Due to the uncertainty inherent in investment operations, an employment pension insurance company must have a sufficient buffer against market fluctuations. The ability to withstand fluctuations in investment operations is called solvency.
The solvency of an employment pension insurance company is measured by the assets exceeding the company’s technical provisions. This part of the assets is referred to as solvency capital. Technical provisions, for their part, refer to the total amount of future pensions under the pension company’s responsibility. Solvency can be expressed by stating the amount of solvency capital in euros, the solvency capital as a percentage of the technical provisions (solvency ratio) or the solvency capital in relation to the company’s risks (solvency position).
When an employment pension insurance company takes care of its solvency, it is in a position to seek high return on its investments. A solvent pension company can also distribute larger client bonuses. Investment returns ensure that pressures to raise earnings-related pension contributions are kept to a minimum in the long run. The long-term rule of thumb is that an increase of one percentage point in annual investment returns reduces the earnings-related pension contribution by two percentage points.
Annual solvency 1997–31 MARCH