INTERNATIONAL

LABOUR

OFFICE

STUDIES AND REPORTS
Series M (Social Insurance) No. 16

The Investment of the Funds
of

Social Insurance Institutions

GENEVA
1939

PRINTED BY
IMPRIMERIE POPULAIRE
LAUSANNE

PREFACE

As a result of their financial constitution a great many social
insurance institutions have to administer funds of considerable
magnitude. The purpose of these funds or reserves is either to
ensure that the interest earned on the accumulated capital will
maintain the financial balance of the insurance scheme (by means
of technical or actuarial reserves) or to avoid certain fluctuations
in the rate of contribution owing to unforeseen events (by means
of contingencies reserves).
The investment of these funds constantly raises problems
for the bodies responsible for their administration, problems that
are particularly difficult in periods of economic and monetary
instability.
In view of the dimensions of these problems, the International
Labour Office proposed to its Governing Body to call a preliminary
meeting of experts, who were asked to advise as to what should
be the' general lines and limits of the enquiries to be made^into
the investment of the funds of social insurance institutions. This
proposal was approved by the Governing Body, and the Office
accordingly convened a meeting at Geneva, on 8, 9 and 10 December
1937, of a certain number of experts with particular competence
in investment questions. The experts drew up a questionnaire
intended to bring out the essential aspects of the investment of
social insurance funds, and on -the basis of this questionnaire
members of the Correspondence Committee on Social Insurance (set
up by the Governing Body of the Office) were consulted in writing.
The replies which were received were found to be substantial
and explicit on nearly all the points contained in the questionnaire
and the Governing Body authorised the Office to hold a second
meeting of experts in order to determine, on the basis of this
.consultation, the main principles of an investment policy for
social insurance institutions.
This second meeting took place from 5 to 9 December 1938
in Geneva.
The experts took as basis a Scheme of Discussion drawn up
by the Office, and adopted a series of conclusions which bring
out the main problems involved in investing long-term social

IV

PREFACE

insurance funds and the possible ways of solving these problems.
The conclusions adopted, for which the way had been prepared
by a comparative study of the regulations in force and experience
acquired and by a written consultation of experts in different
countries, form the first study on an international plane of the
investment policy of social insurance institutions. The interest
of such a study, which compares a great variety of conceptions
and practices, is evident, and the Office has therefore assembled
in this volume the main lessons to be drawn from the preliminary
work and the international consultation.
The volume is divided into four chapters. The first defines
the basic principles and aims of the regulation of investments
and discusses the form of such regulations, the degree to which
they should be binding, and the institutions they should cover.
The second chapter deals with the general conditions to be satisfied
by investments : safety, liquidity, yield, and economic or social
utility. In the third chapter the arguments for and against
accepting various classes of investments for the holdings of
insurance funds are set forth, as also the conditions on which
the investments can be accepted ; lastly, this chapter discusses
the desirable proportions between the different classes of investments in the total holding and analyses the problem of a possible
guarantee by the public authorities in order to maintain the
purchasing power of the benefits promised to insured persons.
The fourth and last chapter deals with the authorities responsible
for selecting investments, the composition of these authorities,
and thé respective advantages of centralising and of decentralising
the investments.
Por the reader's convenience, the preliminary work and the
successive stages of the international consultation are not presented
in chronological order but are set forth systematically point by
point. For each point, its nature and general significance, as
shown by the preliminary work, are first indicated, and this is
followed by an account of the views and statements of the experts
consulted.
Thus, for each point, the reader will find the available
information grouped, ' as a rule, in the following order :
1. General position of the problem and reference to the
question put to the experts ;
2. Brief analysis of the replies received from the persons
consulted ;
3. Summary of the discussions and conclusions of the experts.

PREFACE

V

The Office wishes here to pay a tribute to the members of
the Correspondence Committee on Social Insurance who, by
participating in the written consultation or the oral discussion,
enabled it to bring this study to a successful conclusion.
The volume has been prepared by the Social Insurance Section
of the Office, the general survey of the problems on which the
consultation was based having been made by Mr. Cyrille Dechamp,
member of that Section.
There are three appendices : the first reproduces the questionnaire which served as a basis for the written consultation,
the second contains the conclusions adopted by the experts,
and the third gives a list of the classes of securities in which
long-term investments are allowed under the principal compulsory
social insurance schemes of some fifteen countries.

The preparation of this volume was finished early in 1939 and
the introduction was written in July of the same year. That is
why the introduction expresses opinions such as that " the state
of political insecurity has not eliminated all serious hopes of peace ".
Although that hope has not been fulfilled, there seemed no reason
to change the words already written : peace is still the ultimate desire
of all peoples and it is to be hoped that from the conflict will emerge
some permanent organisation of peaceable relations between States
that will ensure the maintenance of social justice and progress.
In any case, the war in no way affects, even for the countries
engaged in it, the fundamental problems raised by the investment
of social insurance funds. These problems may have become, in
some respects, more acute; but that is a reason the more for the
International Labour Office to publish the study it had undertaken,
in spite of the changed circumstances.
Geneva, 15 December 1939.

CONTENTS

Page
PREFACE

m

INTRODUCTION

1

CHAPTER I : Basic Principles and Aims of the Regulation of Investments
Temporary Methods of Using Funds
Voluntary and Compulsory Insurance
Surplus Income and Profits
Insurance Schemes Covered

11
11
12
14
14

CHAPTER I I : General Conditions to be Satisfied by Investments
Safety
Yield
Liquidity
Economic and Social Utility
Establishment of a Periodical Investment Scheme

. .

20
22
33
41
48
63

CHAPTER I I I : Permissible Classes of Investments
A. Fixed-Yield Investments
Government Funds and Government-guaranteed Funds .
Loans contracted or Guaranteed by Provinces, Towns,
or other Local Authorities
Loans Issued by Public Bodies other than Regional or
Local Authorities
Loans of Land Mortgage Banks or Building Societies . .
Mortgages
Commercial and Industrial Debentures
Other Fixed-Yield Investments

66
68
68

B.

Variable-Yield Investments
Loans of Public Authorities with Gold,Clause or Currency
Option
Ordinary or Common Shares or Stock
Real Estate
Other Variable-Yield Investments

C. Composition of Insurance Holding
Investments which must be Included in the Holding . . .
Investments which may represent only a Prescribed
Proportion of the Holding . . . •
Proportion of the Various Classes of Investments to the
Total Holding

75
78
82
84
89
93
96
96
97
104
109
Ill
112
115
117

CONTENTS

VIII

Page

D. Possible Guarantee b y Public Authorities
Nature of the Problem
Cover for the Revaluation of Pensions
CHAPTER IV : Bodies Responsible
Analysis of Legislation
Centralised or Decentralised
Selection of Investments b y
Selection of Investments b y
Institution

for Selecting Investments
Selection of Investments
t h e Insurance Institution . _. . .
a Body other th.«n-úhc- -insurance

APPENDICES

I.

118
118
125
135
135
140
144
146
149

Consultation of Experts with a View t o Studying the
Problem of the Investment of the Funds of Social Insurance Institutions
Investment of the Funds of Social Insurance Institutions.
Meeting of the Committee of Experts

149

I I I . Permissible Classes of Investments in Certain Countries .

165

II.

156

BIBLIOGBAPHY

188

INDEX

190

INTRODUCTION

There are a number of studies concerning the accumulation
of savings, their economic function, and their relative importance.
At all times man, whether to acquire more power or, more
modestly, to protect himself and his family against the vicissitudes
of life, has accumulated property, beginning with the means
of production, cash and real estate, and followed by securities.
The consequences of such accumulation, its effects on the production and distribution of wealth, and the means used for preserving
the invested capital and obtaining the expected yield have often
been discussed at considerable length.
On the other hand, the special problems involved by the
administration of collective savings, whether the reserves of
social insurance funds or the deposits of savings banks, have
been studied much less often. It is true that there are a few
excellent works On the investment of ther capital of private
insurance companies ; but in the present times of economic and
monetary uncertainty, the investment of the funds of social
insurance institutions raises problems that are far wider and more
complex than the investment of the reserves of private insurance
companies.
Unlike such companies, which in the vast majority of cases
merely have to cover the nominal amount of their commitments
and therefore to see to it that the capital they have invested and
the interest earned by such capital retains its nominal value
only, social insurance institutions must be constantly concerned
with maintaining the purchasing power of the benefits they
guarantee at a level which will ensure that the protection promised
to insured persons will retain all its value. To the extent that
the payment of these benefits depends on the collection of interest
and the redemption of invested capital, it is clear that the financial
equilibrium of an insurance scheme must be sensitive to the
real yield of investments and, therefore, to fluctuations in the
purchasing power of money. In this respect, the administration
of social insurance funds tends to resemble that of any private
estate, real or personal. There are, however, important differences
i

2

INTRODUCTION

between t h e situation of private individuals on the one hand
and social insurance institutions on the other as regards the
investment of their funds. Whereas the former are completely
free in their actions, act only for themselves and stake only their
own interests, the bodies responsible for investing social insurance
funds have to administer the property of others and are bound
to observe strict rules concerning prudence and control. Moreover,
an insurance institution cannot refrain, when selecting its investments, from taking into account the relative importance of the
economic or social utility of the uses to which the invested money
is p u t .
There is no need to stress the influence that investment on
a vast scale m a y have on the money market, investment that
often exceeds in amount the holdings of the largest trusts, the
most powerful insurance companies and the biggest commercial
banks. I n some countries, and more particularly in new countries,
the investment of social insurance funds represents an important
part of t h e new capital formed each year. I n Chile, the investments of t h e compulsory insurance funds in the financial year
1938 absorbed about one-tenth of the total new issues and mortgage
loans of t h e year. This proportion is no doubt comparatively
high but it is b y no means exceptional ; and in insurance schemes
where t h e formation of old-age pensions is based on t h e accumulation of a large proportion of the contributions the accumulated
sums are considerable in amount. I n France, the total investments of t h e general compulsory social insurance scheme amounted,
in the first nine months of 1938, to nearly 1,042 million francs,
to which should be added the loans or advances to the Joint
Employment Fund, amounting in the same period to about
1,740 million francs. The total .sum accumulated in nine months
was thus over 2,780 million francs, an amount whose relative
importance appears clearly if it is compared with the total new
issues of capital (excluding short-term loans), which, according
to official statistics, were about 17,000 million francs for the
year 1938.
The trend of the investment of compulsory insurance funds
may thus, a t least in certain cases, have a profound influence
on the financial policy of the public authorities and even, though
to a smaller extent, on the development of the whole national
economy.
I n view of the economic and social function of the investments
of compulsory insurance funds it follows that, when the securities

INTRODUCTION

3

are to be chosen, it is usually necessary to take into account
the utility of the investment to the community as a whole or
to the insured community. Whereas a private individual can
hardly be expected to select his investments from the point of
view of their possible social value, that criterion must as a rule
be taken into account by the insurance institutions and m a y
even be altogether decisive.
I t is true that the criterion of social utility is not peculiar
to the investment of social insurance funds, for it cannot
be left out of account in the investment of collective funds from
other sources, for instance, the deposits of savings banks. The
difference between the investments of savings banks and of
compulsory insurance institutions is, however, very marked, for
not only must the former be much more liquid than the actuarial
reserves of an insurance scheme, but in addition, the savings
banks, like private insurance companies, merely have to see to
it t h a t the capital entrusted to them, with any accumulated
interest, retains its nominal value.
The special problems of the investment of social insurance
funds are thus from certain points of view very similar to, and
from others, very dissimilar from the general problem of investments. Often, too, they are as serious äs they are difficult, for
the data on which they have to be based may be contradictory
or very uncertain.
The most difficult and, a t least in certain circumstances, t h e
most serious of these problems — the selection of securities for
investment in relation to the prospects of monetary stability
or instability — cannot be solved in a manner that is absolutely
appropriate and suitable in every case.
There can be no doubt t h a t it seems hardly possible to realise
an absolute stability of money in relation to prices — the principal point for the purposes of social insurance. I t seems impossible
to eliminate for ever either the slow movements of depreciation
or appreciation of the currency in relation to prices or the r a t h e r
sudden but less marked fluctuations ; such elimination would
call for constant and absolutely exact adjustment of the volume
of the means of payment to the total quantity of available consumption goods. Nevertheless, slow changes in the purchasing
power of money or even sudden but small fluctuations, of the
kind observed in Europe, for example, during the second half
of the nineteenth century and up to 1914, are no obstacle to
accumulation. The falling tendency of the purchasing power of

é

INTRODTJCTIOH

money observed during that period did not prevent the capital
placed in State funds in 1850, for example, from retaining all,
or at least a very substantial part, of its real value. Fluctuations
in the rate of interest and above all, perhaps, the increase in taxes
on securities may have partly counteracted the effects of compound interest, but, taken as a whole, the volume of capital was
maintained and accumulation played its part and retained its
significance between the two above-mentioned dates.
There is a wide gap, however, between the fluctuations observed
in the second half of the nineteenth century, including the first
years of the twentieth, and some of the monetary collapses of
recent years.
The question is whether such collapses are likely to be repeated.
Were the currency depreciations that followed the war merely
an accident 1 Not so much, perhaps, as might be believed at
first sight. They were the outcome of the persistent action of
several forces whose resultant is a permanent increase in the
needs of Governments.
Owing largely to bankruptcies or composition arrangements
(large-scale inflation or devaluation), the needs of Governments
arising directly out of the war of 1914-1918 are no longer such an
economic burden on States as ten, fifteen or twenty years ago ;
but their place has been taken by other needs no less heavy and
distressing.
The burden of armaments, created by political uncertainty,
is at present the most powerful factor making for monetary
instability, not so much by its absolute amount as by the threats
of conflict it implies.
Further, the impecuniosity of Governments, too often a chronic
condition owing to their weakness in relation to the taxpayers
or their assumption of excessive burdens, might perhaps tend
less to produce monetary bankruptcy if the profits derived therefrom were reserved to the Governments alone ; but the depreciation of the currency benefits not only Governments but all those
for whom a nominal rise in prices means ultimately a smaller
burden and an increase in real income. I t frees the bodies responsible for paying fixed sums, interest and redemption of bonds,
pensions, etc., from part at least of their obligations and
relieves " active " wealth, that is to say, the wealth lying in
the exploitation of the means of production or distribution, by
reducing the share of gross income absorbed by the service of
the debts contracted to pensioners or other creditors. " Active "

INTRODUCTION

5

wealth is thus relieved of part of its obligations a t the expense
of the " passive " wealth t h a t is invested in fixed-yield securities
or in money. Sometimes such relief has been found indispensable
in order to revive an overburdened economic system, and there
can be no question of systematically holding either the owners
of the means of production or distribution or t h e wage earners
responsible for a situation t h a t has involved devaluation to such
an extent as to make it in some cases inevitable. So superficial
and summary a judgment could not hold water.
But, without any need of analysing in detail t h e very complex
facts underlying devaluations of the currency, it may be admitted
t h a t some, a t least, of their more deep-seated causes still exist
and will long continue to do so.
Economic evolution since the war has not yet taken its final
form and this evolution has been a powerful factor making for
monetary instability.
The falling back of the different peoples on their own economic
resources, their tendency to isolate themselves, to t r y to satisfy
all their needs themselves and to find all t h a t they require in their
own territory, have meant a restriction of markets t h a t were
formerly open to foreign trade. The bitterness of international
competition in the commercial field is thereby increased for every
State, because, even though each State tries as far as possible
to be self-sufficient, it is not prepared to give up its foreign markets
to a corresponding extent. And even if it were willing to do so,
it could not. The need of importing certain raw materials or
manufactured goods persists in spite of the most intensive a t t e m p t s
to organise production on autarkic lines ; and imports imply
exports, either to a country holding the materials or products
required or to some other country which can supply the first
country with the goods or services it needs.
Since the rise in customs tariffs and the widespread adoption
of protection and quota systems limit the openings for export
trade, exporting States may try to overcome the difficulties they
have to contend with and their severe competition with each
other b y resorting to monetary manipulations. Now devaluation
of the currency or the creation of new currency with a different
value a t home and abroad implies either a more or less rapid
fall in the value of money or at least a serious risk of such a fall
later, unless there is accurate and constant adjustment of the
volume of the means of payment to the volume of production.
The temptation to resort to such manipulations in order to

6

INTRODUCTION

increase the openings for sales on outside markets — that is,
in order to increase exports — is clearly all the greater when
the conditions of competition are more severe. I n recent years
these conditions have been much aggravated by the development
of very cheap mass production in certain countries or areas which
some twenty or thirty years ago could not be regarded as serious
rivals on the world market.
Further, monetary instability is without doubt due, at least in
part, to the special nature and intensity of the last economic crisis.
The adjustment of the economy of each country to a new
equilibrium, an. adjustment which is necessitated by the collapse
of the prices of raw materials caused by increased production or
diminished demand, is very certainly an important factor in the
difficulties t h a t the States producing these materials have met
with in maintaining the stability of their currency.
But there is more. The attempt made by each State, either
spontaneously or by force of circumstances, to achieve as much
independence a s possible of foreign markets, and the predominance.
so given to t h e home market for the absorption of production,
have led to a n extensive and rapid, not to say sudden, evolution
of the national economy of the different countries, taking place
in a very short space of time, at the most a few years. Such an
evolution could not fail to be accompanied by monetary disturbances, for it m e a n t such great transformations of the machinery
of production and distribution t h a t it would have been out of
the question t o hope to carry them out without creating serious
difficulties for a large number of undertakings, especially undertakings of t h e first importance to the economy of the country
in question. Since it was as a rule impossible to leave to their
fate undertakings whose ruin might have led to serious disorder,
and since in a n y case the unemployed could not be left without
relief — and t h e number of unemployed was in itself a threatening
factor — the public authorities had to engage in vast credit, salvage
and relief operations. All this took place at a time when the
income of the State was declining because of the falling off in
economic activity which was due to the impossibility of making
up at once for the restriction of outside markets (the reduction
of international trade) by developing the home market and
increasing exchanges within the national territory. Recourse to
monetary manipulations was thus often found to be inevitable
on account n o t only of the magnitude but also of the nature of
the crisis.

INTRODUCTION

7

Some of the factors of monetary instability just sketched ;
the indebtedness of States, political insecurity, the bitterness of
international competition, and the restriction of markets, certainly
exist to-day to an extent rarely reached in earlier times. But as
against these factors, making it doubtful whether the purchasing
power of money can be maintained, there are others, which are
favourable to fixed-yield investments ; and the strength and
significance of these other factors should not be underestimated.
The enormous development of the means of production has
made it possible without too much risk to augment public expenditure and indebtedness, that is to say, fiscal charges, to a degree
far beyond what was formerly conceivable. The aggregate of
the taxes and loans needed to liquidate the last war or meet present
public expenditure is undoubtedly heavy, but since it is borne
out of a large volume of production, it can still be tolerated. A
hundred years ago it would have meant the most terrible distress,
even in the countries that were then most advanced industrially.
The more widespread ownership of negotiable securities and
the increase in the number of persons entitled to pensions, etc.,
tend no doubt to make an ever-increasing section of the population
more and more sensitive to the effects of devaluation. It may
well be argued that this extension of the group of persons who
have an interest, and very often a major interest, in the maintenance of the purchasing power of the fixed-yield securities they
hold, or the pensions they receive, is in itself likely to promote
monetary stability.
Monetary technique has been perfected side by side with the
increase in the possibilities of expanding production to meet a
demand that has itself grown owing to the putting into circulation
of a larger quantity of monetary units. This is a factor of monetary
stability which is far from negligible. A devaluation undertaken
to put an end to a heavily encumbered situation does not involve,
or no longer necessarily involves, a really marked rise in the cost
of living. The monetary operations that have taken place in
recent years in the United States, Great Britain, the Scandinavian
countries and Belgium, for example, show that the purchasing
power of a currency in terms of gold may very well be substantially reduced without seriously affecting its purchasing power
in terms of the total goods and services that determine the " cost
of living ". And for persons who are in receipt of a fixed income,
for institutions responsible for administering collective savings,
and for social insurance institutions in particular, it is obviously

8

INTRODUCTION

not the purchasing power of money in terms of gold, but that
in terms of the cost of living, which really counts.
The state of political insecurity, disturbing though it may be,
has not eliminated all serious hopes of peace. In spite of certain
appearances, the organisation of the relations between States
on a pacific basis is in conformity with the deep-seated will of the
peoples. In all likelihood that will would react violently as soon
as it had been stirred up by the considerable sacrifices that an
armed conflict between two groups of equal power must mean
for the masses. The continuation, and perhaps even the outbreak,
of hostilities would entail enormous risks to-day not only for the
Governments actually involved, but also for the régimes they
represent. It is very doubtful whether even those Governments
which are most certain of their strength and most inclined to use
it for regulating international relations are really quite prepared
to run risks of this kind. The threat of conflict that finds concrete
expression in armaments is perhaps less grave in reality than in
appearance.
The culminating point of the structural crisis that the economy
of the different nations has undergone owing to the sudden restriction of foreign markets and the difficulty of adapting production
to new conditions appears to have been passed.
No doubt the difficult adjustment of an economy based chiefly
on the international division of labour to one involving only
limited exchanges with other countries, is far from complete.
But the most serious effects of the change seem to have been
overcome, at least in part. The internal markets of the different
States have revived — much more evidently than international
trade — and have recovered a certain equilibrium, either in the
direction of real autonomy or in that of the establishment of a
more or less directed flow of exchange between complementary
economic systems. This tendency to equilibrium seems to be
growing, and although the stabilisation of the economy of the
different countries is not yet complete or certain, it seems likely
that it will be effected on the basis of a home market that.will
play a much more important part than in the past in initiating
and regulating productive activity. Whether this evolution is
intrinsically fortunate or unfortunate, it may perhaps eliminate
many of the factors of insecurity as regards the maintenance of
the purchasing power of money, provided that it is not pressed
to the extreme and accompanied by a serious threat of political
disorder.

INTEODtrCTION

9

In point of fact, it seems too often impossible to forecast
objectively the future movements of the currency. Is it necessary
on this account, or in spite of this, to revise the theory which,
notwithstanding the dramatic experiences of recent years, is
still regarded as classic, the theory that investments should be
made in " trustee " securities, that is in fixed-yield securities,
which are affected by all the leaps and bounds, all the collapses
of the currency ? Should the principle of investing in variableyield securities be approved ? Is it not possible that the risks
of depreciation or loss of such securities are so great as largely
to offset their possible advantages ?
The difficulty of assessing, with a full knowledge of the facts,
the probability of monetary stability or instability for the purpose
of guiding the investment policy of social insurance funds is, in
fact, only one of the aspects of the many problems to be solved
in any scheme whose operation involves the accumulation of
large sums.
As already stated, it is hardly conceivable that such sums
should be invested without any reference to the economic or social
utility of the uses to which they are put. But is there not a sort
of antinomy between the desire to obtain the maximum possible
economic or social utility from the investments and the need of.
ensuring that their safety, yield, and even liquidity, will be all
that is desired ? Is it not a fact that ultimately social insurance
reserves are formed largely out of small savings and deductions
from wages ; and can such small savings be exposed to the risks
connected, for instance, with the development of a particular
branch of production 1
The study undertaken by the International Labour Office
with the assistance of many members of its Correspondence Committee on Social Insurance is, of course, not intended to. give
complete replies to all the above questions. What it aims at is
to set forth the principal problems, to state how they can be solved
in certain circumstances, or at least on what lines the solution
may be sought, and, lastly, to show how rational collaboration
between the public authorities and the insurance institutions
will make it possible to resolve, at least in part, the sometimes
apparently irreconcilable contradictions between the instability
of the modern world and the general conditions as to safety,
yield, and liquidity that the investments must satisfy.
A point that must be made clear from the outset is that this
study is concerned with the investment of funds and not with

10

INTRODUCTION

the financial structure of insurance schemes. The merits of the
different financial systems which determine how insurance resources
are to be spread over a given period are not under discussion.
It is not the purpose of the study to examine the soundness of the
provisions that prescribe the measure and the rate of the accumulation of reserves ; its concern is only with the tasks with
which insurance institutions are faced as the result of the existence
of these reserves and their obligation to utilise them in conformity
with the purposes of the insurance scheme.
Lastly, it is assumed that the characteristic features of the
different financial systems and the part that should be played by
the various kinds of reserves are known.

