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VOL III ISSUE 1, JANUARY 2011
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EMERGING RISKS... DARING SOLUTIONS

JANUARY 2011
 The Actuary India January 2011

CONTENTS

l

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

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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
Linked Insurance Policies) Regulations,
2010, notified on 1st July 2010,
and new unit linked guidelines that
became effective on 1st September
2010, have caused most life insurance
companies to review their business
models and make significant changes
aimed at increasing productivity while
at the same time cutting costs. These
changes have been made across all
functions within the insurers but with a
particular focus on distribution.
The other impact of the new regulations and guidelines has been to
significantly raise the profile of lapse and surrender risk amongst the many
risks to which life insurers are exposed. It is not that this is a new risk; it
is just that the new unit linked regulations and guidelines severely limit
the ability of insurers to manage this risk by a combination of adjusting
the pace of charging and surrender penalties. Commission claw back,
when practiced, has had limited utility especially at the longer durations
in force.
The emergence of lapse risk as an important risk factor poses a number
of problems to actuaries currently involved in pricing unit linked products
and in the future it will cause difficulties for the calculation of embedded
values where there is a significant amount of unit linked business written
under the new regulations and guidelines.
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
large number of independent risks. However, such an approach cannot
protect the insurer from a change in the mean risk itself, on the contrary,
accepting a large number of such risks will only lead to a large loss if the
mean experience changes adversely.
As an example of this we only have to look at annuities in some overseas
markets to see the financial strain that has been caused by systematic
improvements in mortality rates. This strain has been produced by
a reasonably gradual improvement in mortality rates that has been
sustained over a long period of time.
A more dramatic example would be the losses incurred on mortgage
backed securities. While the US property market was stable the large
number of mortgages pooled in these securities smoothed out the
fluctuations in default experience of individual mortgages. But once the
US property market turned down there was a systemic rise in mortgage
default rates leading to the financial consequences that are only too well
known to us all.
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,
4 Indian Actuarial Profession Serving the Cause of Public Interest
a change in the economic outlook, or a change in the availability of
alternative financial products, or a change in the tax treatment of financial
products.
For any risk, a systemic change in the mean experience can have a
particularly dangerous aspect. Just because there might be a change in
the mean experience does not necessarily mean that there will be such a
change. Sometimes, the complete reverse happens, the mean experience
can be stable for a number of years lulling everybody into a false sense
of security, and only then is there a change in mean experience. Such
behavior was exhibited by the default of mortgage backed securities;
initially this was a small niche market for specialists, with the large
companies staying out of the market having concluded that it was too
risky. Over time as nothing went wrong and the small players appeared
to be making a lot of money in this market, the big players entered and
it was only when they had a large exposure that the mean default rates
increased. The possibility of the same sequence of events happening in
respect of lapse and surrender risk is worrying.
A final troubling aspect of the current concern about lapse and surrender
risk is that it comes at a time when insurers are trying to increase
distribution productivity and cut distribution costs. Past experience
suggests that when there is management pressure on these distribution
measures then lapse and surrender rates can deteriorate. Data on
changes in productivity and costs are available almost immediately, but
data on lapse and surrender rates will only emerge slowly over a number
of years. This imbalance in availability of data may cause management to
focus on productivity and costs and not give enough attention to lapses
and surrenders.
When faced with any risk, an insurer has the option to transfer the risk to
a third party, or to avoid the risk or to manage the risk.
Historically, re-insurers have not been keen to accept more than what
they would deem their fair share of lapse risk, and after the recent history
of mortgage backed securities it could be some time before the capital
markets are willing to underwrite the lapse and surrender risk on unit
linked life insurance policies.
Unit linked life policies have occupied a dominant position in the life
insurance market for a number of years because of their transparent
market participation and flexible features. Consequently, most insurers
will find the option of avoiding lapse and surrender risk by not writing unit
linked business to be unpalatable.
The most desirable alternative would seem to be a new approach to
managing lapse and surrender risk. I do not know how this might be
achieved, perhaps by an innovative product design, perhaps we need to
underwrite for lapse and surrender risk, but actuaries with their knowledge
and experience of risk should be actively involved in this process.
Nick Taket

FROM THE PRESIDENT
13th GCA is just around: 20 - 22, Feb. 2011. In December 2010
issue I talked about it and gave some flavour of the things to
come.
Things are really happening.
K Ganesan’s (of L I C of India) award winning entry of the 13th
GCA theme: Emerging Risks... Daring Solutions, did catch the
imagination in number of ways.
The idea of a Global Round Table (GRT) immediately after the
Inaugural ceremony emerged out of it. – Fifteen global leaders from
different areas of risk management, sitting together and debating
various global issues around risk management is aimed at leading
to global dialogue and of course “daring solutions”. We can look
at all these leaders on the website www.actuariesindia.org (click
13th GCA and on Speakers at the right hand side). The GRT and
eight Plenary sessions have around 40+ speakers and along with
concurrent sessions will make an army of some 55+, a formidable
number to discuss, debate and share ideas. The eight plenary
sessions together create an umbrella covering all specific areas
of application specifically the life insurance, non-life insurance,
Health & Care insurance and Pension, Employee Benefits & Social
Security. No application sits in isolation and hence all the sessions
are of importance to all.
N Rangachari, first Chairperson of the IRDA had started it all –
the GCA, first two were in fact managed from his office by actuarial
team around there lead by K Subrahmanyam. Rangachari desired
sound and global debate around issues that were expected to be
addressed through IRDA Regulations. This happened. A whole lot
of people were involved in shaping the regulations and ideas around
these came to fruition through debate and dialogue in the early
GCAs particularly the first two. Thirteen years down the line things
have changed - lesser global participation and more gathering of
bludgeoning Indian actuarial students, full of hope and aspirations.
India has capacity to absorb such hopes and aspirations but is
limited by various issues plaguing the insurance sector and non-
existence of regulatory mechanism for the Pensions and Social
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
be plagued by (perceived or real) regulatory malnourishments?
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
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)
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
was on stream on 24th December
2010 and at the moment of writing
this piece (11:54 am, 10th Jan. 2011)
as many as 1,563 unique visitors
had browsed it from 31 countries.
The first ten: India – 1,276, The
United Kingdom – 65, US – 44, Hong
Kong – 29, Singapore -26, Australia
– 24, Germany – 20, Japan – 12,
Bangladesh – 10 and Canada 6.
We are going global indeed and it’s a
beginning with NO END.
Some initiatives within the HOME: The Member Tracker
System (MTS) for management of the member data and service
delivery is on track though about a month behind self-imposed
schedule. We expect to be fully on stream by Jan. 2011 end.
The Website revamp project is on stream. Vendor engagement
contract for Phase 1 development was signed off on 9th Jan. 2011
for completion within 30 days to be followed by phase 2.
The fist Council (after my taking over as President on 4th Sept.
2010) met on 28th December 2010 in New Delhi and cleared
number of initiatives;
 Mutual Recognition Agreements with Casualty Actuarial
Society and the Society of Actuaries in US.
 Off shored Actuarial work in India - Issues and opportunity, an
initiative lead by M Karunanidhi.
 Strategy Initiative lead by Anil K Singh and Dr. K Sriram.
 CERA Treaty signing and qualification an initiative lead by
Sanchit Maini.
 Review of entry requirement of students, an initiative lead by
Varun Gupta.
 Position of Marketing Manager for executing number of
marketing and development initiatives of the Institute.
Certainly lot of things to look forward to, however, in the immediate
let us register for the 13th GCA and jointly make it a great event.
Regards,
Liyaquat Khan
5
The Actuary India January 2011
FROM THE PRESS
Strengthen actuarial departments,
says insurance regulator
Chennai, Dec 23 (IANS) The Insurance Regulatory and
Development Authority (IRDA), the industry watchdog, has asked
the 24 non-life insurance companies to strengthen their actuarial
department and have it manned by full-timers.
