1. Abstract and Introduction A “Swedish” actuarial balance sheet for a notional defined contribution pension scheme with disability and retirement benefits 3 rd EAJ 2016 & IA Summer School French Institut des Actuaires – Lyon, France J. M. Pérez-Salamero González, M. Ventura-Marco & C. Vidal-Meliá (University of Valencia) This paper proposes an actuarial balance sheet (ABS), TSPS (2015), for a notional defined contribution (NDC) scheme embedding disability insurance within the retirement pension system. The proposed ABS splits the system into two parts: the pure NDC and the redistributive part, which includes the assets and liabilities originating from non-contributory rights. This paper deals with the “Swedish” actuarial balance sheet (SABS), specifically designed for NDC schemes. This can be described as a financial statement listing the pension system's obligations to contributors and pensioners at a particular date, with the amounts of the various assets (financial and mainly through contributions) that underwrite those commitments. Although NDC scheme provides benefit for everyone who works and contributes to it, it will not necessarily provide everyone with a benefit that gives sufficient income for them to live on. NDC schemes should be supplemented with a minimum pension benefit (MPB), (Holzmann & Palmer, 2006). The introduction of an MPB, Barr & Diamond (2009), is a way of preserving the social sustainability of the scheme as well as the adequacy of the pension. NDC schemes mainly focus on old-age pensions, but their application can be extended to other contingencies such as permanent disability, Ventura-Marco & Vidal-Meliá (2016). The Model Conclusions This paper has developed the necessary technicalities to draw up a Swedish type ABS for an NDC scheme embedding disability insurance within the retirement pension system. In addition, the initial integrated NDC scheme has been extended by adding a minimum pension benefit. The articles by Ventura-Marco and Vidal-Meliá (2014 and 2016) and the current Swedish public ABS have been the cornerstones enabling the paper's aim to be achieved. This paper has also explored two alternatives for keeping the system solvent and preserving its transparency when an MPB is taken into account: 1.To make an extraordinary contribution (payment) to fully finance the necessary buffer fund to back up the increase in liabilities caused by the non-contributory rights (it forces politicians to guarantee “pension promises” made in the form of an MPB and keeps order in the system). 2.To register a claim on the public purse for yearly payments to cover the system’s shortfall: new item known as the public contribution asset on the assets side (the present value of future state subsidies to cover the gap between total expenditure on pensions). The numerical example confirms that the model works reasonably well and provide us with some useful values regarding the impact of introducing a disability benefit into the classic NDC scheme and the effect of the inclusion or non-inclusion of the dividend effect on the solvency indicator that emerges from the ABS, also has assessed the impact of introducing an MPB on the system's financial equilibrium under two different rules for indexing the initial pension benefits. The model has practical implications that could be of interest to policy makers, given that it integrates actuarial and social aspects of public pensions and discloses the real cost of redistribution through minimum pensions. References (poster) Barr, N and P. Diamond. (2009), Pension Reform: A Short Guide. Oxford University Press. New York. Holzmann, R. and E. Palmer, Editors (2006), Pension Reform: Issues and Prospects for Notional Defined Contribution (NDC) Schemes. Washington, DC: World Bank. Jiménez-Martín, S. (2014), The Incentive Effects of Minimum Pensions: extended version, Working Paper 2014-04 FEDEA. Palmer, E. (2006), What