Glossary of actuarial terms in the private sector

The glossary explains the most common terms concerning the calculation of technical provisions and solvency of earnings-related pension providers.

A

Actuarial principles

The rules that pension insurers are required to apply when calculating, for instance, insurance premiums and technical provisions. Pension insurance companies, company pension funds and industry-wide pension funds have their own actuarial principles.

Administrative cost component

A component included in the pension contribution paid to a pension insurance company. It is used to cover costs arising, for instance, from the management of insurance policies, the making of pension decisions and the payment of pensions.

B

Bonus

A reduction in the pension contribution granted by a pension insurance company. It is determined on the basis of the pension insurance company’s solvency and the surplus remaining after administrative costs. The surplus on investments and the savings on administrative costs thanks to efficiency increase solvency. The maximum annual bonus is not more than 1.0 per cent of the solvency capital plus the surplus remaining after administrative costs.

C

Clearing reserve

A buffer fund for jointly financed pensions that is included in technical provisions or in pension liability.

Contribution category model

The disability pension contribution of a large employer insured at a pension insurance company is determined according to the contribution category model. In the model, the pension expenditure for the past years, calculated from the employer’s disability pensions, affects the contribution category assigned to the employer. There are 11 contribution categories. The smaller the employer’s disability risk is, the lower is the employer’s contribution category and the smaller is the disability pension contribution.

Contribution for premium losses

A component included in the earnings-related pension contribution at a pension insurance company. It is used to cover insurance premiums that have not been received for reasons such as bankruptcies and premium losses. On average, large employers cause fewer premium losses than small employers.

D

Disability pension contribution

A component included in the pension contribution at a pension insurance company. It is used to cover the funded components of future disability pensions.

Discount rate

A technical rate of interest used for calculating the capital value of a pension. The discount rate is 3 per cent. The funds for old-age and disability pensions are supplemented yearly by a sum corresponding to the discount rate.

E

Equity-linked buffer fund

The system’s collective buffer fund that is used to provide for increased investment risks. Assets above the maximum limit agreed are transferred from the fund to old-age pension liability. The amount of the equity-linked buffer depends on the pension providers’ average returns on listed shares.

F

Fund transfer obligation

Defines how pension providers must credit their funds yearly. The fund transfer obligation consists of a supplementary factor, an equity-linked provision and a discount rate.

Funded component

The component of pensions under the Employees Pensions Act and the Seafarer’s Pensions Act that is paid from the assets funded. The pension provider that has insured the employment contract is responsible for the funded component. Funded components are included in old-age and disability pensions.

I

Insurance contribution interest

Used for calculating the interest on insurance contributions and the division of cost items between pension providers. The insurance contribution interest is based on the 12-month TyEL reference rate quoted by Garantia. However, the minimum interest is always at least 2 per cent.

Insurance premium

A pension contribution that is used to cover both current and future pensions. The pension contribution is paid by both employers and employees; self-employed persons are themselves responsible for paying their pension contributions.

O

Old-age pension contribution

A component included in the pension contribution at a pension insurance company. It is used to cover the funded components of future old-age pensions.

P

Pension liability

Assets reserved by a company pension fund for future funded pensions. Pension liability corresponds to the technical provisions of pension insurance companies and industry-wide pension funds.

Pooled component

The portion of the pension contribution for financing the unfunded pension components, such as index increments, for which the pension system is jointly responsible.

Provision for current bonuses

In pension insurance companies, the component of technical provisions that consists of the return on investments and the balance of administrative costs. Pension insurance companies use the provision for current bonuses to distribute their customer bonuses.

Provision for future bonuses

In pension insurance companies, a component of technical provisions included in the solvency capital. It is used to even out fluctuations in the value of investments and to prepare for underwriting risks.

Provision for outstanding claims

The responsibility that pension insurance companies and industry-wide pension funds have for pension contingencies that have already occurred but have not yet been fully paid. The provision for outstanding claims also includes the clearing reserve.

Provision for unearned premiums

The provision for future pension contingencies made by pension insurance companies and industry-wide pension funds. The provision for unearned premiums also includes the provision for current bonuses and provision for future bonuses and the equity-linked buffer fund.

S

Solvency capital

The solvency capital describes the pension provider’s capacity to bear risks. Pension providers can use solvency capital to provide for investment and insurance risks. In the main, solvency capital consists of the shareholders’ equity, the differences between market and book values,and the provision for current and future bonuses.

Solvency limit

The solvency limit is a quantity calculated on the basis of the structure of the company’s investment portfolio. It is dimensioned so that, at the probability of 97.0 per cent, some solvency capital is still left after one year if the initial solvency capital was at the solvency limit.

Solvency position

The solvency position is the solvency capital in relation to solvency limit.

Solvency ratio

The solvency ratio shows by how much the pension insurer’s assets exceed the technical provisions. The solvency ratio is calculated by dividing pension assets by technical provisions.

Supplementary factor

Determined on the basis of the average solvency of pension providers. Pension providers strengthen their funds by a return that corresponds to the supplementary factor. The supplement is targeted at the old-age pension liability for people over 55 years of age.

T

Technical provisions

An estimate of future pension expenditure insofar as such provisions are funded. Pension insurance companies and industry-wide pension funds enter the technical provisions into the financial statements. The technical provisions consist of the provision for unearned premiums and the provision for outstanding claims.

Technical rate of interest

The buffer fund for pooled pension components, i.e. the provision for pooled claims, is supplemented annually by means of the technical rate of interest. The technical rate of interest is 18 per cent of the average solvency, but not less than 3 per cent.