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VOL III ISSUE 1, JANUARY 2011
Rs. 20

EMERGING RISKS... DARING SOLUTIONS


JANUARY 2011
The Actuary India January 2011

CONTENTS

l

l
IAA – IAA FUND MEETING IN KAZAKHSTAN
IAA – IAA ADMITS CHINA ASSOCIATION OF
9
9
ACTUARIES AS FULL MEMBER
√ FROM THE CHIEF EDITOR 4
l IAA ELECTION RESULTS FOR 2011 10
NICK TAKET TALKS ABOUT IMPACT OF THE NEW IRDA
(TREATMENT OF DISCONTINUED LINKED INSURANCE l SIGMA STUDY – NEW SWISS RE SIGMA STUDY 11
POLICIES) REGULATIONS, 2010, AND NEW UNIT LINKED HIGHLIGHTS THE SIGNIFICANCE AND POTENTIAL
GUIDELINES ON LIFE INSURNCE COMPANIES. OF MICROINSURANCE IN SUPPORTING SOCIO-
ECONOMIC DEVELOPMENT IN EMERGING MARKETS
√ FROM THE PRESIDENT 5
LIYAQUAT KHAN WRITES ABOUT 13TH GCA, √ REPORTAGE : 6TH CILA 13
MEMBER TRACKING SYSTEM AND THE FIRST BY SANJEEB KUMAR
COUNCIL HELD IN NEW DELHI ON 28 DECEMBER, 2010.
√ SWEDISH PENSIONS UNDER STRESS 17
√ FROM THE PRESS BY K G SCHERMAN
l STRENGTHEN ACTURIAL DEPARTMENTS, 6 √ PUZZLE CORNER 26
SAYS INSURANCE REGULATOR
√ CAREER OPPORTUNITY 27
l IANS - EXPERT ‘ACTUARIES’ WHO ASSESS 7
INSURANCE RISK GETTING YOUNGER
CORRECTION
l ECONOMIC TIMES – ON PMO ADVICE, 8 Kindly note the correction in the email id of Mr. Denis Plouffe as
CORPORATE MINISTRY TO CONSULT denis.plouffe@globalbenefit.ca in December 2010 issue.
COMPANIES AGAIN ON IFRS

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Indian Actuarial Profession Serving the Cause of Public Interest 3


The Actuary India January 2011

FROM THE CHIEF EDITOR


The IRDA (Treatment of Discontinued a change in the economic outlook, or a change in the availability of
Linked Insurance Policies) Regulations, alternative financial products, or a change in the tax treatment of financial
2010, notified on 1st July 2010, products.
and new unit linked guidelines that
became effective on 1st September For any risk, a systemic change in the mean experience can have a
2010, have caused most life insurance particularly dangerous aspect. Just because there might be a change in
companies to review their business the mean experience does not necessarily mean that there will be such a
models and make significant changes change. Sometimes, the complete reverse happens, the mean experience
aimed at increasing productivity while can be stable for a number of years lulling everybody into a false sense
at the same time cutting costs. These of security, and only then is there a change in mean experience. Such
changes have been made across all behavior was exhibited by the default of mortgage backed securities;
functions within the insurers but with a initially this was a small niche market for specialists, with the large
particular focus on distribution. companies staying out of the market having concluded that it was too
risky. Over time as nothing went wrong and the small players appeared
The other impact of the new regulations and guidelines has been to to be making a lot of money in this market, the big players entered and
significantly raise the profile of lapse and surrender risk amongst the many it was only when they had a large exposure that the mean default rates
risks to which life insurers are exposed. It is not that this is a new risk; it increased. The possibility of the same sequence of events happening in
is just that the new unit linked regulations and guidelines severely limit respect of lapse and surrender risk is worrying.
the ability of insurers to manage this risk by a combination of adjusting
the pace of charging and surrender penalties. Commission claw back, A final troubling aspect of the current concern about lapse and surrender
when practiced, has had limited utility especially at the longer durations risk is that it comes at a time when insurers are trying to increase
in force. distribution productivity and cut distribution costs. Past experience
suggests that when there is management pressure on these distribution
The emergence of lapse risk as an important risk factor poses a number measures then lapse and surrender rates can deteriorate. Data on
of problems to actuaries currently involved in pricing unit linked products changes in productivity and costs are available almost immediately, but
and in the future it will cause difficulties for the calculation of embedded data on lapse and surrender rates will only emerge slowly over a number
values where there is a significant amount of unit linked business written of years. This imbalance in availability of data may cause management to
under the new regulations and guidelines. focus on productivity and costs and not give enough attention to lapses
and surrenders.
As with other types of risk, an insurer can protect itself from the fluctuations
of lapse and surrender experience about the mean by accepting a When faced with any risk, an insurer has the option to transfer the risk to
large number of independent risks. However, such an approach cannot a third party, or to avoid the risk or to manage the risk.
protect the insurer from a change in the mean risk itself, on the contrary,
Historically, re-insurers have not been keen to accept more than what
accepting a large number of such risks will only lead to a large loss if the
they would deem their fair share of lapse risk, and after the recent history
mean experience changes adversely.
of mortgage backed securities it could be some time before the capital
As an example of this we only have to look at annuities in some overseas markets are willing to underwrite the lapse and surrender risk on unit
markets to see the financial strain that has been caused by systematic linked life insurance policies.
improvements in mortality rates. This strain has been produced by
Unit linked life policies have occupied a dominant position in the life
a reasonably gradual improvement in mortality rates that has been
insurance market for a number of years because of their transparent
sustained over a long period of time.
market participation and flexible features. Consequently, most insurers
A more dramatic example would be the losses incurred on mortgage will find the option of avoiding lapse and surrender risk by not writing unit
backed securities. While the US property market was stable the large linked business to be unpalatable.
number of mortgages pooled in these securities smoothed out the The most desirable alternative would seem to be a new approach to
fluctuations in default experience of individual mortgages. But once the managing lapse and surrender risk. I do not know how this might be
US property market turned down there was a systemic rise in mortgage achieved, perhaps by an innovative product design, perhaps we need to
default rates leading to the financial consequences that are only too well underwrite for lapse and surrender risk, but actuaries with their knowledge
known to us all. and experience of risk should be actively involved in this process.
In the case of lapse and surrender risk it is not difficult to think of a number
of external events outside the control of the insurer that would lead to a
systemic change in the mean lapse and surrender rates, for example, Nick Taket
4 Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011

FROM THE PRESIDENT


13th GCA is just around: 20 - 22, Feb. 2011. In December 2010 was on stream on 24th December
issue I talked about it and gave some flavour of the things to 2010 and at the moment of writing
come. this piece (11:54 am, 10th Jan. 2011)
as many as 1,563 unique visitors
Things are really happening.
had browsed it from 31 countries.
K Ganesan’s (of L I C of India) award winning entry of the 13th The first ten: India – 1,276, The
GCA theme: Emerging Risks... Daring Solutions, did catch the United Kingdom – 65, US – 44, Hong
imagination in number of ways. Kong – 29, Singapore -26, Australia
The idea of a Global Round Table (GRT) immediately after the – 24, Germany – 20, Japan – 12,
Inaugural ceremony emerged out of it. – Fifteen global leaders from Bangladesh – 10 and Canada 6.
different areas of risk management, sitting together and debating We are going global indeed and it’s a
various global issues around risk management is aimed at leading beginning with NO END.
to global dialogue and of course “daring solutions”. We can look
Some initiatives within the HOME: The Member Tracker
at all these leaders on the website www.actuariesindia.org (click
System (MTS) for management of the member data and service
13th GCA and on Speakers at the right hand side). The GRT and
delivery is on track though about a month behind self-imposed
eight Plenary sessions have around 40+ speakers and along with
schedule. We expect to be fully on stream by Jan. 2011 end.
concurrent sessions will make an army of some 55+, a formidable
The Website revamp project is on stream. Vendor engagement
number to discuss, debate and share ideas. The eight plenary
contract for Phase 1 development was signed off on 9th Jan. 2011
sessions together create an umbrella covering all specific areas
for completion within 30 days to be followed by phase 2.
of application specifically the life insurance, non-life insurance,
Health & Care insurance and Pension, Employee Benefits & Social The fist Council (after my taking over as President on 4th Sept.
Security. No application sits in isolation and hence all the sessions 2010) met on 28th December 2010 in New Delhi and cleared
are of importance to all. number of initiatives;
N Rangachari, first Chairperson of the IRDA had started it all –  Mutual Recognition Agreements with Casualty Actuarial
the GCA, first two were in fact managed from his office by actuarial Society and the Society of Actuaries in US.
team around there lead by K Subrahmanyam. Rangachari desired
 Off shored Actuarial work in India - Issues and opportunity, an
sound and global debate around issues that were expected to be
initiative lead by M Karunanidhi.
addressed through IRDA Regulations. This happened. A whole lot
of people were involved in shaping the regulations and ideas around  Strategy Initiative lead by Anil K Singh and Dr. K Sriram.
these came to fruition through debate and dialogue in the early  CERA Treaty signing and qualification an initiative lead by
GCAs particularly the first two. Thirteen years down the line things Sanchit Maini.
have changed - lesser global participation and more gathering of
bludgeoning Indian actuarial students, full of hope and aspirations.  Review of entry requirement of students, an initiative lead by
India has capacity to absorb such hopes and aspirations but is Varun Gupta.
limited by various issues plaguing the insurance sector and non-  Position of Marketing Manager for executing number of
existence of regulatory mechanism for the Pensions and Social marketing and development initiatives of the Institute.
Security. Ten years of open insurance market is hardly a time span
for the sector to mature; it is just in its juvenility. Why should it Certainly lot of things to look forward to, however, in the immediate
be plagued by (perceived or real) regulatory malnourishments? let us register for the 13th GCA and jointly make it a great event.
For variety of right reasons the GCA should go global again and
become platform for debate and dialogue not only for needs of
India but for the globe. The Indian economy is global and so is
the insurance sector. India has potential to become global hub for Regards,
actuarial and risk solutions. The GCAs have to become platform
for global debate and dialogue so as to provide daring solutions for
the global emerging risks.
Beginning with NO END: 13th GCA, in some way, is a beginning in
this direction. The website: www.actuariesindia.org (13th GCA TAB) Liyaquat Khan

