For calculations pursuant to the German tax code for book reserved plans the following restrictions apply to the economic assumptions made:
(i) The interest rate used must be 6%.
(ii) No future benefit increases may be funded in advance unless their absolute value is given in writing in the plan rules or by law2. Therefore no long-term salary increase assumptions are to be included and normally no pension increase assumptions as well.
The following requirements concerning the economic assumptions apply in respect of calculations made for the commercial accounting for pension schemes financed via book reserves and Unterstützungskassen:
(i) A suitable interest rate is in the range 3%-6%. An interest rate of greater than 6%
should only be used in conjunction with salary/pension increase assumptions (where appropriate).
(ii) Salary and pension increase assumptions can only be included when they are not already allowed for in the interest rate assumption.
The majority of companies choose, however, to use 6% without salary/benefit increase assumptions.
2 Under the 1974 occupational pensions act in Germany, companies are obliged to increase pensions in payment triennially in line with price inflation, if they are running a profitable business. The law was amended in 1998 stating that the employer complies with the general legal rule if he takes over the obligation to increase the pensions in payment by at least 1% pa. This new rule is not applicable for pension benefits promised earlier than 01.01.1999.
App 1 D-8
For bulk transfer calculations the assumptions are often adjusted to fully or partially allow for future pension and salary increases. Where these are to be fully allowed for a typical set of assumptions would be
Assumption Typical value
Interest rate 5.0%-7.5%
Salary increases 2.0%-3.5%
Social security increases 0.5%-3.0%
Pension increases 1.0%-2.5%
For Pensionskassen contributions and liabilities must be calculated using an interest rate of 3.5% with no further allowance for benefit increases unless these are guaranteed in absolute terms. For pension schemes of Pensionskassen introduced after July 1994 and not later than 1999 an interest rate of up to 4.0% might be used.
It is, however, common to carry out and publish a valuation on a second "realistic" basis.
This is used to demonstrate the financial security of the Pensionskasse and to show that future increases to benefits (eg due to increases in earnings) can be met. The basis in this case would probably lie at the lower end of the range of assumptions shown above (especially the interest rate assumption).
Since 01.07.2000 insurance premiums are to be calculated using an interest rate of up to 3.25% with no further allowance for benefit increases unless these are guaranteed in absolute terms. The maximum interest allowed by the supervisory authorities has changed in the past from time to time varying between 3.0% and 4.0%.
Demographic assumptions
The demographic assumptions used for the tax-calculations for book reserved plans have to be approved by the taxation authorities. The standard tables "Richttafeln" published by Dr Klaus Heubeck in 1982 are approved, and in practice were almost always used without modification until 1998 when he updated them and published the "Richttafeln 1998". The change from "Richttafeln" to "Richttafeln 1998" has to be spread over the years 1999 to 20013.
Commercial accounting requirements in respect of the demographic assumptions to be used for calculations relating to book reserved pension plans and Unterstützungskasse are as follows:
(i) Assumptions should be based on observed data and mathematical techniques.
General tables are possible.
(ii) Company specific turnover assumptions are allowed.
(iii) The retirement age should have regard to the final retirement age in the rules and that commonly found in practice.
3 Some companies in the chemical industry do not use "Richttafeln 1998" but demographic assumptions developed by Dr K J Bode and Dr E Grabner in 1996 are used.
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It is usual now, however, to use the "Richttafeln 1998". Modifications may be made in some cases, in particular company specific turnover rates could be included and the disability rates amended.
Different mortality assumptions are used for actives, pensioners and disability pensioners up until the attainment of normal retirement age.
The normal retirement age used is either that found in the plan rules or the flexible early retirement ages in the state pension scheme. The following table summarises the decrements used in the "Richttafeln 1998".
Class of pension scheme member
Active Deferred
Select rates are not used. Different decrements are used for males and females.
The "Richttafeln 1998" were produced using a variety of sources, most notably the following:
a) Statistics gathered by the Association of German Pension Insurers (VDR) concerning the experience of the state pension scheme, based on the years 1994-1996.
App 1 D-10
b) Previous mortality tables (Sterbetafel 1994/96).
c) General population statistics.
d) Statistics gathered for the German statistical yearbook.
