Pension Reforms and Actuaries

The future of pension is for sure one of the most important and difficult social challenges in many countries. Numerous reforms, especially in the first pillar of social security, have been launched these last decades, in order to respond to the aging pressure. Traditional collective state pension schemes were very often organized on a Pay As You Go (PAYG1 ) basis whose sustainability is threatened, so future challenges are huge, especially for actuaries.

It is quite obvious that the demographic evolution, observed in nearly every country and characterized simultaneously by a decrease of the number of active people (persistent low levels of fertility rates) and an increase of the number of retirees (baby boom effect and increase of life expectancy) will induce major effects on these PAYG techniques. It is also well known that it is possible to finance a pension collective structure, using other techniques: mainly, the fully funding (FF) approach, where each generation saves for their own pensions. These FF schemes are less sensitive to demographic issues (even if the longevity risk affects equally both techniques) but are exposed to other forms of risk such as the market risk. The relative place given to these two techniques (PAYG or FF) in the general architecture of pension can be quite different from one country to another.

[....]