When we invest our shared pension assets, we need to have a sufficient buffer in case of market volatility. Our ability to withstand fluctuations and risks in investment operations is called solvency.
Solvency describes the ability to withstand investment market volatility
As a pension insurance company, our solvency is measured by the assets exceeding the company’s technical provisions.
The portion of the pension assets exceeding the technical provisions is called the solvency capital. Technical provisions, for their part, refer to the total amount of future pensions under our responsibility. Technical provisions therefore accumulate when our customers accrue pension for themselves.
Solvency can be expressed as the solvency capital in euros, the solvency capital as a percentage of the technical provisions, i.e. the solvency ratio, or the solvency capital in relation to own risks, which is the solvency position.
A higher solvency offers us the opportunity to bear more risk related to investments, which, in the long term, increases the return on our investments.
When our solvency is high enough, we can distribute larger client bonuses. This means that we can refund a larger portion of the employer’s pension contribution and thus reduce the costs of the earnings-related pension system.
Investment returns ensure that pressures to raise earnings-related pension contributions are kept to a minimum in the long run. The rule of thumb is that an increase of one percentage point in annual investment returns over time corresponds with an earnings-related pension contribution that is two.