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ACTUARIAL AND FINANCIAL REVIEW OF THE GENERAL PENSION SCHEME OF LUXEMBOURG. 15 February 2001 The International Financial and Actuarial Service (ILO-FACTS) ILO Social Protection Sector. Structure of the presentation. 0. International comparison 1. Assumptions of the valuation - PowerPoint PPT Presentation
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1
ACTUARIAL AND FINANCIAL ACTUARIAL AND FINANCIAL REVIEW OF THEREVIEW OF THE
GENERAL PENSION SCHEME GENERAL PENSION SCHEME OF LUXEMBOURGOF LUXEMBOURG
15 February 2001
The International Financial and Actuarial Service (ILO-FACTS)
ILO Social Protection Sector
2
Structure of the presentationStructure of the presentation
0. International comparison
1. Assumptions of the valuation
2. Status quo results
Scenario 1
Scenario 2
3. Alternative reform options
4. Conclusions and recommendations
3
International comparisonInternational comparison- retirement 65 years old with - retirement 65 years old with
40 years contribution40 years contribution
Replacement ratioContribution rate for individuals
One point contribution rate buys … replacement ratio
Luxembourg 77.35% 16.00% 4.83%
France 45.00% 19.85% 2.27%
Germany 42.30% 19.50% 2.17%
Belgium 53.33% 19.86% 2.69%
4
AssumptionsAssumptions- Net cross-boarder workers- Net cross-boarder workers
Assumptions - Net cross-boarder workers
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Nu
mb
er o
f n
et c
ross
-bo
ard
er w
ork
ers
Scenario 1
Scenario 2
200,000 more over 50 years
constant
5
AssumptionsAssumptions- Real GDP increase- Real GDP increase
Assumptions - Real GDP increase
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Rea
l GD
P in
crea
se
Scenario 1
Scenario 24% on average
2% on average
6
AssumptionsAssumptions- Employed (Domestic) and- Employed (Domestic) and
labour force (National)labour force (National)Assumptions - Employment (Domestic) and labour force (National)
0
100'000
200'000
300'000
400'000
500'000
600'000
700'000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
YearScenario 1 Employment (Domestic) Scenario 2 Employment (Domestic)
Scenario 1 Labour force (National) Scenario 2 Labour force (National)
7
Status quo resultsStatus quo results
1. Scenario 1(a) Demographic ratio(b) Financial ratio(c) PAYG cost rate(d) Reserves and funding ratio
2. Scenario 2(a) Demographic ratio(b) Financial ratio(c) PAYG cost rate(d) Reserves and funding ratio
8
Demographic ratioDemographic ratio- - Scenario 1Scenario 1
Demographic ratio(pensioners / active contributors)
0%
10%
20%
30%
40%
50%
60%
70%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Dem
og
rap
hic
rat
io (
pen
sio
ner
s / a
ctiv
e co
ntr
ibu
tors
)
Orphans
Widows
Invalids
Retired
9
Financial RatioFinancial Ratio- - Scenario 1Scenario 1
Financial ratio(average pension / average contribution base)
0%
10%
20%
30%
40%
50%
60%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Fin
anci
al r
atio
(ave
rag
e p
ensi
on
/ av
erag
e co
ntr
ibu
tio
n b
ase)
Total
Retired
10
PAYG cost ratePAYG cost rate- - Scenario 1Scenario 1
Pay-as-you-go cost rate(annual expenditure / annual contribution base)
0%
5%
10%
15%
20%
25%
30%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Pay
-as-
you
-go
co
st r
ate
(an
nu
al e
xpen
dit
ure
/ an
nu
al c
on
trib
uti
on
bas
e)
Others
Orphans
Widows
Invalids
Retired
Present contribution rate
General Average Premium
11
Reserves and fundingReserves and funding ratio ratio- - Scenario 1Scenario 1
Reserves at the end of the year(in million Euros)
0
10'000
20'000
30'000
40'000
50'000
60'000
70'000
80'000
2000 2010 2020 2030 2040 2050
Year
Res
erve
s at
the
end
of th
e ye
ar (i
n m
illio
n E
uros
)
Funding ratio(reserves / annual benefit expenditure)
0
1
2
3
4
5
6
2000 2010 2020 2030 2040 2050
Year
Fund
ing
ratio
(res
erve
s / a
nnua
l ben
efit
expe
nditu
re)
12
Comparison between two Comparison between two scenarios - demographic ratioscenarios - demographic ratio
Comparison between two scenarios - demographic ratio(pensioners / active contributors)
0%
20%
40%
60%
80%
100%
120%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Dem
og
rap
hic
rat
io(p
ensi
on
ers
/ act
ive
con
trib
uto
rs)
Scenario 1
Scenario 2
13
Financial ratioFinancial ratio- Scenario 2- Scenario 2