Indian Actuarial Profession Serving the Cause of Public Interest 5


The Actuary India January 2011

FROM THE PRESS


Strengthen actuarial departments,
says insurance regulator

Chennai, Dec 23 (IANS) The Insurance Regulatory and Ten years back when the sector was opened up, there was a
Development Authority (IRDA), the industry watchdog, has asked dearth of qualified actuaries in general and specially for the non-
the 24 non-life insurance companies to strengthen their actuarial life sector.
department and have it manned by full-timers. There are 24 non-life insurers - six of them government owned,
The authority has asked the non-life insurers to spell their plan of four non-life, one agriculture insurance company and one Export
action in this regard. Credit Guarantee Corporation - in India.
Actuaries are experts in assessing the financial impact of future IRDA is also considering to scrap the system of part-time
events. They enable financial decisions by analysing the past, appointed actuaries in non-life sector, Kannan said. ‘But we are
modeling the future, assessing the risks and communicating what not sure about the adequate supply of actuaries for the non-life
the results mean in financial terms. sector,’ he added.
Speaking to IANS, R.Kannan, member (actuary) at the IRDA, Kannan agreed only four non-life insures have full-time appointed
said: ‘The actuarial work for non-life insurers is on the rise. For actuaries and others have part-timers, many of them over 70
example, from March 2011 onwards insurers have to calculate years of age.
economic capital (sufficient surplus to cover potential losses over The Institute of Actuaries of India (IAI) - the professional body
a specified time). It involves a lot of actuarial calculations, and governing the actuarial profession - is frowning at IRDA for
work has to start at least three months before next March. The permitting non-life insurers to hire professionals over 70 years of
insurers are sending their replies to our letter.’ age as appointed actuaries.
As per IRDA regulations, every life and non-life insurer should ‘There is sufficient supply of young actuaries for the non-life sector.
have an appointed actuary. While life insurers should have a The upper age limit for a person to be hired and appointed actuary
permanent official, non-life companies can have a part-timer. as per regulations is 70 years and IRDA is granting exemptions to
Further, appointed actuaries are IRDA’s representatives in the some actuaries,’ IAI president Liyaquat Khan told IANS.
insurance companies and cannot be hired or fired without the According to IAI, 87 of the 170 actuaries in India as on March 31,
regulator’s consent. 2010, are in the age bracket of 26-45.

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6 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

FROM THE PRESS


Expert ‘actuaries’ who assess insurance
risk getting younger

Chennai, Dec 28 (IANS) By V. Jagannathan ‘I found actuarial science interesting and decided to pursue the course
and complete it in five years,’ D’Costa told IANS.
Once considered the exclusive preserve of venerable middle-aged
executives, the office actuaries -- experts who scientifically review the On the other hand, 35-year-old Tania Chakrabarti, who holds a master’s
risks in the life and non-life insurance business -- is getting younger by in quantitative economics from Indian Statistical Institute, Kolkata, and
the year. working with the Murugappa group, found actuarial science a logical
progression.
‘Earlier, Indian actuaries in the age bracket of around 45 years were
hired to head the offices,’ said G.L.N. Sarma, the managing director of Clearing the exams in 2009, she became the appointed actuary of Royal
Hannover Re Consulting Services India, speaking about these experts Sundaram Alliance General Insurance Company in June 2010. Some of
who assess the financial impact of future events. the other young actuaries are Anil Kumar Singh of Bajaj Allianz Life and
‘But in the recent times the age of recruits for the top post has come Ashley Edward Rebello of HDFC Standard Life.
down to around 35 years,’ Sarma, who in 2007 was himself named According to the institute, it takes at least four years to complete the
actuary at Bharti Axa Life Insurance at the age of 36, told IANS. course as some subjects are practical-oriented, needing actual work
As per Insurance Regulatory and Development Authority’s (IRDA) experience.
regulations, every life and non-life insurer should have an appointed With not many new life insurers on the Indian horizon and the existing
actuary. While life insurers should have a permanent official, non-life ones downsizing their actuarial departments, the non-life insurance
companies can have a part timer. sector is now turning lucrative for the young actuaries, say industry
Currently, there are 24 non-life insurance companies in India, six of officials.
which are state-run, and 23 life insurers, one of which is owned by the ‘Non-life companies are becoming more aware of the value that full
government -- Life Insurance Corp. time actuaries with a strong actuarial department can bring to the
Against this, there are just 216 qualified actuaries who are members of organisation in product development, pricing, financial planning and
the Institute of Actuatries of India and practise within the country, 76 of portfolio performance analysis,’ Chakrabarti said.
whom are under the age of 40. In addition, there are 46 other fellows in
‘IRDA has over the last few years strengthened the statutory reporting
all age group who are overseas.
requirement from appointed actuaries in non-life industry bringing it
R. Kannan, member-actuary, at the regulatory authority, said only four non- closer to that of life segment. It will become increasingly difficult for a
life insures have full-time appointed actuaries and others have part-timers, part-time actuary to cope with the pressures.’
many of them over 70 years of age. But the situation is changing now.
Ajay Bimbhet, managing director of Royal Sundaram, agreed and said
Some of the recent additions to the growing young-appointed or chief there is the need for greater statutory reporting, and scrapping of state-
actuaries club are Tania Chakrabarti at the Royal Sundaram Alliance determined pricing in the motor and commercial business; only a full-
General Insurance Company, Sharon D’ Costa at the SBI General time actuary can improve profitability.
Insurance and Abhay Tewari at Edelweiss Tokio Life Insurance.
‘Non-life offers more challenge to actuaries as the products have to be
In terms of pay packets, appointed actuaries are highly paid professionals priced based on risks. The market is more evolving now and there are
commanding an annual price of around Rs.5-7 million on the life side more regulatory requirements,’ SBI General’s D’Costa added.
and slightly lower in the general insurance sector. Expat actuaries
command premium price. According to the Institute of Actuaries of India (IAI) - the professional
body for actuaries - 87 of the 170 actuaries in India as on March 31,
Further, appointed actuaries are IRDA’s representatives in the insurance 2010, are in the age bracket of 26-45 years.
companies and hence can’t be hired or fired without the regulator’s
consent. One of the youngest in the insurance industry is 30-year-old (V. Jagannathan can be reached at v.jagannathan@ians.in and biz@
science graduate Sharon D’Costa of SBI General. ians.in)

Indian Actuarial Profession Serving the Cause of Public Interest 7


The Actuary India January 2011

FROM THE PRESS


On PMO advice, corporate ministry to
consult companies again on IFRS

Economic Times 14 Dec, 2010, 0438 hrs Amarjit Chopra, president, Institute of Chartered
IST, Souvik Sanyal & Dheeraj Tiwari,  Accountants of India ICAI.

NEW DELHI: Less than four months before the big The Companies (Amendment) Bill is key to a smooth
companies switch over to the global accounting shift to the new standard as certain provisions in
format, the government has called for a fresh round the present Companies Act of 1956 will have to be
of deliberation , creating uncertainty about the roll changed for the transition to take place.
out of the new global rules of financial reporting.
The prime minister’s office also asked the ministry
The ministry of corporate affairs has called for to examine the issues raised by the Public accounts
comments from the more than 300 companies that committee chairman Murli Manohar Joshi in a letter
are required to prepare their accounts according to the prime minister, asking for delaying the new
to the International Financial Reporting Standards standards.
(IFRS).
“We should focus our attention on ... the areas where
These companies can raise any regulatory concerns Indian accounting standards differ with IFRS, so that
they may have with respect to the new standards by 2013 or by 2015, the stabilised IFRS can take
that are to roll out from April next year. into account the concerns of Indian accountants and
Indian companies,” Mr Joshi said in the letter.
The fresh round of consultations follow a missive
from the Prime Minister’s Office asking the ministry Countries such as US and Japan have
to hold further consultations with the companies that already deferred IFRS implementation to
will be affected. 2015, the veteran parliamentarian wrote.
The government has already agreed to dilute many
This is the last leg of consultation with the
provisions of IFRS, particularly those relating to
stakeholders before the converged standards are
notional losses or profits arising out of market
notified, an official in the know of development told
valuation of assets and liabilities.
ET.
The convergence requires preparedness not just at
The directive from the prime minister’s office is
the level of companies that follow it, but also from
in response to the ministry’s cabinet note on the
the government in respect of regulatory policies.
Companies (Amendment) Bill, 2010.
Some of the regulations that are yet to be aligned
It also calls for finalising taxation issues arising due
for the convergence include taxation laws, existing
to the convergence process in consultation with the
Company law provisions. “There need to be specific
department of revenue.
provisions provided for under the tax code which
“In our view most of the 300 entities which have would permit adjustments,” said Rajshree Sabnavis,
to implement the norms are almost ready,” said partner corporate tax practices, BMR Advisors.

