Saw “actuarial balance” in your pension report? Here’s what it means
Most people examining their pension fund focus on three things: how much money has accumulated, how much they pay in management fees, and the return the fund achieved.
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- 7 minutes
- Complexity
- Intermediate
- Last updated
But the annual pensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. report sometimes contains another, quieter and less familiar item: actuarial balance, also known as demographic returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested.. Despite its complex and intimidating name, the idea behind it is fairly simple: the pension fundA savings vehicle based on mutual risk sharing that includes insurance coverage in cases of disability or death. checks whether the money collected from all members for insurance coverage was enough to pay the actual pensions and claims that year.
This is not the first item you should examine in a pension fund, and it will usually not make a dramatic difference to your savings. But if the report shows an addition or deduction under this item, it is worth understanding what it means: this is not an investment return, but an adjustment arising from the pension fund’s shared insuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. component.
First of all: a pension fund is not just savings
To understand the balance, remember that a pension fund is not an ordinary savings account. It is a hybrid that combines three elements:
- Pure savings for retirement.
- Disability and loss-of-work-capacity insurance.
- Survivors’ insurance—a pension for family members in the event of death.
This insurance coverageThe list of events and damages for which the insured is entitled to compensation. is not managed separately for each person within their personal account. It is part of a mechanism shared by all the members of the fund.
So what exactly is actuarial balance?
Actuarial balance is the pension fund’s reconciliation between its forecasts and what actually happened.
The pension fund estimates in advance, using statistical tables, how many disability claims there will be, how many deaths will occur, how many survivors’ pensions will be paid, and how long retirees are expected to live and receive a pension. Based on these estimates, it calculates how much money to “collect” from you each month for insurance. But real life does not always follow the spreadsheets:
- Actuarial surplus (positive): If there are fewer claims or lower insurance costs than expected, a financial surplus is created. In that case, part of the surplus is transferred directly back into members’ accounts and increases their savings.
- Actuarial deficit (negative): If there are more claims, more disability cases, or longer life expectancy than forecast, an actuarial deficit is created. In that case, the fund has to deduct a small amount from all members to cover its obligations, and savings or pension payments are slightly reduced.
Do not confuse investment return with actuarial balance
This is one of the most common mistakes among pension savers. These are two entirely separate factors that affect your account:
Investment return versus actuarial balance
| Measure | What does it examine? | What affects it? |
|---|---|---|
| Investment return | How your money was invested in the capital market | Shares, bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest., and rises and falls in the market |
| Actuarial balance | How insurance risks were shared | Disability, death, life expectancy, and ongoing insurance costs |
Because of this distinction, your pension fund may post excellent capital-market performance—a high positive investment return—while recording a negative actuarial balance because of a large number of claims that year. The reverse is also possible.
Does a negative actuarial balance mean the fund is bad?
In short: not necessarily.
One year of negative actuarial balance does not mean you need to move to another fund. Just as it is not sensible to judge a pension fund only by one year’s investment return, it is not sensible to judge it only by one year’s actuarial balance.
What is important is the trend.
If the fund shows a relatively large negative actuarial balance for several years compared with other funds, that is a warning sign. It is time to stop and ask questions:
- How does the fund manage and screen its risks?
- Is its medical underwriting process too lenient, admitting higher-risk groups without appropriate pricing?
- Is it paying claims too readily relative to the amount collected?
Where can you see it, and how do you compare funds?
You can find the effect of the actuarial balance in your extended annual report. It will usually appear under terms such as actuarial balance, actuarial surplus or deficit, or demographic return.
You can compare pension fund data using comparison systems such as Pension-Net (פנסיה.נט) from the Capital Market Authority. But it is important not to look at only one figure. When examining a pension fund, you need to look at the full picture: management fees, returns over time, investment track, insurance coverage, service quality, and actuarial balance.
Checklist for evaluating a pension fund
What should you examine?
- Management fees: How much of your ongoing deposits and total accumulated savings goes to the management company?
- Returns over time: How has the fund performed over longer periods—three and five years—and not only in the most recent year?
- Risk profile and investment tracks: Is the investment track suited to your age and goals?
- Quality of insurance coverage: Do the insurance definitions suit your family situation?
- Average actuarial balance: Has the fund maintained demographic stability over the years?
- Service and operations quality: Examine the Ministry of Finance’s official service indices.
Can actuarial balance be avoided?
Within a pension fund, the answer is no. It is at the heart of the mechanism. The basic idea of the fund rests on mutual risk-sharing: you benefit from surpluses and share deficits.
Anyone who wants a pension product that completely removes the link to other savers needs to examine alternatives such as Kupat Gemel (קופת גמל), which provides savings without a built-in insurance component, or Bituach Menahalim (ביטוח מנהלים)A savings product based on an individual contract between the saver and the insurance company, combining a savings component and insurance coverage., in which insurance is managed directly with an insurance company without mutual risk-sharing, but usually at the cost of much higher management fees and insurance costs. Each product has its own advantages, disadvantages, costs, and risks.
The bottom line
When examining your pension fund, do not be dazzled only by graphs of stock-market returns. From time to time, take a look behind the demographic scenes as well. The fund’s ability to manage its members’ risks in a balanced way helps determine how much money actually remains in your account.
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Sources and links
- Kol Zchut (כל זכות) — Comprehensive pension fund — An explanation of pension funds, insurance coverage, and mutual risk-sharing among members. (Kol Zchut)
- Capital Market Authority — Pension-Net — A system for comparing pension funds and key fund data. (Pension-Net)
- Capital Market Authority — Pension directives and reports — Regulatory information on pension funds, actuarial balances, and risk management. (Capital Market Authority)
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