the
actuarial reports.
1
Annex 3 presents Canadian reporting practice for Work Injury programmes.
The Survey’s respondents indicated that a variety of social security professionals are involved
in the preparations of the Reports. Actuaries remain the most prevalent social security
professionals with 40% of respondents saying that actuaries are the only professionals
responsible for the preparation of the Reports. However, another 40% state that actuaries are
working in collaboration with other professions, such as economists, statisticians,
accountants and mathematicians.
It should be noted that economists are becoming extensively involved in this area that used to
be predominantly actuarial. While economists are rarely solely responsible for the
preparation of a Report, for 50% of the Reports, they are involved in the work together with
other professionals.
Section 2. Highlights
• 80% of Reports are prepared by actuaries either alone
or in collaboration with other professionals
• Economists are involved in the preparation of Reports
in 50% of cases
Three quarters of respondents indicated that there is a legislative requirement to produce the
Report. In addition, more than half of such respondents stated that the Reporting
Organizations follow additional guidelines in this respect. Most often mentioned are
professional guidelines such as Canadian Institute of Actuaries (CIA) standards, Guidelines
of Actuarial Practice for Social Security Programmes of the International Actuarial
Association and country specific accounting standards.
An impressive 95% of respondents stated that the Reports are produced on a regular basis.
Legal requirements specify the reporting frequency in 70% of cases. The remaining 25% are
following the established practice. Almost 80% of reports are produced every one to three
years, with 30% being produced annually. Several respondents stated that, if required, more
frequent than usual reporting could be undertaken.
In almost 60% of cases, the Reports are expected to be produced within one year of the
valuation date. In 35% of cases, there is no established practice or legislative requirements in
respect of the Report’s preparation timeframe.
For half of the Reports, it is indicated that the relevant legislation specifies the measures of
sustainability that should be assessed. Such measures are often based on ratios of outflows to
The appropriate choice of assumptions and methodology is a vital part of producing social
security reports. By their nature, social security programmes cover a wide segment of the
population. Thus, economy-wide and nation-wide economic and demographic assumptions
are often needed for the purpose of assessing systems’ sustainability. The developing of the
assumptions for social security valuations is often a joint exercise that involves inputs from
Reporting and Monitoring Organizations as well as various governmental organizations and
independent bodies of experts. Moreover some of the assumptions may be prescribed by
legislation.
The majority of the respondents have indicated that Reporting Organizations play an
important role in developing assumptions. In 40% of cases, the Reporting Organization is
solely responsible for assumptions, and, in another 30% of cases, it shares responsibility with
other organizations. In 20% of Reports, at least some of the assumptions are specified by the
applicable legislation, for example in Sweden. It is interesting to note that in Europe
assumptions developed by the European Commission in the framework of the Ageing
Working Group are used in the valuations of several social security systems.
The choice of the methodology is also mainly the responsibility of the Reporting
Organizations (70% of respondents). Out of this number, in 20% of cases, the methodology is
developed by the Reporting Organization either in collaboration with other stakeholders or
by taking into account legislative requirements. Overall, in 20% of cases, the legislation
specifies at least some elements of the methodology to be used. It is noteworthy that the
Canadian worker compensation scheme reporting follows closely the methodology standards
of the CIA.
In order to promote the accountability with respect to the social security arrangements it is
advisable for the Reporting Organization to demonstrate to which extent it takes
responsibility for its work and the findings of the Report. The International Actuarial
Association Guidelines of Actuarial Practice for Social Security Programs states that: “Where
specified in the terms of reference of the evaluation or review, or in the legislative
requirement for an actuarial report, the actuary should provide any opinion required on the
financial soundness or balance of the Social Security Program, on the adequacy or otherwise
of contributions or on the necessary future level of contributions.” The Survey results show
that such opinion is required by legislation only for 20% of Reports and it is mostly expressed
by actuaries. In 40% of cases, even if the opinion is not required by law, it is expressed, once
again mostly by actuaries. In the remaining 40% of cases, professionals involved in the
preparation of the actuarial or financial reports do not express any opinion.
Section 3. Highlights
• 75% of Reports are required by law
• The law or other guidance specifies the frequency of reporting in 95% of
Reports
• 80% of Reports are produced every one to three years
• 60% of Reports are required to be produced within one year of the
valuation date
In two thirds of the cases, the submitting process follows established practice, and in one
third it is prescribed by legislation. The Reports are required to be submitted within a year or
less, in cases when such a requirement exists.
It was indicated that almost 80% of Reports are made available to the public, either because
this is required by legislation (45%) or it is considered as standard practice (35%). In addition,
some respondents have indicated that even if the full Report is not made public, selected
information from the Report is published. In the majority of cases where a Report becomes
public within one month, it is either submitted to or approved by the external authority.
Reports most often become public through the combination of the web and hard copy
publications. Several respondents indicated that a Report is available only upon request. Press
conferences as well as press releases are other reporting channels in addition to web/hard
copy publications. Some of the more technical Reports are not made available to the public.