Financial ratio(average pension / average contribution base)
0%
10%
20%
30%
40%
50%
60%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Fin
anci
al r
atio
(ave
rag
e p
ensi
on
/ av
erag
e co
ntr
ibu
tio
n b
ase)
Total
Retired
14
Comparison between two Comparison between two scenarios - PAYG cost ratescenarios - PAYG cost rate
Comparison between two scenarios - pay-as-you-go cost rate(annual expenditure / annual contribution base)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Pay
-as-
you-
go c
ost r
ate
(ann
ual e
xpen
ditu
re /
annu
al c
ontr
ibut
ion
base
) Scenario 1
Scenario 2
15
Reserves and funding ratioReserves and funding ratio- Scenario 2- Scenario 2
Reserves at the end of the year(in million Euros)
-350'000
-300'000
-250'000
-200'000
-150'000
-100'000
-50'000
0
50'000
2000 2010 2020 2030 2040 2050
Year
Res
erve
s at
the
end
of th
e ye
ar (i
n m
illio
n E
uros
)
Funding ratio(reserves / annual benefit expenditure)
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2000 2010 2020 2030 2040 2050
Year
Fund
ing
ratio
(res
erve
s / a
nnua
l ben
efit
expe
nditu
re)
16
Summary of Summary of Financial situationFinancial situation-- Status quo Status quo
1. Sound financial situation at present, but sensitive to assumptions, especially economic ones(a) Scenario 1
Contribution rate increase necessary after 2050(b) Scenario 2
Contribution rate increase necessary after 2010
2. Financial situation deteriorates in the second half of the projection period because of demographic reasons- Relatively large cohort of residents at present
between the age of 30 – 34- Higher number of pensioners because of present commuters
17
Alternative reform optionsAlternative reform options1. Parametric reform options
1.1 Yearly adjustment of pensions
1.2 Increase in the level of pensions
1.3 Payment of a thirteenth pension
1.4 Unspecified increase of payment
1.5 Higher weight to contribution periods close to retirement
1.6 Change of retirement age
1.7 Reduced invalidity incidence rates
18
Financial effectsFinancial effects- parametric reform options- parametric reform options
General Average Premium Absolute increase in
Scenarios and reform options Long-term cost indicator Relative increase in cost contribution rates
(GAP) in points
Present contribution rate 24% points
Scenario 1 points points
1 Status quo 22.9 0.0% 0.0
2 Indexation 23.1 1.2% 0.3
3 Increase in the level of pensions 24.5 7.4% 1.7
4 Thirteenth payment 25.6 11.8% 2.7
5 Unspecified increase 23.8 4.3% 1.0
6Higher weight to contribution periods close retirement
23.4 2.2% 0.5
7 Change of retirement age (1 year) 22.6 -1.2% -0.3
8 Reduced invalidity incidence rates (50%) 21.6 -5.7% -1.3
Scenario 2
1 Status quo 31.9 0.0% 0.0
19
Alternative reform optionsAlternative reform options
2. Systemic reform proposals
2.1 Bonus accounts
2.2 Two-tier pension scheme(introducing DC scheme)
2.3 Value added contribution (VAC)
20
Bonus accountsBonus accounts- Funding ratio comparison- Funding ratio comparison
Funding ratio comparison (different interest rates)(reserves at the end of the year / annual benefit expenditure)
0
1
2
3
4
5
6
7
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Fu
nd
ing
rat
io(r
eser
ves
at t
he
end
of
the
year
/ an
nu
al b
enef
it e
xpen
dit
ure
)
Annual interest rate of 6%
Annual interest rate of 5%
21
Bonus accountsBonus accounts- Development of account balances- Development of account balances
Hypothetical balances of individual surplus accounts(individual savings / monthly average old-age pension)
0
1
2
3
4
5
6
7
8
9
10
1 6 11 16 21 26 31 36
Years of excess income
Rel
ativ
e su
rplu
s(i
nd
ivid
ual
sav
ing
s / m
on
thly
ave
rag
e o
ld-a
ge
pen
sio
n)
10 years savings
20 years savings
30 years savings
40 years savings
22
Introduction of two-tier pension Introduction of two-tier pension scheme (DC scheme)scheme (DC scheme)
Assumptions1. Introduction
In the year 2010
2. Contribution rate(a) First pillar (DB scheme) 18%(b) Second pillar (DC scheme) 6%
3. Financial transfers between the two pillars in case of invalidity and survivorshipHigher administrative cost in 2nd pillar
23
Introduction of two-tier pension Introduction of two-tier pension scheme (DC scheme)scheme (DC scheme) (Contd.) (Contd.)
