Excellence in administration

  • Guidelines:
  • Actuarial Work for Social Security

Excellence in administration

  • Guidelines:
  • Actuarial Work for Social Security

Actuarial Work for Social Security -
Guideline 45. Funding policy, financing approach and financing considerations

In respect of the financing of a social security scheme, the social security institution establishes a formal written funding policy, including its corresponding financing approach, which takes into account factors relevant to the scheme as well as the socio-economic context of the country. An actuary takes into account the funding policy and, in particular, the financing approach while preparing any actuarial valuation of the social security scheme.

The financing approach and the funding policy are two closely linked terms. The purpose of a funding policy is to establish a framework for funding a social security scheme by taking into account factors relevant to the scheme. These factors include: benefit security and adequacy, stability and/or affordability of contributions, the evolution of demographic characteristics of the scheme’s members, the financial situation of the scheme, the legal provisions of the scheme, and any substantive commitments such as benefit indexation.

The financing approach is the method by which a social security scheme systematically accumulates revenues to provide security for benefit payments by allocating resources in an orderly and rational manner over time, thus ensuring that resources will be available to meet benefit payment commitments and administrative expenses. The selection of the financing approach should reflect the funding policy objectives and should be fully documented through the funding policy.

Both the funding policy and the financing approach provide guidance to the actuary in the selection of valuation methodologies and assumptions in accordance with actuarial standards of practice and respecting the scheme’s risk tolerance. Their consideration by the actuary is essential to ensure that the funding objectives are met with respect to securing benefit levels and payments in line with the rules, and stability and sustainability of the contribution level.