CHAPTER I
BASIC PRINCIPLES AND AIMS OF THE REGULATION
OF INVESTMENTS

The rules adopted for the employment of social insurance
funds vary according as such employment is temporary, the
funds being merely deposited with a bank, or entails investment
for a shorter or longer period. They also vary according as the
funds to be invested are derived from surplus income or are intended
to form the compulsory reserves which secure the payment of
the benefits due to insured persons. Lastly, even within one
country they may differ according to the branch of insurance
in question ; funds are not necessarily invested in the same way
in a sickness insurance and an accident insurance scheme, for
example, or in an invalidity insurance and an old-age insurance
scheme. In every branch, moreover, there are often marked
differences in the rules according as the insurance scheme is
voluntary or compulsory:
In determining the basis for consultation, it was therefore
necessary to decide whether or not it should cover also short-term
investments, voluntary insurance, and the investment of surplus
income or profits. Another point to decide was whether it was
to comprise the investments of all compulsory insurance schemes,
whatever the differences in their financial structure and the
nature of the risks they cover, or whether, on the contrary, it
should be limited to the investments of certain schemes with
common features as to the risks covered and the general structure
of their financial organisation (for example, invalidity, old-age
and widows' and orphans' insurance, involving the accumulation
of actuarial reserves).
TEMPORARY METHODS OF USING FUNDS

The provisions concerning temporary methods of using funds
apply mainly to the maximum sums that may be kept as cash
in hand, the proportion that may be deposited with" a bank or
in postal current accounts, etc., and the specification of the credit

12

INVESTMENT OF SOCIAL INSURANCE FUNDS

or other institutions entitled to have the care of insurance assets.
Although these provisions are not without practical importance,
they are left out of account, in this international study, chiefly
owing to the lack of comparability in the data on which they
are based. The rules adopted in this field vary in fact with the
substantial differences in the actual situation, not only of the
different countries but also of the different schemes — differences
which deprive an international comparison of all value.
As a matter of fact, the temporary methods of using funds
can be regarded as not being investments in the true sense and
as having nothing to do with the technical machinery of the
accumulation of funds.
But besides these strictly temporary methods, the regulation
of which is intended chiefly to define and protect immediately
available assets, there are investments which, although by their
nature they cannot be made for more than a limited period, are
to some extent intermediate between temporary investments
proper and long-term investments. An example is advances on
securities.
Even though the importance of investments of this kind must
be recognised, especially in periods of monetary uncertainty and
a rising rate of interest, it must be admitted that they are more
or less exceptional in the field of social insurance. Further, they
would in practice call for regulations different from those applicable
to those for long-term investments. ' I t is hardly conceivable
that a plan for short-term investments could be drawn up in
advance, or that the part to be assigned to any one kind of such
investments should be precisely determined. It would also be
difficult to imaginé that the actual making of the investment
could be made subject, for instance, to a necessarily lengthy
process of administrative authorisation.
Short-term investments are thus, in principle, excluded from
this study, although it is impossible to draw anything but a purely
arbitrary line between short-term and long-term investments.
Certain investments may be regarded as short-term or long-term,
depending on circumstances.
VOLUNTARY AND COMPULSORY INSURANCE

As regards the nature of the insurance schemes to be covered
by the study, a distinction should first be drawn between voluntary
and compulsory insurance in examining the question of the use

PRINCIPLES AND AIMS OF THE REGULATION

13

and investment of funds. The main difference lies in the fact
that whereas a voluntary scheme must normally provide for
the absorption of the reserves it has accumulated, this is only
exceptionally the case in a compulsory scheme, where — apart
from the reserves formed to meet unforeseen charges — the normal
course is to draw only on the interest and not on the capital.
A voluntary scheme must therefore pay more attention than a
compulsory scheme to the liquidity of its reserves.
This difference is not such, however, as to have a far-reaching
effect on the types of securities that might be suitable as investments for the funds of a voluntary scheme on the one hand or a
compulsory scheme on the other. The degree of liquidity that
social insurance investments should possess depends largely on
the spacing of capital outlay and, more generally, on the safety
of the capital and its yield.
It is obvious that the spreading of capital outlay over a period
of time in order that the scheme may at any given date have
at its disposal the sums which it requires cannot be the subject
of statutory regulation : it must be arranged by the exercise of
proper foresight on the part of the management.
Moreover, the conditions as to safety and yield that must
be met by the investments obviously cannot vary according as
the insurance scheme is voluntary or compulsory.
It is true that the rules adopted for the selection of investments
may in some cases be affected by the source of the funds. Prom
this point of view there are substantial ' differences between
voluntary and compulsory insurance. The latter always involves
the payment of contributions by employers, whereas the former
either does not do so at all or does so only to a much smaller
extent.
Further, the reciprocal obligations of the public authorities
and the insurance scheme (subsidies, supervision, etc.) vary
according as the scheme is a voluntary, even though subsidised,
one or a compulsory one, and this is a factor that may affect
investment policy. The degree of its influence depends both
on the legal structure of voluntary insurance schemes and on
actual circumstances. I t would, however, be impossible in- a
study of investments to analyse how the various conditions in
which a voluntary scheme may be placed affect the investments
that it must make. Very often these conditions shade into each
other imperceptibly, and the transition from a heavily subsidised
voluntary scheme, with benefits subject to statutory regulation,

14

INVESTMENT OF SOCIAL INSURANCE FUNDS

to a compulsory scheme in which the part played by the public
authorities is confined to the exercise of supervision on the lines
of that applying to commercial life insurance companies is almost
unnoticeable.
For the above reasons voluntary insurance schemes were left
out of account in the written consultation of experts.

SUBPLUS INCOME AND PROFITS

Financial considerations play a very limited part in the use
made of surplus income or profits. These are assets which an
insurance institution can and should use either for directly
improving benefits or for making social investments whose financial
return is of secondary importance (for the development of
preventive measures and social hygiene or of curative treatment,
for instance). Whereas the employment of funds forming the
counterpart of the compulsory statutory reserves is strictly
regulated, that of profits is very largely left to the discretion
of the insurance institutions.
The principles underlying, on the one hand, the investments
for the formation of reserves and, on the other, the use of profits
are thus totally different. The ends in view are not the same,
and the criteria by which the expediency of a particular investment is determined often differ according as the investment is
to form part of reserves or is to represent an employment of
profits.
In these circumstances, the consultation was limited to longterm investments proper, to the exclusion of profits.

INSURANCE SCHEMES COVERED

Every insurance scheme entails the placing of more or less
considerable sums to reserve. The size and object of these reserves
depend on the place assigned to them in the financial system
of the scheme.
The lev-el that can be reached by contingencies reserves is
as a rule comparatively low. These reserves are intended to
avoid sudden fluctuations in the rates of contribution in-consequence
of unforeseen events and they rarely exceed^an amount corresponding to one or at most two years' current expenditure.

PRINCIPLES AND AIMS OF THE REGULATION

15

The actuarial reserves intended to balance, a t least in part,
the burden of the benefits ordinarily guaranteed to insured
persons may, on the contrary, reach a considerable amount, not
only in absolute figures but also in relation to the annual
expenditure of the scheme. In the United States, for example,
the Old Age Reserve Account should, according to the original
actuarial estimates, reach a figure of nearly 14 times the annual
expenditure at the end of about 45 years, reckoned from the
date the scheme came into operation 1.
The differences in the relative amount and objects of the
two classes of reserves entail variations, sometimes of considerable
importance, in the policy and selection of investments. For this
reason it might have been decided t h a t the consultation should
be limited, for example, to the problem arising out of the formation
of actuarial reserves, to the exclusion of investments of contingencies
reserves. Such a decision was not taken, however, for the consultation was made to cover all long-term investments forming the
statutory reserves of compulsory insurance schemes, whatever
the risks covered by the scheme.
*

*

*

The outlines within which the consultation was to take place
having thus been defined, the experts were asked to reply to the
following question :
Do you consider that the long-term investments of the
funds "of compulsory social insurance institutions should be
subject to national regulation ?
The question called for a statement not only on the expediency
of regulating investments, the nature of such regulations and
their degree of flexibility, but also on whether the prescribed
obligations as to the selection of securities for investment should
be the same, and have the same force, whatever the body responsible
for administering the insurance scheme, whether the State or an
institution with financial autonomy and a certain independence
of the public authorities.
The point is t h a t the situation created by the disappearance
1
I t should be noted, however, t h a t the statutory provisions affecting
the financial equilibrium of the old-age insurance scheme in the United
States of America, are undergoing a change, in t h a t the financial system
of accumulation is being replaced by one based on the assessment of
current expenditure.

16

INVESTMENT OP SOCIAL INSURANCE FUNDS

of reserves may possibly differ according as the scheme is administered by the State or by an institution which is more or less
independent of the public authorities.
In the first case, the sums needed for the payment of benefits
are included in the national budget ; and provided that the rights
to which they correspond can, if need be, form the subject of
an appeal to the law courts, they mean for the public authorities
a compulsory item of expenditure in the same way as the sums
corresponding to any other claim on the State. In the second
case, they constitute a claim on a public body without any State
guarantee.
When the insurance scheme is administered by the public
authorities, the promises made to insured persons are guaranteed
by the State itself ; but unless this is expressly provided by law,
there is no such guarantee in the alternative case. It is true that
the guarantee resulting from State administration of the scheme
relates only to the nominal value of benefits, so that if the currency
is depreciated, involving more or less complete disappearance of
the real value of the reserves, the situation will be the same
whether or not the scheme is administered by the State.
It may also be agreed that if the yield of the reserves is reduced
by forced conversion or any other similar measure, the situation
of the insured persons will hardly be affected by the fact that
the scheme is or is not administered by the State. For if the
State reduces its debt to its creditors, by whatever method, the
•only question that arises as regards the maintenance of the
purchasing power of benefits is whether the reduction should also
apply to the claim of the insured persons ; and the reply to this
question does not depend on what body is responsible for administering the fund.
But depreciation of the currency or forced conversion is not
the only possible cause of a more or less complete disappearance
of reserves, which may also be produced by bad investments.
In such a case, if the scheme is administered by a body enjoying
financial autonomy, the loss will be met, if not by each insured
person individually, at least by the whole group of insured persons.
On the other hand, an insured person belonging to an institution
administered by the public authorities will not, as a rule, suffer
from the reduction or disappearance of reserves, since in principle
his rights will be unaffected. It is the body administering the
scheme, in other words the State, which will have to bear the
loss and spread it over the taxpayers.

PRINCIPLES AND AIMS OF THE REGULATION

17

The same line of argument could be applied in the case of
administration by a public authority other t h a n the State on
condition that it is empowered to levy taxes a n d is in fact in
a position to use this means of making up for losses incurred
on the administration of reserve funds.
The fact remains, however, t h a t the public authorities are
responsible for the administration of the funds they hold ; and
although this responsibility, except in cases of particularly faulty
administration, fraud, etc., is purely political a n d impersonal in
character, so that its consequences for individuals are attenuated,
any loss or risk of loss must be avoided when investing funds,
and the methods to be used for this purpose will be the same
whatever the body responsible for administering the scheme.
I t hardly seems necessary to discuss a t greater length the reasons
why, when the State is responsible for turning t h e sums entrusted
to it to the best account, it must watch over their preservation,
their yield, and their utilisation with the same care as the most
diligent and enlightened individual.
Even from the point of view of the insured person, the
maintenance of the capital and yield of reserves is, in practice,
just as essential when the insurance scheme is administered by
the State. Even though the promised benefits are included in
the national budget, their amount can at a n y time be reduced
by some legislative action, and the disappearance or diminution
of the resources which form the counterpart of benefits can
obviously lead to the reduction or limitation of benefits.
The wording of the question drawn up in 1937 a t the first
meeting of experts was thus intended to cover the regulation
of investments for all institutions statutorily required to form
reserves, whatever the method of organisation and legal status
of the authorities or services responsible for administering the
funds. The written consultation and the second meeting of
experts were to determine whether or not this principle should
be maintained.
Analysis of Replies
With one exception the replies to this question were in the
affirmative.
The persons consulted recognised in nearly every case that the
regulation of investments is justified by the fact that the public
authorities have at least a moral responsibility for the administration
of funds drawn from compulsory contributions. Further, social insurance absorbs so large a part of the national income that the State
cannot refuse at least to regulate and supervise — if not to direct —
2

PRINCIPLES AND AIMS OF THE REGULATION

17

The same line of argument could be applied in the case of
administration by a public authority other than the State on
condition that it is empowered to levy taxes and is in fact in
a position to use this means of making up for losses incurred
on the administration of reserve funds.
The fact remains, however, t h a t the public authorities are
responsible for the administration of the funds they hold ; and
although this responsibility, except in cases of particularly faulty
administration, fraud, etc., is purely political and impersonal in
character, so t h a t its consequences for individuals are attenuated,
any loss or risk of loss must be avoided when investing funds,
and the methods to be used for this purpose will be the same
whatever the body responsible for administering the scheme.
I t hardly seems necessary to discuss a t greater length the reasons
why, when the State is responsible for turning t h e sums entrusted
to it to the best account, it must watch over their preservation,
their yield, and their utilisation with the same care as the most
diligent and enlightened individual. .
Even from the point of view of the insured person, the
maintenance of the capital and yield of reserves is, in practice,
just as essential when the insurance scheme is administered by
the State. Even though the promised benefits are included in
the national budget, their amount can a t a n y time be reduced
by some legislative action, and the disappearance or diminution
of the resources which form the counterpart of benefits can
obviously lead to the reduction or limitation of benefits.
The wording of the question drawn up in 1937 at the first
meeting of experts was thus intended to cover the regulation
of investments for all institutions statutorily required to form
reserves, whatever the method of organisation and legal status
of the authorities or services responsible for administering t h e
funds. The written consultation and the second meeting of
experts were to determine whether or not this principle should
be maintained.
Analysis of Replies
With one exception the replies to this question were in the
affirmative.
The persons consulted recognised in nearly every case that the
regulation of investments is justified by the fact that the public
authorities have at least a moral responsibility for the administration
of funds drawn from compulsory contributions. Further, social insurance absorbs so large a part of the national income that the State
cannot refuse at least to regulate and supervise — if not to direct —
2

18

INVESTMENT OP SOCIAL INSURANCE FUNDS

t h e investments of compulsory insurance institutions. Lastly, i n t h e
absence of compulsory rules, t h e bodies responsible for investment
would sometimes be obliged t o listen t o demands which would n o t
be accompanied b y t h e s t a n d a r d of guarantee required for insurance
holdings ; t h e issue of compulsory rules prevents, to some extent a t
least, t h e making of such demands, a n d in a n y case permits t h e rejection
of those which do n o t fulfil t h e conditions laid down in t h e regulations.
Most of t h e replies added t h a t t h e proposed regulations should be
sufficiently flexible t o leave t h e bodies responsible for investment
enough scope for selection among permissible securities.
One of t h e replies stated t h a t t h e regulations should for preference
include exact rules, a n d another t h a t t h e y should provide a n exclusive
list of permissible investments.
As against these opinions in favour of t h e principle of regulation,
one of t h e persons consulted stated t h a t if it was to give good results,
the administration of such large sums as were represented b y insurance
holdings required t h a t t h e bodies responsible for investment should
have freedom of action ; t h e regulations should therefore contain very
general provisions only, a n d even those would be superfluous if — as
was t o be presumed —- t h e bodies in question possessed t h e necessary
qualifications.
Discussion
The
(a)
(b)
(c)

and

Conclusions

Scheme of Discussion submitted b y t h e Office related t o :
t h e necessity of investment regulations ;
t h e form of t h e regulations ;
their scope.
(a) Necessity of Regulations

The Committee adopted t h e following text, which h a d been proposed
by t h e Office :
The constitution a n d administration of t h e insurance holding
should be t h e subject of statutory regulations. These should
be so framed as t o achieve t h e purpose of t h e reserves, namely
either t o afford security for t h e payment of benefits due, now
or in t h e future, t o t h e persons covered b y t h e insurance scheme,
or t o guard against t h e consequences of accidental increases
in t h e frequency a n d severity of t h e risks covered.
(b) Form

of

Regulations

The t e x t proposed b y t h e Office was as follows :
The regulations should be sufficiently precise t o be used
as a practical guide t o t h e bodies responsible for selecting
investments, while a t t h e same time leaving them sufficient
liberty of action t o serve in t h e best w a y t h e interests of t h e
insured community.
The discussion turned on t h e relative importance t o be assigned
respectively t o t h e interests of t h e insured community a n d t o those
of t h e national community.
Mr. D Y B O S K I a n d Mr. H E N N I N G proposed t h a t it should be clearly

emphasised t h a t t h e legitimate interests of t h e national community
— other t h a n those of insured persons — should be t a k e n into consideration.

PRINCIPLES AND AIMS OP THE REGULATION

19

Mr. HACKFOETH also stressed the importance of bearing in mind
the interests of the national community in selecting investments. H e
added, however, t h a t the safeguarding of such interests should be
assured by the fact of making regulations and by their tenor r a t h e r
t h a n by the methods of selection to be followed within the framework
of the regulations. Accordingly it might be provided t h a t " t h e
regulations, while affording protection for the national community,
should be sufficiently precise . . . . "
Mr. L I N D N E R and Mr. KTTPERS proposed to place greater stress
on the importance of the interests. of t h e insured persons as such,
stating t h a t in any event it would be preferable not t o refer t o t h e
interests of the national community, which were not a concern of t h e
insurance authorities.
This view was shared by Mr. B O H R E N a n d Mr. MATJASIC.
As a compromise Mr. B I S Q F E R E T proposed the following t e x t :
The regulations should be sufficiently precise to be used
as a practical guide to the bodies or authorities responsible
for selecting investments and wide enough to leave them sufficient
liberty of action t o serve in t h e best way t h e interests of t h e
insured community, while allowing, if necessary, for the interests
of the national community.
Mr. GARCIA OLDINI proposed to add after the words " if necessary "
the words " and subject to the conditions laid down in Chapter I I "
(Chapter I I refers to the conditions as to safety, yield, liquidity, a n d
economic or social utility which must be satisfied by investments).
I n addition, at the request of Mr. MACÉDO SANTOS, t h e Committee
made it clear t h a t the use of the words " bodies responsible for selecting
investments " could not be taken t o affect the question whether t h e
body concerned was an " outside body " or a n " authority ". This
question would be considered in greater detail in the course of t h e
discussion on Chapter I V concerning t h e institutions responsible for
selecting investments.
Mr. BISQTJERET thereupon pointed out t h a t , having regard to t h e
meaning given here t o the word " bodies ", there was no further point
in referring t o " bodies or authorities " responsible for selecting investments. The t e x t adopted by the Committee by 11 votes to 3 was
as follows :
The regulations should be sufficiently precise to be used
as a practical guide to the bodies responsible for selecting
investments and wide enough t o leave t h e m sufficient liberty
of action to serve in the best way t h e interests of the insured
community, while allowing, if necessary and subject to t h e
conditions laid down in Chapter I I , for t h e interests of t h e
national community.
(c) Scope of

Regulations

The following text, submitted by the Office, was adopted :
The regulations should apply to social insurance institutions
possessing financial autonomy. Where t h e administration of
their holding is not entrusted t o t h e institutions themselves,
t h e regulations should apply to the establishments, funds or
public accounts which are responsible f o r administering t h é
insurance holding.

CHAPTER I I
GENERAL CONDITIONS TO BE SATISFIED
BY INVESTMENTS

In order to serve their purpose, which is to cope with chance
increases in the frequency and size of claims or to balance the
guaranteed benefits, the investments of social insurance funds
must fulfil certain requirements as regards safety, yield and, if
necessary, liquidity.
In addition, among the various investments that fulfil these
fundamental requirements, preference must often be given to,
those that are most useful economically or socially.
The precise determination of these criteria and of the various
classes of securities which ordinarily satisfy them will be discussed
later, as also the order in which they should be applied.
The mere statement of the general conditions that investments
must satisfy is in itself a provisional classification in order of
importance or priority.
Safety is obviously fundamental and takes precedence of all
other conditions that may be required or proposed for investments.
Yield is essential in so far as an insurance institution cannot
be expected to offer the bodies borrowing from it a heavy reduction
on the interest they have to pay, account being taken of their
solvency, the duration of the loan and the state of the market —
a reduction that would be made at the expense of the employers
or workers contributing to the scheme.
Liquidity, which is of capital importance in the case of funds
representing the contingencies reserves and much less important
for all the reserves taken together, is the outcome on the one
hand of safety and yield, which mean that the accumulated funds
can be rapidly realised, and on the other of the spacing of capital
outlay in accordance with a forecast of future claims.
As regards the conditions of economic and social utility, these
are no doubt of value, but the question arises whether they should
not be made subordinate to the safety, yield and, possibly, liquidity
of the invested funds.

GENERAL CONDITIONS

21

At all events, no general classification can be held to apply
in all circumstances and in every case.
While safety appears always to take precedence and must,
whatever happens, be secured as far as possible, even at the cost
of sacrificing yield, liquidity or economic or social utility, the
order in which these other criteria are to be placed cannot be
established once and for all and irrespective of circumstances.
For each of them, therefore, it becomes necessary to consider its
relative importance with regard to the nature of the reserves
in question, and, to decide the order in which economic utility
and social utility should be placed with reference to the financial
policy of the State.
*

*

*

The following question was accordingly put to the persons
consulted, no distinction being made according to the nature
or legal status of the body responsible for investments, at least
as regards the general conditions to be satisfied :
Do you consider it desirable that the regulations should
.determine the general conditions to be satisfied by the investments in question ?
If so, do you consider that in the" "determination of investments regard should be had _ to the following aspects among
others : safety, yield1, liquidity, social utility and utility for
the economic interest of the country ?
Analysis of Replies.
All the replies agreed that the safety, yield, and liquidity of
investments should be taken on the one hand, and their social and
economic utility on the other, as criteria for selection.
Most of the replies pointed out that though considerations of social
and economic utility are of importance, they must in every case be
subordinated to those of safety, yield, and liquidity.
In support of making such a distinction between fundamental
and secondary aims (the latter to be pursued only in so far as they
are compatible with safety, yield, and the degree of liquidity recognised
as essential), some of the replies brought forward the following
arguments :
Considerations of social and economic utility may be important
in certain cases, but it should not be forgotten that social insurance
is intrinsically of great value to the community, and that the satisfactory
working of insurance institutions is of undoubted importance from
the point of view both of social economy and of national economy.
The strengthening of the national economy is one of the principal
objects of the accumulation system, particularly when, owing to the
nature of the insurance scheme, it is to be expected that the number
of pensioners and consequently the cost of pensions, will gradually
increase as a result of demographic changes in the insured population.

22

INVESTMENT OP SOCIAL INSURANCE FUNDS

The use to which the funds are put cannot therefore be a matter of
indifference to the body responsible for investment ; it may even be
the decisive factor in the investment policy. But its importance is
only secondary when compared with the safety and yield of the
investments. As to social utility, this is outside the sphere of action
for which the reserves were constituted and cannot justify a sacrifice
of the other requirements.
If social and economic utility are considered, said another reply,
there is a danger that the interests of insured persons will be sacrificed
to those of the country taken as a whole. In present conditions such
consideration is practically inevitable, and the problem consists in
defining social utility in such a way that the interests of insured persons
will be safeguarded.
Lastly, a few replies emphasised that yield should be given precedence
over liquidity, while others referred to the necessity of securing, at
least in certain cases, as high a degree of liquidity as possible.
Discussion and Conclusions
The Office text was to the effect that the regulations should
determine the general conditions which should be satisfied by investments, namely, safety, yield, and liquidity. Among investments which
combined in themselves to the same degree these basic conditions,
the choice might be determined by the measure of social or economic
utility which they provide.
At the instance of Mr. HENNING, the text was amended by deleting
the words " to the same degree ", which might suggest that as much
importance was attached to liquidity as to safety or to yield. In fact,
safety must always be a fundamental condition, whereas, sometimes,
conditions relating to yield are essential and those relating to liquidity
less important, and sometimes, conditions relating to liquidity may
be more important than those of yield. The Committee further took
into account an amendment, put forward by Mr. Bisqueret and seconded
by Mr. Garcia Oldini, and made it clear that the general conditions
relating to safety, yield and liquidity were to be understood as having
the meaning explained later iii the Scheme of Discussion.
The text unanimously adopted was as follows :
" T h e regulations should determine the general conditions
which should apply to investments, namely, safety, yield and
liquidity, as explained hereinafter. Among securities which
satisfy these basic conditions, it is desirable that consideration
should be given to the measure of social or economic utility
which they may provide."

SAFETY

A compulsory social insurance institution must first of all
see t h a t its debtors punctually pay the interest they have promised
to pay and t h a t they repay the full amount of the borrowed capital
a t the due d a t e . I n other words, the first requirement is t h a t the
debtors must provide effective security for the repayment of the
principal with interest at the nominal value (" formal " safety).

GENERAL CONDITIONS

23

Should the institution also seek " real " safety ? Should it
try to invest its funds in such a way t h a t the yield increases with
a fall in the purchasing power of money ?
Lastly, what machinery and methods should be used for
obtaining !: formal " or " real " safety ?

Formal

Safety

Nominal or formal safety expressed in a fixed currency m a y
clearly be sought in various ways.
As a rule; there would appear to be the best safety when the
debtor is a public authority — such as the State, a province or a
municipality — which is a permanent entity and has power to
levy taxes on persons within its jurisdiction for the purpose of
meeting its liabilities. A claim on the State and its component
institutions, it must be repeated, affords the fullest measure of
nominal safety, since the repayment of principal with interest is
guaranteed by rates or taxes which the political authority m a y
always levy, subject only to such limits as are set b y the taxpayers' ability to p a y taxes.
When the debtor is a corporation, b u t not "a public authority,
and the source of revenue available for the repayment of principal
with interest is not absolutely reliable, formal solvency may be
ensured either by some charge t h a t will cover the amount or by a preferential claim on the debtor's property or on part of t h a t
property. This is equally true of a private person.
The formal safety afforded by the charge or preferential claim
depends without a doubt on the comparative value of the charge
or preference.
Neither the charge nor the preference relieves the responsible
authority of the duty to enquire into the personal solvency of the
debtor, which means his ability to meet his liabilities without
the charge having to be realised or the preferential,claim having
to be enforced. I t seems unnecessary to dwell on the difficulties
and the risks involved in foreclosing a mortgage, for instance.
If the authority failed to enquire, before granting the loan, n o t
only into the real value of the charge and the opportunities of
getting value for the charge, but also into the personal solvency
of the borrower, it might, in order to avoid a loss of principal
as well as of interest, subsequently have to acquire the real estate
mortgaged. I t may very often be undesirable, if not necessarily

24

INVESTMENT OF SOCIAL INSURANCE FUNDS

disastrous, to acquire real estate in such circumstances, since the
cost of repairs and of management may considerably diminish
the net return on the investment.
*
*

*

As the various means of ensuring formal safety were to be
discussed later in detail, the experts were merely asked whether
the investment regulations should lay down as a fundamental
condition t h a t there should be a guarantee to the insurance institution of recovery of capital invested and of payment of interest
at their nominal value.
Analifsis of Replies
All the replies insisted that in selecting investments, factors which
must be taken into account are the maintenance of the nominal value
of the invested capital, the recovery of the capital, and the punctual
payment of interest.
Discussion and Conclusions
The Office text read as follows :
The first consideration of the body responsible for selecting
investments should be to verify that their nominal value is
secure as regards recovery of the capital invested and payment
of interest.
The discussion made it clear that the words " capital invested "
used in the text covers, on the one hand, the purchase value wher«
no increase in this value can be expected at the time of purchase,
and, on the other hand, the purchase value plus redemption premiums
where it is possible to take such premiums into account at the
time of purchase.
Real

Safety

The above-mentioned conclusions bring out the necessity for
the insurance institution to try to get as full a measure of nominal
or formal safety as possible, supplementing the personal solvency
of the debtor, if necessary, by a preferential claim or charge
covering the amount of the debt.
But, is formal safety always enough ? Is there not a risk
that it will b e nullified b y devaluation of the currency ? Should
it not therefore be accompanied b y an attempt to obtain real
safety b y investing in variable-yield securities, which may be
expected to retain a t least their nominal value a t the date of
purchase, although they must be adjusted to any fall in the purchasing power of money %

GENERAL CONDITIONS

25

The first difficulty t h a t the Committee of Experts which drew
up the Questionnaire had to cope with in this connection was
whether formal safety as to the recovery of capital and interest
a t their nominal value was compatible with real safety, t h a t is
the maintenance of the purchasing power of the invested sums
and their yield.
By including a question intended to determine whether the
insurance institution should aim not only a t formal but also a t
real safety, the Committee of Experts at least implicitly expressed
the view that the two were compatible, if not absolutely and
certainly, yet a t least relatively and conditionally, in specified
circumstances. I t apparently held that, apart from securities
with a gold clause or currency option, which, besides having the
advantages of fixed-yield securities, are more or less of the nature
of variable-yield securities, real estate and first-class shares do
not necessarily imply, even in the absence of a n y depreciation
of the currency, a smaller nominal safety t h a n fixed-yield securities
or loans secured by a mortgage, for example.
If real estate has been acquired on advantageous terms, is
properly administered and suitably redeemed, its yield must
ultimately be sufficient to pay t h e interest fixed a t the d a t e of
purchase and t o r e d e e m t h e capital." The preference and-even the
ordinary shares of first-class companies sometimes also afford
substantial guarantees of the recovery of capital, since such
companies devote p a r t of their profits to reserves and sinking
funds.
To this should be added t h a t any tendency to depreciate
the currency ordinarily has a favourable influence on the conditions
necessary for the maintenance, n o t to say the increase, of the
nominal value of variable-yield securities.
I t is certainly difficult to ensure t h a t the conditions needed
for effectively maintaining the nominal value of variable-yield
securities will really be satisfied. Perhaps it is even more difficult
to say whether, humanly speaking, the circumstances which are
counted on to have this effect will continue to exist. In a n y case
it must be admitted that, as a rule, the administration of real
property or variable-yield securities presents greater hazards
and difficulties than t h a t of a holding composed of fixed-yield
securities. I t does not seem, however, t h a t these hazards and
difficulties are such as to make the aim of real safety a n d t h e
maintenance of formal safety. incompatible in every case and by
definition.