The authority has asked the non-life insurers to spell their plan of
action in this regard.
Actuaries are experts in assessing the financial impact of future
events. They enable financial decisions by analysing the past,
modeling the future, assessing the risks and communicating what
the results mean in financial terms.
Speaking to IANS, R.Kannan, member (actuary) at the IRDA,
said: ‘The actuarial work for non-life insurers is on the rise. For
example, from March 2011 onwards insurers have to calculate
economic capital (sufficient surplus to cover potential losses over
a specified time). It involves a lot of actuarial calculations, and
work has to start at least three months before next March. The
insurers are sending their replies to our letter.’
As per IRDA regulations, every life and non-life insurer should
have an appointed actuary. While life insurers should have a
permanent official, non-life companies can have a part-timer.
Further, appointed actuaries are IRDA’s representatives in the
insurance companies and cannot be hired or fired without the
regulator’s consent.
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Health Insurance sector in India is witnessing a tremendous
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in reaching out for health services to the masses. Keeping in
view the needs of the readers. This book critically analyses all
6 Indian Actuarial Profession Serving the Cause of Public Interest
Ten years back when the sector was opened up, there was a
dearth of qualified actuaries in general and specially for the non-
life sector.
There are 24 non-life insurers - six of them government owned,
four non-life, one agriculture insurance company and one Export
Credit Guarantee Corporation - in India.
IRDA is also considering to scrap the system of part-time
appointed actuaries in non-life sector, Kannan said. ‘But we are
not sure about the adequate supply of actuaries for the non-life
sector,’ he added.
Kannan agreed only four non-life insures have full-time appointed
actuaries and others have part-timers, many of them over 70
years of age.
The Institute of Actuaries of India (IAI) - the professional body
governing the actuarial profession - is frowning at IRDA for
permitting non-life insurers to hire professionals over 70 years of
age as appointed actuaries.
‘There is sufficient supply of young actuaries for the non-life sector.
The upper age limit for a person to be hired and appointed actuary
as per regulations is 70 years and IRDA is granting exemptions to
some actuaries,’ IAI president Liyaquat Khan told IANS.
According to IAI, 87 of the 170 actuaries in India as on March 31,
2010, are in the age bracket of 26-45.
the factors affecting the health insurance industry and efforts
needed to make this portfolio sustainable. It covers reviews from
eminent persons from the health sector to chalk out a future
roadmap for healthy growth of this sector. The book written in
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well as technical guide for insurers and health service providers
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Book review at: http://store.bimabazaar.com/

FROM THE PRESS
Expert ‘actuaries’ who assess insurance
risk getting younger
Chennai, Dec 28 (IANS) By V. Jagannathan
Once considered the exclusive preserve of venerable middle-aged
executives, the office actuaries -- experts who scientifically review the
risks in the life and non-life insurance business -- is getting younger by
the year.
‘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
Hannover Re Consulting Services India, speaking about these experts
who assess the financial impact of future events.
‘But in the recent times the age of recruits for the top post has come
down to around 35 years,’ Sarma, who in 2007 was himself named
actuary at Bharti Axa Life Insurance at the age of 36, told IANS.
As per Insurance Regulatory and Development Authority’s (IRDA)
regulations, every life and non-life insurer should have an appointed
actuary. While life insurers should have a permanent official, non-life
companies can have a part timer.
Currently, there are 24 non-life insurance companies in India, six of
which are state-run, and 23 life insurers, one of which is owned by the
government -- Life Insurance Corp.
Against this, there are just 216 qualified actuaries who are members of
the Institute of Actuatries of India and practise within the country, 76 of
whom are under the age of 40. In addition, there are 46 other fellows in
all age group who are overseas.
R. Kannan, member-actuary, at the regulatory authority, said only four non-
life insures have full-time appointed actuaries and others have part-timers,
many of them over 70 years of age. But the situation is changing now.
Some of the recent additions to the growing young-appointed or chief
actuaries club are Tania Chakrabarti at the Royal Sundaram Alliance
General Insurance Company, Sharon D’ Costa at the SBI General
Insurance and Abhay Tewari at Edelweiss Tokio Life Insurance.
In terms of pay packets, appointed actuaries are highly paid professionals
commanding an annual price of around Rs.5-7 million on the life side
and slightly lower in the general insurance sector. Expat actuaries
command premium price.
Further, appointed actuaries are IRDA’s representatives in the insurance
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
science graduate Sharon D’Costa of SBI General.
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
‘I found actuarial science interesting and decided to pursue the course
and complete it in five years,’ D’Costa told IANS.
On the other hand, 35-year-old Tania Chakrabarti, who holds a master’s
in quantitative economics from Indian Statistical Institute, Kolkata, and
working with the Murugappa group, found actuarial science a logical
progression.
Clearing the exams in 2009, she became the appointed actuary of Royal
Sundaram Alliance General Insurance Company in June 2010. Some of
the other young actuaries are Anil Kumar Singh of Bajaj Allianz Life and
Ashley Edward Rebello of HDFC Standard Life.
According to the institute, it takes at least four years to complete the
course as some subjects are practical-oriented, needing actual work
experience.
With not many new life insurers on the Indian horizon and the existing
ones downsizing their actuarial departments, the non-life insurance
sector is now turning lucrative for the young actuaries, say industry
officials.
‘Non-life companies are becoming more aware of the value that full
time actuaries with a strong actuarial department can bring to the
organisation in product development, pricing, financial planning and
portfolio performance analysis,’ Chakrabarti said.
‘IRDA has over the last few years strengthened the statutory reporting
requirement from appointed actuaries in non-life industry bringing it
closer to that of life segment. It will become increasingly difficult for a
part-time actuary to cope with the pressures.’
Ajay Bimbhet, managing director of Royal Sundaram, agreed and said
there is the need for greater statutory reporting, and scrapping of state-
determined pricing in the motor and commercial business; only a full-
time actuary can improve profitability.
‘Non-life offers more challenge to actuaries as the products have to be
priced based on risks. The market is more evolving now and there are
more regulatory requirements,’ SBI General’s D’Costa added.
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,
2010, are in the age bracket of 26-45 years.
(V. Jagannathan can be reached at v.jagannathan@ians.in and biz@
ians.in)
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
IST, Souvik Sanyal & Dheeraj Tiwari,  Accountants of India ICAI.
NEW DELHI: Less than four months before the big
companies switch over to the global accounting
format, the government has called for a fresh round
of deliberation , creating uncertainty about the roll
out of the new global rules of financial reporting.
The ministry of corporate affairs has called for
comments from the more than 300 companies that
are required to prepare their accounts according
to the International Financial Reporting Standards
(IFRS).
These companies can raise any regulatory concerns
they may have with respect to the new standards
that are to roll out from April next year.
The fresh round of consultations follow a missive
from the Prime Minister’s Office asking the ministry
to hold further consultations with the companies that
will be affected.
This is the last leg of consultation with the
stakeholders before the converged standards are
notified, an official in the know of development told
ET.
The directive from the prime minister’s office is
in response to the ministry’s cabinet note on the
Companies (Amendment) Bill, 2010.
It also calls for finalising taxation issues arising due
to the convergence process in consultation with the
department of revenue.
“In our view most of the 300 entities which have
to implement the norms are almost ready,” said
8 Indian Actuarial Profession Serving the Cause of Public Interest
Amarjit Chopra, president, Institute of Chartered
The Companies (Amendment) Bill is key to a smooth
shift to the new standard as certain provisions in
the present Companies Act of 1956 will have to be
changed for the transition to take place.
