Actuarial Sustainability Alarm

Recently the European Commission launched the 'Sustainability Report 2009", investigating the long-term (2010-2060)sustainability of public finances.

This report clearly shows the long-term economic effects of the aging society and the continuous increasing life expectancy.

Financing increasing pension and health costs in the next decades, will be a real challenge for almost all European countries. Even more, the current financial crisis and unsure financial outlook urge for severe short term measures in order to prevent much more unpleasant other measures in the next decades.

The report claims that the ability to meet public pensions liabilities is a higher long-term risk for governments than ever before and in most cases reform of member states’ pensions systems is 'must' and can no longer be delayed.

Although the report manly focuses on the increase (the so called delta) of the sustainability gap, I would like to take a look at the development of the aging costs in relation to the debt development of each country.

Development Aging costs
Let's start to take a look at the development of the public pensions liabilities (pension costs) and health costs from a slightly different angle as published in the report:

On average the total aging costs are increasing from 25% in 2010 to about 30% in 2060 on bases of a no-policy-change assumption.But there a countries (BE, EL, LU, SI) that grow way above this average to a level that's even above the current level of countries with high social standards, like Sweden and Finland.

To conquer this development, some member countries are trying to tackling the longevity issue by raising retirement ages.
Not only the pension costs increase, but also the projected long-term increase in healthcare spending is large and constitutes on its own a risk to sustainability.

Countries whose regimes are listed by the report as 'high-risk' in terms of sustainability are: The Czech Republic, Cyprus, Ireland, Greece Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia and the UK. In many countries the age-related expenditure is expected to climb quickly against existing financial imbalances.

Development gross debt ratio
As is clear from the next table, the mentioned next decades increase in health and pension costs, in combination with the unhealthy financial situation - due to the credit crisis - cumulates in a clear desperate debt situation for most of the European countries:

The table shows the government gross debt ratio in 2008 and 2009, and the projections for 2010, 2030 and 2060, once the costs of servicing debt and paying for age-related expenditure are taken into account.

As mentioned before, the long-term debt projections have been prepared under a no-policy-change assumption and in partial equilibrium. Given these assumptions, the projections are not robust forecasts and are not meant to be realistic scenarios of what may happen in the future.

The aim of the debt projections is to illustrate the long-term trends and the size of the required remedial action to avoid government debts to enter into an exponentially increasing spiral.

Actuary Involvement
It's clear that the debt and social costs developments are not heading in the right direction..... Actuary involvement to analyze, advice and create new social systems seems necessary.
Actuaries on the bridge, please!

Sources
- IPE
- EC
- Sustainability Report 2009
- Report 2009
- Download: Maggid Excel tables Aging Costs and Debt Development

Best Pension Country 2009

There's a small country somewhere on this globe, called The Netherlands......

This small country does not only turns out to be the European and (probably) World Health Leader 2009, but - by the way - also happens to be the first Pension World Leader 2009, according to a new global research by Mercer.

You might wonder, who's the leader of that small country near the sea? His name is Mr. Jan Peter Balkenende. He's Prime minister for more than 7 years, is said to have no charisma and has proved to be able to lead a country that's loaded with hair-splitters and complaining people who disagree with each other on every possible subject.

Opposite to other European presidents like Sarkozy (France) or Berlusconi (Italy), who perform strongly on basis of their charisma and seem mainly interested in the fair sex, the Dutch Prime Minister Balkenende - just like the German Prime Minister Angela Merkel - is a modest no-nonsense leader, who walks his talk and gets the job done.

For sure he would be the best European President kandidate, to lead Europe through difficult times ahead on basis of dialog, respect and agreement.

Mercer Global Pension Index
Back to the Mercer Global Pension Index outcome.
The research is a first attempt to objectively compare the retirement income systems of eleven countries spread across the world.

Countries where rated in five grades:

Grade	Index value	Description
A	>80	A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity
B	65–80	A system that has a sound structure, with many good features, but has some areas for improvement that differentiate it from an A-grade system.
C	50–65	A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.
D	35–50	A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt.
E	<35	A poor system that may be in the early stages of development or a non-existent system.

The overall index value for each country represents the weighted average of the three sub-indices. adequacy, sustainability and Integrity.


Pension Index Outcome 2009
The results of the pension research clearly appoint The Netherlands as the undisputed Pension leader.


Remarkable however, is that none of the participating countries were classified with an A-grade (index value > 80). This can be easily explained by the fact that no one system is strong enough to withstand the challenges of an aging population.

Want to know more? Than listen to to Dr David Knox (WWP Mercer) discussing the Melbourne Mercer Global Pension Index




Or simply download the full report.

Interested in how The Netherlands 'did it'? Just contact Tim Burggraaf, one of the best worldwide consultants of Mercer in The Netherlands. Tim is a Master in Pensions and Life Assurance. No... he's not an actuary... but you wouldn't notice and moreover, he's one of the best interlocutors and speakers you can can get.

Sources :
- IPE
- Melbourne Mercer Global Pension Index

Humor: Actuary Solves Credit Crisis

One upon a time there was a small village depending on only one source of income, tourism... the only problem was - due to the 'crisis' - there were no tourists left...

Every villager had to borrow from an other in order to survive.. several months passed .. everyone felt miserable.

One day a cost conscious actuary, visiting a Risk Conference nearby, arrived in the village.

Heading for a cheap overnight stay, he booked a small room in the only available local hotel. He paid in advance with a 100 dollar note and went to his room to prepare for the conference.

Before the actuary could unpack his bags, the hotel owner had already taken the 100 dollar note, heading his way to pay the butcher.. to whom he owed precisely 100 dollar.

The butcher, in his turn, immediately ran off with the 100 dollar to see the local farmer and paid his debt for all the meat he'd been supplied with...

With the same 100 dollar note, the farmer immediately paid the seed salesman who, right at that time, was visiting the farmer to collect the unpaid 100 dollar bill.

Back in his hotel, the seed salesman closed the circle. In order to settle the hotel bill for that night, he dropped the 100 dollar note on the counter. Just at that moment, the actuary - who'd come down to tell the hotel owner that he didn't like his room - arrives at the counter, picks up his 100 dollar and disappears.

Nothing was spent,
nothing was gained,
nothing was lost.
Nonetheless, thanks to the actuary, nobody in the village had any debts!

Moral
This story shows why it's important for actuaries to attend Risk Conferences and illustrates how actuaries can actively contribute to solving the credit crisis.

Original Sources: Free after newciv, Dutch source Aardbron