8 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

FROM THE PRESS


IAA Fund Meeting in Kazakhstan

IAA 2 December, 2010 Asta Zviniene from the World Bank. Tarmo Koll represented the IAA
Advice & Assistance Committee as the incoming Chairperson and
The IAA Fund supported the Third Actuarial School in Kazakhstan spoke about the IAA and the international actuarial profession, as
on “Insurance and Pension Research: International Experience”. well as leading a discussion at which representatives of the different
This event was held in conjunction with the 2nd CIS (Commonwealth CIS countries shared news and information about the development
of Independent States) Congress of Actuaries, including a of the actuarial profession in their respective countries. The week
Professionalism Course, from October 25-30, 2010, in Almaty, ended with a one and half day professionalism course led by IAA
Kazakhstan. The Actuarial Society of Kazakhstan was founded in Fund Chief Executive, Chris Daykin.
2001, ten years after Kazakhstan became an independent state,
and is working hard to establish the actuarial profession in this The IAA Fund provided bursaries for six (6) participants from six
rapidly developing country of 17 million people in central Asia. (6) different countries in the region other than Kazakhstan and
representatives from three (3) other countries also attended.
The previous IAA Fund meeting for Central and Eastern Europe Apart from speakers, a total of 47 people attended the 2nd CIS
took place in Moscow, Russia on November 27-29, 2008, at the Congress of Actuaries, 38 of whom were from Kazakhstan. A total
invitation of the Russian Guild of Actuaries. of 59 people attended the Professionalism Course, with 52 of them
being from Kazakhstan.
Lecturers in Almaty included David Ingram, incoming Chairperson
of the IAA Enterprise and Financial Risk Committee, on the subject The IAA owes sincere thanks to the Actuarial Society of Kazakhstan
of CARE (Comprehensive Actuarial Risk Evaluation) and Esko for hosting the meeting and for the support provided.
Kivisaari, Chairperson of the IAA Pensions and Employee Benefits
Committee, who spoke on capital requirements for pensions, ERM To learn more about the work of the IAA Fund, contact the IAA
for pensions and pensions accounting issues. A third speaker was Secretariat, care of the Chief Executive of the Fund.

IAA admits China Association of Actuaries as Full Member

IAA 22 December, 2010 Code of Professional Conduct, a formal discipline process,


and a formal process for the adoption of standards of practice,
The International Actuarial Association (IAA) is pleased to announce where applicable. The IAA Accreditation Committee reviews
that it has admitted the China Association of Actuaries (CAA) as each of these documents to ensure compliance with IAA set
its 63rd Full Member association with effect from December 14, requirements. The IAA Education Committee ensures that the
2010.  Only three years after it was established, the CAA, whose association’s education programme meets the criteria set out
President is Mr. Wei Yingning, has a membership comprising 390 in the IAA Education Guidelines and Syllabus and that all the
fully qualified actuaries, 269 Associates and 1600 students.   actuaries that will be recognised as attaining fully qualified status
Admission as a Full Member association of the IAA follows will be required to have successfully completed this programme.
a rigorous process that includes reviewing the education To learn more about membership in the IAA, contact the IAA
program and ensuring that the applicant association has a Secretariat.
Indian Actuarial Profession Serving the Cause of Public Interest 9
The Actuary India January 2011

FROM THE PRESS


IAA Election Results for 2011

IAA 5, January 2011 on several IAA committees as a member, and Chaired the
Education Committee (1999-2004) and the Strategic Planning
The International Actuarial Association (IAA) is pleased to Subcommittee of the Executive Committee (2010).
announce that, at its meeting on October 12, 2010 in Vienna,
the Council of the IAA elected the following individuals to As I look forward into 2011, I am excited about continuing the
serve as Officers of the IAA effective January 1, 2011. legacy of my IAA Presidential predecessors. Through his tireless
efforts, 2010 President Paul Thornton launched several initiatives,
Cecil Bykerk, President (one-year term ending December several of which were accomplished during his term of office, but
31, 2011) much remains to be done. The IAA’s five strategic objectives
Jean-Louis Massé, Secretary General (four-year term ending give us a clear path to follow. Important decisions remain to be
December 31, 2014) made with respect to our
new governance processes
Desmond Smith, President-Elect (one-year term ending
and major transition needs
December 31, 2011)
to take place with respect
Paul Thornton, Immediate Past President (one-year term to the newly formulated
ending December 31, 2011) standards setting process.
Cecil, a resident of the United States, is the Penultimate I pledge to help direct this in a
President of the Society of Actuaries and a past member transparent and democratic
of the Board of Trustees of the American Academy of manner and look forward to
Actuaries. He is past chairman of The Actuarial Foundation, your continued support as
currently serving on its Board. He was appointed to the I move forward on the IAA’s
Actuarial Standards Board in 2003 moving up to Chair agenda.
at the beginning of 2006. Over the years, he has served

Jean-Louis, a resident of Canada, is a Past President of the IAA Armed with so many enthusiastic volunteers from 50 plus
(2006) and of the Canadian Institute of Actuaries (2001-2002). He countries and, supported by a dedicated Secretariat, the IAA
has also served on several IAA committees as a member, and can look forward with optimism to contributing to the well-being
Chaired several committees within the IAA, namely the Committee of society as a whole. As
on Professionalism (2003-04), the Executive Committee (2006), the new SG, I share that
the Strategic Planning Task Force (2005), the Nominations goal and I invite you to join
Committee (2007), the Task Force on Sections of the Member us in pursuit of that noble
Services Committee (2008), and the Task Force on Advice and objective. Together we can
Assistance and on Actuaries Without Borders (2010). make a difference.
January 1st is also the beginning of the term of office for the To learn more about the
Secretary General. Yves Guérard retired on December 31, 2010 work of the IAA, contact the
after serving as the 1st SG of the IAA for more than 13 years. It IAA Secretariat.
will be a challenge to follow in his footsteps, but it is an honour
and privilege to have been elected by my peers to serve in this
capacity.

10 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

FROM THE PRESS


New Swiss Re sigma study highlights the significance and
potential of microinsurance in supporting
socio-economic development in emerging markets

15 December 2010 Huge untapped market potential at the bottom of the


pyramid
Zurich
The microinsurance market could generate premiums of up to
Swiss Re’s latest sigma study ‘‘Microinsurance - risk protection for USD 40 billion. Over the last decade, insurers, NGOs, mutuals
4 billion people’’ emphasises the relevance of microinsurance as and community organisations have launched microinsurance
an effective and viable risk management solution for low-income programmes across product lines and major markets. The key
individuals. Microinsurance, which has the potential to cover up drivers supporting this activity’s growth have been increasing
to 4 billion people, concentrates on few risks today, but its scope microfinance penetration (in particular microcredit), the active
is broadening. The interest of insurers in microinsurance lies very involvement of government in certain markets and need-based
much in its future potential. product offerings.
Microinsurance refers to insurance products especially designed Kalra said: ”The Asia-Pacific region is the fastest growing and
for low-income individuals. The premiums and coverage are the largest microinsurance market. Microinsurance has also
kept at a low level in order to make the products affordable grown considerably in African and Latin American countries
and attractive to those policy holders, yet remain commercially despite these being relatively smaller microinsurance markets at
sustainable. Currently, the risks covered by microinsurance are present.”
heavily tilted towards credit life insurance, but the market could
As the microinsurance industry expands, organisations must
expand to cover areas such as health, agricultural insurance, term
increasingly cope with rising risk exposure and risk accumulation.
life insurance, affordable pension products and other savings
This will lead to additional needs for capital and reinsurance
products.
solutions that leverage both traditional products and tailor-made
Microinsurance supports socio-economic development and innovative solutions. The latter includes, for example, weather
insurance growth in emerging markets derivatives and parametric nat cat solutions.

By reaching many individuals who were formerly excluded from Market potential and challenges
insurance, and thereby reducing the vulnerability of low-income While credit life, a mortality cover bundled with microcredit, is
individuals and protecting their income streams, microinsurance the largest selling microinsurance product, there is a strong need
helps to improve social stability and supports broad-based for a higher and broader level of protection that can be met with
economic development. savings/term life, health and agriculture microinsurance.

Amit Kalra, author of the new sigma study stated: “For insurers, Some of the challenges that microinsurance faces are: Insufficient
microinsurance creates an opportunity to tap into new markets infrastructure, the absence of specific regulatory provisions for
and build a strong brand value that can be used for selling microinsurance, and the lack of exposure and risk data. Insurers
conventional insurance products in the future.” Kalra added: ”It is must also find suitable partners for distribution and claims
a win-win situation: Insurers help those who urgently need access management. Products must be adapted to client needs as well
to insurance. This in turn supports the long-term economic goals as the cultural background of the prospective microinsurance
of insurers.” buyers.

Indian Actuarial Profession Serving the Cause of Public Interest 11


The Actuary India January 2011

Governments can foster the development of microinsurance Kalra added: ”NGOs, international developmental organisations
through favourable regulations and public private and donors have played an instrumental role in aiding the
partnerships development of the microinsurance sector. The contribution of
social-minded entrepreneurs in the field of microfinance and
The key objectives for governments and policymakers in this
microinsurance has also been influential in encouraging private
regard should be:
players to participate in the socially-driven businesses and
1. improving access to financial services for the low-income
thereby create new market opportunities for the bottom of the
population;
pyramid population.”
2. the development of a sound regulatory framework;
Notes to editors
3. lowering of barriers and developing efficient markets; and
Swiss Reinsurance Company Ltd
4. increasing awareness and ensuring consumer protection.
Swiss Re is a leading and highly diversified global reinsurer. The
Kalra further said: “Policymakers can deploy multiple approaches
company operates through offices in more than 20 countries.
to develop the sector, including adopting specific microinsurance
Founded in Zurich, Switzerland, in 1863, Swiss Re offers
regulations, providing financial support and sponsoring insurance
financial services products that enable risk-taking essential to
schemes targeted to the extremely poor population.”
enterprise and progress. The company’s traditional reinsurance
Governments in partnership with private players can offer products and related services for property and casualty, as well
effective alternatives as the life and health business are complemented by insurance-
For the extremely poor population or markets which otherwise based corporate finance solutions and supplementary services
are not commercially viable, governments through public private for comprehensive risk management. Swiss Re is rated “A+“ by
partnerships (PPP) can effectively channel subsidies through Standard & Poor’s, “A1” by Moody’s and “A” by A.M. Best.
microinsurance programmes by fully funding or subsidising How to order this sigma study:
premiums. Kalra added: ”The governments contribute to
The English, German, French and Spanish versions of the sigma
developing comprehensive natural disaster solutions and
study No 6/2010, “Microinsurance – risk protection for 4 billion
formulate collaborative approaches – such as PPPs – to
people” are available electronically on our sigma section. The
effectively deal with the financial consequences of large-scale
versions in Chinese and Japanese will appear in the near future.
natural disasters on the low-income population.”
Figure 1: Potential market estimates of the global This media information is also distributed by e-mail. To receive
microinsurance market your copy, please contact sigma@swissre.com

OBITUARY
Mr. N S Sastry, 68, a fellow member of
the Institute expired on 12th Dec, 2010
in Hyderabad. He had been ailing for
some time and had a long career with
LIC of India. Post retirement from LIC,
he served with Shriram Life Insurance
Company.
Mr. N S Sastry is survived by his wife,
two daughters and a son. Actuary India condoles his death and
express deep condolences to his family members and friends.
We also pray that his soul rests in peace.