The prime minister’s office also asked the ministry
to examine the issues raised by the Public accounts
committee chairman Murli Manohar Joshi in a letter
to the prime minister, asking for delaying the new
standards.
“We should focus our attention on ... the areas where
Indian accounting standards differ with IFRS, so that
by 2013 or by 2015, the stabilised IFRS can take
into account the concerns of Indian accountants and
Indian companies,” Mr Joshi said in the letter.
Countries such as US and Japan have
already deferred IFRS implementation to
2015, the veteran parliamentarian wrote.
The government has already agreed to dilute many
provisions of IFRS, particularly those relating to
notional losses or profits arising out of market
valuation of assets and liabilities.
The convergence requires preparedness not just at
the level of companies that follow it, but also from
the government in respect of regulatory policies.
Some of the regulations that are yet to be aligned
for the convergence include taxation laws, existing
Company law provisions. “There need to be specific
provisions provided for under the tax code which
would permit adjustments,” said Rajshree Sabnavis,
partner corporate tax practices, BMR Advisors.

FROM THE PRESS
IAA Fund Meeting in Kazakhstan
IAA 2 December, 2010
The IAA Fund supported the Third Actuarial School in Kazakhstan
on “Insurance and Pension Research: International Experience”.
This event was held in conjunction with the 2nd CIS (Commonwealth
of Independent States) Congress of Actuaries, including a
Professionalism Course, from October 25-30, 2010, in Almaty,
Kazakhstan. The Actuarial Society of Kazakhstan was founded in
2001, ten years after Kazakhstan became an independent state,
and is working hard to establish the actuarial profession in this
rapidly developing country of 17 million people in central Asia.
The previous IAA Fund meeting for Central and Eastern Europe
took place in Moscow, Russia on November 27-29, 2008, at the
invitation of the Russian Guild of Actuaries.
Lecturers in Almaty included David Ingram, incoming Chairperson
of the IAA Enterprise and Financial Risk Committee, on the subject
of CARE (Comprehensive Actuarial Risk Evaluation) and Esko
Kivisaari, Chairperson of the IAA Pensions and Employee Benefits
Committee, who spoke on capital requirements for pensions, ERM
for pensions and pensions accounting issues. A third speaker was
IAA admits China Association of Actuaries as Full Member
IAA 22 December, 2010
The International Actuarial Association (IAA) is pleased to announce
that it has admitted the China Association of Actuaries (CAA) as
its 63rd Full Member association with effect from December 14,
2010.  Only three years after it was established, the CAA, whose
President is Mr. Wei Yingning, has a membership comprising 390
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
a rigorous process that includes reviewing the education
program and ensuring that the applicant association has a
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
Asta Zviniene from the World Bank. Tarmo Koll represented the IAA
Advice & Assistance Committee as the incoming Chairperson and
spoke about the IAA and the international actuarial profession, as
well as leading a discussion at which representatives of the different
CIS countries shared news and information about the development
of the actuarial profession in their respective countries. The week
ended with a one and half day professionalism course led by IAA
Fund Chief Executive, Chris Daykin.
The IAA Fund provided bursaries for six (6) participants from six
(6) different countries in the region other than Kazakhstan and
representatives from three (3) other countries also attended.
Apart from speakers, a total of 47 people attended the 2nd CIS
Congress of Actuaries, 38 of whom were from Kazakhstan. A total
of 59 people attended the Professionalism Course, with 52 of them
being from Kazakhstan.
The IAA owes sincere thanks to the Actuarial Society of Kazakhstan
for hosting the meeting and for the support provided.
To learn more about the work of the IAA Fund, contact the IAA
Secretariat, care of the Chief Executive of the Fund.
Code of Professional Conduct, a formal discipline process,
and a formal process for the adoption of standards of practice,
where applicable. The IAA Accreditation Committee reviews
each of these documents to ensure compliance with IAA set
requirements. The IAA Education Committee ensures that the
association’s education programme meets the criteria set out
in the IAA Education Guidelines and Syllabus and that all the
will be required to have successfully completed this programme.
To learn more about membership in the IAA, contact the IAA
Secretariat.
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


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
Zurich
Swiss Re’s latest sigma study ‘‘Microinsurance - risk protection for
4 billion people’’ emphasises the relevance of microinsurance as
an effective and viable risk management solution for low-income
individuals. Microinsurance, which has the potential to cover up
to 4 billion people, concentrates on few risks today, but its scope
is broadening. The interest of insurers in microinsurance lies very
much in its future potential.
Microinsurance refers to insurance products especially designed
for low-income individuals. The premiums and coverage are
kept at a low level in order to make the products affordable
and attractive to those policy holders, yet remain commercially
sustainable. Currently, the risks covered by microinsurance are
heavily tilted towards credit life insurance, but the market could
expand to cover areas such as health, agricultural insurance, term
life insurance, affordable pension products and other savings
products.
Microinsurance supports socio-economic development and
insurance growth in emerging markets
By reaching many individuals who were formerly excluded from
insurance, and thereby reducing the vulnerability of low-income
individuals and protecting their income streams, microinsurance
helps to improve social stability and supports broad-based
economic development.
Amit Kalra, author of the new sigma study stated: “For insurers,
microinsurance creates an opportunity to tap into new markets
and build a strong brand value that can be used for selling
conventional insurance products in the future.” Kalra added: ”It is
a win-win situation: Insurers help those who urgently need access
to insurance. This in turn supports the long-term economic goals
of insurers.”
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
Huge untapped market potential at the bottom of the
pyramid
The microinsurance market could generate premiums of up to
USD 40 billion. Over the last decade, insurers, NGOs, mutuals
and community organisations have launched microinsurance
programmes across product lines and major markets. The key
drivers supporting this activity’s growth have been increasing
microfinance penetration (in particular microcredit), the active
involvement of government in certain markets and need-based
product offerings.
Kalra said: ”The Asia-Pacific region is the fastest growing and
the largest microinsurance market. Microinsurance has also
grown considerably in African and Latin American countries
despite these being relatively smaller microinsurance markets at
present.”
As the microinsurance industry expands, organisations must
increasingly cope with rising risk exposure and risk accumulation.
This will lead to additional needs for capital and reinsurance
solutions that leverage both traditional products and tailor-made
innovative solutions. The latter includes, for example, weather
derivatives and parametric nat cat solutions.
Market potential and challenges
While credit life, a mortality cover bundled with microcredit, is
the largest selling microinsurance product, there is a strong need
for a higher and broader level of protection that can be met with
savings/term life, health and agriculture microinsurance.
Some of the challenges that microinsurance faces are: Insufficient
infrastructure, the absence of specific regulatory provisions for
microinsurance, and the lack of exposure and risk data. Insurers
must also find suitable partners for distribution and claims
management. Products must be adapted to client needs as well
as the cultural background of the prospective microinsurance
buyers.
11
The Actuary India January 2011
Governments can foster the development of microinsurance
through favourable regulations and public private
partnerships
The key objectives for governments and policymakers in this
regard should be:
1. improving access to financial services for the low-income
population;
2. the development of a sound regulatory framework;
3. lowering of barriers and developing efficient markets; and
4. increasing awareness and ensuring consumer protection.
Kalra further said: “Policymakers can deploy multiple approaches
to develop the sector, including adopting specific microinsurance
regulations, providing financial support and sponsoring insurance
schemes targeted to the extremely poor population.”
Governments in partnership with private players can offer
effective alternatives
For the extremely poor population or markets which otherwise
are not commercially viable, governments through public private
partnerships (PPP) can effectively channel subsidies through
microinsurance programmes by fully funding or subsidising
premiums. Kalra added: ”The governments contribute to
developing comprehensive natural disaster solutions and
formulate collaborative approaches – such as PPPs – to
effectively deal with the financial consequences of large-scale
natural disasters on the low-income population.”
