The Public Responsibility of Actuaries in American Pensions

Abstract

This article traces the history of the public responsibility of actuaries concerning American pension plans. It includes both defined-benefit and defined-contribution plans for employees of both private and public employers. It does not include Social Security. Actuaries have provided innovative approaches to plan design, funding, funding instruments, accounting, and legal and regulatory requirements. Actuaries have made substantial contributions that have enabled pension plans, together with Social Security, to provide economic security for millions of workers and their dependents when employment ends. However, many Americans still lack assurance of a retirement income that is initially adequate, continues for life, and keeps pace with inflation. Thus, challenges will continue to face pension actuaries in the years ahead.     

Empirical Risk Analysis of Pension Insurance: The Case of Germany

The book reserve system is the most widespread method of financing occupational pension plans in Germany. The pension liabilities are mutually insured by the Pensions-Sicherungs-Verein VVaG (PSVaG) against bankruptcy. The PSVaG recently stated that the insurance system needed to be reformed. In the future, risk-adjusted premiums as foreseen for the newly established Pension Protection Fund in the United Kingdom could become feasible. We perform a credit portfolio analysis to determine the risk profile of the PSVaG. The magnitude of a tail risk event suggests that under the current financing system it can only be smoothed out over decades. Under an expected loss pricing plan insurance premiums would vary greatly. In a marginal risk contribution approach the variation of the premiums would be less pronounced.     

Theorie und Empirie steigender Lebenserwartung, Nachreservierung und „Umverteilung“ in der privaten Rentenversicherung

An unexpected increase in life expectancy has implications for private pensions (annuities). These can be offset by reducing pension payments, cross-subsidization of the pension payments, risk-taking of insurance companies or combining these policies. An empirical study of the German market for annuities shows that most of the companies under investigation dealt with the problem of an unexpected increase of life expectation in the 90ies by significant cross-subsidization of the pension payments from young policy holders. This paper discusses the implications such policies can have when the importance of private pensions increases in the future.     

Making Federal Pension Policy Work

Abstract

Millions of Americans retire while they are still productive. Of these, many will have the resources to enjoy all of their golden years. Unfortunately, many others will face economic hardships after they have exhausted their own resources but have become too frail to return to work. Part of the problem is that the current pension system is fraught with financial incentives that push ablebodied elderly workers into retirement just when they should instead be encouraged to remain in the workforce to accumulate additional retirement assets. This paper recommends a number of ways to change federal pension laws in order to encourage elderly workers to remain in the workforce. For example, this paper recommends toughening the penalty on premature distributions, repealing the minimum distribution rules, and repealing the exceptions to the Age Discrimination in Employment Act that permit retirement plans to provide early retirement incentives and subsidies.

This paper also considers whether the government should require that all retirement plans be neutral as to the timing of retirement. In an age-neutral world, workers would always accrue more benefits if they kept working. Consequently, more workers would remain in the workforce, accumulating additional assets for their eventual retirement.

Finally, this paper also considers how federal pension policy could help counteract the tendency of Americans to retire too early because they underestimate their life expectancies, overestimate their financial resources, and fail to understand the deleterious effects of inflation. In particular, this paper recommends that the government require that virtually all retirement plans pay at least a portion of their benefits in the form of an inflation-adjusted annuity.     

Issues for Implementing Phased Retirement in Defined Benefit Plans

Abstract

U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.

This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.

The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.     

A case of constitutional apples and oranges: a functional comparison of pension priority and benefit guarantees in U.S., U.K. and Canadian insolvency and pension law regimes