12 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

Reportage
6th CILA Reportage
Sanjeeb Kumar
Sanjeeb.kumar@avivaindia.com
o However, high inflation is a serious issue in India and is
structural in nature, just not a cyclical one.
He concluded his address with the quote “learn to live with the present
until you learn to live with the future”.
Below is a short summary of the sessions held in the Seminar, copies
of these presentations can be accessed at http://www.actuariesindia.org/
Presentations/CILA/CILA%202010/CILA6.htm

Session 1: Assured lives’ Mortality & Morbidity Experience - Findings


Liyaquat Khan, President, IAI, giving inaugural address of the investigations conducted by the MMIC by Mr. K.P.Sarma

The Institute of Actuaries of India (IAI) held the 6th seminar on Current
Issues in Life Assurance (CILA) on 22nd and 23rd of November, 2010,
in Mumbai. The Seminar commenced with a welcome address by Avijit
Chatterjee, Chair, Life Insurance Advisory Group. The President, IAI, in
his inaugural address stated that the life insurance industry has faced a
wide variety of issues even within the first 10 years of opening to private
players. He proposed that the Institute should engage in debate on the
future development of the industry.

K.P.Sharma presented paper on Assured lives’  Mortality & Morbidity


Experience -Findings of the investigations conducted by the MMIC
The first session of the conference was on the results of the mortality
investigation conducted by the MMIC. Data for the investigation had
been supplied by almost all life insurance companies and covered a
three year period. Because of problems with the data in respect of unit
linked policies, the investigation had been limited to other than unit
linked plans.
The investigation was done for the usual groups like male/female,
G N Bajpai giving key note address on internal and external issues medically underwritten or not, geographic origin. The investigation
The key note address was delivered by Mr G N Bajpai, past chairman of revealed that the crude rates follow a rapid decline at early ages followed
SEBI and of LIC. In his address he presented both an insider’s and an by a hump around young adult ages and generally increasing with age.
outsider’s perspective. He noted in particular that However, there was a second hump which was observed at around age
53. The investigation confirmed the effect of selection on mortality for
• The industry faces both internal as well as external issues. about 2 years, and also there was some evidence to suggest that the
• On internal issues: selection lasted for 3 years.
o As a consequence of a low level of financial literacy,
mis-selling will remain a risk. Session 2: Issues & Opportunities in writing Conventional &
o There have been responses to this from the Regulator. Unitized-with-profit (UWP) business in India by Mr. Ashley Rebello
However, these responses have put a considerable burden
This session explored various aspects of selling Unitised With Profit
on insurance companies.
(UWP) contracts in the Indian market. The presentation gave a brief
o There is a shortage of skills in the industry and it is not doing overview of UWP contracts and how they differ from conventional with-
enough to address this shortage. profits business, underlining the increased transparency and flexibility of
• On external issues: UWP business. This was followed by analysis of recent events in the
o India is geography with large market potential and the economy Indian market that have increased the relative attractiveness of UWP
is likely to grow in double digit after couple of years. business, both to consumers as well as the insurers. The presentation

Indian Actuarial Profession Serving the Cause of Public Interest 13


The Actuary India January 2011

then focused on some of the issues that need to be addressed to make particular, the types of losses, risk event categories that should be
par business more viable, highlighting corporate governance and product monitored and economic capital guiding principles. The presentation
structure issues in particular highlighted the data challenges in calibration as well as challenges
in generation of scenarios for OR. He briefly touched upon different
approaches of OR quantification including the European Commission’s
regulatory approach.

Ashley Rebello giving presentation on various aspects of selling Unitised With


Profit (UWP) contracts in the Indian market

Session 3: The Future of ULIPs – Round Table Geoffery Au giving presentation on the data challenges in calibration as well as
challenges in generation of scenarios for OR.

Panel Discussion from Left Richard Holloway, T R Ramachandran,


Sanjeev Bajaj, V Jagannathan Keith Walters’s talked about the increased role of ERM and companies’ use of
risk appetite in a recent survey
Richard Holloway chaired a panel session to discuss the future
of ULIPs. The panel comprised of Mr. T R Ramachandran, Mr Keith Walters’s presentation started by highlighting the September
MD, Aviva Life Insurance; Mr Sanjeev Bajaj, MD, Bajaj 2008 crisis and how lack of ERM (including OR management) may have
Capital and Mr. V Jagannathan of Indo Asian News Service. contributed to certain of these failures. The increased role of ERM and
Richard started by making a presentation which highlighted the companies’ use of risk appetite in a recent survey were highlighted. The
recent regulatory changes to ULIPs. He expressed a view that presentation also touched upon the following issues:
the real issue may be mis-selling, and he questioned if there • What issues should be addressed by an organization in defining,
were alternative approaches that could be taken by the regulator/ quantifying, measuring and managing of risk at enterprise level?
industry to enhance selling practices, as opposed to placing • The requirement for a risk assessment framework by an
significant restrictions on the product that is being mis-sold. organization
The panel highlighted the importance of balancing the needs of the • Guidance on OR from consultation paper 33 of CEIOPS
consumer, distributors and the insurance company, and questioned if
the recent changes to ULIPs really benefit the consumers (as a popular Session 5: Direct Tax Code – Potential implications for Life insurance
product may be withdrawn), or distributors (as commission levels business by Samit Sawant
will fall), or the company (as profitability and sales may be affected).
Subsequent discussion highlighted that companies had focused too
much on top line growth, rather than bottom line profitability and that this
may have led to “mis-selling” ULIPs. A view was expressed that ULIP’s
do not need to be backed by equities, and that if equity movements
are behind possible mis-selling, other fixed income investment funds
should not be penalized.

Session 4: Operational Risk (OR) Management in Life Insurance by


Geoffrey Au and Keith Walter
The two presentations in this topic introduced frameworks on Samit Sawant Shared views on current tax provisions and the draft Direct Tax
Operational Risk (OR) management. Mr. Au presented on OR, in Code (DTC) applicable for life insurance area

14 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

This session covered the current tax provisions and draft Direct Tax Code In this session Mr. John Poole introduced Universal Life contracts in
(DTC) applicable for life insurance area. The focus of the presentation the form they are currently being sold in North America. He noted that
was how introduction of DTC will affect the life insurance companies Universal Life contracts are the most significant form of business being
and the policyholders. Under the DTC, policyholders’ account would sold in North America in the present day.
be exempt from tax and profits as per shareholders’ account would be
The later part of the presentation focused on how Universal Life type of
deemed as income from life insurance business. Companies would be
contracts fit in with the current Indian regulatory regime. The presentation
taxed at the general corporate tax rate, income from pension business
specifically focused on IRDA’s draft Guidelines for “Variable Insurance
would continue to be exempt from tax and losses could be carried forward
Products” and how those guidelines can affect viability of offering
indefinitely. Applicability of MAT (20% of adjusted book profits) is not
North American style Universal Life products in India. The presentation
clear. Another feature of DTC is that there is no grandfathering provision
suggested that Indian consumers should indeed have the choice of North
for past policies. If this is not rectified, then the industry may see mass
American style Universal Life products.
withdrawals before 1st April 2012.
Session 8: CPPI strategies and guarantees on ULIPs by Dr Avijit
Session 6: IFRS Implementation in Life Insurance in India: Actuarial Chatterjee
Aspects by K S Gopalakrishnan

Dr Avijit Chatterjee discusses market consistent valuation of embedded


derivatives
K S Gopalakrishnan talked about IFRS Phase 1
This presentation started with a simple example of the dynamic
This presentation focused on IFRS Phase 1 which makes limited changes
hedging strategy known as CPPI, and of the policyholder proposition
to accounting by insurers for insurance contracts while requiring increased
that it enables. The risks arising from the strategy and the policyholder
disclosures. IFRS Phase 1 allows current approaches to continue subject
proposition were discussed, with particular reference to PRE, Mass
to certain minimum requirements, however insurers would need to
discontinuance and Systemic risks in capital markets. After a brief
additionally follow certain IFRS principles. Mr Gopalakrishnan mentioned
discussion of more sophisticated algorithms, the presentation turned to
that certain areas such as unit pricing and amortisation in the context of
reserving for guarantees. It was noted that systemic risks that could arise
investment contracts require action from IRDA and have been highlighted
from the widespread use of such liability measures.
in the Informal Working Group’s report to the Authority. Mr Gopalakrishnan
also suggested that the Institute of Actuaries of India should consider
issuing the practical guidelines similar to the guidelines issued by the Session 9: Need and ability to write protection business by Mr Jug
International Actuarial Association. Finally, he briefly touched upon the Parmar
key features of the Exposure Draft on insurance contracts issued by the
IASB in July 2010.

Session 7: Universal Life Business by Mr. John Poole

Jug Parmar focused on the scope of protection business in India


This session focused on the scope of protection business in India with Mr
Jug Parmar giving a refresh of popular protection-oriented products from
around the world. This included an overview of risks and challenges in
John Poole specifically focused on IRDA’s draft Guidelines for “Variable such product types, product differentiation within each product types as
Insurance Products” well as recent developments in those areas.

