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The International Standard of Actuarial Practice—Valuation of Social Security Programs

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By Jean-Claude Ménard, FCIA

The International Actuarial Association (IAA) is the worldwide association uniting almost 100 professional actuarial organizations from 83 countries or regions. The IAA encourages the development of a global actuarial profession and promotes its acknowledgement as technically competent, professionally reliable, and serving the public interest.

One of the IAA’s strategic objectives is to promote the development and issuance of actuarial standards in the jurisdictions of all full member associations, and the global convergence of actuarial standards. As such, International Standards of Actuarial Practice (ISAPs) are currently being developed by the IAA. The Canadian Institute of Actuaries (CIA) is a full member association of the IAA, and Canadian actuaries are actively involved in the work on ISAPs.

One of the ISAPs being developed is the ISAP on Valuation of Social Security Programs. Social security actuaries play an important role in carrying out financial analyses of social security programs. Since the policy decision-making relies heavily on such analysis, it is important that it is done by actuaries in a highly professional and responsible way. Few existing professional standards and guidelines specifically apply to social security programs, and international bodies such as the International Social Security Association and the International Labour Organization have been stressing an urgent need for appropriate standards. In Canada, even if the CIA has a comprehensive set of actuarial practice standards that cover a majority of actuarial practice fields, there are no practice-specific standards for social security programs. Therefore, the ISAP on Valuation of Social Security Programs will be of a great value for Canadian actuaries working in this field.

In the social security area of practice, the IAA previously adopted Guidelines of Actuarial Practice for Social Security Programs, which became effective on January 1, 2003. Those guidelines had the effect of a practice note and will be superseded by the adopted version of the new ISAP.

In the middle of 2011, the IAA Executive Committee approved the statement of intent to issue an ISAP on Valuation of Social Security Programs. Subsequently, the draft of this ISAP was developed by the Social Security Task Force of the Interim Actuarial Standards Subcommittee (IASSC). The drafting team was led by Robert L. Brown (Canada) and Godfrey Perrott (U.S.) and included Canadian social security actuaries: Pierre Plamondon, the chief actuary of the Québec Pension Plan (recently retired) and myself (in consultation with my colleagues in the Office of the Chief Actuary). The draft was discussed at several IAA meetings and teleconference calls.

In May 2012, a draft of the ISAP on Valuation of Social Security Programs was submitted to the IASSC, which intends to expose it concurrently with ISAP 1—General Actuarial Practice. The ISAP on Valuation of Social Security Programs is expected to be the first ISAP other than ISAP 1 to be adopted; this is expected to happen at the IAA Council meeting in the fall of 2013 or the spring of 2014.

This raises the question of whether Canada will adopt this proposed ISAP on Valuation of Social Security Programs, particularly since, as mentioned earlier, our Canadian standards include no practice-specific standards in this area. My understanding is that the Actuarial Standards Board is starting to consider how to incorporate not only this ISAP but also ISAP 1 on general actuarial practice and other ISAPs as they are developed into Canadian actuarial guidance.

By their nature, social security programs cover a wide segment of the population, and, as such, economy-wide and nationwide economic and demographic assumptions are often needed in order to prepare actuarial valuations. Valuation methodologies used in social security valuations are dependent upon financing methods of these programs and upon the sustainability measures used. Finally, communication is increasingly becoming an integral part of social security actuaries’ mandate: they need to effectively convey their findings and recommendations to policymakers in order for responsible public policies to be developed. All these considerations are reflected in the ISAP on Valuation of Social Security Programs through discussion of appropriate practices as well as communication and disclosure requirements.

Canada has significant experience in the area of social security valuations. We were pleased to participate in the development of the ISAP on Valuation of Social Security Programs and to share our expertise. We are also pleased that some of the best Canadian practices were reflected in this ISAP: the guidelines with respect to the independent expert review process and the acknowledgement that a balance sheet for pay-as-you-go or partially funded social security programs should be prepared using an open group approach, under which contributions and benefits of both current and future participants are considered.

In her remarks at the 2011 CIA Annual Meeting, superintendent Julie Dickson from the Office of the Superintendent of Financial Institutions (OSFI) recognized and applauded the CIA’s involvement with the IAA in promoting and potentially developing appropriate international actuarial standards related to International Financial Reporting Standards. The CIA involvement in the development of the ISAP on Valuation of Social Security Programs is another example of sharing Canadian experience and expertise with an international audience and promoting the main guiding principle of the actuarial profession: serving the public interest.

Jean-Claude Ménard, FCIA, is chief actuary at the Office of the Chief Actuary, OSFI, and Chair of the Technical Commission on Statistical, Actuarial, and Financial Studies of the International Social Security Association.

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