A Proposed Methodology for Modelling the Solvency of a National Pension Scheme

Louis Asiedu,Felix Mettle,Stella Lawerh,Emmanuel Aidoo

doi:10.18187/pjsor.v17i4.3593

Louis Asiedu, Felix Mettle + Show 2 more

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https://doi.org/10.18187/pjsor.v17i4.3593

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Abstract

The main aim of this study is to fit a model for predicting pension liability. The study proposed a stochastic population model to determine the status of a pension scheme. By categorizing the members of the Social Security and National Insurance Trust (SSNIT) pension scheme of Ghana into five groups, the birth and death process with emigration and the pure death process coupled with assumption of the Yule’s process, were combined to successfully formulate a model for forecasting the surplus of SSNIT to be used as a proxy for assessing the solvency status of the scheme. The reliability of the proposed model was corroborated by very high coverage probabilities of the estimates of expected surpluses produced. The study demonstrated how easy it is to use the proposed model to carry out sensitivity analysis which allows the exploration of various scenarios leading to formulation and implementation of policies to enhance the solvency of the scheme. One major advantage of the proposed model is that, it uses more information (variables) compared to others proposed elsewhere for the same purpose. This contributes to the precision of estimates from the model. A key finding of the study is that SSNIT would have still been solvent had she increased pension by 50%.

Highlights

Social Security schemes are pension schemes imposed and controlled by government units for the purpose of providing social benefits to members of the community as a whole, or of particular sections of the community (Kwabla-King, 2017)
This study proposes a stochastic model known as Pure birth and death processes with emigration, which uses other variables to ascertain the sustainability of the Pension Scheme
The advantages of this model are that in addition to income and expenditure, it involves estimation of expected values of relevant variables such as population of contributors, contributors who die on the line of duty, retirees, pensioners and pensioners who die before age 72 years in the calculation of pension scheme surplus

Summary

Introduction

Social Security schemes are pension schemes imposed and controlled by government units for the purpose of providing social benefits to members of the community as a whole, or of particular sections of the community (Kwabla-King, 2017). This study proposes a stochastic model known as Pure birth and death processes with emigration, which uses other variables to ascertain the sustainability of the Pension Scheme The advantages of this model are that in addition to income and expenditure, it involves estimation of expected values of relevant variables such as population of contributors, contributors who die on the line of duty, retirees, pensioners and pensioners who die before age 72 years in the calculation of pension scheme surplus. This contributes to the precision of estimates from the model

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