I am delighted to contribute to the 10th anniversary edition of IPE. I was asked to give an actuarial view on likely changes in pensions in Europe over the next 10 years, but as with all actuarial projections, things may turn out differently. Certainly some of the issues which we are currently considering would not have been foreseen 10 years ago. Since then there have been significant changes in regulation in many countries, as well as at EU level, and developments in international accounting standards. In addition, the provision of pensions, and in some unfortunate cases, the failure to provide pensions, has become headline news in the mainstream press, and not just in IPE.

One area where actuaries have particular expertise is in mortality statistics, and the implications for financial institutions such as pension funds and insurance companies of improvements in longevity. A key question for actuaries advising on the funding of DB plans, or assessing the present value of obligations to pay future pensions for disclosure in corporate accounts, is whether or, perhaps more appropriately, to what extent allowance should be made for continuing future improvements in longevity.

While it may be prudent to assume that the pace of improvement in recent years will continue, or even accelerate, there is a view that while some of the traditional causes of death have been alleviated by advances in medical science and research, other illnesses or diseases will emerge to offset the extent to which mortality rates can improve.

This debate will no doubt continue over the next 10 years and perhaps an additional 10 years of data will enable a consensus view to emerge.

Of particular interest in the EU context is the extent to which mortality differs between member states, and a report prepared by Cass Business School in 2005 (available on www.gcactuaries.org) with the assistance of the GCAE demonstrated that this is exaggerated by different approaches in different member states to updating mortality tables and making allowance for future improvements.

These differentials would impact on the possible development of an EU wide standard basis for the assessment of technical provisions or individual transfer values. While we are a long way from this situation at present, and there would no doubt be much debate about whether harmonisation can or should be an objective, it is conceivable that in 2017, after 12 years' experience of the IORPS directive, and perhaps with a portability directive in place, this may be on the agenda.

Of course there are issues other than mortality which affect the calculation of reserves or technical provisions and drive the pace of funding of DB schemes. The GCAE undertakes an annual survey of the approaches adopted by actuaries within member states to the determination of technical provisions and the most recently completed survey (as at 31 December 2005) is available on the www.gcactuaries.org.

The major factors are the funding target chosen (or stipulated in national legislation) and the discount rate, net of salary increases for final salary related plans.

Where legislation or practice requires that the funding target is at a high level, eg with allowance for indexation in pensions before and after retirement, the reserves will be much higher than where there is no practice of such increases and hence no requirement to reserve for them. In some countries, the discount rate is set at a level which is higher than current market yields, whereas in others it is lower (presumably to include an implicit margin for indexation), and in some countries there is no apparent link with current market conditions, despite the requirements of Article 15.4(b) of the directive.

It will be interesting to see the extent of convergence in the approach to reserving over the next 10 years, and indeed how the European Commission addresses this issue once there has been a period of bedding in of the IORP directive.

It is likely that if there is to be any significant growth in cross-border or pan-European (DB) schemes there will need to be greater convergence and also greater flexibility between member states within CEIOPS in relation to the requirements to operate cross border, eg by minimising the extent of the social and labour law requirements. It will also be necessary to ensure that the taxation treatment of cross-border schemes and members is not more onerous than for domestic pension arrangements.


The GCAE intends to play a major role in the development of the Commission's thinking in relation to pension reserving, including the question of whether, and to what extent, the Solvency II framework being developed for insurance companies should be applied to IORPS. This issue would merit an article (or perhaps even an entire supplement) on its own, but I think it is safe to assume that despite the postponement by the Commission of this issue, and vehement opposition from a number of quarters, it is still on the medium-term agenda.

The GCAE is preparing a position paper on the topic which will address the matter primarily from a technical perspective, drawing on the experience and knowledge of colleagues working in insurance who are heavily involved with CEIOPS and the Commission in the development of Solvency II.

There have been many changes in accounting standards in recent years with the result that international standards have become closer together. However, there are still significant issues to be resolved before there is a truly harmonised international standard for disclosure of pensions costs in corporate accounts, and this process may still be ongoing in 10 years' time. The GCAE, together with the International Actuarial Association will continue to play a key role in these discussions. While the role of actuaries in relation to occupational pension provision has traditionally been with DB schemes, there are many EU member states where defined contribution (DC) plans are the main or sole form of second pillar pension. Even in the countries where there is a strong tradition of DB provision, such as the Netherlands, the UK and Ireland, the trend towards DC is very strong, and actuaries have been heavily involved in the design and establishment of DC schemes. The main aspects on which actuaries can add value are:

q Contribution rates and structures

q Investment options pre-retirement

q Post retirement drawdown of benefits with particular emphasis on risk, which in DC plans is generally borne by the individual member.

A challenge for actuaries, both advising DC pension schemes and working for insurance companies selling pensions, is communication of complex issues in terms which ordinary people can understand, without giving a false sense of certainty about unknown outcomes. The GCAE has recently established a working party comprising representatives from pensions and investment disciplines to consider issues arising from DC provision.

There are also some employers who do not, perhaps after negotiation with trades unions representing their workforce, pass all of the risk to the employees and retain part of the risk themselves. In recent years, this has led to the establishment of so-called hybrid plans, such as cash balance plans, or collective DC plans, and actuaries are likely to become increasingly involved in this area as the shortcomings of the traditional ‘plain vanilla' DB or DC plans become more widely appreciated. Of course, the challenge of communicating complex and unusual designs to members will be even greater.

Although this article focuses on second pillar pensions, it is impossible not to make reference to state provision, which has a significant impact on the extent and type of occupational pensions provided by member states.

Governments are now well aware of the so-called "demographic time-bomb" in relation to their pension liabilities, and some are taking steps to address this, with significant input from actuarial profession.

For newer member states, the challenge is to develop a sustainable and equitable level of state provision, usually coupled with second pillar or private provision. It is likely that in 10 years' time, there will have been significant developments in many member states in relation to state provision, and this will have a knock on effect on the occupational pension system in those countries.

Of course with the continuing expansion of the EU, there may well be more divergence than convergence in pension systems in the next few years.

In closing, I anticipate 10 years of challenge and of change, and I look forward to reading all about it in IPE.

Philip Shier is chairman of the pensions committee at Groupe Consultatif