Figure 1: Potential market estimates of the global
microinsurance market
12 Indian Actuarial Profession Serving the Cause of Public Interest
Kalra added: ”NGOs, international developmental organisations
and donors have played an instrumental role in aiding the
development of the microinsurance sector. The contribution of
social-minded entrepreneurs in the field of microfinance and
microinsurance has also been influential in encouraging private
players to participate in the socially-driven businesses and
thereby create new market opportunities for the bottom of the
pyramid population.”
Notes to editors
Swiss Reinsurance Company Ltd
Swiss Re is a leading and highly diversified global reinsurer. The
company operates through offices in more than 20 countries.
Founded in Zurich, Switzerland, in 1863, Swiss Re offers
financial services products that enable risk-taking essential to
enterprise and progress. The company’s traditional reinsurance
products and related services for property and casualty, as well
as the life and health business are complemented by insurance-
based corporate finance solutions and supplementary services
for comprehensive risk management. Swiss Re is rated “A+“ by
Standard & Poor’s, “A1” by Moody’s and “A” by A.M. Best.
How to order this sigma study:
The English, German, French and Spanish versions of the sigma
study No 6/2010, “Microinsurance – risk protection for 4 billion
people” are available electronically on our sigma section. The
versions in Chinese and Japanese will appear in the near future.
This media information is also distributed by e-mail. To receive
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.

Reportage
6th CILA Reportage
Liyaquat Khan, President, IAI, giving inaugural address
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.
G N Bajpai giving key note address on internal and external issues
The key note address was delivered by Mr G N Bajpai, past chairman of
SEBI and of LIC. In his address he presented both an insider’s and an
outsider’s perspective. He noted in particular that
• The industry faces both internal as well as external issues.
• On internal issues:
o As a consequence of a low level of financial literacy,
mis-selling will remain a risk.
o There have been responses to this from the Regulator.
However, these responses have put a considerable burden
on insurance companies.
o There is a shortage of skills in the industry and it is not doing
enough to address this shortage.
• On external issues:
o India is geography with large market potential and the economy
is likely to grow in double digit after couple of years.
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
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
of the investigations conducted by the MMIC by Mr. K.P.Sarma
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,
medically underwritten or not, geographic origin. The investigation
revealed that the crude rates follow a rapid decline at early ages followed
by a hump around young adult ages and generally increasing with age.
However, there was a second hump which was observed at around age
53. The investigation confirmed the effect of selection on mortality for
about 2 years, and also there was some evidence to suggest that the
selection lasted for 3 years.
Session 2: Issues & Opportunities in writing Conventional &
Unitized-with-profit (UWP) business in India by Mr. Ashley Rebello
This session explored various aspects of selling Unitised With Profit
(UWP) contracts in the Indian market. The presentation gave a brief
overview of UWP contracts and how they differ from conventional with-
profits business, underlining the increased transparency and flexibility of
UWP business. This was followed by analysis of recent events in the
Indian market that have increased the relative attractiveness of UWP
business, both to consumers as well as the insurers. The presentation
13
The Actuary India January 2011
then focused on some of the issues that need to be addressed to make
par business more viable, highlighting corporate governance and product
structure issues in particular
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
Panel Discussion from Left Richard Holloway, T R Ramachandran,
Sanjeev Bajaj, V Jagannathan
Richard Holloway chaired a panel session to discuss the future
of ULIPs. The panel comprised of Mr. T R Ramachandran,
MD, Aviva Life Insurance; Mr Sanjeev Bajaj, MD, Bajaj
Capital and Mr. V Jagannathan of Indo Asian News Service.
Richard started by making a presentation which highlighted the
recent regulatory changes to ULIPs. He expressed a view that
the real issue may be mis-selling, and he questioned if there
were alternative approaches that could be taken by the regulator/
industry to enhance selling practices, as opposed to placing
significant restrictions on the product that is being mis-sold.
The panel highlighted the importance of balancing the needs of the
consumer, distributors and the insurance company, and questioned if
the recent changes to ULIPs really benefit the consumers (as a popular
product may be withdrawn), or distributors (as commission levels
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
Operational Risk (OR) management. Mr. Au presented on OR, in
14 Indian Actuarial Profession Serving the Cause of Public Interest
particular, the types of losses, risk event categories that should be
monitored and economic capital guiding principles. The presentation
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.
Geoffery Au giving presentation on the data challenges in calibration as well as
challenges in generation of scenarios for OR.
Keith Walters’s talked about the increased role of ERM and companies’ use of
risk appetite in a recent survey
Mr Keith Walters’s presentation started by highlighting the September
2008 crisis and how lack of ERM (including OR management) may have
contributed to certain of these failures. The increased role of ERM and
companies’ use of risk appetite in a recent survey were highlighted. The
presentation also touched upon the following issues:
• What issues should be addressed by an organization in defining,
quantifying, measuring and managing of risk at enterprise level?
• The requirement for a risk assessment framework by an
organization
• Guidance on OR from consultation paper 33 of CEIOPS
Session 5: Direct Tax Code – Potential implications for Life insurance
business by Samit Sawant
Samit Sawant Shared views on current tax provisions and the draft Direct Tax
Code (DTC) applicable for life insurance area

This session covered the current tax provisions and draft Direct Tax Code
(DTC) applicable for life insurance area. The focus of the presentation
was how introduction of DTC will affect the life insurance companies
and the policyholders. Under the DTC, policyholders’ account would
be exempt from tax and profits as per shareholders’ account would be
deemed as income from life insurance business. Companies would be
taxed at the general corporate tax rate, income from pension business
would continue to be exempt from tax and losses could be carried forward
indefinitely. Applicability of MAT (20% of adjusted book profits) is not
clear. Another feature of DTC is that there is no grandfathering provision
for past policies. If this is not rectified, then the industry may see mass
withdrawals before 1st April 2012.
Session 6: IFRS Implementation in Life Insurance in India: Actuarial
Aspects by K S Gopalakrishnan
K S Gopalakrishnan talked about IFRS Phase 1
This presentation focused on IFRS Phase 1 which makes limited changes
to accounting by insurers for insurance contracts while requiring increased
disclosures. IFRS Phase 1 allows current approaches to continue subject
to certain minimum requirements, however insurers would need to
additionally follow certain IFRS principles. Mr Gopalakrishnan mentioned
that certain areas such as unit pricing and amortisation in the context of
investment contracts require action from IRDA and have been highlighted
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
International Actuarial Association. Finally, he briefly touched upon the
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
John Poole specifically focused on IRDA’s draft Guidelines for “Variable
Insurance Products”
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
In this session Mr. John Poole introduced Universal Life contracts in
the form they are currently being sold in North America. He noted that
Universal Life contracts are the most significant form of business being
sold in North America in the present day.
The later part of the presentation focused on how Universal Life type of
contracts fit in with the current Indian regulatory regime. The presentation
specifically focused on IRDA’s draft Guidelines for “Variable Insurance
Products” and how those guidelines can affect viability of offering
North American style Universal Life products in India. The presentation
suggested that Indian consumers should indeed have the choice of North
American style Universal Life products.
Session 8: CPPI strategies and guarantees on ULIPs by Dr Avijit
Chatterjee
Dr Avijit Chatterjee discusses market consistent valuation of embedded
derivatives
This presentation started with a simple example of the dynamic
hedging strategy known as CPPI, and of the policyholder proposition
that it enables. The risks arising from the strategy and the policyholder
proposition were discussed, with particular reference to PRE, Mass
discontinuance and Systemic risks in capital markets. After a brief
discussion of more sophisticated algorithms, the presentation turned to
reserving for guarantees. It was noted that systemic risks that could arise
from the widespread use of such liability measures.