Indian Actuarial Profession Serving the Cause of Public Interest 15


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The Actuary India January 2011

SWEDISH PENSIONS UNDER STRESS


By KG Scherman
Over the years I have been engaged, nationally, as Director General of basic needs and constraints, a balance that is a prerequisite for a reform
the National Social Insurance board as well as internationally, in ISSA, that is sustainable not only financially but also socially and politically.
the International Social Security Association, with matters relating to
The need for a broad and nuanced knowledge is especially important
pension systems and pension reform.i
when it comes to a pension model, like the Swedish one, that is widely
In Sweden during the 1980-ties I worked hard to explain to Swedish observed throughout the world. Some of the features of this model, i.e.
politicians that a reform of the Swedish pension system was necessary. the so-called notional defined contribution (NDC) sub scheme have
In the first half of the 1990’s work was dominated by efforts, together been introduced in Italy, Latvia and Poland, and automatic adjustments
with colleagues at the board, to contribute to the design of a good of various sorts have been introduced elsewhere. The model has been
reform. At the time I thought this had been successful, with a reform that contemplated in the reform debate in the USA and it has also been part of
aimed to strike a balance between the need for adequate pensions and the discussion about pension reform in France. It is recommended by the
financial sustainability. Consequently I presented the Swedish reform to World Bank as a viable reform model and it is referred to by the European
other countriesii. Union as containing ‘a key type of innovation’2.
Later I discovered that some features of the reform, as it finally came Following this, there is a need to sort out what the new Swedish pension
out towards the end of the 1990’s, were not that sound. There had been system really is, and to realize that it contains a whole range of different
a gradual shift of focus from 1994 when the principles of the reform features, many of them fundamentally different from what Swedish
were formulated, a shift that lost sight of the need for a proper balance welfare arrangements have traditionally stood for. And to realize that
between the level of pensions, pension age and financial constraints. the NDC system is only one part of the Swedish reform.
The shift was gradual and not that easy to trace. And early warnings
In this brief article3, I hope to clarify the consequences of the NDC
have been ignored.
principles in Sweden, in particular when it has come under intense
For instance, the inflexibility of the reform in meeting changes in the financial stress, as well as the development of other parts of the overall
demographic and economic environment has been observed only when Swedish pension system, i.e. the minimum pension and the individual
they have occurred, and even then it has not been recognized by those account scheme, and thereby contribute to a debate about the true
responsible, be they politicians or public authorities. The so-called nature of the Swedish pension model and what is needed for a positive
automatic balancing mechanism (ABM) was not contemplated in 1994. development of this model. Such a debate most probably is of value for
It was not even part of the enactment of the new system that passed judging to what extent the Swedish pension model is a viable reform
Parliament in 1998. Moreover, the funded part as envisaged in 1994 was model.
quite different from what was enacted in 1998. And even in 1994 there
As a background I begin with a short repetition of core features of the
were features of the reform that deserved criticism. In several reports
new Swedish pension system and some further elaborations on the true
to international fora and in articles in Swedish morning newspapers and
nature of the NDC concept.
periodicals as well as books, I have tried to identify the problemsiii.
I hope all this will be of interest to you
Swedish officials naturally tend to focus on the strengths of the reform,
With my best regards
i.e. its financial sustainability1, as do representatives of finance ministries
KG Scherman
throughout the world. But there is much more to say. A nuanced, in–
depth, international debate is badly needed. Only then can the true
nature of this reform be made clear, and a development of its strengths 2
A recent publication is a Green Paper on Pensions 2010-07-07 now out for
be brought about while re-establishing a proper balance between the comment all over EU. The publication can be found at http://ec.europa.eu/
social/main.jsp?langId=en&catId=89&newsId=839&furtherNews=yes. An
analysis forming a starting point for the Green paper is an Interim Joint EPC-
SPC Report on Pensions 2010-05-31 that can be found at http://europa.eu/epc/
1
See for example Settergren: ‘Impact of the financial and economic crises on publications/index_en.htm
the Swedish pension system’, in the ISSA Social Security Observer that can be 3
I thank Bernard Casey, Jan Hagberg, Warren McGillivray, Larry Thompson,
found at http://news.issa.int/eng/newsletter/newsletter_repository/observer/ John Turner and Ellis Wohlner for valuable comments to an early draft of this
en/social_security_observer_10/(article)/4547 paper.

Indian Actuarial Profession Serving the Cause of Public Interest 17


The Actuary India January 2011

The Swedish pension system: a short description It contains a minimum pension, guaranteed by the state for all residents
in Sweden. In addition, there are various supplements available for
There are many reasons to observe the Swedish reform
those who have no, or only a low, pension. The guarantee is indexed
The Swedish reform contains a range of features, both from a pension according to the cost of living, regardless of the development of wages.
system point of view and when it comes to pension policy that together Hence, in the long run, its relative value will diminish in the face of real
can explain why it has been so much observed. growth of wages. This is the stated policy of the government.
From a pension system point of view there are the following The public earnings-related scheme consists of two parts: a fully funded,
features: savings scheme, called the PPM-scheme and a pay-as-you-go scheme.
v A completely changed PAYG scheme, ending up in the ‘notional A core idea in the new system is to retain a stable contribution rate of
defined contribution’ (NDC) model; including 18,5% of covered earnings into the indefinite future. The contribution is
 Life-time contributions as the basis for the level of retirement split between the PPM scheme and the pay-as-you-go scheme. Certain
pension; periods (while receiving social security benefits, periods of child care,
 Abolishing the ‘normal pension age’; military service and higher education) give pension rights for which the
individual and the state pay the contributions in full.
 Taking increasing life expectancy into account in the
calculation of pensions, thereby steadily raising the age The fully funded savings scheme is new. The contribution to that
when a person can retire with an adequate pension. part is 2.5 percentage points and it pays for life annuities based on
insurance principles. It is administered separately from the pay-as-
v The introduction of a funded pension component alongside the
you-go earnings-related scheme. Private and public fund managers
PAYG part;
are available. The rest of the administration and the insurance function
v A successive phasing out of the minimum pension in the face of of this sub-system is a public responsibility.
economic growth.
The pay-as-you-go scheme is completely redesigned. It has become
From the point of view of pension politics, other features come to the a notional defined-contribution (NDC) scheme. This redesign has been
fore: much commented upon in the international debate. One of its principal
v There was a broad political consensus behind a reform that intentions is to maintain a stable contribution rate into the indefinite
effectively reduces pensions and pension expenditure; future. This scheme has the following features.
v The benefit formula is tightened up and benefits are based on all
v There is a stated policy that the contribution rate to the public
contributions over an individual’s full working career.
earnings related pension system should be unchanged into the
indefinite future. v Indexation rules are linked to average wage development:
 pension rights being indexed to average wage growth,
v There was no public opposition despite reductions in future
pensions.  pensions in payment being indexed to average wage growth
reduced by 1.6 percent per year (flexible indexation with the
v Sweden’s reputation as an advanced welfare state makes it useful
‘norm’ 1,6 %) 4.
for politicians elsewhere to refer to their reform proposals as
v Benefits are made dependent on life expectancy, meaning that
following the Swedish model.
a benefit drawn at a certain age by an individual belonging to
As can be seen, the NDC system is only one part of the Swedish reform. one cohort will be lower than that for the preceding cohort, if life
All parts taken together, including the successive phasing out of the expectancy has increased.
minimum pension and the introduction of a funded component, must
The PAYG part is financed by a contribution of 16.0 percentage points.
be taken into account, alongside with the NDC sub scheme, in order
to see what has happened and what will be the result for current and
future pensioners.
4
The ‘norm’ used comes into the annuity factor as an imputed real rate of
The rules
return. Its function is to rearrange the time profile of pension payments over an
The new old-age pension system contains an earnings-related part individual’s time in retirement, making first years pension larger than it would
otherwise have been. A reason for this approach was the political wish to offer a
and, in addition, it offers protection to those who have no, or only a low, first years pension that was of the same magnitude as in the old system. It has no
earnings-related pension. connection to any projections of presumed increases of real wages.

18 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

The PAYG system contains two other important features. The first is a to ‘life time earning’s. But this is true only provided that the scheme
special fund, called the buffer fund. All contributions are paid into this does not come under financial stress7.
fund and all pensions are paid out of it. As a consequence, the buffer
Now, it must be observed that every pension system trying to retain benefit
fund accumulates capital in certain periods, for example if large cohorts
and contribution rules unchanged comes under financial stress following
reach working age, and, consequently, the labour force expands, or if
demographic developments and other changed circumstances, as soon
labour force participation increases. The surplus generated under such
as ‘dedicated reserves’ or ‘buffer funds’ that might have been available at
periods will be used to counter financial strains on the system in other
some point in time, are depleted. And when financial stress occurs, there
periods. Such strains will emerge when the baby boom generation
are fundamental differences between these types of schemes.
reaches pension age. At the outset of the new system, most of the
pension fund that had been accumulated under the old ATP pension Under financial stress a traditional DB scheme becomes subject to
system was transferred to the buffer fund, where it serves as a sort of a review, where benefit levels, pension age and contributions all are
start up capital. discussed. Basically, what happens is a political process aiming at
striking a new balance between these factors. Such a reaction is not
The second special feature is an automatic balancing mechanism feasible in a NDC scheme, where, as we have seen, the contributions
(ABM)5. New calculation methods have been established to make it themselves are the basis for the accumulation of pension rights.
possible to estimate the assets and liabilities of the PAYG scheme. Consequently, in a NDC scheme it is not advisable to try to help to solve
If the estimated liabilities of the system exceed its assets, the yearly current financial problems by increasing the contribution rate, as such
revaluation of pension rights and pensions in payment will be reduced an increase would create new pension rights and hence risks to create
enough to enable pension liabilities to grow at the same rate as the new financial problems in the future.
system’s assets. Obviously, such a mechanism makes the system
financially stable. Whatever happens, it reduces current and future In NDC schemes, the desire to stabilise contributions has been
pensions by as much as needed in order to restore financial equilibrium transferred into a basic principle; contribution rates are intended to
to the system. remain unchanged into the indefinite future.
The consequence is that there is no way to change the NDC part of a
About the general NDC concept pension system in the face of changes in external conditions with a view
to attain a new balance between social goals and financial constraints.
There are some misunderstandings about core features of the NDC
Instead all adjustments must be made on the benefit side, either in the
system. For instance, even international experts from time to time state
accumulation phase or for pensions in payment or both.
that defined benefit schemes in general as well as the so-called point
systems can be made to mimic the general NDC model6. Only the Swedish system contains a mechanism that makes the basic
definition of the NDC concept to a consistent design. This feature is
This statement is true under the condition that the parameters, such
the automatic balancing mechanism (ABM) that operates directly based
as those enumerated above, (see page 3), built into a NDC scheme
on the financial balance. Whatever happens, the ABM reduces current
are enough for keeping the scheme in financial balance under various
and future pensions by as much as is necessary in order to maintain
developments of the environment, i.e. demography and economy,
the stability of the system’s financing. But it is important to realise, that
without a need to increase the rate of contributions. Under such
as soon as the basic NDC approach is applied, i.e. the contribution
circumstances a traditional DB (point) scheme, given the appropriate
themselves form the basis for accumulation of pension rights, the
parameters, can function exactly as the NDC-scheme, when it comes
outcome must be the same; all adjustments must be made on the
to accumulation of pension rights and pensions in payment. The NDC
benefit side. The alternative is to abandon the NDC principle.
scheme then functions as if ‘life time contributions’, that are the basis
for pension rights accumulations in all NDC schemes, were equivalent
7
In the international debate ”life time earnings” are sometime used as the
basis for pension rights accumulation in the definition of the basic NDC concept,
This mechanism was at first named ‘the Brake’ a name still
5
reserving the strict dependence on contributions to the Swedish system, with
widely used its automatic balancing mechanism. But then, the whole concept becomes
6
Se for instance Whitehouse: ‘Decomposing National Defined-Contribution meaningless, being in fact nothing but a certain form of a ‘parametric reform’ of
Pensions’ in OECD Social, Employment and Migration Working papers No 109 traditional DB schemes. And it is a fact that all the countries that are said to use
that can be found at NDC, i.e. Italy, Sweden, Latvia and Poland use contributions as the basis for
http://www.oecd-ilibrary.org/social-issues-migration-health/decomposing- accumulation of pension rights. As do the original proponents of the model, i.e. Mr
national-defined-contribution-pensions_5km68fw0t60w-en Palmer in Sweden and Mr Holzmann at the World Bank.