26

INVESTMENT OF SOCIAL INSURANCE FUNDS

If an insurance institution tries to achieve real safety for its
investments b y making them in variable-yield securities, it must
weigh the advantages afforded b y investments of this kind in the
event of any currency devaluation against the disadvantages
they involve : the difficulty of managing them, their extreme
sensitiveness to economic fluctuations and to changes in production
and consumption, their very small or their uncertain yield, their
excessively speculative nature, and finally, the special openings
for fraud t h a t some of them afford. The institution must to some
extent decide between fixed-yield and variable-yield securities.
I t must carefully consider in each case what likelihood there may
be of losing b o t h principal and interest either owing to an unfortunate speculation or owing to monetary devaluation.. B u t it
should not be overlooked t h a t in the former contingency there
will as a rule be no remedy other than perhaps an increase in
members' contributions to cover the loss, while the same may
not apply in t h e event of currency devaluation if the responsibility
of the State is likely to be involved.
The kind of action taken to restore financial equilibrium when
it is upset or threatened by the depreciation of reserves will clearly
depend on the causes of the depreciation, and the extent to which
the cause lies in the administration of the insurance scheme or
in independent circumstances such as monetary devaluation.
The success of the action taken will depend on the forces at
work, the extent and rapiditv of the devaluation anr) thp amrmnt
of the loss incurred, as well as on the opportunities t h a t the public
authorities have of counteracting or rather compensating for
the effects of t h e fall in the purchasing j)ower of the currency.
Post-war experience shows t h a t compulsory insurance schemes
have usually been able to overcome even the most acute and
prolonged monetary crises without reducing to a very marked
extent the real value of the benefits paid.
I t is very much to the advantage of compulsory insurance
schemes, however, t h a t monetary stability should be maintained ;
while the liabilities of an insurance scheme do not vary exactly
with the purchasing power of the currency, they must in practice
always be adjusted to t h a t purchasing power. Currency devaluation inevitably leads to a deficiency in reserves, if it does not
wipe them out altogether, and thus makes it impossible for the
scheme to meet liabilities by drawing on its own resources. Adjustments made after devaluation are always difficult to carry out,
whatever the strength of the insured group. They are slow ; in

GENERAL CONDITIONS

27

most cases they entail sacrifices not only on the p a r t of the active
members of the scheme but also at the expense of the beneficiaries ;
they undermine faith in the value of the protection guaranteed
to insured persons, and hinder the future growth of confidence.
Monetary stability or instability, however, is nearly always
entirely independent of social insurance investments, since t h e
nature of those investments can have only a very insignificant
effect on currency stability. I t could not be otherwise, unless
the investment policy of the insurance scheme could have a decisive
influence on public finance. No doubt t h a t policy is one of t h e
many factors t h a t influence the credit of the State. I t may be
held that a compulsory social insurance scheme ought to support
public credit, but it is scarcely conceivable t h a t this could have
a decisive influence.
I t cannot be said, of course, t h a t prospects of monetary stability
or instability do not normally affect the choice of investments ;
but all t h a t insurance authorities can do is to t r y within the limits
of their powers to guard against currency devaluation by confining
investments to certain classes of security and selecting those
with a variable yield. The question t h a t arises is whether insurance authorities ought to do this, or more exactly whether i t is
reasonable and desirable to authorise them tö cover the risk"of
currency devaluation by investing in variable-yield securities.
*

*

This is the problem on which the persons consulted were invited
to give their views, by replying to the following question :
Do you consider that these conditions should be extended
to include maintenance of the real value, i.e. purchasing power,
of capital and interest ?
Analysis of Replies
The replies were about equally divided.
Some of the persons consulted were against any attempt to use
investment in variable-yield securities as a means of adjusting capital
and interest to variations in the purchasing power of money, their
reason being the risks involved.
As against this definitely negative attitude, there was a small
majority of replies which allowed that, at least when the risk of
monetary devaluation appears to be substantial, it would be desirable
to try to maintain the purchasing, power of investments. Even so,
many of these replies were subject to important qualifications relating
to the extreme difficulty, if not practical impossibility, of maintaining
purchasing power.

28

INVESTMENT OF SOCIAL INSTTBANCE FUNDS

In all, 11 replies were against any attempt to find means of
maintaining the purchasing power of investments, and 13 were in
favour of such an attempt, although 7 of them expressed doubt as
to the practicability of obtaining a result.
The attempt to find real safety undoubtedly raises complex problems
because of the risks and difficulties involved in acquiring and exchanging
variable-yield securities.
I t is difficult, however, to maintain that prospects of monetary
stability or instability should not affect the choice of investments.
Is it, in fact, reasonable to prohibit the insurance institution absolutely
and in all circumstances — including that of probable or even imminent
monetary devaluation — from trying to maintain the real value of
its investments if it can do so without incurring serious risk ?
The fact is that it seems impossible to require that for all the
investments which constitute the whole of the reserves the maximum
degree of both real safety and nominal safety should be attained.
On the contrary, it would appear advisable to empower the insurance
institution to try to maintain the real value of its investments as far
as possible and on condition that the capital concerned is not exposed
by such measures to serious risk.
I t is obvious that the measures, should be taken with all due
precaution, and that only certain classes of securities, whose value
for insurance investment purposes has been particularly carefully
examined and watched, should be allowed. Such conditions no doubt
limit the possibility of attaining real safety for the holding in general
and the proportion of the total that may be invested in variable-yield
securities. Nevertheless, even though this possibility may be limited
and investment in variable-yield securities cannot ensure full maintenance of the purchasing power of the whole of the reserves, this
is no reason to forbid such investment absolutely and completely.
Discussion and Conclusions
The Office text rpprl »a follows ;
In order to protect the insurance scheme in periods of
monetary and economic instability against devaluation or
measures which reduce capital of, or income from, the investments, the body responsible for selecting investments may
(or even should) be authorised to seek investments which
maintain also their real value in purchasing power. The
acquisition of variable-yield securities should be subject to
particularly strict regulation and supervision.
Mr. LENGYEL proposed the deletion of the words " in periods of
monetary and economic instability ". He pointed out that such
periods could not be foreseen and that accordingly some investments
which remained stable as to their real value should always be included
in the insurance holding.
This amendment was unanimously adopted.
The discussion then turned on the following two main points :
1. Should monetary devaluation be mentioned as the essential
reason for which the insurance institution should seek to maintain
the real value of its investments 1
2. Would it be better to state that the institution should be
authorised to seek real safety for its investments or merely that it
might be authorised to seek such safety ?

GENERAL CONDITIONS

29

After a discussion in the course of which Mr. BISQUEBET and
Mr. GÉBABD took one side and Mr. GARCIA OLDINI and Mr. H E N R Y
the other, the two last-named emphasising the important consequences
which monetary devaluation has for insurance schemes, the Committee
decided to mention devaluation as one of the grounds on which it
is advisable as far as possible to seek real safety for the investments.
On the question of the advisability of 'stating in the conclusions
that the insurance institution should, or that it might, have the power
to seek real safety, the Committee came round to the view expressed
by Mr. MACÊDO SANTOS, who suggested a statement to the effect
that it is desirable that the insurance institution should be authorised
to seek this kind of safety.
Mrs. DULLES pointed out that search for real safety might compromise both liquidity and yield and even the basic condition of
safety itself. Accordingly, on her proposal, the Committee decided
in favour of stating expressly that this search should be undertaken
only to the degree in which it was consonant with the observance
of the basic conditions to be satisfied by the investments.
Finally, Mr. HENBY proposed to add the following sentence :
The regulations should require appropriate provision to be
made for the depreciation of the various kinds of investments.
This proposal was adopted.
In the result the complete text, as finally adopted by the Committee,
was as follows :
" In order to protect the insurance scheme against measures
such as devaluation which reduce the capital of, or income
from, investments, it is desirable that the body responsible
for selecting investments "should be authorised, in so far as is
consistent with the conditions of safety, yield and liquidity,
to seek investments which maintain also their real value in
purchasing power. The acquisition of variable-yield securities
should be subject to particularly strict regulation as provided
in Chapter I I I x . The regulations should require appropriate
provision to be made for the depreciation of the various kinds
of investments. "
Assessment of the Degree of Safety
Once the conditions of safety have been defined, there comes
the practical problem of determining which of the possible investments are those which prima facie may or should be considered
as satisfying the necessary conditions.
There is a choice of two methods. Under the first, t h e rules
to be observed, i.e. the precautions to be taken when selecting
investments in order to make sure t h a t safety is properly guaranteed, are set forth in a general definition. Under t h e second
method, instead of making a general definition, an exclusive list
is drawn up of the various classes of investments t h a t are deemed
t o satisfy the condition of safety.
*
1

See below pp. 66 et seq.

*

30

INVESTMENT OF SOCIAL INSURANCE FUNDS

The questions put to the persons who were consulted asked in
effect whether it would be useful to include in the investment regulations
a general definition of the necessary conditions of safety and, if need
be, to round off the definition by a list restricting the classes of
permissible investments.
Analysis of Replies
The replies are analysed separately according as they favoured
a general definition or an exclusive list.

(1)

General Definition of the Kinds of Permissible Securities
and Investments in Real Estate

Principle of a General Definition
Most of the replies were in favour of the insertion in statutory
investment rules of a general definition of the required conditions
of safety. Six, however, of the 18 direct answers to the question,
expressed the view that such a definition is either inadvisable or would
be ineffective. In support of this view some of them pointed out
that it would be difficult to include in one definition all the conditions
of safety that ought to be satisfied both by securities and by investments
in real estate. Even if one could arrive at a comprehensive definition
setting out for each class of investment the necessary conditions of
safety, • it would still be nothing but a theoretical formula. There
would be a danger that some authorities might, in good or in bad
faith, get round the definition and for ends of their own make investments which in those circumstances would probably be very hazardous.
Since it would be difficult to formulate a general definition of +.h«
degree of satety to be required of investments, considerable freedom
of action should be left to the bodies responsible for making them.
While the law can, or even should, for instance, make it compulsory
to obtain guarantees for mortgage loans (e.g. by prohibiting loans
saTe on a first mortgage) it is, on the other hand, impossible to
express in statutory form general rules which would enable anyone
to estimate the personal solvency of a borrower and the real value
of a security. In the case of loans to an individual, it would of course
be possible to demand of him that he should assign in favour of the
institution making the loan the benefit of an insurance on his life to
the amount of the loan.
With the group of answers on these lines can be placed two others,
which doubted whether it would be possible to frame rules in a general
.definition that would be both elastic and comprehensive and yet at
the same time sufficiently precise to bind effectively the body responsible
for making investments.
On the other hand, 12 of the persons consulted considered that
it is essential to lay down a general definition and to accompany it,
if necessary, by statutory rules of application setting out the circumstances in which the conditions of safety can be held to be
satisfied.
Finally, three of the replies asserted that the problem should be
dealt with in accordance with local conditions.

GENERAL CONDITIONS

Elements

of the General

31

Definition

The replies which were in favour of a general definition did n o t
propose to set out in s t a t u t o r y form the elements of this definition
to the exclusion of all others, but a t the most to outline t h e essential
points, as was in fact suggested b y t h e question.
Securities. — All the replies which considered a general definition
advisable held t h a t it should determine the principles for assessing
the degree of safety of securities. The definition should consequently
indicate the personal guarantees and, where necessary, the real
guarantees t h a t should be demanded of borrowers.
I n the case of securities the restrictive list of permissible classes
of investments should be such as t o rule out borrowers who cannot
accord t o the lender real and material security, unless t h e y are able t o
offer very strong personal guarantees (as the State and local authorities can do).
B u t in addition to being guided b y tb,e formal provisions of s t a t u t o r y
rules, the bodies responsible for selecting investments should be
provided with certain general principles.
For instance, t h e y should always, where possible, a n d even where
this is not specifically provided for in the investment regulations,
t r y t o obtain real safety. B u t their preoccupation with this point
should not exclude insistence on t h e personal solvency of the borrower.
For example, in t h e case of mortgage loans it is not sufficient t h a t
the value of the pledged security should clearly cover t h e a m o u n t of
the loan. The financial situation and reputation of t h e borrower
are also of importance. A delay in repayment of sums due attributable
to a default on t h e borrower's p a r t m a y i a v e a very, prejudicial effect
on the lender's position. Moreover the value of t h e pledged security,"
which m a y appear t o be of the first rank, m a y t u r n out t o be more
or less illusory owing t o unscrupulous action on the p a r t of the
borrower.
Real Estate. — I n the opinion of the persons who were in favour
of a general definition, this should also describe t h e permissible types
of real estate.
I n the opinion of one expert experience has shown the disadvantages
of purchases of building land and the risks involved in acquiring rural
property ; the conditions of safety would be materially strengthened
if the investment regulations imposed on t h e insurance institutions
the d u t y of limiting their purchases to urban property situated in
towns of a certain size, and more particularly building property
already in use.
Variable-Yield Securities and the Distribution of Investments. — I t
was generally agreed t h a t it is necessary t o distribute the investments
among the various permissible classes.
One reply pointed out, however, t h a t the effect of spreading
investments is almost nil from t h e point of view of safety if the funds
are invested in first-class fixed-yield securities, for in t h a t case there
is no spreading of risks since all the securities are exposed t o t h e same
danger, t h a t of monetary devaluation.
On the other hand, a number of t h e persona consulted considered
t h a t the possibility of strengthening the safety of investments by
distribution among first-class fixed-yield securities was of sufficient
importance for such distribution t o be made compulsory.

32

INVESTMENT OF SOCIAL INSURANCE FUNDS

Lastly, the replies which admitted that the insurance institution
should be authorised to invest in variable-yield securities, at least in
certain cases and in certain conditions, thereby implicitly approved
the distribution of investments.
(2)

Exclusive

List

of Permissible

Investments

The great majority of the replies were in favour of drawing up an
exclusive list of investments.
Out of 22 affirmative answers 5 stated that a fixed and absolutely
exclusive list offers no disadvantages. Obviously it would be necessary
to extend or to amend the list of permissible investments if the character
of one or other of those included in the list changed, or if other investments came up to the legal requirements of the list. But the change
in character of an investment from speculative to gilt-edged will be
as slow as changes in the general economic situation, and in such circumstances the law can always extend the list of authorised investments.
Only two replies were directly opposed to the principle of drawing
up a fixed list, one of them on the ground that absolute freedom of
choice of investments is practicable and should be allowed.
Some of the answers received can be classed in two groups according
as they disapproved completely of an exclusive list or considered that
such a list should be strictly exclusive. Between these two groups
can be placed nine other .replies, which considered that it would be
useful to give power in certain circumstances to depart from the
exclusive list by extending the classes of permissible investments, at
least temporarily.
There seemed to be general agreement on the essential purpose
of an exclusive list, namely to avoid all possibility of making
investments of a hazardous nature and of indulging in speculative
operations on the stock exchange, and to rule out completely the
possibility of taking too great risks or of arousing a feeling of mistrust
in the public.
J? urMiermore, the existence of a list makes the tasks of the investing
bodies easier and lessens their responsibilities, and it also facilitates
the task of the supervising authorities. But is it true that the only way
to achieve this object is to draw up an exclusive list from which no
departure is allowed ? Does not such a method involve more disadvantages than advantages ? In support of granting at least a minimum of elasticity in making the list some of the repHes (nine) pointed
out that unless the list is very wide — in which event it runs the risk
of defeating its own object, namely that of avoiding all hazardous
investments — an exclusive list may prevent the bodies responsibly for
making investments from carrying out financial operations whose results
would be of benefit to the insurance scheme ; as their hands would be
tied, they would not be in a position to make' investments which the
evolution of the financial market might suggest to be suitable and
which in given circumstances might offer an equal degree of safety
and a higher yield than those included in the list. This disadvantage
would be particularly marked in a time of low rates of interest, which
might be further depressed to an undue degree if investments were
to be made to a large extent in a restricted sphere, for instance in
Government funds.
One expert expressed the view that if there is to be a strictly exclusive
list, it should be constantly revised in order to take account of the
current opportunities of the investment market, especially when the

GENEBÀL CONDITIONS

33

supply of investments is large. In that case the question would
constantly be arising of how to extend the field of investment and
whether or not the list should include industrial ordinary shares, stock
and debentures or other securities which previously were not allowed
or were allowed only in exceptional circumstances.
It might be added that if there were to be extensive investments
in a limited sphere, the result would be to emphasise the depressing
influence which social insurance investments exercise automatically
on the general rate of interest. In abnormal times when the rate of
interest on first-class securities has already fallen heavily, it may be
useful to limit investment in this section of the market, even if to do
so would involve taking for the time being a slightly greater risk than
would ordinarily be justified.
Discussion and Conclusions
The Office text opened with an alternative :
To ensure the highest possible degree of safety for the
investments the regulations may (or even should) :
(a) set out a general definition of the conditions to be
observed in the selection of investments...
The Committee decided to remove the alternative, i.e. delete the
words " or even should ", and to state in effect that in all circumstances
the regulations should set out a general definition and draw up the
list and provisions for guaranteeing the safety of the investments
as far as possible.
Accordingly the text adopted reads as follows :
To ensure the highest possible degree of safety for the
investments, the regulations ' should :
(a) set out a general definition of the conditions to be
observed in the selection of investments, namely,
permissible classes of negotiable securities or of holdings
in real estate ; character or legal status of the debtor ;
duty to obtain a charge or preferential right as
security for the debt ; geographical distribution of
investments, etc. ;
(b) draw up an exclusive list of the classes of investments
which accord with the general definition and are deemed
in principle to satisfy conditions of safety (the acquisition
of the certain kinds of investments may be made subject
to the approval of the controlling authority to which
the body responsible for selecting investments refers) ;
(c) in order to reinforce the safety of the whole of the
invested holding, prescribe an appropriate distribution
of the investments among the various classes included
in the list.
YIELD

The investments of a compulsory insurance scheme- need not
fulfil any special conditions as regards yield. I n the case of contingencies reserves, the yield is not, in itself, of paramount importance.
3

34

INVESTMENT OF SOCIAL INSURANCE FUNDS

The interest earned merely supplements the provision which the
scheme makes for chance liabilities. The material importance
of these reserves is limited. The scheme must accumulate a sum
equal to, or not more than double, its " normal "annual expenditure. The effects of compound interest and the return on investments will always lessen the burden of the liabilities, but whatever
the yield may be, it will not influence financial equilibrium to
any great extent. In the circumstances, there is not much inducement to look for a high return on contingencies reserves. A higher
rate of interest earned cannot justify a sacrifice of liquidity or,
above all, of safety.
As regards actuarial reserves, the average rate of interest on
which the estimates are based must be earned. If the rate has
been calculated as carefully as it should be for a very long-term
investment, due regard being had to the fact that the interest
earned on the reserves will have to be reinvested, sometimes
over a period of several decades, at a rate no lower than that
chosen in the financial calculations, no difficulties will arise. In
this respect compulsory insurance schemes are better off than
other insurance schemes. Between compulsory insurance institutions there can be none of that rate competition that is rife in
private insurance and leads institutions to look for the highest
possible return on their capital so as to cover the high cost of
competition or to get the better of their competitors by reducing
premiums or contributions either directly or bv profit-sharing
schemes.
It is true that competition cannot always be avoided even
under a compulsory scheme. When compulsory insurance does
not mean insurance with a particular institution, there may be
some rivalry, or even actual competition, and the institutions
may try to increase their membership by offering too attractive
terms, financially difficult to carry out and therefore dangerous
for the insured persons. This risk, however, is mainly theoretical,
even when there is no obligation to insure with a particular institution ; supervision of the institutions, uniformity in the rules
for calculating and granting benefits, and the introduction of
reinsurance among the institutions, will to a large extent make
it possible to avoid competition between the various organisations
authorised to carry on insurance.
The questions that are likely to arise as regards yield bear
on the policy to be adopted when an average rate of interest at
least equal to the actuarial rate cannot be earned on investments,

GENERAL CONDITIONS

35

or when the actuarial rate is much lower than the current r a t e
of interest in the money market and below t h a t which can actually
be earned on investments.
If the average rate of interest on which the actuarial estimates
are based cannot be earned by a prudent administration of the
accumulated capital, there can be no question of trying to obtain
a higher yield a t the expense of safety, or even, in certain cases,
of liquidity.
This being so, when and how must the loss of interest be offset ?
Ought the adjustment to be immediate or can it be deferred ?
Ought it to take the form of increased revenue or of reduced
benefits ?
The loss of interest may be only temporary and due to circumstances that are fairly sure to disappear, so t h a t for the time being
no action is required other than careful watching of investments.
If, on the contrary, the loss of interest seems serious and likely
to last a long time, some remedy will have to be found, b u t in
t h a t case the choice between reduced benefits and increased
revenue will depend on many factors (the rate of contribution,
the level of benefits, the extent of the loss incurred, etc.), the
weight of which will vary with the general-political or economic
situation, the level of wages and profits, etc., so t h a t they cannot
be estimated according to any pre-established rules.
If the current rate of interest on long-term investments
offering the required degree of safety is appreciably higher t h a n
the actuarial rate, the insurance authority may either raise the
rate taken as the basis of its actuarial calculations, which would
mean either reduced contributions or increased benefits, ; or use
the surplus to build up a special reserve with» a view to increasing
benefits in due course, or adopt a policy of lending money a t a
low rate for socially useful purposes and leaving the actuarial rate
unchanged 1 .
The extent to
interest is limited
rate of interest,
collectively saved

which loans may be granted at a low rate of
by the authority's d u t y to pay a reasonable
as compared with market rates, on capital
by the insured persons. I t seems fair t h a t

1
This can be done of course only if the surplus yield of investments
need not be used iñ the first place to cover a- previous-deficit. If. there
has been a previous deficit, the surplus yield merely affords a means of
avoiding that increase in revenue (contributions or subsidies) which
would otherwise have been necessary.

36

INVESTMENT OF SOCIAL INSURANCE FUNDS

those who pay insurance contributions should obtain, from that
part of their contributions which is held in reserve, the maximum
yield compatible with safety and, if necessary, liquidity.