Canada's insolvency law reform increased the priority granted to employer‐sponsored pension claims. The article compares the treatment of such claims in the U.S., the U.K. and Canada. A comparison of the legislative provisions concerning pension funding shortfalls from contribution arrears or economic underperformance in relation to the assumptions used for investment income or liability valuations finds that insolvency law has been used to address contribution arrears, but risks from economic underperformance have been addressed by pension benefit insurance. Post‐insolvency priority for contribution arrears provides appropriate incentives to discourage pre‐insolvency preferences for payments to other creditors, while shortfalls from economic underperformance do not involve issues of preference between creditors. The absence of any insolvency rationale for changing priority for shortfalls from economic underperformance and the likely disparity between the assets available to satisfy clams and the much larger amounts of such shortfalls makes the use of insolvency law to address this risk much less effective than insurance. Canada, however, has not adopted the insurance policy instrument used in the U.S. and U.K. to mitigate the impact of pension funding shortfalls. The constitutional inability of Canada to legislate in respect of matters of pension regulation that would allow it to control the well‐known insurance problems of moral hazard and adverse selection may explain why it has only chosen to adopt an insolvency policy instrument. However, a change in priorities in insolvency may generate incentives for secured creditors that either undermine or reinforce this policy choice. Secured creditors could attempt to circumvent the new priority scheme through private arrangements with the debtor or to increase their monitoring activities to ensure the debtor is current in its pension contributions. Secured creditors choices will be influenced by the bankruptcy courts' interpretation of the preference provisions in the insolvency legislation. Copyright © 2009 John Wiley & Sons, Ltd.     

Developing Mortality Improvement Formulas

Abstract

Longevity improvements have contributed to widespread underfunding of pension plans and losses in insured annuity portfolios. Insurers might reasonably expect some upside from the effect of lower mortality on their life business. Although mortality improvement scales, such as the Society of Actuaries Scale AA, are widely employed in pension and annuity valuation, the derivation of these scales appears heuristic, leading to problems in deriving meaningful measures of uncertainty. We explore the evidence on mortality trends for the Canadian life insurance companies, data, using stochastic models. We use the more credible population data to benchmark the insured lives data. Finally, we derive a practical, model-based formula for actuaries to incorporate mortality improvement and the associated uncertainty into their calculations.     

Betriebliche Altersversorgung durch Direktversicherungen: Eine finanzwirtschaftliche Analyse aus Arbeitnehmerund Eigentümersicht

Corporate pension schemes are part of the total remuneration of employees. In this paper we analyze the?Direktversicherung“ — a life insurance on behalf of the employee paid for by the employer — from the viewpoints of shareholders and employees alike. Firstly we examine, what implications this life insurance contract has on the cash flows to shareholders and employees. Social security payments and tax payments on individual and company level are accounted for. Secondly, we deduce possible substitution quotas q: We ask, what insurance premium the employer can afford to pay at most in place of a given amount of salary, without penalizing his shareholders. Next we deduce the minimum insurance premium an employee has to ask for to replace a given part of his salary in order not to worsen his financial position. From the findings, we conclude that a corporate pension scheme via the?Direktversicherung“ has the potential to lead to a win-win situation, with both parties better off than before. Our findings are also interesting for insurance companies offering those contracts to employers.     

Human Survival at Older Ages and the Implications for Longevity Bond Pricing

Abstract

Governments are concerned about the future of pension plans, for which increasing longevity is judged to be an important risk to their future viability. We focus on human survival at age 65, the starting age point for many pension products. Using a simple model, we link basic measures of life expectancy to the shape of the human survival function and consider its various forms. The model is then used as the basis for investigating actual survival in England and Wales. We find that life expectancy is increasing at a faster rate than at any time in history, with no evidence of this trend slowing or any upper age limit. With interest growing in the use of longevity bonds as a way to transfer longevity risks from pension providers to the capital markets, we seek to understand how longevity drift affects pension liabilities based on mortality rates at the point of annuitization, versus what actually happens as a cohort ages. The main findings are that longevity bonds are an effective hedge against longevity risk; however, it is not only the oldest old that are driving risk, but also more 65-year-olds reaching less extreme ages such as 80. In addition, we find that the possibility of future inflation and interest rates could be as an important a risk to annuities as longevity itself.     