Indian Actuarial Profession Serving the Cause of Public Interest 19


The Actuary India January 2011

Here, it must be stressed that ‘abandoning the NDC principle’ only government and the Social Democrats about a new pension system, will
refer to the need to abandon the inseparable and automatic connection remain in force10.
between contributions and benefits that is the basis for that concept.
Most probably, this will not be so. And in addressing the problems it is
As soon as this step is taken, by introducing some sort of contributions
not enough to do as last year. What happened then is the following.
that does not give rise to pension rights, such as the ‘solidarity
contributions’ introduced in France or by abandoning all together the In late 2008 it was realised that the ABM ‘braking’, mechanism in the
contributions as the basis for pension rights, the NDC system has national pension system would, if nothing was done, reduce pensions,
been transformed into a ‘traditional DB-scheme with interesting new both new pensions and pensions in payment 11, by about four percent
features’. As already pointed out, such a scheme can contain all other in 2010. Representatives of the political parties behind the system
features nowadays and by some experts solely attributed to the NDC quickly met to seek solutions. The outcome of their deliberations was to
concept. propose a revision of the calculations that determine how the ‘braking’
mechanism functions. Instead of a pension reduction of around four
The significant difference that remains after ‘abandoning the NDC
percent, or about 500 kronor per month for a ‘typical pension’, the
principle’ then is that politicians once again resume responsibility for
reduction in 2010 should become about less than half as much, or 200
monitoring the generational contract in order to strike a fair balance
kronor per month.
between social goals and financial constraints. And, after all, the
sooner this need is realised, the better. Already after the financial The Swedish Pensions Authority12 was given a few weeks to investigate
crises during the last couple of years we have seen that politicians and elaborate on the technicalities of the politicians’ proposal, and
have intervened or voiced plans to mitigate the effect of the crises on the few weeks of consideration that then followed resulted in most
pensions in all four countries (i.e. Italy, Sweden, Latvia and Poland) groups rejecting the proposal. The day after the consideration period
that usually are mentioned as those applying NDC8. This is a good had expired, the political parties in cahoots met and agreed to anyhow
and valuable proof that the belief that it should be possible to relieve proceed with the proposal. Despite the Pensions Authority writing: ‘The
politicians of the responsibility for continually monitoring the public Pensions Authority rejects the proposal since it does not lead to the
pension arrangements was out of touch with reality already from more even development of pension levels that was desired.’
the start. This harsh statement didn’t influence the politicians. What was ignored,
Much needs to be done, an in-depth debate and analyses are of vital or perhaps not understood, was that the Pension Authority’s investigation
importance showed that the new rules would result in the ‘Brake’ continuing to apply,
and even more severely, during the following years.
Pensions in focus in election campaign, but that is not enough
Instead of such cosmetic reforms, in addressing the real problems,
Sweden had a general election in September 2010. The main
politicians have to recognize that pension systems are very much about
combatants were two blocks that stood against each other. It was ‘the
pension adequacy, not only about financial sustainability. And a long
Alliance’, consisting of the parties forming the current government,
range of failed forecasts must also be taken into account.
Conservatives, Liberals, Center and Christian Democrats, and ‘the
red-greens’ consisting of the Social Democrats, the Left party and the The reform, as designed, was not intended and not suited for
Green party9. Both blocks promised that the time has now come to automation
prioritize pensioners. Improvements in various respects, such as health
care, care for the elderly and related matters, are imminent. But the Interestingly enough, the Left party and the Greens accepted that this
10

pension system should not be changed. The ‘pension agreement’, i.e. agreement remained untouched by the new coalition between them and the
the agreement from 1994 between the present four parties in the current Social Democrats
The accumulation of pension rights are also affected. But losses can
11

be recovered, should the future be characterised by a positive financial


8
About this see: Chłoń-Domińczak A., D. Franco & E. Palmer, 2011. The First development. That is a complicated matter which is not dealt with here.
Wave of NDC – Taking Stock Ten Years Plus Down the Road in Holzmann, R. 12
Over the last ten years the authority in charge of public pensions has changed
& Palmer E. (eds.) Non-financial Defined Contribution (NDC) Pension Systems: names several times. Up until 2004 it was the National Social Insurance Board.
Progress and New Frontiers in a Changing Pension World. Forthcoming publication Between 2005 and 2010 it was the Social Insurance Agency. In parallel for a
of the World Bank. A draft can be found at http://www.forsakringskassan.se/ couple of years there was also The Premium Pension Authority, in charge of
omfk/ndc_pension_conferens the individual account subscheme. Today it is the Swedish Pensions Agency
9
The election result was that the Alliance received more seats in Parliament that is resposible for all parts of the Swedish public pension. To avoid confusion in
than the red-greens, but did not obtain an absolute majority. A new party reached this paper the term The Pensions Autority is used regardless of which of these
20 seats, which is more than the difference between the two big blocks. authorities it is that have been in charge at each particular time.

20 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

The agreement on principles for a pension reform was concluded by five the Swedish society had had more than ten years of stagnating or
parties in parliament in the middle of the 1990’s. From the agreement even falling real wages. As a result, no one considered what would
it follows, among other things, that pensions shall be dependant on the happen if real wages should begin to grow during the implementation
development of the economy. That is a good feature of the system. But period of the new system. But that was what really happened. During
the principles did not contain either a ”Brake” - the mechanism that now the last half of the 1990’s and the beginning of 2000 there was a steep
has been activated to reduce pension payments - or any investment of increase in real wages. Pensions, on the other hand, began to follow
the pension buffer fund in the stock market, or an individual account wages only from 2002 onwards. Compared to wages, the pension for
part, the so-called PPM system, with the scope and design that it was an individual that had retired 1994 or earlier declined by more than
ultimately given. Nor was it envisaged that taxes on pensions would 30% as a result.
become higher than on wages, which, as we will see in the following,
The financial prospects of the pension system itself were also
has over the last four years become a reality.
misinterpreted. The financial constraints, or – more accurately – the
In fact, already back in 1999 it was possible to see that something was absence of financial constraints, were formulated in the discussion
going wrong. In my 1999 report for the ILO, I wrote by way of a closing about a payment from the buffer fund to the state budget of monies to
remark the following: ‘My concluding opinion is that Sweden is in the compensate for some of the extra burdens that it would incur as a result
process of building a new pension system that is sustainable and, of the reform. The terms of the original documents are worth citing.
generally speaking, fair. The approach chosen for the reform design After having described the proposed compensation, the text reads: ‘Of
makes it difficult to see which the differences between the old and the course these proposals affect, as has been described above, only the
new systems are. The general public is still to be informed. Whether financial side. Neither the successive phasing in of the contributions,
the reform will be sustainable in the long range will to a considerable nor the transitional use of the buffer fund for other then old-age pension
extent depend on how still not decided questions are settled and on payments, affect the benefit side, that is obvious’. But reality soon
how the political parties in the future will handle the dialogue with the proved differently.
general public.’ Instead of pausing to take into account all these changes in the
foundations of the reform in order to find out what they really meant, the
Alas, in 2010 it must be concluded that among the ‘still not decided
politicians proceeded with the design and implementation of a totally
questions’ was what ultimately became a complete automation of the
automatic balancing mechanism and with plans to transfer large sums
pension system, preventing a sound approach to the need to continually
of money from the pension buffer fund to the state budget. To make
monitor the system in the light of new projections and new knowledge,
this possible, and in addition to other restrictive measures, including a
and a transfer of funds to the state budget that was too large (see
need for an effective pension age13 of 68 or 69 for younger generations
below).
(should today’s forecasts about the development of life expectancy for
In retrospect it is easy to see that the decisions back in 1994 were those generations come true), a ‘Brake’ was added that always reduce
based on assumptions and forecasts that have not materialized. Those pensions and accumulated pension entitlements further and as much
assumptions were then ”locked into” the system for all eternity by the as is needed in order to restore financial balance After this automatic
automatic balancing mechanism. Among such failed beliefs about system was put in place, the politicians seem to cease concerning
coming years that have proved to be wrong are forecasts about life themselves with social justice and a proper balance between the active
expectancy and about the development of real wages. and the retired population. Everything had been completely thought
through.
The Pensions Authority, responsible for the calculations that formed the
basis for the new pension system, anticipated a modest increase in life What is needed now is to address the problems in a constructive
expectancy and, consequently, a need to increase the pension age with manner. This observation applies not only to the current visible and
less than one year in the long run. Today we know otherwise. Already acute problems, i.e. what has happened with the level of pensions in
today the life expectancy exceeds what was anticipated for the long run payment, but also to the problematic situation of younger generations.
in 1994 and today’s projection for further development of life expectancy
ends up in young people having to anticipate working until 68 or 69 to 13
‘Pension age’ here used as the age up to which a person belonging to a certain
get a decent pension. birth year cohort needs to work, in order to receive a pension of the same size as
a person born 1940, with an equivalent earnings history. This is the concept used
The same inability to look into the future influenced the discussion in the yearly official report on the performance of the public pension system. See
more about this on page 16 ff in the following and the quotation, page 15, from an
around the development of real wages. At the beginning of the 1990’s official report that the Swedish government has submitted to the EU.