Session 9: Need and ability to write protection business by Mr Jug
Parmar
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
such product types, product differentiation within each product types as
well as recent developments in those areas.
15
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SWEDISH PENSIONS UNDER STRESS
Over the years I have been engaged, nationally, as Director General of
the National Social Insurance board as well as internationally, in ISSA,
the International Social Security Association, with matters relating to
pension systems and pension reform.i
In Sweden during the 1980-ties I worked hard to explain to Swedish
politicians that a reform of the Swedish pension system was necessary.
In the first half of the 1990’s work was dominated by efforts, together
with colleagues at the board, to contribute to the design of a good
reform. At the time I thought this had been successful, with a reform that
aimed to strike a balance between the need for adequate pensions and
financial sustainability. Consequently I presented the Swedish reform to
other countriesii.
Later I discovered that some features of the reform, as it finally came
out towards the end of the 1990’s, were not that sound. There had been
a gradual shift of focus from 1994 when the principles of the reform
were formulated, a shift that lost sight of the need for a proper balance
between the level of pensions, pension age and financial constraints.
The shift was gradual and not that easy to trace. And early warnings
have been ignored.
For instance, the inflexibility of the reform in meeting changes in the
demographic and economic environment has been observed only when
they have occurred, and even then it has not been recognized by those
responsible, be they politicians or public authorities. The so-called
automatic balancing mechanism (ABM) was not contemplated in 1994.
It was not even part of the enactment of the new system that passed
Parliament in 1998. Moreover, the funded part as envisaged in 1994 was
quite different from what was enacted in 1998. And even in 1994 there
were features of the reform that deserved criticism. In several reports
to international fora and in articles in Swedish morning newspapers and
periodicals as well as books, I have tried to identify the problemsiii.
Swedish officials naturally tend to focus on the strengths of the reform,
i.e. its financial sustainability1, as do representatives of finance ministries
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
be brought about while re-establishing a proper balance between the
1
See for example Settergren: ‘Impact of the financial and economic crises on
the Swedish pension system’, in the ISSA Social Security Observer that can be
found at http://news.issa.int/eng/newsletter/newsletter_repository/observer/
en/social_security_observer_10/(article)/4547
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
By KG Scherman
basic needs and constraints, a balance that is a prerequisite for a reform
that is sustainable not only financially but also socially and politically.
The need for a broad and nuanced knowledge is especially important
when it comes to a pension model, like the Swedish one, that is widely
observed throughout the world. Some of the features of this model, i.e.
the so-called notional defined contribution (NDC) sub scheme have
been introduced in Italy, Latvia and Poland, and automatic adjustments
of various sorts have been introduced elsewhere. The model has been
contemplated in the reform debate in the USA and it has also been part of
the discussion about pension reform in France. It is recommended by the
World Bank as a viable reform model and it is referred to by the European
Union as containing ‘a key type of innovation’2.
Following this, there is a need to sort out what the new Swedish pension
system really is, and to realize that it contains a whole range of different
features, many of them fundamentally different from what Swedish
welfare arrangements have traditionally stood for. And to realize that
the NDC system is only one part of the Swedish reform.
In this brief article3, I hope to clarify the consequences of the NDC
principles in Sweden, in particular when it has come under intense
financial stress, as well as the development of other parts of the overall
Swedish pension system, i.e. the minimum pension and the individual
account scheme, and thereby contribute to a debate about the true
nature of the Swedish pension model and what is needed for a positive
development of this model. Such a debate most probably is of value for
judging to what extent the Swedish pension model is a viable reform
model.
As a background I begin with a short repetition of core features of the
new Swedish pension system and some further elaborations on the true
nature of the NDC concept.
I hope all this will be of interest to you
With my best regards
KG Scherman
2
A recent publication is a Green Paper on Pensions 2010-07-07 now out for
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/
publications/index_en.htm
3
I thank Bernard Casey, Jan Hagberg, Warren McGillivray, Larry Thompson,
John Turner and Ellis Wohlner for valuable comments to an early draft of this
paper.
17
The Actuary India January 2011
The Swedish pension system: a short description
There are many reasons to observe the Swedish reform
The Swedish reform contains a range of features, both from a pension
system point of view and when it comes to pension policy that together
can explain why it has been so much observed.
From a pension system point of view there are the following
features:
v A completely changed PAYG scheme, ending up in the ‘notional
defined contribution’ (NDC) model; including
 Life-time contributions as the basis for the level of retirement
pension;
 Abolishing the ‘normal pension age’;
 Taking increasing life expectancy into account in the
calculation of pensions, thereby steadily raising the age
when a person can retire with an adequate pension.
v The introduction of a funded pension component alongside the
PAYG part;
v A successive phasing out of the minimum pension in the face of
economic growth.
From the point of view of pension politics, other features come to the
fore:
v There was a broad political consensus behind a reform that
effectively reduces pensions and pension expenditure;
v There is a stated policy that the contribution rate to the public
earnings related pension system should be unchanged into the
indefinite future.
v There was no public opposition despite reductions in future
pensions.
v Sweden’s reputation as an advanced welfare state makes it useful
for politicians elsewhere to refer to their reform proposals as
following the Swedish model.
As can be seen, the NDC system is only one part of the Swedish reform.
All parts taken together, including the successive phasing out of the
minimum pension and the introduction of a funded component, must
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.
The rules
The new old-age pension system contains an earnings-related part
and, in addition, it offers protection to those who have no, or only a low,
earnings-related pension.
18 Indian Actuarial Profession Serving the Cause of Public Interest
It contains a minimum pension, guaranteed by the state for all residents
in Sweden. In addition, there are various supplements available for
those who have no, or only a low, pension. The guarantee is indexed
according to the cost of living, regardless of the development of wages.
Hence, in the long run, its relative value will diminish in the face of real
growth of wages. This is the stated policy of the government.
The public earnings-related scheme consists of two parts: a fully funded,
savings scheme, called the PPM-scheme and a pay-as-you-go scheme.
A core idea in the new system is to retain a stable contribution rate of
18,5% of covered earnings into the indefinite future. The contribution is
split between the PPM scheme and the pay-as-you-go scheme. Certain
periods (while receiving social security benefits, periods of child care,
military service and higher education) give pension rights for which the
individual and the state pay the contributions in full.
The fully funded savings scheme is new. The contribution to that
part is 2.5 percentage points and it pays for life annuities based on
insurance principles. It is administered separately from the pay-as-
you-go earnings-related scheme. Private and public fund managers
are available. The rest of the administration and the insurance function
of this sub-system is a public responsibility.
The pay-as-you-go scheme is completely redesigned. It has become
a notional defined-contribution (NDC) scheme. This redesign has been
much commented upon in the international debate. One of its principal
intentions is to maintain a stable contribution rate into the indefinite
future. This scheme has the following features.
v The benefit formula is tightened up and benefits are based on all
contributions over an individual’s full working career.
v Indexation rules are linked to average wage development:
 pension rights being indexed to average wage growth,
 pensions in payment being indexed to average wage growth
reduced by 1.6 percent per year (flexible indexation with the
‘norm’ 1,6 %) 4.
v Benefits are made dependent on life expectancy, meaning that
a benefit drawn at a certain age by an individual belonging to
one cohort will be lower than that for the preceding cohort, if life
expectancy has increased.
The PAYG part is financed by a contribution of 16.0 percentage points.
4
The ‘norm’ used comes into the annuity factor as an imputed real rate of
return. Its function is to rearrange the time profile of pension payments over an
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
first years pension that was of the same magnitude as in the old system. It has no
connection to any projections of presumed increases of real wages.