In these circumstances the persons who were consulted were
invited :
(a) to declare what, in their opinion, the minimum yield to be
obtained on the investments should be ;
(b) to state whether, in their opinion, social insurance institutions
could not, or even should not, be satisfied, for certain of their
* investments, with a rate of interest lower than the current
rate, provided that the average yield on all the investments
attained at least a predetermined figure ; if so, they were
to state what this average yield should be, and on which
investments the lower rate should be allowed.
Minimum

Yield

The question concerning the minimum interest to be obtained
on the capital formed by the collective savings of insured persons ,
implicitly excluded the view t h a t a yield a t least equal to the
actuarial r a t e of interest might not be obtained on the investments which satisfy the conditions of safety and where necessary
liquidity. As already explained, it would be impossible to fix
beforehand a line of action in such a case, save for the obvious
necessity, in uase oí inability to maintain the yield for any length
of time, of increasing the contributions to make up for the lack
of interest or of reducing the benefits.
The question accordingly involved two criteria for the definition of the minimum yield :
Given that the average yield on the whole of the investments
should never be lower than the actuarial rate of interest, do you
consider that that yield should attain at least :
(i) the net rate of interest on long-term Government debt where
this rate is higher than the actuarial rate ?
(ii) or, in the case of investments made in the course of a given
period, the average net rate of interest on the market during
that period, where this rate is higher than the actuarial rate ?
Analysis of Replies
Seven of the replies proposed the net yield on long-term Government
debt as a criterion of the average rate of interest to be obtained on
all the investments. The arguments they put forward emphasised
that in countries where there is a shortage of capital both the net
rate of interest on long-term Government debt and the current market

GENERAL CONDITIONS

37

rate are as a rule high. In these countries it is advisable that the
yield on the capital of insurance institutions should be high, since
the possibility of monetary devaluation or of a more general economic
breakdown cannot be left out of account.
Furthermore, the rate of interest on long-term Government debt
can be easily ascertained, and it is all the more advisable to fix the
minimum yield on the holding on the basis of this rate in that longterm Government bonds are in fact the most natural form of investment
for the capital of compulsory insurance funds.
As another reply put it, the net rate of interest on long-term
Government debt is often lower than that which could be obtained
from other investments, but this is usually due to the speculative
nature of the latter, and speculation should be avoided in insurance
investments.
Finally, one of the replies asserted that the yield should as a rule
slightly exceed the rate of interest taken as basis for the actuarial
calculations. The rate of yield chosen should be in proportion to the
lowest rate of interest obtained on Government funds " and to the
general rate of interest laid down in civil or commercial law ".
The majority of the direct answers (12 out of 19), however, rejected
the ^proposal to take the net yield on long-term Government debt.
In this connection it may be noted, on the one hand, that at certain
times the net yield on Government funds exceeds that on other
investments — for instance, municipal loans, mortgage bonds, building
property, etc. — and that to demand that the yield on the whole
of the investments should at least attain that on Government funds
might in certain circumstances lead to investment of the whole holding
in " Government securities.-This would be contrary to the principleof spreading risks and distributing investments which' has already
been recognised as necessary, or might lead to the adoption of a policy
which would pay more attention to yield than to safety, seeing that
the greater the safety factor, the lower, as a rule, is the rate of interest
or the net yield.
On, the other hand, the insurance scheme should always obtain
i on its investments the maximum rate of interest compatible with
the degree of safety and liquidity which are regarded as indispensable.
If the yield on Government funds is low in relation to the current
market rate of interest on long-term investments, the insurance
authorities should take as much advantage of their opportunities as
possible to invest the funds under the best conditions, that is to say
in practice to obtain the highest possible yield consonant with an
adequately guaranteed degree of safety.
While the suggestion that the figure to be taken for the minimum
yield on investments should be the net rate of interest on long-term
Government debt met with considerable opposition, as little support
was given to the idea of requiring by law that the average yield on all
investments made within a given period should correspond to the
net rate of interest currently obtained in the market during the same
period on investments of the same type and character.
Seven of the persons consulted considered it inadvisable — and,
in fact, useless — to try to insist on a minimum figure for the. yield
to be obtained. Four, .however, held that as far as possible ft müiimum
yield should he sought for each kind of investment, to be fixed in
such a way that, taking into account the probable composition of
the total holding, the average yield on the whole of the investments

38

INVESTMENT OF SOCIAL INSURANCE FUNDS

will not fall below; the rate of interest which served as a basis for the
actuarial calculations.
Moreover, in order to avoid mistakes or the granting of overgenerous terms to individual borrowers, it may be considered necessary
to fix in advance a minimum yield to be obtained on each class of
investment. This figure should be reconsidered at intervals in order
to take into account any fluctuations which may have occurred in
the market. For certain classes of investments which are quoted
in official lists, and are easily marketable, it might be possible " instead
of periodically fixing the minimum rate, to fix the rate at a figure,
being the average current market rate in a given period on specified
securities, plus a certain margin fixed in advance. If the statutory
regulations were made sufficiently precise, as they ought to be, no
investment should be at a rate below the specified minimum ".
Conclusions
The Committee of Experts adopted, without amendment, the text
proposed by the Office :
I t is essential that the insurance scheme should obtain for
its investments the highest yield consonant with the safety and
liquidity which are held to be indispensable. The average
yield of the whole of one kind of investments made within a
given period should not be less than the net rate of interest
generally current on the market for investments of the same
kind not made during the same period.
Investments at a Low Rate, of Interest
The question concerning the investments a t a low rate of
interest which might be made by insurance institutions related to :
(1) the conditions in which such investments might be made ;
(2) the definition of the invcstrjiôîïuo un whiuli Lue ju±»iu"auce
scheme might, if necessary, have to be satisfied with a
low r a t e of interest.

The persons consulted were asked the following question :
. Do you consider that social insurance institutions may, or
even must, for certain investments, be satisfied with a rate of
interest lower than" that generally current for the class of
investment in question, provided that the average yield on all
the investments is not lower than a prescribed rate ? If so,
what should the classes of investment in question be ?
Analysis of Replies
Five out of the 14 of the replies rejected the suggestion that
insurance investment authorities should be authorised — and still more
that they should be obliged — to make investments at a low rate
of interest in certain circumstances.
The argument in favour of the acceptance by insurance funds of
a low rate of interest is that it is justified by the social utility which

GENERAL CONDITIONS

39

the investments present. The arguments against may be classed as
follows.
Social insurance institutions are merely trustees of the interests
of insured persons, and, in a more general way, of the contributors
to the insurance scheme. In principle they should avoid investments
whose yield is markedly less than the yield currently to be obtained
in the money market, even when the average yield on the total holding
is not appreciably reduced thereby.
The sums to be invested come from the contributions paid by
insured persons or on their account, for the purpose of securing the
provision of the statutory benefits, and no one is entitled to live
extravagantly on another's money. Moreover, " social " investments
(so defined) do not as a rule satisfy the requisite conditions of safety.
Finally, it is the duty of the body responsible for investment to
accumulate in times of high interest as much reserve as possible in order
to provide as long as possible against a subsequent deficiency in yield.
Among the answers received, absolute opposition to accepting a
low rate of interest was the exception rather than the rule, but the
many persons among those consulted who declared themselves in favour
of such investments took care to emphasise that in so doing they did
not have in mind that the funds constituted by compulsory contributions
should be used to finance a systematic policy of investment at a low
rate of interest.
Low-yield investments should be made only by way of exception
in predetermined circumstances, and only where it is clear that the
insured persons are bound to profit thereby — for instance, in the
acquisition of preventive or curative establishments considered to be
- -- necessary, .or_in_.the_construction of workers' dwellings.
Moreover, not only should the purposes for which such investment
may be made be clearly prescribed, but such prescription should also
define in what financial circumstances and to what extent the investment should be made. The most rigid condition would be to insist
that before investments giving a low rate of interest can be made,
the insurance budget should be actuarially balanced and should have'
a surplus either on the risks covered or from the yield on capital.
»
The moneys for making the investments would be taken out of the
surplus, and so would in fact be taken out of profits. They would
accordingly not serve to create reserves in the true sense of the term.
In fact, none of the direct answers to the question stipulated such
a condition, but the majority took care to emphasise that such investments should absorb only a fraction of the reserve funds, varying
with the financial position of the insurance funds and with the yield
of the investments in question. The fraction should in no case represent
more than a small proportion of the total holding or of the funds to
be invested.
/
I t should furthermore be a condition precedent to the making of
investments at a low rate of interest that the yield of the whole of
the invested holding should amount at least to the actuarial rate,
plus, if need be, a small safety margin (0.50 per cent., for instance).
,\
Discussion and Conclusions
The Office text was as follows :
In special circumstances the insurance scheme may. (or
even should) content itself with a rate of interest lower than
that which is currently obtained, where the investments procure

-40

INVESTMENT OF SOCIAL INSURANCE FUNDS

advantages for insured persons as a social group, for instance
by acquisition of preventive or curative establishments, construction of workers' dwellings, etc. In order that the making
of such investments may be entertained, it appears to be
essential that there should be obtained on the total holding a
yield at least equal to the rate of interest which was taken as
a basis when the contribution and the benefit tables of the
insurance ' scheme were drawn up, plus a slight margin of
security.
The first point which the Committee dealt with was the general
question whether insurance schemes should grant loans at a low rate
of interest.
Mr. K U P E B S held that it was not for insurance institutions to grant
loans at a low rate of interest even to their own members, seeing that
the yield on their capital should always correspond to market possibilities. Furthermore, insurance schemes should be administered on a
business basis in the sense that it was certainly not in the interest
of insured persons to ask them to make a sacrifice, whoever might
be the person to benefit by it.
This proposal was rejected, but, on the suggestion of Mr. BOHKEN,
who agreed with Mr. KUPEBS in asking for its rejection, the Committee
decided to state that the insurance scheme can content itself with
a lower rate than that currently obtained, without making any mention
of a duty to grant loans at a low rate of interest in particular circumstances.
Subject to this alteration, the Office text was maintained.
The Committee then considered an addition proposed by Mr.
LENGYEL, who stated that in his opinion insurance institutions could
also content themselves with a low rate of interest in respect of investments in real estate, the essential purpose of which is to maintain
the real value of the sums invested, that is to say the purchasing power
of their capital and of the interest received upon it
i n the course of the discussion, and at the request of Mr. BISQUEBET,
Mr. LENGYEL explained that the low rate of interest which the insurance
scheme could accept with a view to protecting the real value of its
investments should in no case fall below the actuarial rate of interest.
Mr. GABCIA OLDEST and Mr. MACÊDO SANTOS then pointed out
that variable-yield investments, to which Mr. LENGYEL'S amendment
must be taken to refer, involved special risks, and that a higher rate
of interest should be sought in order to counteract these. For this
purpose it was necessary in particular to obtain, where possible, a
yield in excess of the actuarial rate of interest, so as to constitute a
reserve against possible loss.
These arguments were accepted as decisive by the Committee,
which decided not to accept the proposed addition.
Mrs. DULLES thereupon drew attention to the fact that in certain
circumstances the interests of the insured community and of the national
community can be best served by the investment in low interestbearing securities of sums exceeding even to a considerable extent
those necessary to meet current needs.
The Committee made a note of Mrs. DULLES'S statement. Obviously
the bodies responsible for making investments are the best judges
of the appropriate time at which they should be made, and recommendations relating to long-term investments can clearly apply only
at the time when the particular investments have been decided upon.

GENERAL CONDITIONS

41

LIQUIDITY

The liquidity of an investment m a y be estimated in relation
to the possibilities it offers of immediate realisation of the capital,
at any moment, or a t a date which is fixed in advance and cannot
be anticipated.
The first kind of liquidity is afforded b y a current account
in a solvent institution, the second b y a mortgage loan, or a wellsecured loan repayable a t the end of ten, fifteen or twenty years.
The contingencies reserves of social insurance institutions
should as a rule seek the first kind of liquidity, while actuarial
reserves, which are intended, subject to what will be said below,
to be used up gradually and in accordance with a pre-arranged
plan, should seek the second kind.
This by no means implies, however, t h a t the "contingencies
reserves of a social insurance institution may only be deposited
on current account in a bank or invested in very short-term
securities, such as the floating debt, or t h a t a compulsory insurance
scheme should always provide for the realisation of all or p a r t
of its actuarial reserves at a given date to pay benefit claims.
I t is easy to raise money temporarily on a holding of stock:
exchange securities. An insurance authority which needs for a
time a large sum of money, b u t which wishes to realise its holding
only by degrees, can without much trouble or expense raise such
funds as it requires, for any short period it chooses to fix, by
discounting Government securities, pledging other securities,
borrowing from banks against its holdings, and so on.
The raising of loans on real estate involves more formalities,
but funds can also be raised b y this means fairly quickly and
without much expense.
The insurance authority will of course have to pay interest
on these loans, b u t if they are short-term loans the rate charged
will be low and the institution will no doubt retain p a r t of the
interest earned on the securities it has pledged. If loans have
to be sought for a comparatively long term, or if there is serious
risk of depreciation of the securities charged, or again when money
is scarce and dear, the insurance authority will have to p a y the
difference between the interest earned on its capital and the
interest on the money" borrowed. If in the choice of its investments the insurance authority has paid sufficient care to the
question of safety, the difference cannot be very considerable.

42

INVESTMENT OE SOCIAL INST7EANCE FUNDS

So much for the investment of contingencies reserves.
As regards actuarial reserves, the first question to be answered
is whether, in the normal course of events, the insurance authority
will ever have to realise the capital.
Under a compulsory insurance scheme, membership of the
scheme is renewed so that, provided the technical (demographic
and^fmancial) basis does not change, the actuarial reserves increase
till they reach a permanent level at which, other things being
equal, they should indefinitely remain. The contributions paid"
by active members, together with the interest earned, exactly
balance expenditure on benefits. It is just as if the financial
resources, as accumulated, were used to redeem the securities
in which the actuarial reserves guaranteeing the payment of benefits
are invested.
It is obvious that a theory of this kind cannot be applied
exactly in practice. There will always be variations in the number
of insured persons, their wages, their mortality, their invalidity,
and the benefits guaranteed. These variations will lead to fluctuations in the amount of actuarial reserves, and so it should never
be forgotten that part of the reserves may have to be liquidated
at some time or other, even when the scheme is fully developed,
and when the youngest members admitted on the scheme's first
being put into operation have been granted the benefits due at
the end of their occupational life and been replaced by subsequent
generations. But íionstn.nt-í^iíiHbri'aEi between estimated income
and actual expenditure is never absolutely essential. A compulsory
insurance scheme based on the system of accumulation can,
without seriously prejudicing the rights of insured persons, quite
well borrow or contract debts rather than sell its assets on
unfavourable terms, but it must be able at some later date to
balance the deficit so incurred. Judgment must be used and
events must be forecast with caution.
It is probable that fluctuations in the reserves to be accumulated or spent will largely cancel each other out. If, for instance,
owing to a fall in the birth-rate there is a fall in the number of
newly-admitted members, and part of the accumulated capital
must therefore be spent, the fall may be neutralised by an increase
in the volume of wages on which contributions are payable and
in the amount of the benefits promised. This increase'will lead
to an increase in revenue and to the building up of larger reserves
per insured person, so that the capital spent ón the benefits due
to persons whose pension rights have matured will be replaced.

G E N E B A l CONDITIONS

43

The same result would obviously follow if the scope of the insurance
scheme were extended.
Sometimes, however, p a r t of the reserves may have to be
realised without any compensation. If the accumulated capital
is to be maintained, membership must constantly be renewed.
While it may be assumed that, under a compulsory insurance
scheme, the renewal is fairly sure to take place, this is true only
for the scheme as a whole and not for each individual institution,
except where compulsory insurance involves an obligation to
insure with a particular institution. Where there is no such obligation, an institution may fail to recruit new members, or recruit
very few, and thus have to use up its reserves.
To take another example, when special supplementary benefits
are provided for certain classes of insured persons which will
ultimately disappear and not be renewed (persons insured under
a transitional scheme), expenditure on these benefits, if covered
on an accumulative basis, will entail the realisation of the corresponding reserves.
Even where the choice of institution is free, however, it seems
certain t h a t there will be a constant renewal of membership
provided the liability to insurance is strictly enforced. The free
interplay of the psychological, economic and social forces on
which insurance institutions base their recruiting is, in fact,
nearly always sure to make for a turnover t h a t is at least fairly
steady.
I t seldom happens that exceptional temporary benefits are
covered in an accumulative system ; cover for these benefits is
provided, in most cases, by the system of assessment to meet
current expenses.
Institutions will be able to foresee a good while ahead the
necessity to realise capital, and realisation will take place gradually ; if necessary, it can be made much easier b y spacing sales,
or by temporary loans and advances on securities.
*

*

The questionnaire accordingly distinguished between actuarial
reserves and contingencies reserves. The persons consulted were
asked to state :
(a) -How they proposed -to define the conditions relating
to liquidity as regards :
. (1) actuarial reserves.;
(2) contingencies reserves ;

44

INVESTMENT OF: SOCIAL INSURANCE FUNDS

(b) Whether they considered that from the one or the
other type of reserves certain classes of investments
should be excluded as being too difficult to realise ;
(c) Whether they considered that a prescribed proportion
of contingencies reserves should be invested in.securities
deemed to be immediately realisable, and if so, what
proportion ;
(d) Whether in their opinion the conditions relating to
liquidity of the invested funds of social insurance of
long-term risks should apply equally to social insurance
of short-term risks ?
Analysis of Replies
(a) Definition of Conditions relating to Liquidity
Actuarial Reserves. — The replies were based as a whole on the
principle that the consumption of the capital of actuarial reserves
can only be exceptional, and that when it does occur it can be
foreseen.
x The degree of liquidity to be required of this class of reserves
should be examined with reference to the possibilities which an
investment offers of realisation at a fixed and predetermined date
which cannot be advanced.
The degree of liquidity that should be required of actuarial
reserves depends on the forecast which can be made of the amount
of the reserves in future years. Social insurance institutions should
therefore draw up as accurate estimates as possible of future income
and expenditure, setting out their probable financial needs in the
years to come. The dates for the redemption of long-term or fairly
long-term investments should be fixed with reference to the insurance
scheme's financial needs and to the possibilities of sale or discount
which the investments offer.
I t lollows that the importance of liquidity is relatively small,
provided that renewal of membership is fairly certain, as is especially
the case when compulsory insurance is combined with compulsory
membership of a specified fund.
Three of the persons consulted held that the degree of liquidity
to be required of actuarial reserves can only be determined according
to the special circumstances of each case, and cannot be defined once
and for all in any rules. Economic circumstances differ very greatly
from country to country, and the degree of liquidity to be required
varies according as the insurance institution is or is not under an
obligation to commute pensions for a lump sum at the request of
the holder or of a third party acting in his name.
Four replies merely stated that in the case of actuarial reserves
the question of liquidity has no special importance or serious
significance. I t is usually possible to calculate in advance the cash
needs of a compulsory social insurance scheme, and more particularly
of a pension insurance scheme, and it is therefore unnecessary to lay
down rules as to the liquidity of investments, more especially as the
insurance institutions are constantly taking in ready money in the
form of contributions and interest. In principle the actuarial reserves
relating to passive members (beneficiaries) of the scheme can be
transferred at any time to the account of active (contributing)
members.

GENEBAL CONDITIONS

45

According to one expert, the higher yield of long-term investments
makes them particularly suitable for actuarial reserves when the
compulsory insurance scheme is one covering long-term risks.
Another expert, however, while recognising that it is not absolutely
necessary to be able at any given moment to realise the investments
which constitute actuarial reserves, maintained that large purchases
of perpetual interest-bearing securities should not be permitted unless
benefits are only payable out of interest received on the reserves.
Even in this event, preference should be given to redeemable investments, since they offer better means of adapting reinvestment of
capital to changes in the general economic situation.
This view was put even more strongly in a reply which stated
that all investments should be easy to realise ; in general, investment
should be allowed only under securities quoted in official stockexchange fists.
Finally, one reply asserted that the liquidity to be required of
a large holding, comparable in size to that accumulated in the actuarial
reserves of compulsory insurance of long-term risks, depends in large
measure on circumstances which are beyond the control of the person
who makes the investment, such as movements in short and longterm rates of interest, variations in the demand for long-term
credit, etc.
Contingencies Reserves. — The great majority of the replies to the
question relating to the degree of liquidity to be required in the case
of contingencies reserves maintained that these investments should
be capable of more rapid realisation than those made in the case of
actuarial reserves. Two of them, however, pointed out that a special
degree of'liquidity-should not - be required unless the contingencies.
reserves, being small as compared with annual expenditure, might
have to be converted into cash at short notice.
Two replies took the view that contingencies reserves may merely
be complementary to the actuarial reserves, being intended to
compensate for any advance in the latter caused by a fall in the rate
of interest or an unavoidable reduction in yield. In such a case
there is no point in postulating any special degree of liquidity, since
the transfer from contingencies reserves to actuarial reserves amounts
to a book entry, and there is no necessity to convert into cash.
Finally, in the opinion of three experts, no special conditions as
to liquidity should be required of contingencies reserves. The
regulations should merely require distribution of investments in
such a way that at any given moment part can be realised in cash.
There is always available a sufficient supply of securities which can
be realised at short notice so as to meet sudden and exceptional
expenditure, and one of the objects of spreading investments is
precisely to ensure that an adequate proportion of the total holding
shall be invested in easily negotiable securities.
(b)

Exclusion of Certain Classes of Investments

All the replies to the question whether certain classes of investments should be excluded from one or other type of reserves as being
too difficult to_realise were based on the assumption that it is impossible
to determine in advance in a general way what degree of liquidity
should be required of actuarial reserves ; that degree can be determined
only by a forecast of current expenditure.

46

INVESTMENT OF SOCIAL INSUKANCE FUNDS

Four of the replies, however, added that in no event should the
total holding be made up entirely of securities or investments which
are not easily negotiable. Distribution of investments is always
necessary, particularly in relation to liquidity, and according to one
of these replies not more than a third of the total holding should
consist of investments which are difficult to realise.
Five of the experts made a definite distinction between actuarial
reserves and contingencies reserves. They would have the degree of
liquidity to be required of actuarial reserves vary with circumstances
(the kind of insurance, the renewal of membership, the benefit
system, etc.), but in the case of contingencies reserves they would
exclude all investments likely to be too difficult to realise.
(c) Investment of a" Prescribed Proportion of Contingencies
Reserves in Securities deemed to be Immediately Realisable
In the opinion of four of the persons consulted, it is impossible
to lay down a general rule prescribing the proportion of contingencies
reserves which should be invested in securities deemed to be immediately realisable. If the reserves have a special object — for instance,
to cover exceptional expenses of administration — it is obvious that
a greater degree of liquidity should apply than in the case of reserves
for general purposes, the consumption of the capital of which could
be spread over several years, and the investments of which could be
transferred from the contingencies reserves to the actuarial reserves.
Taken as a whole, however, the replies favoured the investment
of contingencies reserves in easily negotiable securities, at least part
of which should be of a category deemed to be immediately realisable.
Fourteen of the replies were to this effect, and most of them added
that the proportion of contingencies reserves to be invested in securities
deemed to be immediately realisable should be high, though they
did not specify any figure. Three suggested a proportion, ranging
from one-half to two-thirds or five-sixths of the total holdings.
(d) Differentiation between Insurance Schemes covering Long-Term
Risks and those covering Short-Term Risks
The question whether different degrees of liquidity should be
required according as the insurance scheme coyers long-term risks
or short-term risks may be considered in relation to the whole of the
reserves, both actuarial and contingencies, or only to the actuarial
reserves, or only to the contingencies reserves.
/
The differences in degree of liquidity to be required of actuarial
reserves according as the risks covered are short- or long-term were
discussed in one of the replies.
It pointed out that the actuarial reserves of a sickness insurance
institution, for instance, would in any case cover only expenditure
arising in the distant future, the sum of which can be calculated in
advance. Moreover, where membership is constantly renewed, the
capital which constitutes these reserves can be taken over by the
young generations of insured persons when and as they take the
place of older generations whose actuarial reserves are used up.
Accordingly, the conditions as to liquidity to be satisfied by the
actuarial reserves of a sickness insurance scheme (regarded as a
typical form of short-term insurance) need not be different from
those which should be required for actuarial reserves covering longterm risks.

GENERAL CONDITIONS

47

Apart from what has been said above concerning those contingencies
reserves which are merely complementary to the actuarial reserves
of the insurance scheme, the former reserves do not need to satisfy
any special conditions as to liquidity that vary in principle, and in
a degree measurable in advance, with the date when the risks covered
mature.
But when the reserves of the insurance scheme are considered as
a whole — and this point was made by practically all the replies —
different rules should apply according as the risks covered are shortterm or long-term.
It is obvious that in the case of short-term risks the part played by
actuarial reserves is negligible or nil, and that the effective part is
played by the contingencies reserves. In the case of long-term risks,
on the other hand, the importance, both absolute and relative, of
actuarial reserves may be much greater than that of contingencies
reserves.
For these reasons, and with one exception, the persons consulted
were agreed that different rules relating to liquidity should be laid
down according as the insurance scheme covers long-term risks or
short-term risks.
Discussion and Conclusions
1. Technical Reserves
The Office text read as follows :
It is necessary to provide for the liquidity of investments,
in particular when, in the normal course of events and as a
result of the nature of the benefits and of the financial structure
of the scheme, a part of the actuarial reserves will have to be
realised at a given date. In these circumstances the liquid
assets required can be provided by sums received on account
of redemption or capital repayment which fall to augment
current receipts at the same date. Moreover, the necessity
c
for a rapid realisation of part of the actuarial reserves may
result from" substantial reductions in receipts arising from the
non-renewal of insured membership — as, for instance, when
the insurance is compulsory but the choice of insurer is free,
or where the insurance is organised by industries and is particularly affected by an unemployment crisis.
An amendment was put forward by Mrs. DULLES, who pointed out
that a necessity for rapid realisation of part of the actuarial reserves
might arise from severe fluctuations in wages or employment. Her
amendment was accepted, and accordingly the third sentence of the
Office text reads as follows :
Moreover, the necessity for a rapid realisation of part of
the actuarial reserves may result from substantial reductions
in receipts arising from a severe fall in wages or employment
or from the non-renewal of insured membership
(remainder
unamended).
2. Contingencies Reserves
The Office text was as follows :
The contingencies reserves should in principle, as tó á fixed
proportion, be capable of immediate realisation ; it would
appear to be advisable to invest them only in securities quoted

48

INVESTMENT OF SOCIAL INSURANCE FUNDS

on the stock exchange and, if possible, subject to early
redemption.
A comment was made on this text by Mr. HENRY, to the effect that
the distinction made between actuarial reserves and contingencies
reserves was arbitrary and would not always correspond with the facts.
He accordingly called for the redrafting of these two points in such a
way as to bring out that the officials responsible for the administration
of a social insurance scheme should estimate what eventualities they
may have to deal with and establish a plan for keeping their investments
liquid to enable them to deal with these eventualities, bearing in mind
the considerable difference that there may be between estimate and
reality in calculating receipts and expenditure.
Mr. MACÊDO SANTOS opposed this view, and put forward an
amendment to the effect that :
1. contingencies reserves should in principle be immediately
realisable ;
-2. it would be advisable to invest a predetermined part in securities
^quoted on the stock exchange, etc.
The' Committee having adopted this amendment, Mrs. DULLES
pointed out that it would be necessary to take into account the very
different conditions which apply from country to country in the
description given to securities which clearly had the quality of liquidity.
She had in mind more particularly the situation in the United States,
where Government bonds were without doubt the most usual and the
safest form of short-term investment, but where securities quoted on
the stock exchange were securities which were often difficult to
negotiate without loss. For this reason she suggested an appropriate
amendment in the text.
This suggestion was accepted, and the text, subject to drafting
changes, was adopted in the following form :
The uuuliugeiioies reserves should in principle be capable of
immediate realisation ; it would appear to be advisable to
invest a certain proportion of them either in short-term
Government securities or in other securities which are readily
marketable or are subject to early redemption.