The Public Role of Actuaries in Private Pensions in Canada

Abstract

Actuaries have played prominent public roles in the development of occupational pension plans and social security arrangements in Canada. These roles include advising governments and government-appointed committees about regulatory structures, establishing funding standards, actively participating in regulatory functions, and pioneering valuation work for pension plans covering public sector employees. The formation in 1965 of the Canadian Institute of Actuaries led to the accreditation of actuaries in pension and tax legislation and to the development of actuarial standards of practice for pension work.     

Guaranteeing Defined Contribution Pensions: The Option to Buy Back a Defined Benefit Promise

After a long commitment to defined benefit (DB) pension plans for U.S. public sector employees, many state legislatures have introduced defined contribution (DC) plans for their public employees. In this process, investment risk that was previously borne by state DB plans has now devolved to employees covered by the new DC plans. In light of this trend, some states have introduced a guarantee mechanism to help protect DC plan participants. One such guarantee takes the form of an option permitting DC plan participants to buy back their DB benefit for a price. This article develops a theoretical framework to analyze the option design and illustrate how employee characteristics influence the option's cost. We illustrate the potential impact of a buy‐back option in a pension reform enacted recently by the State of Florida for its public employees. If employees were to exercise the buy‐back option optimally, the market value of this option could represent up to 100 percent of the DC contributions over their work life.     

海南省被征地农民基本养老保险项目投资收益需求测算

目前,为保障被征地农民的利益,相关省市已陆续出台了被征地农民养老保险的相关政策。为了满足养老金的支付需求,必须对资金的投资收益需求进行测算。依据海南省颁布的《海南省被征地农民基本养老保险暂行办法》(下称《暂行办法》)的相关规定,本文对海南省被征地农民养老保险资金的投资收益率需求做了测算,并对性别比例、平均年龄、消费价格指数等因素进行了敏感性分析。     

Actuarial concepts in the theory of financing life insurance activities

Abstract

In this paper is presented an attempt by the author to obtain conceptual clarity in the actuarial considerations concerned with financing life insurance schemes, whether private or public, It will, of course, be realized that the author is concerned ultimately with the financing of public or semi-public schemes. However, it is with deliberate intention that the exposition is presented in general terms. As is often the case, abstraction means clarification, thus avoiding a shifting of the meaning of the concepts as one goes from one special situation to another.     

风险分散与中国混合型基本养老保险制度改革研究

本文从参保人养老投资风险分散角度研究混合型基本养老保险制度设计。通过构建一个两期消费模型,综合考虑参保人所面临的人口结构、工资增长率、养老基金投资等风险因素,本文研究了混合型基本养老保险制度中现收现付制与基金积累制的最优比例,并利用中国数据进行了测算与敏感性分析。研究发现:引入小规模个人账户基金积累制可以分散人口老龄化给现收现付制所带来的风险,中国实行混合型基本养老保险制度有其合理性;但如果要维持40%～45%的养老金替代率水平,中国基本养老保险制度的财务可持续性会面临较大挑战。     

Principle of equivalent utility and universal variable life insurance pricing

In this paper we study the pricing problem for a class of universal variable life (UVL) insurance products, using the idea of principle of equivalent utility. As the main features of UVL products we allow the (death) benefit to depend on certain indices or assets that are not necessarily tradable (e.g., pension plans), and we also consider the “multiple decrement” cases in which various status of the insured are allowed and the benefit varies in accordance with the status. Following the general theory of indifference pricing, we formulate the pricing problem as stochastic control problems, and derive the corresponding HJB equations for the value functions. In the case of exponential utilities, we show that the prices can be expressed explicitly in terms of the global, bounded solutions of a class of semilinear parabolic PDEs with exponential growth. In the case of general insurance models where multiple decrements and random time benefit payments are all allowed, we show that the price should be determined by the solutions to a system of HJB equations, each component corresponds to the value function of an optimization problem with the particular status of the insurer.     

