Optimising Contribution Rate for SOCSO’s Invalidity Pension Scheme: Actuarial Present Value (APV)

  • Abstract
  • Keywords
  • References
  • PDF
  • Abstract

    This study proposes the optimization of the contribution rate for Social Security Organization (SOCSO)’s Invalidity Pension Scheme (IPS). This study aims to statistically analyses the current situation of the contribution fund collection and the claim benefits payment under SOCSO’s IPS. It seeks to develop an actuarial formulation based on the benefits coverage from SOCSO’s IPS. It attempts to determine an optimal contribution rate to support the benefits provided under SOCSO’s IPS using an actuarial approach. It proposes an appropriate contribution rate to be implemented by SOCSO. Currently, the contribution rate for SOCSO’s IPS is 1%, which is shared equally between employer and employee. This contribution rate is directly deducted from the employee’s monthly gross salary. This contribution rate needs to be adjusted upwards by SOCSO soon to ensure that all payments of claims are sufficiently covered. Based on the 9th Actuarial Valuation Report issued by the International Labour Organization (ILO), recent statistics show that immediate revision of contribution rate is necessary to achieve the minimum loss ratio (max 20%) in SOCSO’s IPS funding systems. In this study, the Actuarial Present Value Approach is applied to all benefits under SOCSO’s IPS. SOCSO data from 1985 until 2014 are used in this study. Seven assumptions are made in this study namely mortality rate, salary ceiling, interest rate, retirement age, increment salary rate, age entry, and salary entry. By optimizing the worst-case scenario (single simulation), this study has found that the optimal contribution rate is 2.2% rather than the current 1%. This can be attributed to the fact that since 1969, many changes have occurred in the workplace, working conditions are different and many new jobs have been created. Therefore, an Actuarial Present Value Approach with regards to actuarial modeling was conducted to optimize SOCSO’s IPS contribution rate. In conclusion, an optimal contribution rate of 2.2% should be introduced and implemented in the future as part of the efforts to reduce society’s burden whilst ensuring that adequate protection is provided to the nation’s workforce.


  • Keywords

    APV; Contribution Rate; Invalidity Pension Scheme; Optimisation; SOCSO.

  • References

      [1] Aline, G. (2014). Social security around the world a review of datasets. https://www.econstor.eu/bitstream/10419/102048/1/795349955.pdf.

      [2] Bloom, D. E., Canning, D., Mansfield, R. K., & Moore, M. (2007). Demographic change, social security systems, and savings. Journal of Monetary Economics, 54(1), 92–114.

      [3] Boulier, J. F., Huang, S., & Taillard, G. (2001). Optimal management under stochastic interest rates: The case of a protected defined contribution pension fund. Insurance: Mathematics and Economics, 28(2), 173-189.

      [4] Bovenberg, L., & Mehlkopf, R. (2014). Optimal design of funded pension schemes. Annual Review of Economics, 6(1), 445–474.

      [5] Bowers, J., Hans, G. U., Hickman, J. C., Donald, J. A., & Nesbitt J. Cecil. (1997). Actuarial mathematics. Society of Actuaries.

      [6] Population Reference Bureau. (2009). Social security systems around the world. https://assets.prb.org/pdf09/TodaysResearchAging15.pdf.

      [7] Cheah, P. (2013). Malaysian actuary. Actuarial Society of Malaysia Newsletter, 2013, 1–35.

      [8] Cichon, M., Newbrander, W., Yamabana, H., Weber, A., Normand, C., Dror, D., & Preker, A. (1999). Modelling in health care finance. International Labour Office Geneva.

      [9] Cociuba, S. E., Shukayev, M., & Ueberfeldt, A. (2016). Collateralized borrowing and risk taking at low interest rates. European Economic Review, 85, 62–83.

      [10] Diamond, P. A., & Mirrlees, J. A. (1978). A model of social insurance with variable retirement. Journal of Public Economics, 10(3), 295–336.

      [11] Finan, M. B. (2010). A discussion of financial economics in actuarial models a preparation for the actuarial exam MFE / 3F. Arkansas Tech University.

      [12] Godínez-Olivares, H., Boado-Penas, M. del C., & Haberman, S. (2016). Optimal strategies for pay-as-you-go pension finance: A sustainability framework. Insurance: Mathematics and Economics, 69, 117–126.

      [13] Haberman, S., Butt, Z., & Megaloudi, C. (2000). Contribution and solvency risk in a defined benefit pension scheme. Insurance: Mathematics and Economics, 27, 237–259.

      [14] Hamermesh, D. S. (1982). Social insurance and consumption: An empirical inquiry. American Economic Review, 72(1), 101–113.

      [15] International Labour Office (ILO). (1984). Introduction to social security. ILO.

      [16] ILO. (2005). The 7th Actuarial Valuation SOCSO. ILO.

      [17] ILO. (2009). The 8th Actuarial Valuation of SOCSO. ILO.

      [18] ILO. (2013). The 9th Actuarial Valuation Report. ILO.

      [19] Iyer, S. (1999). Actuarial mathematics of social security pensions. http://www.ilo.org/wcmsp5.pdf.