ECONOMIC AND SOCIAL U T I L I T Y

An insurance scheme places a t the disposal of the national
economy a supply of capital accumulated in the form of small
savings a n d deductions from income or wages-sums which are
often hardly noticeable and would otherwise be spent. I t thus
helps to lower t h e price of money, in other words the rate of
interest, and in this respect differs from individual forms of saving
only by affording a more stable method of investment, by being
less sensitive to sudden changes in the investment market, less
inclined to speculative investment or hasty realisation, and,
finally, by managing its investments more firmly, consistently

GENERAL CONDITIONS

49

and wisely, since it can invest its funds on rational lines laid
down in advance, paying due regard to the relative urgency of
the various needs ascertained and to the utility to the community
that their satisfaction presents.
Provided t h a t the conditions of safety, yield, etc., are satisfied,
the utility of the investment is thus a priori one of the crucial
tests to be applied in the choice of investments, whether t h a t
choice is determined in advance by a general investment policy
or in each particular case as funds become available. The result
of the test, however, will depend on whether emphasis is laid
on the economic or on the purely social utility of the investment.
On the one hand, it is clearly to the interest of the insurance
scheme t h a t the funds it accumulates should be used in conditions
that tend to better the health, education and standard of living
of the insured persons.
On the other hand, and especially in countries where the
available capital is far from reaching the amount t h a t could find
direct employment in turning the natural resources of the country
to account, it is important t h a t the sums saved in the form of
social insurance contributions should be placed as rapidly as
possible at the disposal of the national economy. The formation
of reserves thus leads tq^ the. creation of new means of production,
the increase of the national income, and therefore, ultimately, t o
the increase of the goods available for consumption. Furthermore,
the new burdens consequent on the introduction of the insurance scheme will be compensated by the increase of production
resulting from the investments made for the formation of reserves.
Before considering the relative importance of the social utility
and the economic utility of investments and the preference t h a t
should possibly be given to one or other of these two criteria,
it is necessary to determine in what way they can affect the choice
of investments without sacrificing the safety, yield, and, a t least
indirectly, the liquidity of the investments.
If the formation of insurance reserves is to have the effect
of placing a t the disposal of the national economy or of social
policy the capital needed for its development, the question arises
whether this contribution should always be made indirectly
by bringing new money to the market for public funds, mortgages,
etc., the only consideration to be taken into account in selecting
the investments being t h a t of obtaining the maximum safety,
yield, and possibly liquidity. The insurance authorities, by subscribing to State loans for instance, would thus merely be fulfilling
4

50

INVESTMENT OF SOCIAL INSURANCE FUNDS

a function for which savings should in any case be used, and
would thus set free for other investments funds derived from
various sources, private individuals, for example. Even though
they did not satisfy demands for capital t h a t they considered
sufficiently justified because presented by solvent debtors prepared
to pay a n adequate rate of interest, the needs underlying these
demands would still remain and have to be satisfied. The essential, not to say only, social or economic utility of insurance investments would •thus be that they set free savings which otherwise
would b e absorbed b y the needs met b y the investments.
If this argument is accepted, it means t h a t the compulsory
insurance scheme would supplement or take the place of small
individual savings, and its investments should for this reason
be of the same type as those suitable for the investment of such
savings.
Now from a very general point of view the investments of the
more well-to-do classes, of the population should be made in
industry and commerce in order to promote production and
distribution. I t is reasonable to consider t h a t business profits
should b e used to finance the development and transformation
of production or distribution. This is so to speak their natural
destiny ; b u t small savings, on the other hand, cannot be expected
to run t h e risks t h a t such financing involves. W h a t they need
are safe investments in which the maintenance of the value of the
capital and its vield is protected
Any consideration given to the relative utility of the investment from the economic or social point of view would only result
in relegating to the background the fundamental conditions of
safety, yield, and possibly liquidity t h a t the investments must
satisfy. Further, by hazarding the capital invested or by reducing
its possible yield, it would distort the kind of natural distribution
of risks and burdens t h a t should be established between the
various categories of owners and capital. I n any case it would
mean t h a t the insurance scheme would have to run risks t h a t it
is not its business to incur.
There would seem to be no answer to this objection if it were
a question of investing the insurance funds directly in those
branches of production which the insurance authorities consider
useful to develop, or of those authorities themselves administering under their own responsibility the preventive and curative
institutions or workers' dwellings they consider necessary for
improving the standard of health and life of the workers.

GENERAL CONDITIONS

51

The financial yield of curative institutions is always precarious,
except to the extent t h a t they can lead to a reduction in invalidity
or premature death. B u t the reduction depends only in p a r t on
the efforts of the insurance authorities — the last economic depression has shown that, in spite of all, the number of invalidity
pensions awarded is linked up with the state of the labour market
— and in any case the safety of the investments must not be
sacrificed to it.
Similarly, the direct investment of funds in industrial, agricultural or commercial undertakings usually entails risks t h a t must
be avoided in any rational administration of reserves.
B u t neither the administration by the insurance authorities
themselves of workers' dwellings or preventive and curative
institutions nor the direct investment of the funds in agricultural,
industrial or commercial undertakings is indispensable for the
application of the criteria of economic or social utility when
selecting investments.
These criteria will be taken into account in the first place in
order to determine the share of the funds which should be devoted
to the needs of provinces and other local authorities or the loans
of other public bodies, which, are specially intended for the financing
of schemes of evident utility to the insured group as a whole.
Here the social aspect of the utility of the investments no
doubt comes first, although in certain cases, such as t h a t of
public works for combating unemployment, for example, the
criterion of economic utility plays an important part.
Further, the criteria of social and economic utility come into
play more or less automatically owing to the necessity for the
insurance authorities to associate themselves with the economic
and financial policy of the public authorities. For general prosperity and social peace both depend on the success of t h a t policy.
Quite apart from the fact t h a t they are holders of capital, t h e
insurance authorities have a definite interest in the protection of the
currency, the maintenance of the rate of interest, and the economic
development of the country, since the situation of insured persons
is much influenced by what may happen in these various spheres.
The economic and monetary policy of the State is determined
with reference to the general interest, as conceived by the political
authorities ; and the compulsory insurance scheme may be required
and is in any case morally bound to associate itself: with t h a t
policy in its own interest. This is particularly so when t h e
scheme is subsidised by the public authorities.

52

INVESTMENT OF SOCIAL INSURANCE FUNDS

Here the economic and social aspects of the utility of investments generally coincide.
If t h e part played b y insurance investments in the national
economy is to have a more direct effect on the development of
this or t h a t branch of production, it is the duty of the public
authorities to make it possible to play that part without excessive
risk. They must therefore lay down the rules to be observed by
the insurance authorities when playing such a part, and must
guarantee the bodies (credit funds in agriculture, industry, handicrafts, etc.) responsible for using the accumulated funds or grant
these bodies sources of income (the yield of a monopoly, for instance) to enable them to issue secured loans.
Whether it is desirable and possible to make insurance investments on these lines and what direction should be given to the
investments will clearly depend on the amount of capital available
on the money market, the actual openings for productive investment, t h e probable yield of such investment in the near and
distant future, in other words on immediate circumstances and
future prospects which only the central political authority is in
a position to judge.
As already indicated, the value of allowing insurance capital
to be used for the development of production through the medium
of credit funds, for example, will be very much greater in a country
that is still in full process of development and whose supply of
capital is s c ^ c e compared with, the openings available Lo production t h a n in a country whose resources have already been
largely exploited and where the openings for productive investment are more or less risky owing to the relative abundance of
capital. N o definite rule, however, can be laid down in this matter.
Is it possible in these conditions to determine how much
attention should be paid to the economic and how much to the
social aspect of investments ?
I t should be remembered in the first place that, to the extent
that the insurance scheme can play a part in upholding the general
financial policy of the public authorities, it is as a rule impossible
to draw a distinction between the economic and the social aspects
of these investments.
The distinction can be made only if loans are granted for
clearly specified purposes or are of a special nature on account,
for instance, of the character of the borrower ; and even then,
- it is often impossible to say whether the economic or the social
utility of t h e investment predominates. The fact is t h a t the two

GENERAL CONDITIONS

53

forms of utility are quite distinct in extreme cases, but t h a t there
are often many intermediate stages passing from one extreme
to the other by almost imperceptible gradations. A typical example
of an economically useful investment is one designed to develop
a branch of production, while the establishment of almshouses
or dispensaries provides an example of a purely social investment.
An example of the intermediate type is the development of road
communications, which has both an economic and a social aspect.
While considerations of economic and social utility are, as
a rule, easy enough to distinguish when one looks a t immediate
results, they become almost identified when one looks a t distant
and lasting results of an investment policy. The development
of a branch of production cannot fail ultimately to affect the
population's standard of living, while an improvement in the
workers' health will react favourably on the productivity of
labour, the frequency of invalidity due to sickness, benefit charges,
etc.
Both economic and social utility can be estimated variously
according to the weight given respectively to the immediate
interests of one or other of the groups contributing to the resources
of the insurance scheme and to the interests in the more or less
distant future of the whole insurance scheme, as an" institution
specially concerned with certain forms of social improvement
such as housing, sanitation, the prevention of tuberculosis, etc.
The public authorities who represent the national community
may not agree either, with the employers or with the insured
persons, or with the insurance scheme as a whole, as to the expediency or urgency of making certain investments, and hence as
to their utility and the preference they deserve.
For instance, the insured persons may hold t h a t the most
urgent and socially useful purpose to which insurance funds can
be put is to promote a housing policy of which they themselves
would be the immediate beneficiaries. Agricultural employers
may ask t h a t insurance funds be invested in such a way as to
facilitate and develop agricultural credit. Commercial and industrial employers may consider t h a t loans to industry or investment in public works would be most useful. Again, the insurance
scheme may prefer to use its funds mainly to improve sanitation
and prevent disease, while the public authorities m a y consider
it more important to increase the production and the use-of electric
power, o r / t o extend and improve road communications, or to
grant credits to industry or agriculture, and so on. The insurance

54

INVESTMENT OF SOCIAL INSURANCE FUNDS

scheme may be reluctant to make certain investments, however
desirable from a social point of view, because the yield would
he too slight or too uncertain, while the public authorities may
take a different view. No rule for deciding between the merits
of the various claims could be laid down beforehand.
Nor does i t seem possible systematically to apply a rule that
insurance funds, should be invested in the areas where they have
been collected and in the interests of the groups t h a t have contributed to them. I t m a y be inexpedient to use the funds derived
from a certain area for the development of sanitation or thé promotion of town-planning or. credit schemes in t h a t area, when
the money might be more effectively employed in developing a
more backward area. The same observation applies to the investment of insurance funds" so as to promote the special interests
of the classes who have provided the money. Employers or insured
persons in an agricultural community may stand to gain, if not
individually a n d immediately, at any rate collectively and in
the long run, by the fact t h a t the funds they have contributed
are used to promote industrial production. The converse is also
true : industrial and commercial employers m a y stand to gain
by the development of farming.
Nevertheless, though the rule t h a t funds should systematically
be invested for t h e benefit of those who have contributed to them
does not seem applicable as a general policy, it cannot be rejected
absolutely. I t s application depends on circumstances. In actual
practice the relative utility of, and the priority to be given to,
this or t h a t investment among those permitted by law cannot
be determined b y reference to definite standards t h a t are applicable
in all cases. E v e r y investment ought certainly to satisfy the
essential requirements as to yield, safety, and liquidity ; once
these conditions have been fulfilled, however, the authority
responsible for investment must decide what importance should
be attached to economic or social utility according to the particular circumstances prevailing.
However, the Committee of
Experts which drew up the questionnaire for the written consultation considered t h a t it would be difficult for the social or economic
utility of investments to be judged irrespective of the need of
co-ordinating t h e investment policy of the insurance scheme
with the general economic and financial policy of the public
authorities. The social or economic uses to which insurance
reserves should be put should follow the principles indicated by
those authorities.

GENERAL CONDITIONS

55

Such co-ordination obviously implies t h a t the insurance
schemes should contribute their part to the action of the public
authorities in the social, economic or financial spheres ; b u t i t
is surely a necessary counterpart of such a contribution t h a t t h e
authorities should be bound to guarantee a maximum of safety,
yield, and possibly liquidity for the social or economic investments for which they require the assistance of the insurance
scheme.
Moreover, although the two aspects of the utility of investments — social, on the one hand, and economic, on the other —
often coincide, they do not always do so ; and to the extent t h a t
they are distinct, the question arises whether social investments
should be given the preference or whether, on the contrary, they
should compete with economic investments, since the importance
to be attached to the one or the other depends above all on t h e
balance to be maintained between economic and social progress.
*
*

*

The persons consulted were asked to give their opinion more
particularly on the following points :
••-.-....
(1) the principle of making investments for a social or economic
purpose and the conditions under which such investments
should be made ;
(2) the criteria of social and economic utility ;
(3) the preference to he given to investments of a social character.
Analysis of Replies
1. Principle of making Investments for a Social or Economic
Purpose ; Conditions under ' which such Investments should be Made
Only a few of the persons consulted questioned the advisability
of inserting in investment rules a provision to the effect that when
investments are selected consideration should be given to their social
and economic utility. Even so, their doubts related only to the application of these criteria when taken in their widest sense. For instance,
three replies held that in selecting investments no account should be
taken of their general interest to the national community as a whole,
but that weight should be given to considerations of social utility in
the narrow sense of directly serving the interests of the insured community as a group.
One of these replies expressed the view that if the rules prescribe
that when the investments are selected their economic utility must
be considered, and if they- make the selection dependent upon the
financial policy of the public authorities, the impression may he given
that in order to further its economic policy the State can do what it
likes with the assets of social insurance institutions.

56

INVESTMENT OF SOCIAL INSURANCE FUNDS

Another of these replies, on the contrary, argued that it is for the
public authorities and not for the social insurance authorities to decide
whether a particular sphere of economic development shall be encouraged by the allocation of funds and the choice of investments.
Finally, according to the third reply, if economic or social utility
in the widest sense' of the term is to determine investment policy, this
would in practice mean placing the insurance funds at the disposal
of the public authorities, in point of fact of the State. In such a
situation the advantages of keeping the administration of insurance
funds separate from that of State funds are lost, without the offsetting
gain of having responsibility assumed by the public authorities, as it
in fact is when the authorities themselves administer the insurance
scheme.
An important qualification was attached to this reply, however,
for it admitted that under present conditions it is inevitable that the
utility of the investments for the national community should be considered. The problem thus becomes one of defining utility in such a
way as to safeguard the interests of the insured persons, and the most
effective safeguard in this respect is recognition by the Government
that, where it dictates that the economic interests of the country
shall be given first consideration in the investments of social insurance
institutions, it is under at least a moral obligation, to protect these
institutions from the possibility of resulting loss.
All the other replies (21 out of 24) agreed that in the selection of
investments their social and economic utility should be considered.
Three of them briefly set forth the following points. In the first
place it is to the obvious interest of insurance institutions to improve
the standard of living and the health of their members. Secondly, in
order to be effective, the accumulation system of financing social
insurance presupposes an increase of the national income, which has
to furnish the sums necessary for the service of investments. But
concern for the interests — whether mainly economic or mainly social —
of the national riommimity should never be allowed to iead to sacrifice
of the essential financial interests of the insured persons.
Five of the replies added that social utility should not by itself
determine the choice of investments ; it must remain subordinate
to safety, yield, and, where necessary, liquidity. Whereas a general
insurance scheme with compulsory membership of a given fund need
not, in certain circumstances, insist so strongly on the requirements
of yield and liquidity, in an insurance institution which cannot rely
with certainty on the renewal of its membership strict observance of
those requirements is as essential as that of safety.
One of the replies maintained that yield must necessarily take
precedence of social or economic utility, even when the latter is adduced
as a ground for investing in a Government issue.
Nevertheless, many of the replies added that in judging the economic
or social utility of investments, account should be taken of the financial
policy of the State;
Three of them indicated how this should be done. If the social
utility of the investments and their utility for the economic interests
of the country are dependent on the general social policy of the State,
the authorities which have to co-ordinate that policy and which thereby
impose an inevitable obligation on the public authorities, may collaborate
with the social insurance institutions in an advisory capacity, but
without impeding their freedom to invest within the limits imposed by

GENERAL CONDITIONS

57

investment rules whose essential purpose is to serve the economic and
financial interests of the insurance scheme.
The necessity of taking account of the general financial policy of
the State because insurance institutions cannot disregard the trend
of that policy, even if they need not follow it, was stressed in one reply.
The utility of investments for the economic interests of the State
should always be judged in relation to the policy of the State, so that
the furtherance of its economic development may be systematically
pursued with due regard to its economic structure. Accordingly, the
consideration given to economic or social utility should always be
consonant with the general financial policy of the State. On the other
hand, ifc is hardly for the insurance institutions themselves to develop
industrial production directly, whether by the purchase of ordinary
shares or stock or of debentures, or by loans to commerce or industry,
for these various forms of investment do not present the degree of
safety required of trustee investments. Insurance institutions should
not make direct loans except for the industrial activities of local
authorities (for instance, the siipply of electricity or gas), where the
borrower is the local authority itself, which has special financial resources
and the power of imposing taxes. Otherwise social insurance institutions
can only exert an indirect influence on production by making loans
to public financial institutions or by acquiring trustee securities (e.g.
of credit funds guaranteed by a local authority).
One expert, however, while granting that the most desirable form
of investment would be one which reinforced the economic basis of
the insurance scheme, doubted whether any account should be taken
of the financial policy of the State. This policy is not the concern of
-social insurance authorities, and if it leads to a restriction of rights or
activities, it will not be only the administration of insurance funds
which will be affected ; the public authorities have statutory means
of their own to achieve their ends. It would be superfluous, and also
harmful to the special interests of insured persons, if other bodies than ,
the political authorities were to assume the responsibility of pursuing
aims which are the peculiar domain of those authorities. This is
particularly the case in the limited sphere of the administration of
insurance assets.
2. Criteria of Social Utility
A single reply asserted that the extent to which investments serve
the interests of the national community or of insured persons as a group
cannot be used as a criterion for determining their social utility, since
it is impossible to conceive of a way of investing which would benefit
the whole of either of the above-mentioned communities. Experience
shows that, whatever the investments, the interests served in each
case are those of a special district or a special group of persons.
The fact that an investment serves the interests of a limited
circle of persons only is not sufficient reason, however, for rejecting
it ; but this should not be allowed to be the predominant consideration.
Apart from this reply, which allowed that in selecting investments
the criterion of social utility to be adopted can be based on the degree
to which an investment serves the interests of part of the insured
community or of part of the national community, the opinions given
can be divided'into three groups, according to the .persons whose interests
they held should be served.
Five replies stated that the essential criterion of social utility is
the interest of the investment to the national community.

58

INVESTMENT OF SOCIAL INSURANCE FUNDS

The eight replies in the second group did not take up a hard and
fast position as to the sphere and the nature of the interests which
investments should serve in order to be regarded as of real social utility.
They agreed that one can accept as a criterion of social utility the fact
that the investment has a particularly favourable effect on the position
of the insured community and the national community, without
specifying to which community most regard should be had. In several
of these replies, however, investments which clearly benefit the insured
community — for instance, in workers' housing — were given as examples
of investments whose social utility is undoubted.
The third and largest group of replies (eleven) for the most part
merely stated that social utility should be judged by the benefit to
be derived from the investments, in the first place by the insured community, and only in the second place by the national community.
One of these replies gave as a reason for considering only the interests
of insured persons the fact that the needs which social insurance supplies represent an essential element in the life- of the nation. The funds
available to meet these needs never exceed immediate necessities, and
accordingly the aim of an investment policy should never be other
than the furtherance of the interests of the insured persons themselves.
Another reply asserted that where the membership of a fund is
restricted to certain classes of insured persons, preference should be
given to investments which favour those persons' interests.
3. Criteria of Economic Utility
The great majority of the replies which defined the criteria of the
utility of investments for the economic interests of the country approved
the various elements suggested for this purpose in the questionnaire,
that is to say, the contribution the insurance holdings make :
to a balanced distribution of industrial and agricultural
production in different parts of the country (given that insurance
funds should contribute to the development of the natural
resources and the complementary production of each region
wherever such contribution is most required) ;
to the development of means of transport, especially roads
and waterways in regions least favoured in this respect ;
to a better geographical distribution of investments in real
estate and of housing activity.
Some of the persons consulted pointed out, however, that the relative
importance of each element must vary considerably with the country,
its degree of economic development, and the means available for ensuring
an even distribution of production. In some cases it may be advisable
to pay special attention to means of transport, in others to the production of motive power ; in some places the development of complementary means of production should be encouraged by means of export
credits, while in others loans to small industries and handicrafts may
be found more advisable.
Even if only one aspect of economic utility is taken, e.g. the promotion of agricultural production, the means to be used will differ
largely with the geographical and social structure of the countries
and areas concerned. In one case it may be a question of adapting or
clearing land for extensive or intensive cultivation, in another of granting loans to individuals for improving their agricultural equipment,
etc.

59

GENEBAI CONDITIONS

One rule, however, was regarded as essential by five of the persons
consulted, namely, that the application of the criteria of economic
utility should lead to a rational geographical distribution of investments which should eliminate or reduce as much as possible the differences in the degree of economic development or in the standard of
living which may exist between one area and another of the same
country.
It is to be desired that social insurance institutions should contribute
to the improvement in the conditions of life of the national community
by subscribing to loans whose object is to further the economic interests
of the country, for instance, by developing the natural resources of
each area or by improving means of transport in areas less favoured
in this respect, or by trying to ensure a more even geographical distribution of investments in real estate and of housing activity.
The investments that procure an immediate advantage to a given
district may sometimes be of real interest to the national community.
Whether it is entirely advisable to grant financial assistance to a particular town or province really depends, however, on whether the national
community itself reaps the maximum advantage from that assistance.
The investment of social insurance funds should not systematically
favour any particular part of the country if these funds could be more
usefully employed in some other part.
In the opinion of another expert the geographical distribution of
social insurance investments should pay due regard to the special
needs of various areas. In principle funds should be invested in the
different parts of the country in proportion to the amount of the contributions subscribed from each, but on occasion the interest of the State
demands a departure from this principle in favour of areas less favoured
from the economic point of view, in order that the country may be
developed as one co-ordinated whole.
Criteria of economic utility therefore cannot, be applied by rule
of thumb. As one reply expressed ;t, the lines of a decision can be
determined only by examining carefully on the one hand the extent
and urgency of needs, and on the other what means exist of satisfying
those needs. One cannot in advance produce, as it were, a master-key
to problems which are in every case difficult and complex.
Finally, some of the persons consulted added that the result of
applying criteria of economic utility when selecting investments should
always be to improve the standard of living and to prevent unemployment.
4. Preference, far Investments of Social Utility
i

The experts were asked whether it was desirable to lay down as a
general rule for the guidance of the body responsible for selecting
investments that, wherever the conditions are satisfied as to safety,
yield, and, where required, liquidity, preference should be given to
investments which exercise an especially favourable effect on the
situation of the insured community and the national community, e.g.
relating to campaign against disease, improvement of sanitary and
housing conditions, promotion of schemes of urban improvement,
provision of means of communication, etc.In the opinion of five persons who answered this question, preference
should be given to investments whose social utility is clear because
they benefit both the insured community and the national community.

60

INVESTMENT OE SOCIAL INSURANCE FUNDS

Six replies expressed the view that preference should be given to the
investments which clearly serve the interests of the insured community,
while three replies put the interests of the national community first.
Finally, nine of the persons consulted answered that no rule of
preference based on the social utility of investments can be laid down.
Seven of these persons gave their reasons. Thus two of them held that
preference should be given to the economic aspect rather than to the
social aspect of the utility of the investment. Two others held that
economic utility should have the same weight as social utility, and one
expressed the opinion that investments which have a specifically social
purpose cannot as a rule be classed among the safest and in any'event
are the least remunerative. Finally, two of the persons consulted
pointed out that the circumstances vary so much from case to case
that no rule of preference can be laid down. The bodies responsible
for selecting investments should decide each case according to its
merits, giving favourable consideration to investments which further
the interests of the insured community and the national community.
Discussion and Conclusions
'
The Scheme of Discussion proposed by the Office related to :
(a) the principle of using reserves for social and economic purposes ;
(b) special guarantees for investments of a social or economic
character ;
(c) the criterion of social utility ;
(d) the criterion of economic utility.
(a) Use of Reserves for Social or Economic Purposes
According to the Office text :
The insurance scheme should place as quickly as possible
at the disposal of the national economy the sums saved on
contributions so long as the basic conditions of safety, yield,
and, if need be, liquidity, are observed.
Mr. DYBOSKI declared that such a statement appeared to him
altogether too mandatory, especially in respect of the great emphasis
it laid on the rapidity with which the insurance scheme should place
the sums saved on contributions at the disposal of the national economy.
He accordingly asked the Committee to state merely that :
The insurance scheme should, by means of its investments,
lend assistance to the national economy, so long as the basic
conditions of safety, yield, and, if need be, liquidity, are observed.
Mr. BISQIJEEET agreed with this view and stated that in these
circumstances he would not insist on the discussion of an amendment
which he had put forward on the same point.
The Committee thereupon adopted the following text :
" The insurance scheme should by means of its investments
lend assistance to the national economy, so long as the basic
conditions of safety, yield, and, if need be, liquidity, are observed.
By improving health conditions and housing and by facilitating
directly or indirectly the creation of new means of production,
the financial help of the insurance funds co-ordinated with the
economic and financial policy of the public authorities can make
a substantial contribution to the improvement in the standard
of living and to the prevention of unemployment. "

GENEBAL CONDITIONS

61

(b) Special Guarantees for Investments of a Social or
Economic Character
The Office text was as follows :
In respect of those investments of a social or economic
character in which the insurance scheme is required to participate,
the public authorities can be asked to guarantee the highest
possible degree of safety, yield, and, if need be, of liquidity.
To bodies such as agricultural, industrial or craft credit associations which are entrusted with distributing among borrowers
funds placed at their disposal by the insurance scheme, the
public authorities may (or even should) give their guarantee
or even assure a source of income (for instance, from monopolies) which will enable them to issue hypothecated loans.
The Committee considered first an amendment by Mr. MACÊDO
to the effect that it was desirable that the public authorities
should guarantee to investments of a social or economic character the
maximum of safety, yield, and, if need be, liquidity.
As this amendment was adopted, the Chairman pointed out that
there was no longer any reason for the alternative in the Office text :
"public authorities may (or even should) give their guarantee..."
and that the material words should be deleted.
Mrs. DULLES agreed and stated that inasmuch as the Committee
had accepted Mr. MACÊDO SANTOS'S amendment, it would be logical
to express the duty of the public authorities to give the required guarantee before setting out the general form of that guarantee.
The Committee decided to amend the text on the lines suggested
by Mrs. DULLES, and then proceeded to consider an amendment put
forward by Mr. BISQTJERET, which emphasised that :
Investments of a social or economic character are not realisable
or easily realisable and accordingly it is expedient to require
of the public authorities which seek the aid of the insurance
scheme a guarantee for such investments even where they
appear to offer a maximum of safety, yield, and in some cases,
liquidity.
SANTOS

The CHAIRMAN pointed out that this amendment went to the root
of the matter and was outside the scope of the propositions already
adopted concerning the guarantee to be required of the public authorities.
The representative of the Office asked the Committee to remember
that it would certainly be difficult to state that investments of a social
or economic character were not realisable or easily realisable. This
might be true in certain circumstances but it would be untrue to state
it as a general proposition. Por instance, the loans of land mortgage
banks obviously were of a character both social and economic and
were yet at the same time readily realisable. As much might be said
of many municipal loans.
• In order to- make the Office text clearer it would be desirable to
state that the guarantee of the public authorities could be given either
directly to the insurance scheme or to the bodies responsible for distributing investments among borrowers.