Section 4. Highlights
• 80% of Reports are tabled in Parliament and/or submitted
to government
• 80% of Reports are made available to the public
In 35% of the answers, legislation specifies actions that should be taken based on the findings
of the Reports. Half of the time, these prescribed actions are automatic and often take the
form of either self-adjustment mechanisms for old-age schemes like in Canada, Germany,
Japan and Sweden, or adjustments of premiums for work injury and unemployment
insurance systems. In the remaining cases, even if the specific actions are not prescribed by
the law, the decision makers are expected to take actions in order to restore the sustainability
of programmes. In 45% of these cases, the law imposes a timeframe for actions. In addition, in
80% of cases, the proposed actions are subject to public consultations and/or are announced
publicly.
With respect to the 65% of arrangements not subject to prescribed legislative actions, many
respondents have reported that findings of the Reports are carefully monitored by
stakeholders. Thus even if there is no legislative requirement to take actions, those
stakeholders are accountable for the sustainability of the arrangement and therefore have
primary responsibility to take necessary action. The respondents have indicated that the
recommendations and findings of the Reports are used for budget management, for reform
proposals, for adjustment of programme parameters (e.g. contribution rate, covered earnings
ceiling, benefits amounts etc). Some of the findings of the Reports may also be used as input
or supporting information to other official documents (e.g. Ageing report in the European
Union (EU), annex to financial statements etc.) that may have legal and/or financial
implications.
The respondents to the Survey have also identified major issues that are raised with the
external authority and/or with the public. These issues are mainly solvency, sustainability and
affordability of the social security schemes especially in the context of aging populations and
increasing fiscal pressure of the countries’ budgets.
Section 5. Highlights
• Legislation prescribes actions as a result of the findings of
the Reports in 35% of cases
• When there exist no legislatively prescribed actions,
findings are usually taken into consideration through other
channels
IV. Conclusions
The actuarial and financial reporting for social security schemes is an important element in
overall good governance practice. To our knowledge, this Survey attempts for the first time to
investigate technical and legal aspects of the reporting process. The high response rate to the
Survey indicates that countries are paying increased attention to proper monitoring of the
sustainability and solvency of social security schemes.
Findings of the Survey show that actuarial and financial reporting is often a well legislated
and technically and legally sophisticated process. It involves highly qualified social security
professionals. The findings of Reports are formally presented to stakeholders and often to the
public. These findings are used to prompt decision makers to take actions toward correcting
financial imbalances of the schemes.
We hope that the results of this Survey will be helpful to ISSA member institutions to either
implement new or fine-tune existing reporting processes. These results also could be used in
future ISSA work on good governance and assisting in developing relevant guidelines. Finally,
the IAA is currently developing International Standards of Actuarial Practice. The findings of
the Survey may provide a useful input for this process.
Table 2.5. Type of Monitoring Organization for the arrangement(s) (if it is different from
the Reporting Organization) covered in the Report:
Social security institution 7
Intra-ministerial committee 9
Governmental agency 23
Other 6
Table 2.6. Social security professionals involved in the preparation of the Report (Please
mark all applicable):
Actuaries 49
Economists 32
Statisticians 22
Others 13
Table 2.8. Are the Reporting Organization and/or the Monitoring Organization
governed by any guideline to produce the Report (possibly in addition to the
legislative requirements)?
Yes 27
No 32
Table 2.10. Does legislation or practice specify the time period after the valuation date
during which the Report should be prepared?
Within a year 34
Within 1-2 years 2
Other 3
No 21
Table 2.12. The valuation assumptions used in the Report are set by
Legislation 13
The Monitoring Organization 11
The Reporting Organization 43
Other 11
Table 2.13. The valuation methodology used in the Report is determined by
Legislation 11
The Monitoring Organization 7
The Reporting Organization 42
Other 10
Table 2.14. Is there a statement of opinion in the Report by social security professionals
responsible for the preparation of the Report
Yes, prescribed by legislation 13
Yes, not prescribed by legislation 22
Total Yes 35
Expressed by
Actuaries 26
Economists 7
Statisticians 4
Other 5
No 25
Table 2.17. Does legislation prescribe any actions that should be taken with respect to the
arrangement(s) as a result of findings of the Report?
Yes 21
Yes, and actions are automatic 11
Yes, and legislators or stakeholders are required to 16
undertake any actions in order to restore financial
sustainability of arrangement(s)
Yes, and legislation prescribe a timeframe for actions 9
to be taken
Yes, and actions are subject to public consultations 16
and/or announced publicly
No 39
The WCBs of Ontario, Nova Scotia, Quebec and Yukon have answered the Survey. In all four
jurisdictions, an actuarial valuation is prepared every year either by an internal actuary or by
an outside actuarial consultant. The valuation actuaries follow the professional standards of
the Canadian Institute of Actuaries.
The results of these valuations together with an actuarial opinion are included in audited
financial statements of the organizations. These audited financial statements are presented to
an appropriate Minister and are published on the organizations’ websites. In some cases,
these reports are also audited by independent governmental auditors.