      [20] Josa-Fombellida, R., & Rincón-Zapatero, J. P. (2010). Optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates. European Journal of Operational Research, 201(1), 211–221.

      [21] Lean, W. (2010). SOCSO contribution may be raised. The Star.

      [22] Lo, A. (2010). The case for a minimum wage in Malaysia.

      [23] Department of Statistics Malaysia (DOSM). (2008). Labour force statistics, Malaysia, 2008. DOSM.

      [24] DOSM. (2011). Population distribution and basic demographic characteristics. DOSM.

      [25] Malaysia, K. S. M. (2009). The employment law review. http://www.ens.co.za/images/news/201004empLawReview.pdf

      [26] Malaysian Government. (2006). Employees’ Social Security Act 1969. The Commissioner of Law Revision.

      [27] Manasan, R. G. (2009). A review of social insurance in the Philippines. Philippine Journal of Development, 36(2), 47-68.

      [28] Mccray, J. H. (1972). Present value of an annuity: A formula approach. Accounting Review, 47(4), 824–825.

      [29] McGinn, D. F. (2003). Benefit stream driven actuarial valuations for defined benefit pension plans. http://www.actuaries.org/McGinn.pdf

      [30] Malaysian Employers Federation (MEF). (2013). MEF salary surveys forecasted lower salary increase for 2014. MEF.

      [31] Michel, D., Xavier, M., Sandra, P., & Fracois, W. J.-. (2007). Actuarial modelling of claim counts. Wiley.

      [32] Moore, C. L. (1964). The present-value method and the replacement decision. http://search.ebscohost.com/login.aspx/7106860

      [33] Noviyanti, L., & Syamsuddin, M. (2006). Modelling actuarial present value under stochastic discount function. http://math.usm.my/research/OnlineProc/ST27.pdf

      [34] PERKESO. (2014). Pertubuhan Keselamatan Sosial. PERKESO.

      [35] Plamondon, P., Drouin, A., Binet, G., Cichon, M., Mcgillivray, W. R., Bédard, M., & Perez-Montas, H. (2002). Actuarial practice in social security. International Labour Office Geneva and International Social Security Association.

      [36] Rejda, G. E., & Michael J.McNamara. (2014). Principle of risk management and insurance. Pearson Education Limited.

      [37] Salkever, D. S., Shinogle, J. a., & Purushothaman, M. (2001). Employer disability management strategies and other predictors of injury claims rates and costs: Analysis of employment-based long-term disability insurance claims. Journal of Safety Research, 32, 157–185.

      [38] Scholz, W., Cichon, M., & Hagemejer, K. (2000). Social budgeting. International Labour Office Geneva.

      [39] Sekaran, U., & Bougie, R. (2013). Research methods for business. Wiley.

      [40] Seng, S. C. (2014). Social Security: Challenges and issues (No. 2014–1). Kuala Lumpur.

      [41] Silva, R. (2010). An actuarial model for social security valuation. Proceedings of the International Congress of Actuaries.

      [42] SOCSO. (2010). Employees’ Social Security Organisation. SOCSO.

      [43] SOCSO. (2012). SOCSO Annual Report 2011. SOCSO.

      [44] SOCSO. (2014). 1, 2013. Malaysia: SOCSO.

      [45] SOCSO. (2014a). Social Security Organisation (SOCSO) Malaysia. SOCSO.

      [46] SOCSO. (2014b). SOCSO Annual Report 2013. SOCSO.

      [47] SOCSO. (2015). SOCSO Annual Report 2014. SOCSO.

      [48] Stiglitz, J. E. (1983). On the theory of social insurance: The state and the demand for social in contemporary societies. The Geneva Papers on Risk and Insurance, 8, 105–110.

      [49] Wai, C. S., & Yiu, T. K. (2007). Financial and actuarial mathematics. McGraw-Hill.

      [50] Wang, G., & Yuen, K. C. (2005). On a correlated aggregate claims model with thinning-dependence structure. Insurance: Mathematics and Economics, 36, 456–468.

      [51] Wang, L. (2015). Actuarial model and its application for implicit pension debt in China. Chaos, Solitons and Fractals, 89, 224-227.

      [52] Woodfield, T. J. (2010). Predicting workers’ compensation insurance fraud using SAS Enterprise Miner 5.1 with SAS Text Miner. www2.sas.com/proceedings/sugi30/071-30.pdf

      [53] Yamabana, H. (2005, November). New approaches to extending social security coverage. Overview and challenges of social security coverage: Country examples in East Asia. Proceedings of the International Social Security Association Directors Meeting, pp. 9-11.

      [54] Yamabana, H. (2012). Latest development in global pension system. Kuala Lumpur.

      [55] You, Y., & Li, X. (2014). Optimal capital allocations to interdependent actuarial risks. Insurance, Mathematics and Economics, 57, 104–113.

      [56] Yusoff, M. B., Hasan, F. A., & Jalil, S. A. (2000). Globalisation , economic policy, and equity: The case of Malaysia. http://www.oecd.org/dataoecd/54/49/2682426.pdf




Article ID: 23491
DOI: 10.14419/ijet.v7i4.33.23491

Copyright © 2012-2015 Science Publishing Corporation Inc. All rights reserved.