The PAYG system contains two other important features. The first is a
special fund, called the buffer fund. All contributions are paid into this
fund and all pensions are paid out of it. As a consequence, the buffer
fund accumulates capital in certain periods, for example if large cohorts
reach working age, and, consequently, the labour force expands, or if
labour force participation increases. The surplus generated under such
periods will be used to counter financial strains on the system in other
periods. Such strains will emerge when the baby boom generation
reaches pension age. At the outset of the new system, most of the
pension fund that had been accumulated under the old ATP pension
system was transferred to the buffer fund, where it serves as a sort of
start up capital.
The second special feature is an automatic balancing mechanism
(ABM)5. New calculation methods have been established to make it
possible to estimate the assets and liabilities of the PAYG scheme.
If the estimated liabilities of the system exceed its assets, the yearly
revaluation of pension rights and pensions in payment will be reduced
enough to enable pension liabilities to grow at the same rate as the
system’s assets. Obviously, such a mechanism makes the system
financially stable. Whatever happens, it reduces current and future
pensions by as much as needed in order to restore financial equilibrium
to the system.
About the general NDC concept
There are some misunderstandings about core features of the NDC
system. For instance, even international experts from time to time state
that defined benefit schemes in general as well as the so-called point
systems can be made to mimic the general NDC model6.
This statement is true under the condition that the parameters, such
as those enumerated above, (see page 3), built into a NDC scheme
are enough for keeping the scheme in financial balance under various
developments of the environment, i.e. demography and economy,
without a need to increase the rate of contributions. Under such
circumstances a traditional DB (point) scheme, given the appropriate
parameters, can function exactly as the NDC-scheme, when it comes
to accumulation of pension rights and pensions in payment. The NDC
scheme then functions as if ‘life time contributions’, that are the basis
for pension rights accumulations in all NDC schemes, were equivalent
This mechanism was at first named ‘the Brake’ a name still
5
widely used
6
Se for instance Whitehouse: ‘Decomposing National Defined-Contribution
Pensions’ in OECD Social, Employment and Migration Working papers No 109
that can be found at
http://www.oecd-ilibrary.org/social-issues-migration-health/decomposing-
national-defined-contribution-pensions_5km68fw0t60w-en
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
to ‘life time earning’s. But this is true only provided that the scheme
does not come under financial stress7.
Now, it must be observed that every pension system trying to retain benefit
and contribution rules unchanged comes under financial stress following
demographic developments and other changed circumstances, as soon
as ‘dedicated reserves’ or ‘buffer funds’ that might have been available at
some point in time, are depleted. And when financial stress occurs, there
are fundamental differences between these types of schemes.
Under financial stress a traditional DB scheme becomes subject to
a review, where benefit levels, pension age and contributions all are
discussed. Basically, what happens is a political process aiming at
striking a new balance between these factors. Such a reaction is not
feasible in a NDC scheme, where, as we have seen, the contributions
themselves are the basis for the accumulation of pension rights.
Consequently, in a NDC scheme it is not advisable to try to help to solve
current financial problems by increasing the contribution rate, as such
an increase would create new pension rights and hence risks to create
new financial problems in the future.
In NDC schemes, the desire to stabilise contributions has been
transferred into a basic principle; contribution rates are intended to
remain unchanged into the indefinite future.
The consequence is that there is no way to change the NDC part of a
pension system in the face of changes in external conditions with a view
to attain a new balance between social goals and financial constraints.
Instead all adjustments must be made on the benefit side, either in the
accumulation phase or for pensions in payment or both.
Only the Swedish system contains a mechanism that makes the basic
definition of the NDC concept to a consistent design. This feature is
the automatic balancing mechanism (ABM) that operates directly based
on the financial balance. Whatever happens, the ABM reduces current
and future pensions by as much as is necessary in order to maintain
the stability of the system’s financing. But it is important to realise, that
as soon as the basic NDC approach is applied, i.e. the contribution
themselves form the basis for accumulation of pension rights, the
outcome must be the same; all adjustments must be made on the
benefit side. The alternative is to abandon the NDC principle.
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,
reserving the strict dependence on contributions to the Swedish system, with
its automatic balancing mechanism. But then, the whole concept becomes
meaningless, being in fact nothing but a certain form of a ‘parametric reform’ of
traditional DB schemes. And it is a fact that all the countries that are said to use
NDC, i.e. Italy, Sweden, Latvia and Poland use contributions as the basis for
accumulation of pension rights. As do the original proponents of the model, i.e. Mr
Palmer in Sweden and Mr Holzmann at the World Bank.
19
The Actuary India January 2011
Here, it must be stressed that ‘abandoning the NDC principle’ only
refer to the need to abandon the inseparable and automatic connection
between contributions and benefits that is the basis for that concept.
As soon as this step is taken, by introducing some sort of contributions
that does not give rise to pension rights, such as the ‘solidarity
contributions’ introduced in France or by abandoning all together the
contributions as the basis for pension rights, the NDC system has
been transformed into a ‘traditional DB-scheme with interesting new
features’. As already pointed out, such a scheme can contain all other
features nowadays and by some experts solely attributed to the NDC
concept.
The significant difference that remains after ‘abandoning the NDC
principle’ then is that politicians once again resume responsibility for
monitoring the generational contract in order to strike a fair balance
between social goals and financial constraints. And, after all, the
sooner this need is realised, the better. Already after the financial
crises during the last couple of years we have seen that politicians
have intervened or voiced plans to mitigate the effect of the crises on
pensions in all four countries (i.e. Italy, Sweden, Latvia and Poland)
that usually are mentioned as those applying NDC8. This is a good
and valuable proof that the belief that it should be possible to relieve
politicians of the responsibility for continually monitoring the public
pension arrangements was out of touch with reality already from
the start.
Much needs to be done, an in-depth debate and analyses are of vital
importance
Pensions in focus in election campaign, but that is not enough
Sweden had a general election in September 2010. The main
combatants were two blocks that stood against each other. It was ‘the
Alliance’, consisting of the parties forming the current government,
Conservatives, Liberals, Center and Christian Democrats, and ‘the
red-greens’ consisting of the Social Democrats, the Left party and the
Green party9. Both blocks promised that the time has now come to
prioritize pensioners. Improvements in various respects, such as health
care, care for the elderly and related matters, are imminent. But the
pension system should not be changed. The ‘pension agreement’, i.e.
the agreement from 1994 between the present four parties in the current
8
About this see: Chłoń-Domińczak A., D. Franco & E. Palmer, 2011. The First
Wave of NDC – Taking Stock Ten Years Plus Down the Road in Holzmann, R.
& Palmer E. (eds.) Non-financial Defined Contribution (NDC) Pension Systems:
Progress and New Frontiers in a Changing Pension World. Forthcoming publication
of the World Bank. A draft can be found at http://www.forsakringskassan.se/
omfk/ndc_pension_conferens
9
The election result was that the Alliance received more seats in Parliament
than the red-greens, but did not obtain an absolute majority. A new party reached
20 seats, which is more than the difference between the two big blocks.
20 Indian Actuarial Profession Serving the Cause of Public Interest
government and the Social Democrats about a new pension system, will
remain in force10.
Most probably, this will not be so. And in addressing the problems it is
not enough to do as last year. What happened then is the following.
In late 2008 it was realised that the ABM ‘braking’, mechanism in the
national pension system would, if nothing was done, reduce pensions,
both new pensions and pensions in payment 11, by about four percent
in 2010. Representatives of the political parties behind the system
quickly met to seek solutions. The outcome of their deliberations was to
propose a revision of the calculations that determine how the ‘braking’
mechanism functions. Instead of a pension reduction of around four
percent, or about 500 kronor per month for a ‘typical pension’, the
reduction in 2010 should become about less than half as much, or 200
kronor per month.
