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but the volume of the extra funds required would be prohibitive if the financial system selected is to be applied also in respect of the adjustments. However, the scaled premium system of financing pension schemes provides, in addition to its several advantages, the necessary flexibility to enable the adaptation of the scheme to changing economic conditions. It is recalled that this system is based cn
achieving a balance between probable receipts and probable expenditure over a limited period of 10, 15 or even 20 years. The contribution rate is raised as sccn as a stage is reached when current income from contributions and interest is insufficient to cover current expenditure. With this system of financing, it is possible to adopt any desired mechanism for the adjustment of pensions.
Investment of social security reserves
Each country has, at different times, special circumstances which will influence the investment policy of social security funds. It is not possible to discuss the matter in general terms for a group of countries, but it is important to note that there are some basic principles which are generally applicable.
Social security reserves represent the financial guarantee that the liability undertaken by the social security scheme towards insured persons and their dependants will be fulfilled. The management of these funds should, therefore, be handled with great care.
The investment of social security funds should fulfil, to a variable extent, certain requirements as regards safety, yield and liquidity. In addition, among the various investments that fulfil these fundamental requirements preference may be given to those which are most useful from the general economic and social point of view.
Safety is, in any case, the first requirement. The social security
institution must ensure, first of all, that the recovery of the capital invested and the payment of interest at their nominal value is guaranteed (formal safety). But formal safety would not be enough if in the meantime the value of the currency has depreciated. The institution should also attempt to achieve, as far as possible, "real safety", that is, the maintenance of the real value of the invested suns and their yield. Real safety is particularly important for long-term investments of reserves of pension schemes, although the risk of depreciation may equally concern the investment of other social security reserves.
Yield is also essential, although in the case of the investment of contingency reserves relating to short-term benefits, the yield is not in itself of primary importance, partly because the size of such reserves is normally limited, and partly because whatever the yield may be, it will not influence the financial equilibrium to any great extent. In such circumstances, there is not generally much inducement tc look for a high return on contingency reserves, which are mostly concerned with the liquidity requirement see below.
AS regards technical reserves of pension schemes, yield is, on the contrary, a fundamental requirement. These reserves should normally earn an average rate of interest at least equal to the "actuarial rate" on which the financial estimates are based. As regards reserves of provident funds, the yield should cover the rate of interest guaranteed, if any, on accumulated balances and any other statutory charges on the income from the investment such as the administrative expenditure of the scheme.
Liquidity is estimated in relation to the possibility of immediate realisation of the invested capital. The contingency reserves of social security institutions should, as a rule, seek a high degree of liquidity, which means that they should be easily and rapidly covertible into cash. On the contrary, the technical reserve of a pension fund, which is not intended to be used for paying current benefits but rather to produce income in the form of interest, does not require a high degree of liquidity.
As regards a provident fund scheme, the fact that the money represented by the Ieserves will have to be returned in
ca sh at sone future time to the current contributors or their dependants would imply that their investment should be made in assets which will be readily realisable when required.
Provided that the conditions of safety, yield and liquidity are satisfied, the social and economic utility of particularly long-term investment should be taken into account when drawing up an investment policy.
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