Modelling the actuarial projection and valuation of the Egyptian social security pension system
This thesis is concerned with the projection and valuation of the Egyptian social security pension system which represents the first and main pillar in pension provision in Egypt. The system is officially a funded defined benefit one and is managed by two public Funds on behalf of the state. As a result of the pre-funding strategy, the two Funds have been accumulating a large amount of assets, which makes them important institutional investors with certain characteristics. Larger contributions from employees and/or employers or cutting back some benefits cannot be recommended by the system's actuary in the event of an actuarial deficit for many political, economic and social reasons. Actuarial deficits can be dealt with by two methods, the first is higher interest rates on the invested funds from the National Investment Bank (NIB). The second is a transfer from the Treasury to shoulder the actuarial deficit alongside the annual subsidy given to improve the level of benefits. This strategy raises four very important questions. The first is whether the system's expected annual cash flow is sustainable under different demographic and economic scenarios, particularly whether the system will face any cash flow liquidity shortage in the near future. The second is how much the expected annual subsidy will be. The third is what is the required rate of interest on the invested funds to achieve the funding objective of covering 100% of the liabilities. The fourth is whether the current contribution rates are fair and adequate for new entrants at certain ages. In answering these questions a pension projection and valuation model is developed. This involves analysing and modelling the relevant demographic and economic factors in order to project them. It is found that the system will face cash flow deficits unless it liquidates some of its assets over the projection period. It is also found that the current contribution rates are more than enough to cover the cost of new entrants, even with delays in starting work as a result of the high unemployment. It is also found that a moderate rate of interest of around 6-7% per annum with salary growth of around 8-9% per annum can keep the funding level at 100% of the liabilities. Finally, a set of recommendations are made for reforming the system to enable it to survive the changes it faces in an uncertain economic and demographic environment. Some suggestions for further work are also discussed.