The Swedish Pensions Authority12 was given a few weeks to investigate
and elaborate on the technicalities of the politicians’ proposal, and
the few weeks of consideration that then followed resulted in most
groups rejecting the proposal. The day after the consideration period
had expired, the political parties in cahoots met and agreed to anyhow
proceed with the proposal. Despite the Pensions Authority writing: ‘The
Pensions Authority rejects the proposal since it does not lead to the
more even development of pension levels that was desired.’
This harsh statement didn’t influence the politicians. What was ignored,
or perhaps not understood, was that the Pension Authority’s investigation
showed that the new rules would result in the ‘Brake’ continuing to apply,
and even more severely, during the following years.
Instead of such cosmetic reforms, in addressing the real problems,
politicians have to recognize that pension systems are very much about
pension adequacy, not only about financial sustainability. And a long
range of failed forecasts must also be taken into account.
The reform, as designed, was not intended and not suited for
automation
Interestingly enough, the Left party and the Greens accepted that this
10
agreement remained untouched by the new coalition between them and the
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
development. That is a complicated matter which is not dealt with here.
12
Over the last ten years the authority in charge of public pensions has changed
names several times. Up until 2004 it was the National Social Insurance Board.
Between 2005 and 2010 it was the Social Insurance Agency. In parallel for a
couple of years there was also The Premium Pension Authority, in charge of
the individual account subscheme. Today it is the Swedish Pensions Agency
that is resposible for all parts of the Swedish public pension. To avoid confusion in
this paper the term The Pensions Autority is used regardless of which of these
authorities it is that have been in charge at each particular time.

The agreement on principles for a pension reform was concluded by five
parties in parliament in the middle of the 1990’s. From the agreement
it follows, among other things, that pensions shall be dependant on the
development of the economy. That is a good feature of the system. But
the principles did not contain either a ”Brake” - the mechanism that now
has been activated to reduce pension payments - or any investment of
the pension buffer fund in the stock market, or an individual account
part, the so-called PPM system, with the scope and design that it was
ultimately given. Nor was it envisaged that taxes on pensions would
become higher than on wages, which, as we will see in the following,
has over the last four years become a reality.
In fact, already back in 1999 it was possible to see that something was
going wrong. In my 1999 report for the ILO, I wrote by way of a closing
remark the following: ‘My concluding opinion is that Sweden is in the
process of building a new pension system that is sustainable and,
generally speaking, fair. The approach chosen for the reform design
makes it difficult to see which the differences between the old and the
new systems are. The general public is still to be informed. Whether
the reform will be sustainable in the long range will to a considerable
extent depend on how still not decided questions are settled and on
how the political parties in the future will handle the dialogue with the
general public.’
Alas, in 2010 it must be concluded that among the ‘still not decided
questions’ was what ultimately became a complete automation of the
pension system, preventing a sound approach to the need to continually
monitor the system in the light of new projections and new knowledge,
and a transfer of funds to the state budget that was too large (see
below).
In retrospect it is easy to see that the decisions back in 1994 were
based on assumptions and forecasts that have not materialized. Those
assumptions were then ”locked into” the system for all eternity by the
automatic balancing mechanism. Among such failed beliefs about
coming years that have proved to be wrong are forecasts about life
expectancy and about the development of real wages.
The Pensions Authority, responsible for the calculations that formed the
basis for the new pension system, anticipated a modest increase in life
expectancy and, consequently, a need to increase the pension age with
less than one year in the long run. Today we know otherwise. Already
today the life expectancy exceeds what was anticipated for the long run
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
get a decent pension.
The same inability to look into the future influenced the discussion
around the development of real wages. At the beginning of the 1990’s
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
the Swedish society had had more than ten years of stagnating or
even falling real wages. As a result, no one considered what would
happen if real wages should begin to grow during the implementation
period of the new system. But that was what really happened. During
the last half of the 1990’s and the beginning of 2000 there was a steep
increase in real wages. Pensions, on the other hand, began to follow
wages only from 2002 onwards. Compared to wages, the pension for
an individual that had retired 1994 or earlier declined by more than
30% as a result.
The financial prospects of the pension system itself were also
misinterpreted. The financial constraints, or – more accurately – the
absence of financial constraints, were formulated in the discussion
about a payment from the buffer fund to the state budget of monies to
compensate for some of the extra burdens that it would incur as a result
of the reform. The terms of the original documents are worth citing.
After having described the proposed compensation, the text reads: ‘Of
course these proposals affect, as has been described above, only the
financial side. Neither the successive phasing in of the contributions,
nor the transitional use of the buffer fund for other then old-age pension
payments, affect the benefit side, that is obvious’. But reality soon
proved differently.
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
politicians proceeded with the design and implementation of a totally
automatic balancing mechanism and with plans to transfer large sums
of money from the pension buffer fund to the state budget. To make
this possible, and in addition to other restrictive measures, including a
need for an effective pension age13 of 68 or 69 for younger generations
(should today’s forecasts about the development of life expectancy for
those generations come true), a ‘Brake’ was added that always reduce
pensions and accumulated pension entitlements further and as much
as is needed in order to restore financial balance After this automatic
system was put in place, the politicians seem to cease concerning
themselves with social justice and a proper balance between the active
and the retired population. Everything had been completely thought
through.
What is needed now is to address the problems in a constructive
manner. This observation applies not only to the current visible and
acute problems, i.e. what has happened with the level of pensions in
payment, but also to the problematic situation of younger generations.
13
‘Pension age’ here used as the age up to which a person belonging to a certain
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
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
official report that the Swedish government has submitted to the EU.
21
The Actuary India January 2011
There is an urgent need for a discussion about how the labour market
functions and what employment opportunities are available, as well
as for renewed analyses and discussion about the individual account
(PPM) system and what contributions to the public pension system are
needed to make it possible to offer decent pensions.
More about the parts of the pension system
The minimum pension
The minimum pension, i.e. the guarantee of a minimum amount to be
received as a public pension, is indexed to the cost-of-living, and as
real wages increase the minimum pension will gradually decline as a
proportion of average wages. Since 1998, when the new pension system
was enacted, this reduction in the minimum pension has amounted to
20%. Diagram 1 illustrates this.
Diagram 1. Minimum pension is indexed to cost of living, not to
wages. Comparison of development 1998-2009 of the sum 6 500/
month
Source: Authors own calculations
Note: See footnote 14, page 11 for the exchange rate.
Even when one takes into account that Swedish pensioners with low
incomes have access to a housing supplement, there still is a large
reduction.
An increase in the minimum pension was discussed a few years ago.
Minister of Finance, Anders Borg, replied that ‘there is an agreement
how this should be dealt with’ (referring to the original 5-party
agreement), nothing should be changed, and as far as he knew there
was no one proposing any change. A rather interesting observation
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.
22 Indian Actuarial Profession Serving the Cause of Public Interest
The Minister of Finance views his standpoint as reasonable, and subject
to political will. But there are many who say otherwise.
For several years the Pensions Authority wrote in its annual report on
the pension system, (‘the Orange Report’), that the minimum pension
would remain constant in real monetary terms, but with the addendum
that ‘The realism in this assumption can be questioned.’ This comment
is found on page 33 in the report for 2008.
The Ministry of Finance’s Expert Group for Studies in National Economy
(ESS), wrote in ‘Generation analyses; redistribution between generations
in a welfare state’ that despite current regulations one counted on
subsidies and transfers being adjusted upward in accordance with
wages. Otherwise the welfare state will become smaller and smaller in
the future (See page 50).
The OECD publishes reports on pension systems throughout the world.
Its June 2007 report contains the same opinion as the ESS report.
Statements from both Sweden and Great Britain that the countries
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?
Income pension/ATP
In January 2010, the Pensions Authority published a forecast of how
gross pensions, i.e. pensions before income tax, will develop. One
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
to 11,300 kronor in 2011, and then in 2014 rise back to 12,000. A salary
in 2009 of 12,000 kronor will, on the other hand, continually increase
to about 14,000 kronor in 2014, i.e. 2,000 kronor more per month for
the working person. The development can be seen in the following
diagram 2.