Is NDC?. In Holzmann, R. and Palmer, E. (Eds.): Pension Reform: Issues and Prospects for NDC Schemes, Chapter 2, 17-33. The World Bank, Washington, D.C. Palmer, E. (2012), Generic NDC: Equilibrium, Valuation and Risk Sharing. In Holzmann, R., E. Palmer and D. Robalino, eds., NDC Pension Schemes in a Changing Pension World Volume 2, part III: Solvency, Liquidity, and Stability of NDC schemes (chapter 19, pp.309-333). Washington D.C.: World Bank. The Swedish Pension System. Orange Annual Report 2014. (TSPS) (2015), Ed. Estrella Zarate, Swedish Pensions Agency (Pensionsmyndigheten), Stockholm. http://www.pensionsmyndigheten.se/Publications_en.html Ventura-Marco, M. and Vidal-Meliá, C. (2016), Integrating retirement and permanent disability in NDC pension schemes, Applied Economics, 48(12), 1081-1102. Ventura-Marco, M. and Vidal-Meliá C. (2014), An Actuarial Balance Sheet Model for Defined Benefit Pay-As- You-Go Pension Systems with Disability and Retirement Contingencies, ASTIN Bulletin, 44(2), 367-415. Vidal-Meliá, C., Boado-Penas, M.C., Navarro-Cabo, F., (2016). Notional defined contribution pension schemes: why does only Sweden distribute the survivor dividend? Journal of Economic Policy Reform. 19 (3); 200-220. Whitehouse, E. (2009), Pensions, Purchasing-Power Risk, Inflation and Indexation. OECD Social, Employment and Migration Working Papers No. 77. We gratefully acknowledge financial support from Ministerio de Economía y Competitividad (Spain) via project ECO2015-65826-P93-13. Numerical Illustration Evolution of the system’s shortfall and the degree of funding for the two rules of indexing pensions in payment. MOLG Multistate OverLapping Generations Model Survivor Dividend Vidal-Meliá et al. (2016) Minimum Pension Benefit (MPB) Jiménez-Martín (2014); Palmer (2012);Whitehouse (2009) Ventura-Marco & Vidal-Meliá (2014 & 2016) ACCOUNTING FOR PENSIONS. ABS The process for obtaining the system's liabilities and the analytical expressions for the system's turnover duration (TD) and contribution asset (CA) can be separated into 4 additional steps: 1.The analytical expressions for the system's liabilities from the actuarial point of view. 2.The analytical expression for the system's TD in the form of pay-out and pay-in durations. 3.The expression for the TD as the difference in the weighted average ages of the pensioners and contributors. 4.The system's TD and CA as weighting for the TDs and CAs for each contingency. Items Assets CA_(Ret)79.88 BF_(Ret)0.00 55.32 CA_(Dis)20.12 BF_(Dis)0.000.2416.63 Total100.00100.24171.95 Liabilities Con_(Ret)53.97 Con_(Ret) NCR0.00 44.94 Con_(Dis)11.92 Con_(Dis) NCR0.000.1212.23 Pen_(Ret)25.91 Pen_(Ret) NCR0.00 10.38 Pen_(Dis)8.20 Pen_(Dis) NCR0.000.114.40 Total100.00100.24171.95 Indicators DRSDRSDRS 3.9712.0316.003.9712.0316.003.9712.0316.00 3.9712.0316.004.0212.0316.055.9216.8422.76 0.00 0.050.000.01.954.816.76 0.07880.22460.30340.07880.22460.30340.07880.22460.3034 0.50410.53550.52730.50990.53550.52880.75090.75000.7502 0001.160.000.2345.2440.9241.84 System treasury shortfall %0001.150.000.2848.9640.0742.22 Source: Own. Swedish ABS DB PAYG scheme (retirement & disability) The ABS of an integrated NDC scheme with a MPB at year t ASSETS (NDC+NCR)LIABILITIES (NDC+NCR) Contribution asset for disability (NDC)To pensioners for disability Public Contribution asset for disability or Disability buffer fund (NCR) To contributors for disability Contribution asset for retirement (NDC)To pensioners for retirement Public Contribution asset for retirement or Retirement buffer fund (NCR) To contributors for retirement Total AssetsTotal Liabilities The full text can be downloaded at http://dx.doi.org/10.2139/ssrn.2752921http://dx.doi.org/10.2139/ssrn.2752921 The section is very extensive and it has been divided into two different parts depending on whether the MPB is included (Part b) in the ABS or not (Part a). We only show some results for part (b)