62

INVESTMENT OF SOCIAL INSURANCE FUNDS

T h e Committee agreed with this view a n d t h e t e x t was adopted
in t h e following form :
I n respect of those investments of a social or economic
character in which the insurance scheme is required t o participate,
it is desirable t h a t t h e public authorities should guarantee the
highest possible degree of safety, yield, and, if need be, of liquidity.
The public authorities should either give their guarantee
directly t o t h e insurance scheme or t o t h e bodies entrusted with
distributing among borrowers funds placed a t their disposal
b y t h e insurance scheme, such as agricultural, industrial or
craft credit associations, or assure t o such bodies a source of
income (for instance, from monopolies) which will enable them
to issue hypothecated loans.
(c) Criterion of Social

Utility

The Office text was as follows :
A s a criterion of social utility one can accept t h e importance
of t h e effect exercised on t h e health situation, t h e cultural level
and, i n a more general way, on t h e living conditions of the
insured community in t h e first place a n d of t h e national comm u n i t y in t h e second place : t h e campaign against disease, the
improvement in health a n d housing conditions, town planning,
t h e establishment of schools, etc.
Mr.

M A C Ê D O SANTOS

proposed

to

reverse

the

order

of giving

consideration to t h e interests of t h e insured community a n d t o those
of t h e national community, b u t t h e Committee did n o t accept this
proposal o n t h e ground t h a t it h a d already expressed i t s views as
to t h e priority t o be given a n d could n o t go back on its decision.
The Office text was accordingly adopted without amendment.
(d) Criterion of Economic

Utility

The Office text was as follows :
As criterion of t h e utility of t h e investment for t h e national
economy one can accept t h e contribution made b y t h e investments of the insurance scheme towards :
(a) a harmonious distribution of industrial a n d agricultural
production in t h e various parts of t h e country, t h e
insurance funds being expected to assist in t h e development of natural resources a n d of production complementary thereto in areas where t h e necessity is greatest ;
(b) t h e development of means of transport, in particular
of roads a n d waterways in areas least favoured in this
respect ;
(c) t h e better geographical distribution of investments
in real estate a n d in housing.
Mrs. D U L L E S asked t h a t it should be made clear t h a t t h e list was
not exclusive b u t given only b y w a y of example, b y adding before i t
the words " for instance " or else a t t h e end " etc. " .
The suggestion t o a d d " for instance " was accepted.
Mr. G É B A B D emphasised t h e need of proceeding with t h e greatest
caution in regard t o t h e application of economic criteria t o t h e selection
of investments for insurance funds. ' I t could fairly be said t h a t it was
extremely difficult for a n y Government, however enlightened, t o t a k e

GENERAL CONDITIONS

63

decisions on industrial and commercial matters, etc. One could argue
ad infinitum about the advantages and disadvantages of what was
now called planned economy or directed economy, hut from the
point of view of the general economy there was no gainsaying that
it was a very difficult problem. Having stressed these points, Mr.
GÉRARD stated that so far as he personally was concerned he agreed with
the text put forward, and without proposing any amendment he suggested that there would be need for caution whenever a State made
use of the possibilities mentioned in the text under discussion.
The Committee took note of this statement and decided that it
should be mentioned in the Record.
Mr. DA CÁMARA asked whether the Office text was not incompatible
with a regional distribution of investments, taking account of their
geographical origin. It was absolutely necessary, especially in new
countries, to take account both of the geographical origin of the funds
and of the relative importance of the needs of different areas.
The Office representative explained that the text was intended to
provide for the distribution of investments, taking into account first of
all local funds, but without excluding systematically investments
made with reference to the neighbourhood from which the funds were
obtained. No rigid and universally applicable policy could be laid
down, and the proper solution would appear to be a compromise, which
the proposed text obviously allowed.
Mr. DA CÁMARA declared that in these circumstances he did not
propose to put forward an amendment, and the text was finally adopted
in the form suggested by the Office, with the addition of the words
" for instance " in order to emphasise that the list of criteria of social
and economic Utility was not intended to be exclusive.

ESTABLISHMENT OF A PERIODICAL INVESTMENT SCHEME

The question of establishing a periodical scheme for the systematic guidance of investment policy especially as regards the
social or economic utility of investments was raised in the Questionnaire in connection with, the question of the bodies responsible
for selecting investments.
The experts were asked to give their opinion on the value
of making investments in accordance with a periodical scheme
drawn up beforehand and taking account of the general conditions
to be satisfied by investments.
Analysis of Replies
The majority of the replies approved of the idea of a periodical
scheme drawn up beforehand. Several of the persons consulted, however, considered that such a scheme was of no value.
The negative replies pointed out that when the body responsible
for selecting investments is so composed as to be fully equipped for
the performance of its duty, there will be no object in drawing up" a
rigid scheme in advance, for this would limit the freedom of action of
the responsible body and prevent it from adjusting its selection to the

64

INVESTMENT OF SOCIAL INSTJBANCE FUNDS

perpetually changing conditions on the money market and to national
economic needs. The existence of such a pre-determined scheme would
deprive the body in question of the flexibility essential to the due
performance of its task. Some of these replies stated that in periods
of economic and monetary instability a rigid scheme can involve nothing
hut drawbacks.
The replies which were favourable to the idea of a pre-determined
scheme, on the other hand, pointed out that in financial policy, as in
any other field calling for a firm and unwavering line of conduct, the
first condition to success is methodical pursuit of the chosen object,
and that a good investment policy is not possible unless the responsible
body is obliged to keep to a formally approved scheme providing every
•guarantee that the operations carried through will lead to a judicious
selection of insurance investments.
A formal scheme has the further advantage of facilitating preventive
supervision by the competent authority over the financial operations
of the body responsible for the investments. Before the scheme can
be carried through, it should be transmitted to the supervisory authorities or should even require their approval. These authorities can then
intervene in good time and oppose any investment which they consider
either contrary to the regulations or merely inadvisable from the
standard of a wise investment policy.
As regards the period which the investment. scheme should cover,
the views expressed differed widely. The same remark' applies to the
composition of the body which would be responsible for preparing and
revising the/periodical scheme.
The consultation clearly brought out the value of the idea of a,
periodical scheme drawn up beforehand. Such a scheme will set out
the broad lines which investment operations should follow during the
period of the scheme, and its application will facilitate the observance
of a co-ordinated financial policy, since the extent to which the various
existing needs can and should be satisfied will be laid down in advance
and all the funds available for long-term investment will be put to
immediate use.
Discussion and Conclusions
The text submitted by the Office was as follows :
Whatever may be the body responsible for selecting investments, it is advisable to draw up a periodical scheme setting
out the broad lines which investment operations should follow
during the period covered by the scheme.
Such a scheme enables the carrying out of a co-ordinated
investment policy since the extent to which the various requirements could and should be satisfied can be fixed in advance
and all funds available for long-term investment can be put to
immediate use.
Mr. DYBOSKI suggested that this text should be amended with
regard to the order in which this point should appear in the Conclusions
and with regard to its actual tenor.
The discussion turned in the main on the length of the interval
between revisions of the scheme.
Mr. DA CAMAUA pointed out that in some countries social insurance
schemes were still in process of development. Some bodies had already
drawn up a plan of investment when the insurance schemes were

GENERAL CONDITIONS

65

extended ; large social insurance institutions were created, financed
on the accumulation system, which had considerable sums to invest,
more particularly in public funds. These investments in fixed-yield
securities made their market value rise temporarily, but as soon as
purchases ceased the market value fell, with a resulting substantial
loss to all social insurance institutions. It was therefore inadvisable
to lay down very rigid investment principles for countries where social
insurance schemes were still being actively developed.
It was too often necessary to modify the general lines of an investment scheme, sometimes even after a few months, and one could not
therefore advise the laying down of a fixed period within which the
scheme should be revised. A periodical scheme should be sufficiently
elastic to lend itself to the amendments which might be necessary in
consequence of economic events that sometimes were very sudden.
Mr. HENRY and Mr. GABCIA OLDINI agreed with these remarks
and Mr. DYBOSKI stated that they seemed to him to be in harmony
with the spirit of his amendment.
The Committee then adopted the following text concerning the
investment scheme, as suggested bj' Mr. DYBOSKI but taking into
account also the elasticity recommended in the course of the discussion :
It is advisable that the body responsible for selecting investments should draw up a periodical scheme setting out the broad
lines which investment operations should follow during the
period covered by the scheme.
It is also advisable that this scheme should include a table,
to be revised if circumstances require, determining in particular
- what proportions of the Jiolding should be invested in fixedyield and variable-yield investments respectively."
Such a scheme enables the carrying out of a co-ordinated
investment policy, since the extent to which the various requirements could and should be satisfied could be fixed in advance
and all funds available for long-term investment can be put
to immediate use.

CHAPTER I I I

PERMISSIBLE CLASSES OF INVESTMENTS

Social insurance schemes are designed to guarantee a minimum
subsistence, or at least to make a substantial contribution towards
providing it. Thus, while the benefits may be small, they may
not, without failing in their purpose, fall substantially in purchasing power below the level t h a t the insured persons have
been promised.
If reserves are formed to secure benefits adjusted to the
purchasing power of money, the operation takes considerable
time ; consequently, if the funds constituting the reserves are
invested in fixed-yield securities, two conditions must be fulfilled :
there must be a minimum of economic stability, and the purchasing
power of money must be maintained over a very long period.
Further, t h e actuarial reserves must yield a t least the rate
of interest on which the actuarial estimates were calculated.
An insurance scheme has no means of guarding against a natural
fall in the r a t e of interest and the conversions thereby entailed.
but can it in some degree avoid forced reductions in the yield
of its capital (compulsory conversions, for instance) ? And when
stable purchasing power cannot be counted on either now or for
a very long period, how far can the insurance institution make
its reserves independent of fluctuations in the purchasing power
of money, or rather adjust the capital value and yield of the
reserves to those fluctuations 1
*

*

*

The questionnaire drawn up a t the end of 1937 by the first
meeting of experts asked the persons consulted to state what,
in their opinion, were the reasons for and against including the
principal classes of investments in the holding of the insurance
scheme. They were also asked to give the reasons why some
of these investments should necessarily be included in the holding,
and the proportions, if any, to be fixed between the various classes
of investments held.

PERMISSIBLE CLASSES OF INVESTMENTS

67

For this purpose the different classes of investments were
divided into two main groups : fa) fixed-yield investments,
made on the assumption t h a t the money value of goods and
services will remain constant, so t h a t the yield of the funds
invested will be uniform and it will always be possible to realise
the capital ; (b) investments whose yield varies with fluctuations
in the purchasing power of money.
F o r each of the classes of investment whose inclusion in t h e
holding was the subject either of a question to the experts or
of a suggestion made by them, an account is given below of the
following points :
1. The rules concerning permission to make the investment
contained in a few particularly typical or important
insurance schemes, and the main arguments for and against
such permission ;
• 2. An analysis of the replies of the persons consulted ;
3. The conclusions adopted.
The account of the rules concerning the permissible classes
of investments covers the following insurance schemes :
Argentina
Invalidity, old-age and widows' and orphans' insurance for staffs of
private undertakings running public services.
Belgium
Old-age and widows' and orphans' insurance for manual workers ;
invalidity, old-age and widows' and orphans' insurance for (1) salaried
employees, and (2) miners.
Brazil
Invalidity, old-age and widows' and orphans' insurance for persons
employed in commerce.
Chile
Sickness, invalidity and old-age insurance for manual workers.
Czecho-Slovakia
Invalidity, old-age and widows' and orphans' insurance for (1) manual
workers, and (2) salaried employees — scheme still in operation in Bohemia
and Moravia.
France
>
Sickness, maternity, invalidity, old-age and widows' and orphans'
insurance for employed persons.
Germany
Accident and syskness insurance for employed persons ; invalidity,
old-age and widows' and orphans' insurance for (1) manual workers,
and (2) salaried employees.
"
'
Great Britain
Sickness and invalidity insurance for employed persons.

68

INVESTMENT O í SOCIAL INSURANCE

FUNDS

Italy ,
Insurance schemes administered by the Fascist National^Social Welfare
Institute, including invalidity and old-age insurance and tuberculosis
insurance for employed persons, and invalidity, old-age and widows' and
orphans' insurance for seamen.
Netherlands
Insurance schemes administered by the State Insurance Bank : accident
insurance a n d invalidity, old-age a n d widows' and orphans' insurance
for employed persons.
Poland
Accident, sickness, invalidity, old-age and widows' and orphans'
insurance for manual workers.
Sweden
National invalidity and old-age insurance.
United States
Compulsory old-age insurance for employed persons.

A. FIXED-YIELD

INVESTMENTS

The persons consulted were asked to state whether they
considered that all or certain of the following should be regarded
by social insurance institutions as possible investments for their
funds :
1. Government funds ;
2. Government-guaranteed funds ;
3. Loans (quoted on the stock exchange) of regional or local
authorities empowered to levy rates or taxes ;
4. Loans guaranteed by the authorities indicated in 3 ;
5. Direct loans or loans through land mortgage banks to
provinces, counties, or other local authorities ;
6. Loans of public corporations (Chambers of Commerce,
social insurance institutions) other than the regional
authorities indicated in 3 ;
7. Loans of land mortgage banks or building societies ;
8. Mortgages ;
9. Commercial or industrial debentures ;
10. Other fixed-yield securities.
GOVERNMENT F U N D S AND GOVEBNMENT-GUABANTEED F U N D S

Rules concerning Permission to Invest
Argentina
°
The available funds must be invested in the National Debt or Government-guaranteed securities, subject to the power of the management of
the insurance scheme to invest up t o 50 per cent, of its funds in other
securities.

PERMISSIBLE CLASSES OF INVESTMENTS

69

Belgium
Social insurance funds may be invested in Government or Governmentguaranteed securities, irrespective of any limit or authorisation.
Brazil
The available funds must be invested primarily in the obligations
of the Federal internal or external debt.
Chile
Government stock and similar securities (e.g. State railway loans)
represented about 105 million pesos or 55 per cent, of the total holdings
in negotiable securities, or onè-third of the total investments, at 30 J u n e
1937.
Czechoslovakia
At least 20 per cent, of the moneys of the insurance institutions must
be invested in Government funds. I n addition, the Minister of Social
Welfare, in agreement with the Minister of Finance, must decide in what
other securities at least a further 10 per cent, of the total assets are to
be invested.
The two central social insurance institutions are required to invest
with the Czecho-Slovak Re-discount Institute one-tenth of the annual
increase in their funds available for long-term investment, until the
proportion of these funds invested with the Institute reaches 5 per cent.
France
As in Belgium.
Germany
Insurance assets must be invested as to not less than 50 per cent, in
bonds of the National Government or a State or of a credit institution
belonging to the National Government or a State, or-in loans -entered in
the public debt register of the National Government or of a State. The
obligation to invest one-half of the assets in bonds of this kind applies
to the net value of the insurance assets.
In addition, the funds may be invested in bonds the interest on which
is guaranteed by the National Government or a State or a credit institution
belonging to the National Government or a State.
Great Britain
As in Belgium.
Italy
As in Belgium.
Netherlands
Insurance funds may always, and in certain cases must, be invested
at least in part in Government securities. There is no limitation of their
investment in Government-guaranteed securities.
In the invalidity, old-age and widows' and orphans' insurance scheme
for employed persons, investment in Government funds is always compulsory
for that part of the sums available for investment which is derived from
the State subsidy.
I n addition, the Government may require the insurance institution
to subscribe for State loans, whatever.the rate of interest, up to not more
than one-half of the available assets not derived from the State subsidy.
Lastly, in the case of issues of loans for the conversion of the consolidated
debt, subscription is compulsory for all insurance schemes whose funds
are administered by the State Insurance Bank ; the obligation applies
to all the convertible bonds held by these schemes.
Poland
As in Belgium.

70

INVESTMENT OF SOCIAL INSTJBANCB FUNDS

Sweden
At least one-sixth of the insurance funds available for investment
must be placed in securities issued or guaranteed by the State.
United States
The Federal Social Security Act (Old-Age Insurance) bf 14 August 1935
provides t h a t t h e investment of the funds composing the actuarial reserves
of the insurance scheme may be made only in interest-bearing obligations
of the United States or in obligations guaranteed as to both principal and
interest by the United States. For this purpose such obligations may
be acquired on original issue at par or by purchase of outstanding obligations
at the market price.
The Act authorises the issue at par of special obligations exclusively
to the Old-Àge Reserve Account, bearing interest at the rate of 3 per cent.
per annum. Obligations other than such special obligations may be
acquired for the Account only on such terms as to provide an investment
yield of not less than 3 per cent, per annum.

*

*

*

As may be seen from the above account, the investment rules
in operation make no difference, as regards investment in Government funds, between the purchase of perpetual bonds and that
of redeemable bonds.
It is open to question, however, whether the purchase of
redeemable bonds should not be preferred to that of perpetual
bonds owing to the advantages offered by the former. An attempt
will therefore be made to indicate the nature and extent of these
advantages from the point of view of the insurance scheme.
Perpetual Bonds
A Government which issues perpetual bonds undertakes to
pay each year to the bondholders a fixed interest, the rate of
interest having been fixed at the date of issue in accordance
with the relative cheapness of money and the credit enjoyed by
the borrowing Government at the time.
In no case may the lender demand the repayment of his capital,
but the borrower, that is to say the Government, may, if political
and economic circumstances allow, at its discretion offer the
holders of these bonds a conversion reducing the annual rate
of interest from, say, 6 per cent, to 4.50 or 4 per cent, according
to the state of the market.
In such a case, the holder is in principle entirely free to accept
or not as he chooses, and if he refuses, his bonds are redeemed
at par. The possibility of conversion is a serious drawback
attaching to bonds. If they are bought above par, the risk is
all the greater in that once conversion has taken place it is final,

PERMISSIBLE CLASSES OF INVESTMENTS

71

and in t h a t any loss of capital due to a further fall in the r a t e
of the new bonds will always have to be borne by the bondholder.
The risk is particularly great if there is a n y reason to believe
that the Government will decide not on an optional but on a
forced conversion, whether in order to consolidate its floating
debt or to lighten the interest charges on its short-term or
long-term debt.
Redeemable

Bonds

Bonds are called redeemable when the capital must be repaid
to the bondholder within a time limit fixed in advance. The
redemption is very often effected b y the drawing of lots, t h e
bonds whose numbers are drawn being redeemed a t par.
Sometimes the redemption takes another and less favourable
form, for the borrowing Government m a y stipulate when it issues
the loan t h a t redemption shall be either by the drawing of lots
a t par or by repurchase a t the market rate, whichever is the lower.
Finally, a fairly frequent form of redemption is t h a t of t h e
repurchase, in accordance with a redemption table, of a certain
number of bonds each year by individual application to the holders,
who are requested to make a tender under seal of the price a t
which they would agree to give up the bonds they hold. The
Government accepts tenders for the quantity of bonds to be
called in, beginning with those offering the cheapest rates.
Subsidiarily, the Government usually retains the right to
redeem the loan in advance after giving the specified notice,
and sometimes to redeem a t a more rapid rate.
The classic form of redemption, which is independent of t h e
method of choosing the bonds to be redeemed, is to devote to t h e
service of the loan a fixed annual sum, p a r t of which is reserved
for t h e payment of the stipulated interest, the rest being devoted
tö the repurchase or redemption of a certain number of bonds. The
amount devoted to redemption is increased each year by t h e
sum t h a t had hitherto been spent on the payment of interest
on bonds redeemed in previous years.
Advantages

of Redeemable Bonds as compared
with Perpetual Bonds

The advantages t o an insurance institution of purchasing
redeemable bonds as against subscribing for perpetual bonds
appear quite clear.

72

INVESTMENT OP SOCIAL INSURANCE FUNDS

If the r a t e of' interest falls, the holder of a perpetual bond
runs the risk of conversion should the fall be such as to bring
the bond below par, and this inevitably means a loss of capital
if t h e bond was purchased above par.
If the r a t e of interest rises, the market price of the perpetual
bond falls and this means a loss for the insured persons even
if the insurance institution is in no way compelled to sell its bonds.
The position is as though new generations of active members
of the insurance institution (contributing members) took the
place of the passive members (beneficiaries) and the bonds forming
the reserves had to be ceded to the former (be redeemed by them)
in order t o form the reserves serving as a counterpart for the
claims they are acquiring. The investment of the funds intended
to form the reserves of contributing members and to serve as a
counterpart for rights in course of acquisition would be effected
by a simple transfer of the securities, the sums placed a t the
disposal of t h e insurance institution in consequence of this transfer
being used to pay the insurance benefits. Now it is clear that
the transfer of securities to the contributing members (the
redemption by them of the reserves previously accumulated)
cannot take place without injuring them unless it is effected at
the current price a t which the transferred securities might be
bought. If there is a fall in price between the date of purchase
and the date of transfer — t h a t is to say, during the period when
the securities formed the reserve for insured persons who were
formerly contributing members and since became beneficiaries —
the transfer value is obviously lower than the value at which
the securities appear in the reserves. To the insurance institution
this constitutes a loss which it is essential to avoid.
The purchase of redeemable bonds means that this risk of
loss can to some extent be avoided. I n the first place, the
certainty of being able to recall the capital lent and of being
repaid a t a price agreed and a date fixed in advance means that,
the yield being equal, the price of redeemable bonds remains
above t h a t of perpetual bonds. Secondly, the spacing of the
certain or probable dates of redemption means that bonds quoted
below their purchase price need not be transferred to the contributing members of the institution.
With the redeemable bonds should be included State obligations
and Exchequer bills, which are always redeemable, and in the
case of bills usually within a short period.

PERMISSIBLE CLASSES OE INVESTMENTS

Analysis

73

of Replies

Only one reply raised an objection t o permitting the investment
of social insurance assets in Government funds and Governmentguaranteed funds, on the ground t h a t t h e yield of these securities is
comparatively low and t h a t they involve special risks of conversion.
Moreover, the investment of assets in Government funds would defeat
one of the objects of building u p reserves, which is so far as possible t o
avoid making the p a y m e n t of benefits depend on t h e insertion of a
yearly credit in the S t a t e budget and so to avoid establishing a
correlation between the trend of insurance expenses a n d of t h a t p a r t
of the expenses which is borne by the State. 1
The arguments used b y three of the persons consulted, who favoured
investment in Government funds, m e t this objection by referring t o t h e
preference to be given to redeemable bonds as compared with perpetual
bonds, ¡purchase of perpetual bonds being contemplated only as
subsidiary or exceptional.
One reply even suggested t h a t irredeemable securities should never
be considered for the investments of insurance funds.
Two replies pointed out t h a t in t h e interests both of the insurance
institutions and of the State itself, it would be better if investments
in Government funds were effected by the purchase of securities which
are freely quoted on the stock market rather t h a n b y t h e issue of direct
and forced loans on terms arbitrarily fixed by the public authorities.
When social insurance funds are freely invested on the stock m a r k e t ,
the credit of the State tends t o improve a n d rates of interest t o fall,
the Government being thereby directly encouraged to issue loans in
order to take advantage of cheap conditions. If, on the contrary,
insurance assets-are placed a t t h e f r e e .disposal, of the G P v e r n m e n t > it
is to be feared t h a t it will yield to the temptation of making use of its"
opportunities t o raise money cheaply and will issue loans a t rates of
interest which are substantially lower t h a n the normal rate. Such
a n arbitrary reduction in rates of interest does not merely reduce t h e
income from investments. I t s indirect consequences are just a s
unfortunate. Loans of this kind increase the liabilities of the Government, lower its credit, and help t o depreciate its securities q u o t e d
on the stock exchange. Such depreciation injures all creditors of t h e
Government, including insurance institutions.

