85 percent to 0.5 percent every year, until the new FIF mortality rates become available, i.e., every 10 years. The 0.4 percent per year adjustment causes an increase in longevity over 10 years that coincides almost exactly to the rise in longevity using the SFSO or FIF improvement rates for all groups of annuitants. Thus it constitutes a good approximation for the anticipated increase in longevity. The 0.5 percent per year adjustment is a more prudent estimate. When the new mortality tables become available, the pension funds adjust their longevity reserves that had been accumulated over the previous 10 years.

# **_7.3.3  Asset and Liability Management_**

In the 1990s, the chief tasks of asset and liability management (ALM) were rather eclipsed. The high returns rendered an appropriate matching of assets and liabilities unnecessary, especially, since existing reserves were considered as more than adequate. During the last years, unfavorable developments in financial markets scaled back the pension funds ability to take risks. As a direct consequence, many pension funds ran into a funding deficit. This situation triggered a regulatory reaction that involved the imposition of a new risk definition. This new definition stresses the fulfillment of the obligations, i.e., provision for old age, as the main goal. The old version was more focused on the adherence to the minimum interest requirement. Thus, the new version pursues a long term view. In addition, it requires that the pension fund matches its investment strategy to its proper risk profile. The investment restrictions, which were presented in Table 10, remained unaffected. Compliance with these few regulations and the chosen strategy are supervised and approved by the technical expert and the supervisory agency, the rest is left to the discretion of the pension fund.

As mentioned above, the asset and liability management, i.e., getting the right fit between assets and liabilities, is now one of the most important aspects of risk management in pension funds. It aims to ensure that actuarial reserves are sufficiently high to meet current and future benefits. ALM concepts comprise therefore the following aspects: fair valuation of assets and liabilities, asset allocation, and compliance with external constraints.

# **_7.3.4  Fair Valuation of Assets and Liabilities_**

The _liability side_ of the balance sheet of a pension fund consists mainly (c.f Table 35: in 2002, 92 percent) of capital related to provision of old–age insurance, disability and death. This so–called _fixed and non-fixed capital_ comprises mainly accumulated old–age credit balances of the active insured, the present value of current annuities, and technical accruals to cover the risk of longevity, disability and death.

What factors (interest rates) determine the size of “fixed and non-fixed capital”? In the case of the accumulated old–age credit balances it is the MIR that controls its size (apart from the contributions of employer and employee).<sup>77</sup> In the case of the present value of annuities it is the so–called _technical interest rate_ . While old–age credit balances are not

> 77 This view is actually only correct for defined contribution plans. In the case of defined benefits plans, there is no direct effect of the MIR. This is due to the fact that the size of the individual pension depends on the last salary earned.