论我国养老保险逃费的危害、原因和治理

养老保险基金主要由劳动者和企事业单位缴费形成,它是养老保险制度赖以建立的基础。养老保险逃费对这一基础起着极大的破坏作用。调查研究结果表明,我国的养老保险逃费问题比较突出,相当一部分应缴费单位和个人都存在逃费现象,逃费形式花样百出,它直接影响养老保险制度的正常运行和发展。逃费是经济发展水平和劳动者的收入状况、养老保险主体行为和养老保险制度本身多种因素共同作用的结果。克服养老保险逃费需要从多方面着手:努力发展经济,不断提高劳动者收入;改革养老保险管理制度;充分调动企业参加养老保险的积极性;提高劳动者参加养老保险的积极性;强化各级政府的责任;加强养老保险管理部门的责任。     

论社会保障

在对美国社会保障制度改革的政策建议中,彼得·戴蒙德教授主张通过养老金相关参数的调整来适应未来养老基金支出增长的压力,方式是改善养老金待遇标准和税收规则以确保养老基金的精算平衡。其基本观点是:第一,社会保障是退休后收入的基础,是防止贫困和失去保险机会的保障,所以社会保障制度应该建立;第二,因为人们很少自愿进行养老金积累,年金化的强制性公共养老金就非常重要,一是能平衡终生收入,二是能够提供就业激励;第三,公共养老金计划对工人及其家庭,特别是儿童、配偶和遗属有重要保障作用;第四,延迟退休能提高未来的消费,设计合理的待遇累进原则和退休审查制度会有助于增加劳动激励;第五,养老金的代际转移是一种再分配,较多的再分配会对工作生涯形成激励;第六,为实现精算平衡,应引入自动平衡机制来自动调整税率和待遇水平,以减少立法的压力。     

Corporate capital structure and pension-funding strategy

This article provides an integrated analysis of pension funding and corporate financing strategies in the presence of default risk. The article shows that when the marginal personal income tax rate is constant, the financing decision with respect to pension funding is influenced entirely by tax considerations. When the marginal personal income tax is progressive, the optimal financing of pension funding depends on the cyclical nature of the firm (as characterized by the sign of beta), the riskiness of pension assets, and ERISA regulations concerning the pension-benefit guaranty rate, the marginal pension insurance premium and the firm's legal responsibility for its unfunded pension obligations. It is shown that a necessary condition for partial pension funding is that the marginal insurance premium imposed by PBGC must be less than actuarially fair, and a necessary condition for pension funding to be financed by both debt and equity is that beta must be positive.     

公共部门养老保险隐性债务:国际比较

大多数国家针对公共部门工作人员设有单独的养老保险。这些保险未来的财政负担可能相当繁重,因为政府通常是雇用工作人员最多的部门,公共部门的养老待遇相对来讲也更加丰厚,而未来养老金待遇需要直接从国家财政(现收现付制)或积累不足的养老基金(基金积累制)中支付。一些国家有关养老金水平的论证和信息不透明,可能隐含巨额财政债务,将会转移到后代人身上。为了让各国之间就公共部门养老保险财政负担进行公平比较,本文建议根据统一标准对非积累制养老保险的债务进行测评和报告,以提高财政透明度,帮助决策。文章从经济合作与发展组织选取了一些国家,按公允价值估计2008年底的净负债值。这种财政负担也可理解为养老金隐性债务。     

Pension Funds and the U.K. Economy

Abstract

The paper considers the impact of U.K. defined benefit (DB) pension plan unding and investment on the U.K. economy. It suggests that many conventional theories are based on incomplete or inconsistent economics. In particular, the author suggests that:

? An economy cannot really gain competitive advantage from high returns on the domestic assets in which pension funds invest.

? DB liabilities are essentially similar for most schemes and can be closely matched with bonds.

? Funding pension liabilities has no primary impact on individuals’ consumption and saving or on firms’ capital investment.

? Pension funds are not natural investors in the equity of new ventures.

The conclusion of the paper is that the most significant impact of pension funds on the U.K. economy relates to the costs imposed by extreme mismatching between their financial assets and liabilities. The author argues that such risks can, in essence, “crowd out” entrepreneurial risk. He asserts that the U.K. economy would gain from greater focus on the matching of these assets and liabilities, and that the best way to stimulate enterprise is by eliminating the frictional costs in the economy arising from current practices.