14
The exchange rate is around 10 SEK, ‘kronor’ to one Euro

Diagram 2. Comparison of official projections of development of
a salary and a pension, starting from 12,000 SEK a month each in
2009
Source: Report 2010-01-18, from the Pensions Authority to the
government and authors own calculations
An important reason for the pension level declining and the gap between
the retiree and the active worker increasing is that the automatic
balancing mechanism was activated. It reduces the pension by 200
kronor in 2010, and an additional 500 kronor in 2011. There will be a
further reduction in 2012, and the Brake is still applied in 2014.
The politicians do not consider this to be a problem. They refer in election
after election to unanimity, the automatic system and ‘stable finances’.
It is significant to note that in an official answer in Parliament on 9 April
2010, the responsible government minister did not even mention the
pension system’s basic task of providing stable pensions that provide a
reasonable standard of living.
Politicians claim that the economic crisis is the cause of the ’Brake’ being
applied, particularly through the reduced asset values of holdings in
the buffer fund. Government representatives claimed this most recently
in the parliamentary debate in April. But they have misunderstood the
situation.
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,
pensions are reduced. This depends on something other than the ups-
and-downs of the buffer fund. Considerably more than 600 billion kronor
have been lost in the complicated formulae that steer the ‘braking’
mechanism. We shall study three decisive factors.
1. As a result of an unnoticed connection between the tax rules
and the ’income index’, which is the basis of the annual pension
Indian Actuarial Profession Serving the Cause of Public Interest
The Actuary India January 2011
recalculation, the recalculation was ’too large’ for several years15. In
total this accounted for 160 billion kronor in weakening of the pension
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.
For example, Anderson, who retired in 2008 at 65 years of age, receives
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
amount of the decrease is determined by how the number of older
persons has developed over the years.
For social reasons, one doesn’t want to reduce pensions even for those
that already have retired. This costs money. From the pension system’s
annual reports one can calculate that finances have been depleted by
220 billion kronor as a result of this18. This cost wasn’t planned for, and,
no matter how well socially motivated this concern for those already
retired may be, the cost must be recovered. This is brought about by
way of the Brake, and the end result is that those already retired share
the burden of the costs due to increased life expectancy.
3. A third factor affecting finances, is how younger people are acting
in regards to work. If they begin working at an older age, or otherwise
delay their careers, the ‘contribution assets’ of the pension system are
reduced. And this has been the case. Young people are beginning work
later, and other changes have also occurred. More than 200 billion
kronor has in this way ‘disappeared’19.
15
The income index is based on average taxable earnings, i.e. earnings less
a base amount that is deducted before taxable income is established. When
this base amount is increased, which has been the case over the last decade,
people with earnings below this threshold are not included when the average is
calculated.
See Ole Settergren in an article in the periodical ‘Veteranen’, issued by the
16
Swedish Association of Senior Citizens, Nr 1 2010 (available only in Swedish).
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
23
The Actuary India January 2011
The saying that every individual himself bears the brunt of his/her life
choices is incorrect. So is the claim that the ‘Brake’ ensures that ‘costs
are not shifted on to our descendents’. Older peoples’ pensions are being
reduced due to younger people changing their life styles, often due to the
unavailability of jobs. A reverse shifting of costs, in other words.
Without these three factors the Brake would not have been needed,
despite the 191 billion kronor decline in buffer fund assets 2008 and
despite the loss of about 300 billion caused by the economic downturn20.
Referring to the economic downturn is a way to avoid facing the real
problems.
The available money is not enough to pay pensions, not today and even
less in the future. It is unreasonable that the only measure to counter
the shortfall is reducing pensions and removing the social aspect in the
pension system, and, moreover, doing all this automatically and without
any discussion. The effective pension age must be raised, and probably
also the rate of contributions. These are the real issues; the unfortunate
‘Brake’ has become a veil that hides the truth.
The individual account system is not adequate, neither for the overall
financial situation, as contributions that are needed to finance the PAYG
scheme are diverted to this system, nor for the younger generation
when it comes to pension adequacy
A part of the discussion must be about the future of the PPM system,
which diverts recourses that could otherwise be used for the PAYG
system, and which transfers big risks onto the individual.
In a 19 January 2009 morning newspaper article, Mr Leif Pagrotsky,
member of the former Social Democratic government, proposed that
the PPM system be evaluated. He stated that it is not needed. It is
expensive, it subjects people to the risk of inferior pensions and it
presupposes that individuals should be able to make rational choices
between 750 funds.
The opponents to this view answer that while stock markets go up and
down, in the long run the positive result will prevail. But by saying so,
they disregard the real risk that people are facing. The situation for
future pensioners disappears in the airy sphere of economic theories.
Take the situation of Mr Peterson and Mrs Anderson, as it would be
if the PPM-system were in full operation. Mr Peterson draws his first
year’s pension in August 2007. Thanks to the rally in stock markets
his pension will be around 13 000 SEK a month, of which 2 500 SEK
stems from the PPM system. Mrs Anderson is a bit younger, she has
20
This rough estimate is based on comparison between how the ‘contribution
asset’ has developed between 2001 and 2008 (between 140-400 billion SEK/year
with a median value of around 185 billion) with the development 2009, that was a
reduction of 115 billion SEK.
24 Indian Actuarial Profession Serving the Cause of Public Interest
long since planned to retire by August 2008. She had an agreement
on this with her employer. But in August 2008, her PPM funds have
dropped by 40% and her pension will be only 12 000 SEK. Compared
to Mr Anderson she loses 1000 SEK per month for the rest of her life.
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
standard of living.
Theoreticians say: One has to plan, and take care to switch to less
risky investments well in advance of retirement, or keep one’s funds
until stock markets recover, or delay retirement. But, what is meant by
‘well in advance’? Governments could not foresee what happened in
2008. Why then assume that ordinary citizens are able to forecast what
will happen? And ‘keep one’s funds until stock markets recover’? Is it
sound to await new upturns that soon will end in new downturns? And
which funds should the individual choose? How long might one wait
for a recovery? These thoughts worry those who are young; shall the
elderly too be hunted by this impossible choice? Finally: ‘Delay one’s
retirement.’ Who believes that Mrs Anderson would be successful in
approaching her employer, saying: ‘I have changed my mind; I want
to stay until the market has recovered’. Particularly when layoffs are
widespread and employers seek opportunities to reduce their staffs.
Others say: ‘Now the prophets of evil are out again’. 2008 has been
exceptional. But that is not true. It is only seven years since the stock
markets slumped in the same way as in 2008. The situation for the
persons described above would have been the same then. And it will
continue in this fashion, if we do not succeed in getting a totally new order
of the financial markets than what has emerged during the last 20 years.
Paul Krugman speaks about the ‘spirit of the times’ that has caused an
unfounded belief that financial markets can only grow, only create profits.
This frenzy seems to have reached the pension politicians too, and caused
them to leave individuals at the mercy of these markets. A reaction will
come when people ultimately understand what really happens.
So, Pagrotsky got it precisely right. Something must be done. In 20
years’ time, the examples above will be reality. But then it will be too late
to change. One possible alternative is to totally abolish PPM. But there
are other alternatives. One is to return to the agreement on principles
from 1994. Not many people know that that agreement contains a
funded component with a scope and design that radically differs from
what was ultimately decided in 1998.
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
part of the earnings related pension. Otherwise, following basic rules for
a PAYG system and the ensuing transitional costs, the pledge to honour
the entitlements accumulated in the old ATP pension system could not
 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
to be so.
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
much does he find to pay the bill? Answer: Zero. Actuaries
always round to the nearest ten million.
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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