4. Benefits(a) First pillar (DB pillar)
- Old-age pensionsannual accrual rate of 1.28%(instead of 1.78% at present)
- Invalidity and survivors’ pensionssame as the present scheme
(b) Second pillar (DC pillar)- Old-age pensions only
annual amount calculated by dividing accrued individual amount by unisex life expectancy
24
Two-tier pension schemeTwo-tier pension scheme- Development of reserves- Development of reserves
-100'000
-50'000
0
50'000
100'000
150'000
2000 2010 2020 2030 2040 2050
Defined contribution (DC) pillar Defined benefit (DB) pillar Both pillars combined
Development of reserves of two-tier scheme (in million Euros)
25
Two-tier pension schemeTwo-tier pension scheme- Replacement rates- Replacement rates
0%
10%
20%
30%
40%
50%
60%
2000 2010 2020 2030 2040 2050
Two pillars combined Defined contribution (DC) pillar (5% interest rate) Defined benefit (DB) pillar Status quo
Replacement rates comparison (old-age pensions) (average old-age pension / average contribution base)
26
Replacement rates of the Replacement rates of the second tier (DC tier)second tier (DC tier)
0%
2%
4%
6%
8%
10%
12%
2015 2020 2025 2030 2035 2040 2045 2050
Annual interest rate of 5% Annual interest rate of 3% Annual interest rate of 1%
Replacement rate comparison (DC scheme)(average pension / average contribution base)
27
Value added contribution (VAC)Value added contribution (VAC)Why:
1. Compensation of fiscal effects of decrease of labour income share in GDP
2. Possible increase in employment levelProblems:
1. Results of research are inconclusive2. Employment effects marginal3. Lobbying for exemptions is highly probable4. Administrative problems not yet solved or
unclear5. Loosen ownership rights of employers’
contributions6. Introduction only possible in a concerted
international actionConclusions:
Presently not recommendable and not necessary
28
Conclusions andConclusions and recommendationsrecommendations
1. Financial situation of the scheme
- Sound financial situation
- Sensitive to assumptions, especially economic ones
- Future demographic pressure onthe scheme in either scenario
29
Conclusions andConclusions and recommendationsrecommendations (Contd.) (Contd.)
2. Recommendations – ‘‘DO’’s and ‘‘DON’T’’s
- DO adjust benefits on annual basis
- DO increase early retirement age of57 and 60
- DO tighten the eligibility criteria for invalidity pensions after age of 50
- DO prolong the scaled premiumperiod to 10 years with a funding ratio of 2 at its end
30
Conclusions andConclusions and recommendationsrecommendations (Contd.) (Contd.)
- DON’T spend current surpluses andpresently high reserves, except for creating ‘bonus accounts’
- DON’T increase the level of the benefitse.g. - 10% increase in the flat part and
accrual rate of 1.9% instead of the present rate of 1.78%
- Thirteenth payment
- Higher weights to contribution periods close to retirement
31
Conclusions andConclusions and recommendationsrecommendations (Contd.) (Contd.)
- Introduction of two-tier system has no advantage for the individual.
- Introduction of VAC is not necessary from a financial point of view.
- It may be a good idea to introduce ‘bonus accounts’ through which ‘windfall profits’ could be
distributed.
32
ACTUARIAL AND FINANCIAL ACTUARIAL AND FINANCIAL REVIEW OF THEREVIEW OF THE
GENERAL PENSION SCHEME GENERAL PENSION SCHEME OF LUXEMBOURGOF LUXEMBOURG
15 February 2001
The International Financial and Actuarial Service (ILO-FACTS)
ILO Social Protection Sector
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