Indian Actuarial Profession Serving the Cause of Public Interest 21


The Actuary India January 2011

There is an urgent need for a discussion about how the labour market The Minister of Finance views his standpoint as reasonable, and subject
functions and what employment opportunities are available, as well to political will. But there are many who say otherwise.
as for renewed analyses and discussion about the individual account
For several years the Pensions Authority wrote in its annual report on
(PPM) system and what contributions to the public pension system are
the pension system, (‘the Orange Report’), that the minimum pension
needed to make it possible to offer decent pensions.
would remain constant in real monetary terms, but with the addendum
that ‘The realism in this assumption can be questioned.’ This comment
More about the parts of the pension system
is found on page 33 in the report for 2008.
The minimum pension
The Ministry of Finance’s Expert Group for Studies in National Economy
The minimum pension, i.e. the guarantee of a minimum amount to be (ESS), wrote in ‘Generation analyses; redistribution between generations
received as a public pension, is indexed to the cost-of-living, and as in a welfare state’ that despite current regulations one counted on
real wages increase the minimum pension will gradually decline as a subsidies and transfers being adjusted upward in accordance with
proportion of average wages. Since 1998, when the new pension system wages. Otherwise the welfare state will become smaller and smaller in
was enacted, this reduction in the minimum pension has amounted to the future (See page 50).
20%. Diagram 1 illustrates this.
The OECD publishes reports on pension systems throughout the world.
Diagram 1. Minimum pension is indexed to cost of living, not to Its June 2007 report contains the same opinion as the ESS report.
wages. Comparison of development 1998-2009 of the sum 6 500/ Statements from both Sweden and Great Britain that the countries
month intend to leave minimum pensions unchanged in real monetary terms
are noted. The OECD remarks that over a 40-50 year period this would
lead to unrealistically low living standards for poor people and would be
politically unsustainable. Therefore, the report assumes that there will
be an indexing to average wages.
Having said this it is possible that Borg’s standpoint may reflect a desire
to modify the basic tenets of the welfare state -to reduce the extent of
the welfare state and to move from general compensations to need-
based benefits, such as the housing supplement.
In 1994 there were several parties who asserted that it would be necessary
‘in the political process’ to successively adjust the minimum pension if
wages rose, which they have indeed done to an unprecedented extent
over the past 10 years. One wonders where those parties have gone,
and how they view today’s politics. Do they now all agree to reducing
the extent of the welfare state?
Source: Authors own calculations
Note: See footnote 14, page 11 for the exchange rate. Income pension/ATP
Even when one takes into account that Swedish pensioners with low In January 2010, the Pensions Authority published a forecast of how
incomes have access to a housing supplement, there still is a large gross pensions, i.e. pensions before income tax, will develop. One
reduction. can see that a monthly pension in payment 2009 of 12,00014 kronor, a
pension amount that is used as ‘the typical public pension’, will reduce
An increase in the minimum pension was discussed a few years ago.
to 11,300 kronor in 2011, and then in 2014 rise back to 12,000. A salary
Minister of Finance, Anders Borg, replied that ‘there is an agreement
in 2009 of 12,000 kronor will, on the other hand, continually increase
how this should be dealt with’ (referring to the original 5-party
to about 14,000 kronor in 2014, i.e. 2,000 kronor more per month for
agreement), nothing should be changed, and as far as he knew there
the working person. The development can be seen in the following
was no one proposing any change. A rather interesting observation
diagram 2.
since it demonstrates an unwillingness to listen. Several parties had
in fact declared that the minimum pension ought to be raised. More
importantly, the old agreement gives the Minister and anyone else who
was part of the agreement veto in this and all other pension issues. 14
The exchange rate is around 10 SEK, ‘kronor’ to one Euro

22 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

Diagram 2. Comparison of official projections of development of recalculation, the recalculation was ’too large’ for several years15. In
a salary and a pension, starting from 12,000 SEK a month each in total this accounted for 160 billion kronor in weakening of the pension
2009 system’s financial balance16. Additionally, there are elements in the
basic method for determining the income index that causes problems
for the financial balance, according to a spring 2010 report17 from the
Pension Authority, which failed to reveal just how much this influenced
the balance. The Pension Authority proposed a deeper analysis of the
problem, but no political reaction has been heard.
One recalls politicians and civil servants for several years boasting
that ‘the new pension system outperforms the former ATP’, but it is
now obvious that this was due to errors. Now they have realized that
pensions were raised too much and are taking back the excess with the
help of the Brake.
2. Another factor weighing on the finances is increased longevity. We
are living longer and longer, and this affects expenditures from the pension
system. In order to counteract this, pensions are successively reduced.

Source: Report 2010-01-18, from the Pensions Authority to the For example, Anderson, who retired in 2008 at 65 years of age, receives
government and authors own calculations a smaller pension than Peterson, who retired in 2005 at the same age
and who had the same amount and pattern of lifetime income. The
An important reason for the pension level declining and the gap between
amount of the decrease is determined by how the number of older
the retiree and the active worker increasing is that the automatic
persons has developed over the years.
balancing mechanism was activated. It reduces the pension by 200
kronor in 2010, and an additional 500 kronor in 2011. There will be a For social reasons, one doesn’t want to reduce pensions even for those
further reduction in 2012, and the Brake is still applied in 2014. that already have retired. This costs money. From the pension system’s
annual reports one can calculate that finances have been depleted by
The politicians do not consider this to be a problem. They refer in election
220 billion kronor as a result of this18. This cost wasn’t planned for, and,
after election to unanimity, the automatic system and ‘stable finances’.
no matter how well socially motivated this concern for those already
It is significant to note that in an official answer in Parliament on 9 April
retired may be, the cost must be recovered. This is brought about by
2010, the responsible government minister did not even mention the
way of the Brake, and the end result is that those already retired share
pension system’s basic task of providing stable pensions that provide a
the burden of the costs due to increased life expectancy.
reasonable standard of living.
3. A third factor affecting finances, is how younger people are acting
Politicians claim that the economic crisis is the cause of the ’Brake’ being
in regards to work. If they begin working at an older age, or otherwise
applied, particularly through the reduced asset values of holdings in
delay their careers, the ‘contribution assets’ of the pension system are
the buffer fund. Government representatives claimed this most recently
reduced. And this has been the case. Young people are beginning work
in the parliamentary debate in April. But they have misunderstood the
later, and other changes have also occurred. More than 200 billion
situation.
kronor has in this way ‘disappeared’19.
It is true that the value of the buffer fund declined by 191 billion kronor
in 2008. But much of that loss was recovered in 2009. Nevertheless, 15
The income index is based on average taxable earnings, i.e. earnings less
pensions are reduced. This depends on something other than the ups- a base amount that is deducted before taxable income is established. When
and-downs of the buffer fund. Considerably more than 600 billion kronor this base amount is increased, which has been the case over the last decade,
have been lost in the complicated formulae that steer the ‘braking’ people with earnings below this threshold are not included when the average is
calculated.
mechanism. We shall study three decisive factors.
See Ole Settergren in an article in the periodical ‘Veteranen’, issued by the
16

1. As a result of an unnoticed connection between the tax rules Swedish Association of Senior Citizens, Nr 1 2010 (available only in Swedish).
and the ’income index’, which is the basis of the annual pension 17
Report 2010-02-26 (available only in Swedish)
18
The author’s own calculations based on annual reports 2001-2009
19
The author’s own calculations based on annual reports 2001-2009

