Building better retirement solutions

Sri Lanka is in the amidst of a major demographic shift with an ageing population, high migration amongst youth, declining birth rates and increasing longevity.  Ensuring our senior citizens have access to a better retirement including the right infrastructure and support they need is essential. Retirement and the cost of ensuring quality of life in retirement is a major financial puzzle.  

In this equation, actuaries are central and play a key role in both the design and management of pension schemes. They can serve multiple roles in both the private and public system from governance, monitoring, product design and liability valuation. Actuaries are trained with a skill-set and expertise to assess the financial viability of retirement schemes are met and to provide key decision makers the prudent advice.

Actuaries approach the problem by assessing the implications beyond the short-term outcomes by projecting out the future costs after considering variables linked to the benefit design and future economic and biometric assumptions. The work enables stakeholders to better understand the nature of future liabilities, the contributions that need to be made, assessing the sensitivities of these liabilities to changes in benefit parameters and future assumption not only for today but also for future generations.

Shifting to real world examples, at a macro level, as of 2023, around 12% of Sri Lankans are aged of 60 and expected to increase considerably representing a sizeable vote base. On a fiscal front the State pension scheme represents 12% of the Revenue. The pay-as-you-go approach leads to cash-flow pressure out of sync with the national agenda and economic cycle. Ensuring the continuum of the pension whilst maintaining inter-generational fairness in this inherently complex pension scheme is a balancing act where mathematically solutions meet practical reality.  

The private sector is also not immune. Similar risks remain where private firms accumulate gratuity liabilities with respect of their employees. Many such schemes remain unfunded and post a significant financial risk to both employer and employee. The pay-as-you-go approach leads to cash-flow pressure out of sync of the business cycle or the phase in which the business is in. At the extreme outcome of an insolvency an unfunded scheme represents a default on employee obligations.

At an individual level, working with insurers and pension providers, actuaries design and develop products sold via life agents and bancassurance partners. These products which can be privately purchased have features for both the protection and savings build up during the asset accumulation phase and subsequently the release of payments during the deaccumulation phase.

To conclude, retirement systems are complex financial problems. Ageing of society is a known outcome and getting the finances right is critical for individual, institution and State to prosper. Actuarial experts trained in managing such schemes can provide objective advice, balancing different stakeholders and monitoring outcomes against assumptions.