- l The purchase of Government funds means in effect t h a t the collection
of part of the resources on which the insurance institution counts (interest
on and possible redemption of the said funds) will depend on the inclusion
of a credit in the State budget. But the fixing of this credit and even,
in the case of a secured debt, the constitution of the funds corresponding
to it are automatic. The position of the insurance institution with regard
to the public authorities is altogether different when it has a claim on t h e
Government represented by bonds, obligations, etc., the interest or
redemption on which m a y be demanded, a t a fixed date, and when it is
merely in receipt of an annual subsidy the amount and date of payment
of which are open to discussion.
Further, it is hardly conceivable that the service of the debt should
be more or less " guaranteed " or subject to dispute according as p a r t
of the debt is or is not held by public establishments such as social insurance
institutions. This is so even assuming t h a t a Government has little or
no public debt and sets up a social insurance scheme the reserves of which
are to be invested wholly or mainly in Government funds, while the interest
on these reserves is to be the main or even the sole factor in the debt

74

INVESTMENT OF SOCIAL INSURANCE EUNDS

Discussion

and

Conclusions

T h e Office h a d proposed the following text :
Government funds or Government-guaranteed funds are
particularly suitable for insurance investment by reason of the
u n d o u b t e d safety which t h e y present.
Main points to consider :
W h e t h e r preference ' should be given to securities quoted
on t h e stock exchange or to direct loans in which the legal
r i g h t s are not transferable and the terms of which are fixed by
t h e public authorities themselves.
W h e t h e r preference should be given t o redeemable or to
irredeemable securities.
Mr. L I N D N E R asked the Office whether the preference t o be given
to securities quoted on the stock exchange as against direct loans was
not too strongly emphasised, and whether it was really advisable to
apply this universally.
T h e Office representative stated t h a t the object of emphasising this
preference (in conformity with the results of the written consultation)
was particularly t o draw attention t o the disadvantages t h a t insurance
institutions might suffer if they allowed themselves — sometimes
unwillingly — t o be persuaded to grant loans on terms as to interest
and r e d e m p t i o n which accorded neither with their needs nor with the
condition of t h e money market. This did not mean t h a t in all
circumstances direct loans were not profitable and t h a t they should
be systematically avoided ; b u t in principle securities quoted on the
stock exchange appeared t o be preferable.
A s a result of these remarks, the Office text was adopted with the
deletion of the word " undoubted ", it being considered t h a t no
investment could be so described.

charge. I n such a case it is to be supposed that the Government, having
the satisfaction of not being required to have recourse to public credit
for meeting its own needs, will devote the funds placed at its disposal
by t h e formation of the reserves to schemes of economic or social utility,
and t h a t it will have no difficulty in providing for the service of a debt
limited to t h e reserves of the insurance scheme. I t may be added that
a t least p a r t of these reserves will have served to swell the national income.
As a m a t t e r of fact, although it cannot be rejected a priori, such a
hypothesis m u s t be regarded as largely academic.
If the investment of the insurance reserves in the public debt takes
place when t h e Government is not needing credit but already has to bear
the burden of a large debt, exceeding the total amount of the reserves
when they have reached their permanent level, the insurance institution
merely takes the place of other creditors of the State, whether it buys
the bonds on the stock exchange or places at the disposal of the public
authorities funds which can be used for the redemption of previous debt.
I n most eases, however, the sums invested in Government funds for
the purposes of insurance reserves merely meet a demand for public credit
which would have been met even in the absence of an offer from the
insurance institution or an opening provided b y it. The institution then
only takes t h e place t h a t would have been occupied by other creditors
in regard to the debt.

PERMISSIBLE CLASSES OE INVESTMENTS

75

LOANS CONTRACTED OB. GUARANTEED B Y PROVINCES, TOWNS,
OR OTHER LOCAL AUTHORITIES

Bules concerning Permission to Invest
Belgium
Insurance funds may be invested in loans issued by communes and
their federations irrespective of any limit or authorisation.
Chile
Municipal stock appears among the holdings of the insurance institution.
Czecho-Slovakia
Insurance funds may be invested in loans at interest issued or guaranteed
by provinces, districts and municipalities.
Fiance
Insurance funds may be invested in loans issued by the communes
and their federations. Investment in simple loans (not quoted on the
Paris Stock Exchange) to departments, communes and federations of
communes, however, require the approval of a central authority, the
Departmental and Communal Credit Fund, in cases in which the loan is
made directly and not through the Deposit and Trust Fund, the body
ex officio responsible for making part of the investments.
Further, as a transitional measure, the insurance institutions are
required from 1 July 1934 until 31 December 1940 to appropriate 75 per
cent, of their available moneys for the purpose of constituting a joint
fund for granting loans to bodies taking p a r t in the execution of works
intended to reduce unemployment ; the departments, communes, and
federations of communes are among the first to receive such loans.
.Germany
As in Belgium.
"
- -—Great Biitain
The local government securities ia which insurance funds may be
invested are :
(a) stock issued under special Acts (e.g. by large municipal
corporations) ;
(b) stock issued under general Acts in conformity with regulations
made by the Ministry of Health and with its approval;
(c) mortgages charged on the rates levied by the local authority.
Italy
Insurance funds may be invested in :
(a) loans at interest to provinces, municipalities and their federations ;
(b) loans for the redemption of the pension liabilities of provinces
and municipalities.
Netherlands
Insurance funds may be invested in bonds of the provinces a n d
municipalities and in loans issued or guaranteed by them.
Poland
The regulations do not provide for the investment of the assets of
insurance funds in loans to provinces or municipalities, but specifically
admit such investment in municipal credit institutions.
Sweden
No restriction is placed on the investment of insurance funds in the
bonds or other loans which are issued or guaranteed by Swedish
municipalities with State approval.

76

INVESTMENT OF SOCIAL INSURANCE FUNDS

The above rules show that the securities issued or loans contracted by local authorities are regularly regarded as permissible
investments for insurance holdings.
This kind of investment is ordinarily intended to meet expenditure of a social nature, and in actual fact (apart from exceptional
cases in which t h e loan is devoted to covering a budget deficit
or converting a floating debt into a long-term debt) it is usually
employed in conditions which are such as to be, at least indirectly,
of clear advantage to the insurance scheme, e.g. for the construction or development of regional or local roads, waterworks, hospitals, schools, workers' dwellings, etc. The nature of this expenditure and its advantageous effects on the standard of living and
health of the population designate it more especially as suitable
for being financed by the insurance scheme.
A distinction is, however, often made in order to allow for the
considerable differences which may exist in the same country
as to the solvency of particular provinces, departments or municipalities. I n some cases investments in the form of loans under
a private contract are allowed only subject to special authorisation (e.g. France). I n other cases loans not issued under a special
Act or without the special approval of the supervisory authority
are considered as permissible investments only if secured by
resources t h a t can be counted on, such as the proceeds of special
taxes devoted solely or primarily to the service of such loans
(e.g. Great Britain).
Analysis of Replies
Very few objections were made to the recognition of loans issued
— directly or through credit institutions — by provincial, municipal
or communal authorities, or of loans guaranteed by such authorities,
as suitable investments for insurance funds.
One reply did not include this class of investment among those
it considered permissible, while another expressed the view that much
caution should be exercised in allowing investment in such securities,
especially in countries where a federal constitution allows the local
authorities in question considerable freedom of action.
Of twenty-one persons consulted who expressed a definite opinion,
nineteen held that the investments in question should be considered
permissible. Some of the replies, however, contained reservations.
Two stated that such securities should not be invested in unless
it is reasonable to suppose that the fulfilment of the undertakings
given is sufficiently guaranteed.
Two others stated that the financial position of the institution
issuing the loans and the use to which the funds are to be put must
always be taken into account. Loans should not be granted to local
authorities already heavily burdened with earlier loans, and as a rule
preference should be given for loans to new work that will confer

PERMISSIBLE CLASSES OP INVESTMENTS

77

benefits on the community. Loans intended to cover budget deficits
should be granted with much circumspection.
Three replies pointed out t h a t the loans of provincial, departmental
or municipal authorities may, as regards safety, be divided into two
groups, according as they take the form of redeemable debentures
offered to the public, and therefore quoted on the stock exchange,
or of privately contracted loans. Although admission to quotation
on the stock exchange is not, strictly speaking, in itself a guarantee
of t h e borrower's solvency, it does mean t h a t his credit has been
examined — the first requirement t o be fulfilled for determining his
solvency. Accordingly, issues t h a t are quoted are preferable to
privately contracted loans.
I n the public interest, added one of these replies, it is obviously
undesirable t h a t agents or brokers should act as middlemen between
the lending institution and the borrowing community. Ifr must
be admitted, however, t h a t some credit operations which involve
substantial capital amounts and recourse to the most varied forms
of saving can only be carried out successfully by institutions
specialising in this kind of business. There can therefore b e no
question of systematically excluding loans negotiated through specialised
credit institutions where recourse t o such institutions m a y offer the
advantage of spreading risks.
Three of the persons consulted replied t h a t it would in any event
be necessary to ascertain whether the loan has been regularly
approved by the administrative authority responsible for supervision.
The lending institution must also ascertain whether all the necessary
measures have really been taken t o ensure t h a t in the e v e n t of
financial difficulties the local authority will be able immediately to
provide for the service of the loan by" recourse to special resources ;
if necessary, special security such as mortgages would have t o be
stipulated.
Whatever the present position of the borrower m a y be, the
insurance institution rnust avoid granting credit for too long a period.
I t must more especially avoid all loans with a delayed redemption,
such as might place too heavy a burden on the budget of the local
authority. I n the case of loans guaranteed by provinces or other
local authorities, it is necessary to make sure t h a t the security covers
both the principal a n d the interest.
The Committee of Experts adopted without amendment the
following text submitted by the Office :
The loans of local authorities and the loans guaranteed by
them are particularly suitable for financing from insurance
funds when their object is t o cover expenditure of a social
character likely t o improve the standard of living a n d the
health of the community ; for instance, the establishment or
development of means of communication, the provision of
water supply, t h e construction of hospitals, schools, workers'
housing, etc.
Main points to consider :
W h a t is the financial situation of the authority which makes
the loan, and, if necessary, whether guarantees should I>e
obtained, for instance, in the form of the revenues of certain
taxes.

78

INVESTMENT OF SOCIAL INSURANCE ÏTTNDS

W h e t h e r t h e loan should be used for new work t o be
undertaken.
W h e t h e r preference should be given t o securities quoted
on t h e stock exchange as against direct loans effected by
private contract.

LOANS ISSUED BY P U B L I C . B O D I E S OTHER THAN RERIONAL
OR LOCAL AUTHORITIES

Rules concerning Permission to Invest
Belgium
The public bodies other than communes or provinces in whose loans
insurance funds may be invested include polders and drainage syndicates.
At the end of 1934 about 1 per cent, of the insurance assets administered
by the General Savings and Pension Fund were invested in loans to public
loan funds, while about 6 per cent, of the assets administered b y the
National Miners' Pension Fund were lent to public utility undertakings.
Czechoslovakia
Insurance assets may be invested in loans at interest to public bodies
entitled to levy taxes, including syndicates for land improvement, drainage
and hydraulic works.
France
The loans of public bodies other than departments, communes and
federations of communes in which insurance funds may be invested include
those contracted or guaranteed by French colonies and protectorates and
those issued b y the Free Port of Havre, the Chambers of Commerce
of Bordeaux, Nantes, Marseilles and certain other towns (stocks accepted
by the Bank of France as security for advances), the National Agricultural
Credit Fund, or by any other public institution if the loan is quoted on the
Paris Stock Exchange.
Germany
The Social Insurance Code allows subscription for the loans of public
bodies other t h a n the communes or their federations 1 in the case of :
(a) bonds issued by German public bodies a or the credit institutions
of such bodies provided that the bonds are suitable for the
investment of trust funds ;
(b) securities authorised by State laws for the investment of trust
funds ;
(c) German public savings banks declared by the competent authority
to be suitable for the investment of trust funds ;
(d) German banks recognised by law ;
(e) bonds of German public bodies, e.g. school districts, provided
t h a t t h e loan can be called in by the creditor or that provision
is made for its regular amortisation ;
(f) bonds guaranteed by German public bodies 2 or their credit
institutions, savings banks or German banks recognised by law ;
in this case the investment requires the approval of the competent
supervisory authority.
1

State loans are considered as equivalent to Government loans.
E.g. chambers of commerce or of craftsmen and other similar
occupational bodies ; compulsory legal associations of proprietors or users
formed in connection with public works, such as compulsory associations
of landowners formed with a view to drainage and hydraulic works.
a

PERMISSIBLE CLASSES OE INVESTMENTS

79

Great Britain
• The regulations do not provide expressly for the investment of insurance
funds in the loans of public bodies other than those of public authorities.
However, the securities issued under the authority of British Acts by
certain colonies, Dominions and mandated territories which they mention
may be classed in this group.
Investment in the loans of certain public utility undertakings is allowed
provided that there is sufficient guarantee t h a t interest will be paid :
debentures of Indian railways guaranteed by the Government of India ;
the stock issued by statutory commissioners supplying water to «areas -with
a population of over 50,000, when the commissioners are empowered to
levy rates up to a prescribed amount and the rates actually levied during
each of the previous ten years have exceeded 80 per cent, of t h a t amount.
Italy
Insurance funds may be invested in :
(a) loans at interest to consortiums for land improvement, drainage
and irrigation or hydraulic works, provided t h a t they are secured
by a charge on the land taxes or on special taxes which the
consortiums concerned are authorised to levy (this guarantee
is equivalent to that required for loans granted by the Deposit
and Loan Fund) ;
(b) loans to institutions or establishments engaging in work of public
utility if such loans are authorised by an Act or Decree.

_

Netherlands
Insurance funds may be invested in stock of the Netherlands colonies
or of syndicates formed for the reclamation of peat bogs, hydraulic works
and water works.
Poland
The regulations governing the investment of insurance funds allow
the funds to be invested in two kinds of public bodies other than provinces
and municipalities. They allow :
(a) investment in the Post Office Savings Bank 1 ;
(b) mutual loans between the Social Insurance Institution, the
insurance institutions and individual insurance funds, and the
special institutions set up as part of the insurance scheme.
Sweden
Insurance funds may be ' invested in :
(a) loans issued by the Swedish Agricultural Credit F u n d ;
(b) loans to undertakings devoted to improving the national health,
thus benefiting the pension insurance scheme, such as the establishment of hospitals, sanatoria, homes for the aged, etc. Such
loans must, however, be certified as safe by the central insurance
authority, and not more than one quarter of the total holding
may be invested in them.

*

*

*

1
Investment in the Bank of Poland is treated as investment in a
Government loan.

80

INVESTMENT OF SOCIAL INSURANCE FUNDS

The above account of the rules concerning investment in loans
to public bodies other than regional or local authorities brings
out the great variety of the bodies or institutions t h a t can be
covered by such a general designation.
I t will also be noted that the investments in question are
either made subject to special authorisation by the supervisory
authority (e.g. Sweden) or more generally limited to the acquisition of loans from authorities which have the power to levy taxes
and thus to procure reliable and sufficient resources to guarantee
the service of the loan (e.g. France, Great Britain, Italy, etc.).
Mutual loans between social insurance institutions are no
exception to this rule. Moreover, in the particular case of such
institutions regarded as borrowers, the amount of the loan t h a t
may be granted cannot be very great if the loan is to retain the
minimum of safety. The fact is that the contributions of the
institutions can be devoted only to a small extent to covering the
service of loans, in addition to which no institution should borrow
in order to meet its obligations, otherwise than in altogether
exceptional cases.
A social insurance institution can no doubt borrow for the
purpose of creating or developing equipment for the promotion
of public health. But however desirable the creation of such
equipment m a y be and however useful its development, this
cannot justify an indebtedness exceeding the contributing capacity
of insured persons ; for the current expenditure t h a t the insurauoe
institution is bound to incur is nearly always sufficient to exhaust
such capacity almost entirely.
Analysis of Replies
Five replies out of seventeen were opposed to the investment of
insurance funds in these loans. Two of them stated that as a rule
such investments cannot afford sufficient safety.
Another reply advised the exercise of much caution, particularly
in federal States where a wide measure of autonomy is allowed to
local authorities.
Eleven replies stated that the loans of public bodies other than
local authorities can be considered permissible, provided that all the
necessary care is taken to eliminate the risk of insolvency on the
part of the borrowing community. One of these replies added that
such bodies issue loans only by way of exception, and much more
frequently obtain the funds they need by direct borrowing.
The precautions that should be taken to avoid insolvency are
described as follows in one of the replies : loans to public bodies other
than regional or local authorities and subscriptions to loans issued by
such bodies should be allowed only when the bodies in question are

PERMISSIBLE CLASSES OF INVESTMENTS

81

under strict administrative supervision and have at their disposal
special resources or the proceeds of special taxes.
Moreover, only a comparatively small proportion of the assets
placed to reserve should be invested in loans granted to or issued by
such bodies.
Discussion and Conclusions
Mr. AGALLOPOULOS pointed out that the Scheme of Discussion
did not deal with the loans of public corporations other than municipalities, provinces and other local authorities. He therefore suggested
that the conclusion on this point given in the analysis of the replies
to the written consultation should be repeated. The Committee
agreed and accordingly considered the following text :
Social insurance funds should not be invested in loans
to local bodies other than provincial, county or municipal
authorities, for instance, to chambers of commerce, unless
such bodies have unquestionable and adequate resources with
which to guarantee the payment of interest and repayment
of principal, for instance, proceeds of charges for the use of
certain establishments, such as railway stations, ports, etc.,
for the building of which loans may be issued by chambers
of commerce.

-

Principal aspects to be considered :
The opinion of the authorities responsible for administrative
supervision both of the borrowing and of the lending institution.
The time allowed for.the redemption or repayment of the
loan so advanced.

Mr. GÉRARD pointed out that chambers of commerce cannot
always be regarded as public corporations. Mr. HACKFOBTH agreed,
and proposed that by way of example it would be better to mention
gas or electricity undertakings.
Mr. GONZALEZ GALE proposed that no examples should be given.
Mrs. DULLES proposed that the English text should read " quasipublic organisations ".
At the request of Mr. GÉBABD it was agreed that the conclusions
should mention both Chambers of Commerce and gas or electricity
undertakings as examples of public corporations other than local or
regional authorities.
The following text was then • adopted :
Social insurance funds should not be invested in loans to
public bodies other than provincial, county or municipal
authorities unless such bodies have unquestionable and adequate
resources with which to guarantee the payment of interest
and repayment of principal, for instance, proceeds of charges
for the use of certain establishments, such as railway stations,
ports, etc., for the building of which such loans may be issued.
The following might be deemed to be public bodies for
the purpose of the above provision, viz. : Chambers of Commerce,
public enterprises, water and electricity services, where in
virtue of the legislation governing them these bodies possess
the character of public establishments.
6

82

INVESTMENT OF SOCIAL INSURANCE FUNDS

Main points to consider :
The opinion of the authorities responsible for administrative
supervision both of the borrowing and of the lending institution.
Time allowed for the redemption or repayment of the loan •
or advance.

LOANS or LAND MOBTGAGE BANKS OB BUILDING SOCIETIES
(TITLES TO PBOPEETY, MOBTGAGE BONDS)

Rules concerning Permission to Invest
Belgium
Under t h e regulations insurance funds may be invested in titles to
' property (cédules hypothécaires), in other words, in the loans of land banks
and similar credit institutions.
Chile
The holdings of the insurance institutions at 30 June 1937 included
bonds of the Mortgage Bank to the value of 16,127,000 pesos and about
32 million pesos in land settlement loan. These sums represented about
25 per cent, of the total holdings in negotiable securities and 16 per cent.
of the total investments at that date.
Further, Act No. 5950 of 10 October 1936, which established a Housing
Fund, provided t h a t the insurance scheme • should lend 30 million pesos
a year to this Fund until the total of the loans reached 510 million pesos.
The Housing Fund pays interest at the rate of 6 per cent, per annum and
repays the loans at the rate of 1 per cent.
Czecho-Slovakia
Insurance funds may be invested in the securities of land mortgage
banks to the extent that the bank is guaranteed by the Government or
a province, district or municipality.
Fiance
Insurance institutions may invest in the communal land bonds and
titles to maritime property issued by the Land Bank (Crédit Fonder).
Germany
Investment in the loans of land banks and similar credit institutions
is permitted irrespective of any limit or authorisation in the case of
(a) loans the security for which is a safe mortgage on land in Germany
and safe trusts on real estate or annuity bonds on land in Germany ;
.(b) mortgages of joint-stock mortgage banks which are payable to
bearer and on which the Reichsbank makes loans in Class I ;
(c) bonds on securities or, mortgages in which investment is permitted
in accordance with the rules of the National Loan Fund or the
Reichsbank.
Great Britain
The regulations do not expressly provide for the investment of insurance
funds in the loans of land mortgage banks or building societies, but the
National Debt Commissioners, in investing moneys of the National Health
Insurance Fund, are bound to give preference to securities issued to enable
advances to b e made to local authorities for expenditure on housing. I n
point of fact a large proportion of local government loans have been issued
to finance expenditure on housing for the working classes.
Italy
Insurance moneys may be invested in securities issued by the institutions
authorised by law to negotiate loans on landed security.

PEBMISSIBLE CLASSES OF INVESTMENTS

83

Insurance institutions may also advance funds needed for land settlement schemes (smallholdings) in specified zones in Italy and the colonies.
Not more than one-fifth of the total assets available for investment may
be invested in this way.
Netherlands
Investment in the securities of land banks is allowed in the case of
banks set up in accordance with Netherlands law and engaging in negotiation
on mortgage loans on property situated in the Netherlands only.
Poland
The purchase of interest-bearing titles to property and mortgage
bonds issued by institutions or undertakings situated in Poland is allowed.
The bond must be secured by claims amounting to not more than one-half
of the actual value of the real property on which they are a charge, and
in the case of bonds secured by a mortgage the total amount of the liabilities
arising out of the issue, including previous charges, may not exceed onehalf of the actual value of the real property on which they are a charge.
Sweden
The only investment allowed in the loans of land mortgage banks or
building societies is t h a t in bonds of the General Mortgage Bank of Sweden
or the Urban Mortgage Bank of the Kingdom of Sweden.

Analysis

of

Replies

A substantial majority of the replies were in favour of investing
p a r t of the funds of insurance institutions in the loans of land
mortgage banks or building societies.
Five of the replies were against such investment, one of t h e m
pointing out t h a t t h e safety of such loans depends not only on t h e
value of the charge securing the loan, but also on the investment policy
and efficient management of the bank or society. Another reply
pointed out t h a t when the supply of capital is plentiful, social insurance
funds may suSer from fairly severe competition on the p a r t of land
mortgage banks or building societies, and therefore have no reason
t o assist such' institutions by granting them credits which ultimately
can only help t o lessen t h e opportunities for sound investment a n d
thereby injure the insured persons. Mortgage bonds and titles t o
property should therefore not be considered as permissible investments,
except where it is impossible to grant mortgage loans direct or through
a mortgage bank set u p by the central insurance institution itself.
On the other hand, fifteen of the persons consulted stated t h a t
as a rule the loans of land mortgage banks or building societies should
be considered as permissible investments for insurance funds.
Two of the experts were of the opinion t h a t this class of investment
is particularly sound, since t h e loans of land mortgage banks and of
co-operative building societies are secured by charges which are supervised b y a specialised institution. Such loans should therefore be
recommended rather t h a n direct loans secured b y a mortgage. "
One reply also argued t h a t the granting of mortgage loans through
a bank or building society is the best means an insurance institution
has of promoting credit for cheap housing schemes without excessive
risk, for instance, i n order t o enable insured persons to acquire a
small property for their personal use.
Quite a number of the favourable replies were accompanied,
however, by reservations.
--J-

84

INVESTMENT OF SOCIAL INStTBANCE FUNDS

Two of t h e m urged t h a t only a limited, not to say insignificant,
proportion of t h e reserves should be invested in building or land
mortage loans, a further proviso being t h a t t h e solvency of the
establishments concerned should be subjected t o t h e most searching
enquiry.
Two others recommended t h a t these investments should be limited
to such loans as are guaranteed by the State or public authorities,
a guarantee of this kind being required for the investment of trust
funds.
Three others, without insisting on a guarantee from t h e public
authorities, such guarantees being in practice uncommon in a great
many countries, were prepared to consider only the loans of societies
whose operations are by law very strictly supervised.
Conclusions
The- Committee of Experts adopted without amendment t h e
following t e x t submitted b y t h e Office :
T h e loans of land or building credit associations offering a
high degree of guarantee, in particular the acquisition of mortgage
• bonds, whether issued directly or through a trustee (lettres de
gages, cédules hypothécaires), enable the insurance scheme t o
carry out with the minimum of risk a policy of affording means
of credit for workers' housing schemes.
- Main points t o consider :
E x a m i n e carefully t h e security offered and t h e measures
taken t o guard against depreciation.
E x a m i n e whether the securities issued b y such societies
are included in the list of investments permissible t o trustees
(trustee securities).

Rules concerning Permission to Invest
Argentina
U p to 50 per cent, of the available funds may be used for making
loans on mortgage to insured persons. Such loans are reserved for persons
who have been in employment for more than ten years, and may be used
only for the acquisition or construction of dwellings for the borrowers.
Loans must (1) be secured by a first mortgage ; (2) be repayable in
not more than fifteen years ; (3) not exceed 10,000 pesos ; and the charge
for interest a n d repayment may not exceed one-third of the remuneration
of the insured person. The maximum rate of interest is 7 per cent. The
charge for interest and redemption is deducted b y the employer from
the insured person's wages or salary.
The terms under which the loan is granted usually require the borrower
to take out life assurance and fire insurance policies to secure repayment
of his debt, the premiums being likewise deducted at source.
Belgium
The law allows investment in mortgage loans unconditionally. I t also
authorises insurance institutions to make loans for the purchase of building
land or the construction or purchase of buildings in Belgium and for the
establishment or adaptation of curative institutions.
1
Mortgage loans granted directly by the insurance institutions to the
mortgagor.