The rates were projected to allow for improvements in mortality and disability for the 20-30 years following 1996. The resultant rates were smoothed using a cubic spline function. No allowance for administration expenses is made.
For regulated Pensionskassen the demographic assumptions used must be submitted to the insurance supervisory authorities for approval. They are concerned to see that these assumptions contain a sufficient margin of safety. For deregulated Pensionskassen the responsible actuary has to make sure that the Pensionskasse using the demographic assumptions will be able to meet its liabilities at any time.
Standard tables are normally used, in particular the "Richttafeln 1998" or its predecessors with some modifications to allow for further improvements in pensioner mortality or other special situations.
Turnover assumptions are not normally included. As mentioned previously, the calculations are often performed without an assumption regarding administration expenses, although an assumption is included where these are met directly from the Pensionskasse. Insurance premium tariffs are based on standard tables set down by Deutsche Aktaurvereinigung (DAV)4 and include allowance for expenses.
6 COMMUNICATION OF RESULTS
The results of book reserve calculations for both tax, commercial and insolvency fund contribution basis purposes are communicated via a formal actuarial report ("Gutachten").
There are no legal restrictions on who may sign the report but the auditors of the company have an obligation to satisfy themselves as to the correctness of the calculations. In practice the reports are normally signed by an actuarial consultant who will make clear if he is a full member of DAV and/or IVS (Institute of Actuarial Advisors for Retirement Provision which is now a subsection of DAV).
Guidelines as to the contents of the reports are given by the IVS. The main items to be included are:
1) A description of for whom the calculation has been performed, the type of pension arrangement, and the class of members.
2) A description of the pension benefits provided by the pension scheme.
3) A source of the data used for the valuation.
4) A description of the actuarial methods and assumptions used (including formulae).
4 DAV (German Association of Actuaries) set down the standard tables DAV 1994 R for annuities.
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5) A summary of the results.
6) An individual listing showing the data used and the results of the calculations for each member valued.
The stated aim of the guidelines is to allow a third party to accurately check the results of the calculations.
A formal actuarial report is also required for the triennial valuation of a Pensionskasse. This is normally signed by an actuary.
The guidelines for this report are similar (but not identical) to those mentioned above. A further feature of this report is that the appropriateness of the actuarial assumptions needs to be demonstrated, as does the sufficiency of the current assets and future contributions to meet the benefits promised.
7 EXAMPLE DEMOGRAPHIC ASSUMPTIONS
The following table shows an extract of the demographic assumptions that make up the
"Richttafeln 1998" from Dr Klaus Heubeck.
Age q.g(x) q.w(x) q.aa(x) q.i(x) i(x) y(x) h(x)
20 0.626 1.803 0.623 57.290 0.117 20 0.045
30 0.746 1.477 0.602 43.545 0.714 29 0.495
40 1.673 4.345 1.075 40.248 2.544 38 0.754
50 4.361 10.586 2.627 39.677 7.126 47 0.823
60 11.345 21.664 6.569 27.556 54.43 57 0.873
70 28.931 38.293 0 28.931 0 67 0.888
80 72.349 82.858 0 72.349 0 76 0.842
90 166.403 172.795 0 166.403 0 84 0.605
100 314.546 307.880 0 314.546 0 89 0.280
The table above relates to males only. All rates are per 1,000 lives.
q.g(x) = rate of mortality - pensioners q.w(x) -= rate of mortality - widowers q.aa(x) = rate of mortality - actives q.i(x) = rate of mortality - disabled i(x) = rate of disability
y(x) = age of spouse
h(x) = proportion married at death
App 1 IS-1
ICELAND
1 PENSION FUNDS IN ICELAND: LAW AND REGULATIONS
In Iceland every employed and self-employed person is required by law to pay a minimum premium to a pension fund which has a license to operate as such. The employer is responsible for paying the premium which is in most cases 10% of the salary, 4% paid by the employee and 6% paid by the employer. In 1997 a law was implemented in which every aspect of the activity of pension funds was defined and certain minimum requirements were set as to the benefits payable by the funds to the members and their spouses and children. All the funds are on a defined contribution basis except some funds for employees of the government and some municipalities. These funds have the guarantee of the government and the
respective municipalities that they will be able to pay the defined benefits. Other funds are mostly established on the basis of agreements between Employee Unions on one hand and Employers on the other.