Browsing by Subject "technical provisions"

In the Finnish private sector pension system, a part of the pension benefits is financed from funds where a part of the pension contributions has been deposited earlier. The funds collected for the future pensions and different buffer funds constitute the pension providers’ pension liabilities, i.e. the technical provisions. The investment assets acquired with the accrued funds and the returns on them constitute the pension providers’ pension assets. The private sector pension providers must supplement (i.e. increase) their funds reserved for financing the future pensions according to their common rules. These rules, which have an impact on the solvency risk management of the pension providers, constitute the fund transfer obligation. One component of the fund transfer obligation is the supplementary factor, which adjusts the rate at which the old-age pensions are funded, and hence the growth rate of the technical provisions to the average solvency of the pension providers. In 2021, the Ministry of Social Affairs and Health drafted a proposal with significant modifications to the supplementary factor. The proposal includes guidelines for the new formula for the supplementary factor and an option to recalculate its value more frequently than before. However, the proposal also acknowledged that there is no quantitative backing for the benefits from the more frequent recalculation of the supplementary factor. As a part of the results, we will provide the first quantitative estimates of the benefits. In this thesis, we analyze how the recalculation frequency of the supplementary factor affects the solvency risk of the private sector pension providers in aggregate. We find that the more frequent recalculation of the supplementary factor in its current form slightly reduces the solvency risk of the aggregate pension provider without significant drawbacks. This reduction in the solvency risk is magnified when an alternative formula for the supplementary factor aligned with the proposal by the Ministry of Social Affairs and Health is introduced. However, at the same time, the formula aligned with the proposal increases the risk in the rate at which the old-age pensions are funded. In conclusion, we find it recommendable to recalculate the supplementary factor more frequently than currently with both formulas considered.