Indian Actuarial Profession Serving the Cause of Public Interest 23


The Actuary India January 2011

The saying that every individual himself bears the brunt of his/her life long since planned to retire by August 2008. She had an agreement
choices is incorrect. So is the claim that the ‘Brake’ ensures that ‘costs on this with her employer. But in August 2008, her PPM funds have
are not shifted on to our descendents’. Older peoples’ pensions are being dropped by 40% and her pension will be only 12 000 SEK. Compared
reduced due to younger people changing their life styles, often due to the to Mr Anderson she loses 1000 SEK per month for the rest of her life.
unavailability of jobs. A reverse shifting of costs, in other words. The proponents of the financial market must try and understand that for
Mrs Anderson this is of great importance, as it will significantly affect her
Without these three factors the Brake would not have been needed,
standard of living.
despite the 191 billion kronor decline in buffer fund assets 2008 and
despite the loss of about 300 billion caused by the economic downturn20. Theoreticians say: One has to plan, and take care to switch to less
Referring to the economic downturn is a way to avoid facing the real risky investments well in advance of retirement, or keep one’s funds
problems. until stock markets recover, or delay retirement. But, what is meant by
‘well in advance’? Governments could not foresee what happened in
The available money is not enough to pay pensions, not today and even
2008. Why then assume that ordinary citizens are able to forecast what
less in the future. It is unreasonable that the only measure to counter
will happen? And ‘keep one’s funds until stock markets recover’? Is it
the shortfall is reducing pensions and removing the social aspect in the
sound to await new upturns that soon will end in new downturns? And
pension system, and, moreover, doing all this automatically and without
which funds should the individual choose? How long might one wait
any discussion. The effective pension age must be raised, and probably
for a recovery? These thoughts worry those who are young; shall the
also the rate of contributions. These are the real issues; the unfortunate
elderly too be hunted by this impossible choice? Finally: ‘Delay one’s
‘Brake’ has become a veil that hides the truth.
retirement.’ Who believes that Mrs Anderson would be successful in
The individual account system is not adequate, neither for the overall approaching her employer, saying: ‘I have changed my mind; I want
financial situation, as contributions that are needed to finance the PAYG to stay until the market has recovered’. Particularly when layoffs are
scheme are diverted to this system, nor for the younger generation widespread and employers seek opportunities to reduce their staffs.
when it comes to pension adequacy
Others say: ‘Now the prophets of evil are out again’. 2008 has been
A part of the discussion must be about the future of the PPM system, exceptional. But that is not true. It is only seven years since the stock
which diverts recourses that could otherwise be used for the PAYG markets slumped in the same way as in 2008. The situation for the
system, and which transfers big risks onto the individual. persons described above would have been the same then. And it will
In a 19 January 2009 morning newspaper article, Mr Leif Pagrotsky, continue in this fashion, if we do not succeed in getting a totally new order
member of the former Social Democratic government, proposed that of the financial markets than what has emerged during the last 20 years.
the PPM system be evaluated. He stated that it is not needed. It is Paul Krugman speaks about the ‘spirit of the times’ that has caused an
expensive, it subjects people to the risk of inferior pensions and it unfounded belief that financial markets can only grow, only create profits.
presupposes that individuals should be able to make rational choices This frenzy seems to have reached the pension politicians too, and caused
between 750 funds. them to leave individuals at the mercy of these markets. A reaction will
The opponents to this view answer that while stock markets go up and come when people ultimately understand what really happens.
down, in the long run the positive result will prevail. But by saying so, So, Pagrotsky got it precisely right. Something must be done. In 20
they disregard the real risk that people are facing. The situation for years’ time, the examples above will be reality. But then it will be too late
future pensioners disappears in the airy sphere of economic theories. to change. One possible alternative is to totally abolish PPM. But there
Take the situation of Mr Peterson and Mrs Anderson, as it would be are other alternatives. One is to return to the agreement on principles
if the PPM-system were in full operation. Mr Peterson draws his first from 1994. Not many people know that that agreement contains a
year’s pension in August 2007. Thanks to the rally in stock markets funded component with a scope and design that radically differs from
his pension will be around 13 000 SEK a month, of which 2 500 SEK what was ultimately decided in 1998.
stems from the PPM system. Mrs Anderson is a bit younger, she has In 1994 the views expressed were more in touch with realities. Then it
was carefully explained why it was not possible to divert more than two
percentage points, of the total contribution rate of 18.5 %, to the PPM
20
This rough estimate is based on comparison between how the ‘contribution part of the earnings related pension. Otherwise, following basic rules for
asset’ has developed between 2001 and 2008 (between 140-400 billion SEK/year a PAYG system and the ensuing transitional costs, the pledge to honour
with a median value of around 185 billion) with the development 2009, that was a
reduction of 115 billion SEK. the entitlements accumulated in the old ATP pension system could not

24 Indian Actuarial Profession Serving the Cause of Public Interest


The Actuary India January 2011

be fulfilled. Regardless of this knowledge and a very clear explanation, Here is the tax difference in 2010:
later on the size of the PPM part was changed to 2.5%. Furthermore,
Monthly wage or pension Amount of higher tax on pension
in 1994 it was stated that the need to offer a security for the individuals’
savings should prevail over the wish to offer a wide range of alternatives 9 000 500
for investment of the individual’s funds. The rules governing life
insurance companies’ investments and risk sharing between different 12 000 618
individuals and cohorts were mentioned as an example. But in 1998 15 000 737
the unit-linked model was chosen instead. In that context it was simply
18 000 906
stated that neither minimum guarantees for the return on investment nor
any other particular restrictions apply in such a model. It has never been 24 000 1253
explained why the 1994 principles were abandoned.
Note: About exchange rate, see footnote 14 page 11
A reform of the PPM part of the Swedish public pension would be
Both the effect of the Brake and the difference in tax has aroused
significant beyond creating a better pension system. Like Krugman stated,
opposition. Both political blocks have promised to reduce the tax
we need to change the spirit of the times. A more critical view with greater
difference, but to different degrees. It is necessary in this connection to
perspective of what the financial markets can offer is needed. Such a
see through the rhetoric. A reform of one factor does not compensate
view formed a basis for the pension agreement in 1994. A return to those
for the effects of the other one. One can observe that the promised tax
foundations and designing reforms based on them would contribute to
reduction won’t compensate for the reduction caused by the Brake in
creating a new spirit of the times, as should an abolishment altogether
2011, even less so will it reduce the gap between pensioners and those
of the PPM part. One should not underestimate the importance of such a
still at work.
step. The Swedish pension reform has been much observed throughout
the world. A change would be observed too. It is interesting to note reasons that are given for reducing the tax
difference. Minister of Finance Borg says: ‘I don’t believe that anyone
Now, before entering a discussion about problems that will be acute
involved in the pension agreement could predict the enormous swings
primarily for younger generations, let’s shortly address what has
in the stock market and the economy. It isn’t reasonable that pensioners
happened with taxes. Interestingly enough, taxes are not seen as a part
should be so affected by them.’
of the pension agreement. But in fact, they are of significant importance
for pensions as compared with wages. Anders Borg’s conclusion is that tax reductions are needed. These
aren’t meant primarily to reduce the tax difference but to provide a
Taxes play an important role in assessing pension adequacy
(minimal) compensation for what the Brake has caused. It should
In Sweden, one pays income tax on pensions. What one has to live here be mentioned that the parties to the left, the Red-Green Alliance,
on is the net amount after tax. Major changes have taken place in this also want to reduce taxes for pensioners. But these want this done to
area. Through the so-called ‘job tax reduction’, the Alliance government correct the gap in taxes on wages and pensions, put in place by the
has made a major change in how much tax one pays, reducing taxes ruling Center-Right Alliance, and this correction is independent of the
on wages to a much higher extent than on pension. Consequently, Brake.
comparisons between pensions and wages are affected not only by
Contd in the February 2011 issue………….
application of the Brake, but also by the difference in taxation.

About the Author:

Mr Scherman is Honorary President of the International Social Security Association. He has had a long career in the Swedish
public sector. From 1965 to 1976 he was engaged on the municipal level. In 1976 he was appointed State Secretary of the Ministry
of Housing and Physical Planning. In 1979 he became the Managing Director of the Karolinska Hospital in Stockholm. He was
Director General of the Swedish National Social Insurance Board 1981-1996. His international engagement includes many years
of participation in the activities of the ISSA, and between 1993 and 1998 he was the President of the Association.

Mr Scherman holds degrees as a Master of Engineering from The Royal Technical High School in Stockholm and as Master of
KG Scherman
Business Administration from The Stockholm School of Economics kg.scherman@abc.se

Indian Actuarial Profession Serving the Cause of Public Interest 25


The Actuary India January 2011

PUZZLE CORNER When the students boarded Rendrag’s car, he said,” If you can tell
me the mathematically correct price you should pay for your portion
of the trip, I’ll let you ride for free. Remember, your answer has to be
Puzzle No 145:
mathematically equitable for all of us”. How much should the students
Two friends, Alvin and Brendan, played a 25-game tournament of pay for their journey?
horseshoes one day. They agreed that, to decide the winner of the
tournament, instead of counting the number of games each player won,
Answers to puzzles:
they would count the overall number of points scored.
Puzzle No 141:
Alvin started first game, and after that, the player to throw first was the
person who won the previous game.(None of the games were tied). Over A triangle measuring 12 by 16 by 20 will just fit inside a triangle measuring
the course of the 25 games, Alvin won six of the games in which he threw 11 by 60 by 61.
first, and Brendan won seven of the games in which he threw first. Puzzle No 142:
After 24 game, Alvin and Brendan had each scored the same number of Indira Gandhi ( in DIRA, G and HI )
points. Which player won the 25th Game and therefore the tournament? Correct solutions were received from:
Puzzle No 141:
Puzzle No 146:
None
Nitram Rendrag, the world’s most renowned puzzle creator, often rents
Puzzle No 142:
a private dining car on the Charlotte- Greensboro- Charlotte turn-around
shuttle. The railroad charges Rendrag $120 for the trip. On a recent Sejal Chhatriwala
trip, the conductor informed Rendrag that there were two students at
the Franklin station who wished to go from Franklin to Greensboro and Shilpa Mainekar
back to Franklin. Franklin is halfway between Charlotte and Greensboro. shilpa_vm@hotmail.com
Rendrag asked the conductor to let the students ride with him.

The Funny Actuary


l An actuary is flexible; he/she is either right, or can prove it much does he find to pay the bill? Answer: Zero. Actuaries
to be so. always round to the nearest ten million.
Three
l actuaries go to lunch. The waiter leaves a check for
$26.40 at the edge of the table. When the waiter returns, how Acknowledgement: http://users.aol.com/fcas/jokes.html

Quotable Quotes
The secret of health for both mind and body is not to mourn for the past, worry about the future, or anticipate troubles, but to live in the
present moment wisely and earnestly. (Buddha)

Birthday Greetings
Many Happy Returns of the Day
the Actuary India wishes many more years of healthy life to the
following fellow members whose Birthday fall in January 2011

January 2011
Sharma Rajendra Chatterjee
Parikh N.K.
Prasad Bhuddev
Nagasubramanian
Kelekar S.R.
Srinivasan

26 Indian Actuarial Profession Serving the Cause of Public Interest


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