PERMISSIBLE CLASSES OF INVESTMENTS

85

Brazil
Up to 50 per cent, of the available funds may be used for making
loans on mortgage to insured persons.
Under the invalidity, old-age and widows' and orphans' insurance
scheme for persons employed in commerce, a loan fund is established for
each region, into which are paid :
(1) 30 per cent, of the contributions collected in the region;
(2) repayments of previous loans.
The loans may not exceed two-thirds of the value of the mortgaged
property where the purpose is to repair or extend the house or to discharge
an existing mortgage on it. I n any case, the purpose of the loan must
be to enable insured persons to acquire or improve their dwellings. The
maximum loan is 80,000 milreis and as a rule it may not exceed 50,000
milreis.
Repayment may be spread over twenty-five years at most, and the
charge for interest and repayment may not exceed 45 per cent, of the
insured person's wages. No loan may be granted to insured persons aged
60 years or over, and repayment must be completed by age 65.
Czecho-Slovakio
Insurance funds may be invested in mortgage loans satisfying the
conditions imposed for the investment of trust funds.
Poland
The loan may not exceed half the actual value of the mortgaged
property in the case of dwelling houses, two-thirds of its value in t h a t of
rural undertakings, and one-third in that of woodland.
France
Insurance institutions may invest their assets in first mortgages on
completely finished buildings situated in towns- with a population of over
100,000 or in the Department of the Seine. The loan may not exceed
50 per cent, of the value of the property.
Mortgage loans must be approved by a central insurance institution,
the General Guarantee Fund, if they are granted directly by an insurance
institution other than the Deposit and Trust Fund, which is ex officio
responsible for making a part of the investments.
Germany
Direct investment in mortgage loans is allowed in respect of property
situated in Germany, but unfinished buildings and buildings not producing
a regular rent are excluded. The loan may not exceed two-thirds of the
market value of the property on a reasonable valuation, and must, as a
rule, be made on a first mortgage.
Great Britain
Mortgage loans are permitted only in the case of (1) loans to local
authorities and similar public bodies, (2) mortgages on freehold property
in the United Kingdom.
Italy
Mortgage loans are permitted, provided that
(a) the mortgages are on cheap dwellings or on institutions for the
prevention or cure of disease or for public assistance ;
(b) mortgage loans and real estate form not more than one-tenth
of the assets entered in the balance-sheet of the insurance
institution.
Netherlands
Insurance funds may be invested in first mortgages on real estate
situated in the Netherlands.

86

INVESTMENT OF SOCIAL INSURANCE FUNDS

Poland
Insurance funds may be invested in loans secured by real property
situated in Poland, or by mortgages on such property, provided that the
loan does not exceed 75 per cent, of the value of the property.
Sweden
Insurance funds may be invested in direct mortgage loans if the loan
does not exceed 50 per cent, of the real value of the property, or 60 per cent.
in cases where the value is determined by a special assessment made at
the instance of the central insurance authority.
Analysis of Beplies.
One only out of fifteen explicit replies stated that direct loans to
owners of real property on the security of a mortgage should not be
considered as permissible investments for insurance funds " since the
granting of such loans calls for knowledge that is not in the possession
of all insurance institutions. Moreover, mortgages involve risks,
which can of course be lessened if certain precautions are taken, but
which can never be completely eliminated ".
Fourteen replies,' on the other hand, saw no objection to considering
mortgages as permissible investments, provided proper care is taken
to avoid not only the grant of too large a loan as compared with the
value of the mortgaged property, but also the risks of bad management
and of the subsequent depreciation of the property.
Several replies urged the need of careful estimation of the value
of the property to be mortgaged. The first precaution to be taken,
according to one of the replies, is to make a sound estimate of the market
value of the property, that is, of its probable sale value.
Four other replies suggested that advances on mortgage should be
granted only on the security of urban letting property. One of these
pointed out that for a proper valuation of the market price of the
property, it is necessary to ascertain whether the payment of interest
and repayment of principal are, in fact, secured by any income : such
enquiry would eliminate or substantially reduce the number of direct
loans on the security of building land (building loans) or of purely
industrial or ' commercial premises, or again of premises such as
sanatoria, etc., that can only be sold with difficulty and whose market
value is therefore highly problematical.
As regards the maximum permissible proportion of the loan to the
market value of the security, opinion ranged from a ratio of one-third
to one of two-thirds ; in some cases the suggested ratios vary according
as the security is urban or rural building property.
One reply suggested a maximum of one-third, another 40 to 50 per
cent., but only on the security of urban letting property ; three suggested
50 per cent., but one of these would allow twó-thirds in the case
of rural property. Two replies, finally, proposed that the loan might
amount to 50 or 60 per cent, of the market value of the security, one
of them adding that the 60 per cent, limit might be exceeded with the
Government's consent.
Four replies dealt with the priority of the mortgage and maintained
that the loans should be granted only on the security of a first mortgage.
Two replies stated that in estimating net income, account should
be taken of the cost of administering the investment and of the fact
that it may be necessary to set aside a proportion of the gross income
as a reserve against loss.

PERMISSIBLE CLASSES OF IÎTVESTMEÎfTS

87

Lastly, one reply held that whatever the amount or proportion of
the loan, the insurance institution should take all necessary care to
avoid a depreciation of the value of the security or the establishment
of a preferred claim such as might lessen the lender's security. Thus
the institution should make sure that insurance premiums in respect
of any of the various risks to which the property is exposed are regularly
paid, and see that its security does not depreciate because the revenue
authorities acquire a preferred claim or because of any fault on the part
of the borrower, such as failure to maintain the property in a good
state of repair, acceptance of leases for too small a rent or too long a
period, or assignment of all or part of the rent to some third party.
Discussion and Conclusions
The text proposed by the Office was as follows :
Mortgage loans made directly to the owner of a building
or land call for valuation of the worth of the security and for
limitation of the amount and determination of special
conditions to ensure the effectiveness of the security.
Main points to consider :
Nature of the security : urban or other letting property ;
dwelling house for personal use of the debtor ; building to be
used for purely industrial or commercial purposes ; institution
for medical or allied purposes ; rural property ; building land.
Limitation of the maximum of the loan to between one-half
and two-thirds of the valuation of the building, taking into
account its nature and situation.
Priority of the mortgage— preference to be given to first ~
mortgages and precautions to be taken to avoid depreciation
of the security for the mortgage.
The discussion turned first on the general principle of using insurance
funds for direct mortgage loans, Mr. LEÎTOX"EL having proposed an
amendment to reject such use on the ground that insurance institutions
would always have the greatest difficulty in estimating both the value
of the security on which mortgages could be granted and the personal
solvency of the mortgagors.
,
Mr. KFPEKS and Mr. BOHEBN opposed the amendment and explained

that, although in the case of a small insurance institution such as a
sickness fund it might be inadvisable to invest in mortgages, the same
considerations would not apply in the case of an institution of some
size such as a central invalidity or accident insurance institution.
Mr. KUPEES added that in the Netherlands the invalidity and oldage insurance institutions have power to invest millions of florins every
year, and it would be most unfortunate to forbid mortgage loans as
an avenue of investment.
The Committee accordingly decided to maintain the mention of
direct mortgage loans among the permissible investments for insurance
funds, subject to provisos as to the conditions on which such loans may
be granted.
Mr. D A .CÁMARA strongly urged that the limit of the loan should
not be fixed at one-half or two-thirds of the value of the security, laecause
in that case direct mortgage loans to insured persons to enable them
to build their own homes would in practice be excluded. It was very

•88

INVESTMENT OF SOCIAL INSURANCE FUNDS

rare for an insured person in paid employment to have enough cash
to build himself a house unless the whole of the cost of construction
were advanced to him.
Such operations were frequently undertaken, for instance in Brazil,
and had always given good results. Redemption and interest charges
on the loans could be guaranteed by making a deduction at source
from wages, and the death of the insured person could be provided for
by means of a life insurance policy. These measures were easy to
carry out and taken together protected the insurance scheme against
any risk of loss.
Accordingly Mr. D A CAMAKA proposed to maintain the right of
insurance institutions to invest in loans for building purposes and to
allow the loans to exceed the two-thirds maximum mentioned in the
Office text.
Mr. HENRY, on the contrary, considered that great care should
be taken in making recommendations concerning direct mortgage
loans. For instance, the Office text set out various classes of security
on which such loans might be granted, but some of these securities
might be very difficult to realise.
I t would be better to restrict
the type of security and to allow exceptions for specified reasons of
social utility.
The Committee then considered an amendment which took into
account the views set forth above and in particular the desirability
of raising the maximum limit on grounds of social utility where the
purpose of the mortgage loan is the construction or acquisition of
dwellings for insured persons.
On the question of the maximum proportion of the loan to the
value of the property, Mr. MATJASIC proposed that the words
" between one-half and two-thirds " in the Office text should be
replaced by the words " between one-third and two-thirds ". On
considering the amended text, however, he came to the conclusion
that his amendment would be unnecessary provided that the maximum
proportion adopted by the Committee were not taken as meaning
that this maximum should be reached in all cases or that the loan
should attain at least half the value of the security.
The amended text was adopted and the conclusions of_ the
Committee read as follows :
i

Mortgage loans made directly to the owner of a building
call for valuation beforehand of the worth of the security and
for determination of the amount and of any special conditions
for the loan, to ensure the effectiveness of the security.
Main points to consider :
Nature of the security : preference to be given to urban
buildings constructed neither for commercial nor for industrial
purposes, and situated in towns of a, certain size in quarters
in process of development, more particularly if they are of
recent construction and let at reasonable rents and offer
modern conveniences.
Limitation of the maximum of the loan to half, or not more
than two-thirds, of the valuation of the building, to be
determined by taking into account the return it gives, its
nature, and its situation. Nevertheless, for reasons of social
utility, this maximum might be increased in the case of
mortgage loans for the purpose of the construction or purchase

PERMISSIBLE CLASSES OF INVESTMENTS

89

of dwelling houses for the use of insured persons, provided
t h a t such loans absorb only a limited proportion of t h e holding.
Necessity t o obtain a first mortgage and t o t a k e measures
to avoid depreciation of the security owing t o poor upkeep of
the building, too low rents, or too long leases, or owing t o
assignment of rent t o third parties, or owing t o the constitution
of charges prior to t h a t of t h e lender.
Mrs. DULLES stated t h a t while she was not opposed t o allowing
direct mortgage loans as suitable for insurance investments, she could
not consider them suitable in the United States, where there are numbers
of special institutions which act as intermediaries in the financing of
such loans. She wished, however, t o make i t clear t h a t to allow direct
mortgage loans might be advisable because circumstances differed very
much from country t o country.

COMMERCIAL AND INDUSTRIAL DEBENTURES

Rules concerning Permission to Invest
Belgium
Insurance funds may be invested in the debentures of Belgian companies
or companies in the Belgian Congo which for at least five years have met
their obligations out of their ordinary resources.
Chile
The holdings of the insurance institutions in negotiable securities
included a few commercial and industrial debentures, representing an
insignificant proportion of these holdings (about 0.5-per cent.).
Germany
Commercial and industrial debentures appear to be excluded from
the list of securities in which insurance funds may be invested. Section 26,
subsection 2, of the Social Insurance Code, however, provides t h a t the
Minister of Labour may authorise, subject to revocation, the purchase
of classes of securities other than those specified by the law. Under this
provision, therefore, the purchase of commercial and industrial debentures
is possible in certain cases.
Such investments appear, in fact, to have been made, though not to
a very great extent : the total sums invested in classes of securities other
than those specified by law did not at the end of 1937 exceed 0.6 per cent.
of the total reserves of the invalidity, old-age and widows and orphans'
insurance scheme for workers ; for the accident insurance scheme the
debentures of industrial undertakings formed only 0.01 per cent, of the
reserve funds.
Great Britain
Insurance funds may be invested in the debentures of railways and
statutory water companies which have for the previous ten years paid
at least three per cent, on their ordinary stock in the case of the railways
and at least five per cent, in that of the water companies.
Italy
Investment in commercial and industrial debentures is not expressly
mentioned in the list of investments open to insurance institutions,
Nevertheless, such investment is allowed in the case of:
(a) participation authorised by an Act or Decree in the subeription
of the capital of a company run for profit and engaging in work
of recognised public utility ;

90

INVESTMENT OF SOCIAL INSURANCE FUNDS
(b)

an exception, under an Act or Decree issued on the recommendation of the Minister of Corporations in agreement with
the Minister of Finance, to the methods of investment expressly
designated in laws or regulations.
Netherlands
The purchase of commercial and industrial debentures is allowed in
the case of debentures of :
(a) railway companies in the Netherlands or the Netherlands Indies ;
(b) companies of which the State holds at least half the shares ;
(c) companies set up in the Netherlands in conformity with Netherlands law.
Sweden
The purchase of commercial and industrial debentures is possible
under a legal provision authorising investment in other securities than
those expressly enumerated if recommended by the central insurance
authority in special cases and approved as safe by the Government.

*

*

*

The above review of the provisions governing the investment
of social insurance funds in commercial and industrial debentures
will have shown that the legislative authorities have been very
careful with regard to this class of investment.
In some cases the purchase of these securities is limited to
those of companies which are under the supervision of the public
authorities or hold a concession or monopoly (e.g. Great Britain).
In others it is dependent on express authorisation by the supervisory authority and means a departure from the normal regulations (e.g. Italy, Sweden). In yet others, commercial and industrial
debentures are entirely excluded from the permissible investments (e.g. France).
Sometimes, it is true, the purchase of debentures is allowed
without any serious restrictions as, for instance, in Belgium and
the Netherlands, but in both these countries the investment
operations of the insurance schemes are entrusted either entirely
(in the Netherlands) or mainly (in Belgium) to central institutions
whose competence and methods are such that there can be no
fear of their making any risky or unsound investments.
In favour of this type of investment there is the fact that
investment in " industrial " securities promotes the development
of production and thus helps to increase the quantity of consumers' goods, thereby raising the standard of living of the population taken as a whole. Such investment tends to increase the
active capital that corresponds to the production of goods as
against the passive capital that corresponds only to their consumption.

PERMISSIBLE CLASSES OF INVESTMENTS

91

But, as already indicated, whatever the nature of the investments made by the insurance scheme, they always set free funds
t h a t can then be used for other investments. By subscribing t o
Government loans, for instance, an insurance institution sets
free for investment in commercial or industrial securities sums
which would have otherwise been absorbed by those loans.
I t may be added t h a t it would be wrong to assume t h a t investment in Government funds and loans to provinces, municipalities
and other local authorities always and in every case implies
indebtedness unaccompanied by any increase in the means of
production. To give but one example, the extension of road
communications cannot fail to have an effect on the volume of
trade and economic development of an area. Similarly, a mortgage loan may very well help the borrower to develop a particular
means of production.
The reason why legislative authorities are usually disinclined
to allow the investment of insurance funds in commercial and
industrial debentures is that, although these classes of securities
have a higher yield than public funds, mortgage loans and loans
to land mortgage banks and building societies, that increased
yield, if at all marked, is offset by a risk of the loss of capital,
and this risk must not be underestimated, even though, from t h e
point of view of the safety of his holding, the debenture holder is
legally in a privileged position as compared with a. shareholder.
Whether the debenture is regarded as a claim resulting from
a loan contract or as a special kind of contract of the nature of a
loan a t interest and an aleatory contract 1 , the debenture holder
must be considered as a lender, whereas a shareholder is in fact
a partner. The debenture holders are creditors of a company,
and in case of bankruptcy they can establish their claims in t h e
same way as other creditors with a simple contract.
Further, companies issuing debentures with the object either
of finding lenders without difficulty or of obtaining as advantageous
interest terms as possible are often led to grant special rights
to the lending debenture holders and thus to eliminate the risk
to a considerable extent. Such rights are granted in various forms,
such as mortgages on the real property belonging to the company
issuing the debentures, the" provision of special security, collateral,
the guarantee of another company, the delegation of credits,
1
Because the redemption of the capital depends on a contingency
that is uncertain^ at least as to date.

92

INVESTMENT OF SOCIAL INSURANCE FUNDS

etc. But debentures secured in this way are rare, and as a rule
the only guarantee obtained by the debenture holder lies in the
solvency of the borrower.
The security guaranteeing debentures is thus somewhat
uncertain, for the preference granted to debenture holders cannot
be operative unless there is a minimum, if not of prosperity,
at least of activity, for the company, in order t h a t it may be able
to meet t h e promised interest and redemption payments out of
its own resources without causing undue financial strain or
jeopardising the business.
The prior claim of debenture holders with regard to the payment of interest and redemption of capital obviously cannot
withstand a series of reverses, and in the event of bankruptcy
the debenture capital usually disappears with the share capital.
The security for the debentures is in general either insufficient
to guarantee the redemption of the capital or liable to depreciate
rapidly with any fall in turnover, especially when it has to be
realised if the company goes bankrupt. Very few companies
which have lost all or most of their share capital continue to meet
their debenture charges regularly.
Investment in debentures therefore calls for nearly as much
care as regards assessment of the borrower's future solvency as
t h a t in shares, and it is clear t h a t if this solvency seems secure,
the interest .drawn from the debenture can hardly be much higher
than t h a t paid on the loans of public authorities.
Analysis of Replies
Although many of the persons consulted (9 out of 23) objected to
classing commercial and industrial debentures among permissible
investments for insurance funds, most of the replies were favourable
to investment in these securities, but added important stipulations or
reservations, all calculated to eUminate the more speculative type
of securities.
The rules suggested for the elimination of speculative securities
were of the following tenor :
" It might be provided that funds may be invested in the debentures
only of those commercial and insurance companies which have discharged their liabilities out of their own resources during the five
years preceding the investment and have also paid dividends during
that period.
' " Investment should be limited to the securities of companies that
have been paying dividends for a long time, whose productive activity
gives reason to suppose that they will find regular employment for
many years to come, and whose management does not engage in any
speculative business.

PEBMISSIBLE CLASSES OF INVESTMENTS

93

" Consideration should be given only t o t h e debentures of companies
which have for a t least five years, a n d possibly t e n , m e t all their
liabilities out of their ordinary resources.
" Only limited amounts should be invested in this kind of security
a n d t h e choice should be confined to first-class industrial undertakings
which publish their accounts.
" The security t h a t should be asked for depends on t h e law or
custom of the country concerned, for instance : only a given percentage
of t h e total fund might be invested in this way ; funds m i g h t b e
invested only in t h e debentures of companies holding a concession or
monopoly ; special permission from t h e supervising b o d y m i g h t b e
made a condition.
" Industrial a n d commercial debentures should only be considered
as exceptional investments requiring special authorisation from t h e
supervising body. "
Discussion

and Conclusions

The Committee h a d t o consider whether i t was desirable t o include
commercial a n d industrial debentures among t h e permissible
investments for insurance funds.
Mr. LBNGYEL proposed t h a t this class of security should n o t b e
mentioned among t h e permissible i n v e s t m e n t s , b u t Mr. GAECIA O L D I S H

pointed o u t t h a t , if t h e possibility of investing in commercial a n d
industrial debentures were excluded, it would be very difficult t o include
ordinary shares or stock. I t was n o t possible t o reject from t h e outset
a type of security which could play a n important part, seeing t h a t i t
h a d been agreed t h a t i n . c e r t a i n circumstances a n insurance scheme
m a y have t o t r y t o find investments possessing real safety.
The decision t a k e n b y t h e Committee was in favour of regarding
commercial and industrial debentures as suitable investments, subject
t o t h e conditions a n d reservations mentioned in t h e Office t e x t :
Commercial or industrial debentures can only be regarded
as suitable investments for insurance funds if, i n addition t o
affording undoubted security as t o repayment of capital, t h e y
offer a yield markedly higher t h a n debentures of t h e same k i n d
issued b y t h e public authorities.
Main points t o consider :
Nature a n d scope of activities pursued b y t h e concern i n
question ; t h e degree of publicity given t o t h e results of i t s
administration ; future prospects.
Whether there exists a necessity of approval b y a controlling
authority such as t o rule out debentures of a speculative
character.
OTHEE FIXED-YIELD INVESTMENTS

Bules

concerning

Permission

to

1

Invest

I t i s clear t h a t t h e r e a r e o t h e r o p e n i n g s for i n v e s t m e n t i n
fixed-yield
securities t h a n t h e classes of securities w h i c h h a v e
been reviewed a b o v e w i t h reference t o t h e i r s u i t a b i l i t y f o r t h e
1

Advances on security, personal loans to insured persons, etc.

94

INVESTMENT OF SOCIAL INSURANCE FUNDS

investment of insurance funds. Social insurance institutions,
like banks and other credit institutions, may for instance invest
their funds in advances on security or grant personal loans to their
members.
The regulations concerning advances on security — a practice
to be found, for example, in Germany — are left out of account
here, since such a use of the insurance funds can hardly be regarded
as a long-term investment.
Ordinary loans or personal loans to insured persons are fairly
frequent in the insurance schemes of Latin America. For example,
the Argentine scheme for persons employed in public utility
undertakings and the Brazilian scheme for commercial employees
allow the insurance institutions to grant insured persons not
only mortgage loans but also ordinary loans known as personal
loans. The relevant regulations are as follows :
Argentina
Part of the available funds is used to constitute the loan fund for the
grant of loans to insured persons who have been in employment for not
less than five years. These loans, which may not exceed the equivalent
of the borrower's wages for three months, bear interest at 5 per cent.,
payable in advance, and must be repaid within twelve months by means
of deduction from wages.
Brazil
The invalidity and old-age insurance scheme for commercial employees
provides t h a t available funds m a y be used for granting loans to insured
persons up to an amount not exceeding 60 per cent, of the actuarial
reserve accumulated for the person concerned.
Analysis

of

Replies

The question whether a n y fixed-yield investments other than
those previously examined should be considered as permissible for
insurance funds received 12 negative replies. Four replies, on the'
other h a n d , suggested a few additions t o the list of permissible
investments.
The debentures of public utility undertakings might be considered
as permissible investments ; such undertakings as produce goods
or services for t h e general public, e.g. electricity or water supply,
transport undertakings, etc. The undertaking should h a v e ' all the
privileges usually allowed to monopolies. Such investments ought no
doubt t o b e considered permissible if t h e y come, as t h e y would
certainly seem t o do according t o t h e definition given, under the
heading of investments in the securities of first-class undertakings ;
in fact, t h e y are probably the only fixed-yield investments in private
undertakings which should be allowed.
According t o one of t h e persons consulted, loans on the security of
issues m a d e b y public authorities should also be allowed, provided
t h a t " the a m o u n t of the loan does not exceed two-thirds or a t most
three-quarters of t h e value of the securities as quoted on the stock
exchange ; social insurance institutions would t h u s be able t o give
industry effective assistance, which t h e y cannot d o b y means of

PERMISSIBLE CLASSES OP INVESTMENTS

95

mortgage loans, owing to the low or uncertain value of industrial
premises in the event of sale ". Further, the permissible investments
should include the purchase of securities, debentures or short-date
deposit certificates of " public financial establishments, guaranteed by
regional or local authorities and formed to provide working credits
for industrial and commercial undertakings ".
No objection can, in fact, be made to loans secured on marketable
securities, provided the necessary caution is exercised. Further,
securities issued by public financial establishments with the guarantee
of regional or local authorities are included among those which have
to be considered as permissible investments for insurance funds.
Nevertheless, as already indicated, it is open to question whether
advances against security or bank deposit certificates should normally
be considered as permissible long-term investments.
The only real addition proposed was that of personal loans to
insured persons.
From the point of view of the insurance institution as lender, there
is no strong objection to making ordinary loans to insured persons,
provided that effective steps are taken to ensure repayment by
deductions from wages at the source and, in general, to avoid losses
due to the borrower's death or his ceasing to be covered by the
insurance scheme : a surcharge on the premium might be charged
to cover such risks.
The insured person sees an immediate advantage in obtaining a
loan from the insurance institution at a time when money is dear
and moneylending on security gives rise to many abuses. Workers
and more especially salaried employees are glad to be able to borrow
from a fund that is not run for profit and that will grant them
loans oh reasonable terms "when they need money, for instance, when
a member of their family is ill. On the other hand, such practices
can easily give rise to abuses, for insured persons may borrow to
meet needs whose urgency is questionable.
In a general way it may be feared that, if insured persons are
allowed such facilities for borrowing, the result will be to tend to
make them live regularly above their income by systematic recourse
to the borrowing faculties available to them.
Finally, it is clear that the granting of loans to insured persons
will tend, if a risk matures before the loan is repaid, to reduce the
benefits due to the insured person himself or his dependants. Such
a reduction is contrary to the whole aim of insurance and may, if
the sum that still has to be paid back on the loan is really considerable,
reduce the protection afforded by the insurance to a minimum.
Discussion and Conclusions
The text proposed by the Office stated that :
Insurance funds may be used to make loans or advances
on security and in special circumstances to make direct loans
to insured persons.
Special circumstances to be examined :
Whether the current rate of interest is high and whether
usury is widespread and difficult to check.
What precautions . should be taken to ensure repayment
or early redemption of the loan and to avoid Towering the
standard of protection normally guaranteed by the insurance
scheme.

96

INVESTMENT OF SOCIAL INSURANCE

FUNDS

On the motion of Mr. LENGYEL, the Committee decided to delete
all reference to loans or advances on security to insured persons.
B. — VARIABLE-YIELD

INVESTMENTS

'

The persons consulted were asked to state whether they considered that all or certain of the following should be regarded by
social insurance institutions as possible investments for their
funds :
1. Loans with gold clause or currency option issued by public
authorities (Government, province, country or local authority) in the country where the insurance scheme operates ;
2. Loans with gold clause or currency "option issued abroad
by public authorities (Government, province, county
or local authority) of the country where the insurance
scheme operates ;
3. Preference shares or stocks of commercial or industrial
companies enjoying a concession or monopoly ;
4. Ordinary or common shares or stocks of companies indicated in 3 ;
5. Shares or stocks of companies other than those enjoying
a concession or monopoly ;
6. Urban and other letting property ; workers' dwellings ;
7. Rural property.
LOANS OF PUBLIC AUTHORITIES WITH GOLD CLAUSE
OR CURRENCY OPTION

Rules concerning Permission to Invest
The investment rules contained in insurance laws and regulations make
no distinction between loans ordinarily expressed in terms of the national
currency only and the loans with a gold clause or currency option which
States, provinces or other local authorities may issue in order to make
it clear t h a t they mean to respect their signature and not to " free themselves " from at least part of their debts by a depreciation of the currency.
Both kinds of laws are therefore normally regarded as possible investments for insurance institutions. I t may be noted, however, t h a t in t h e
case of loans issued abroad only, an insurance institution cannot invest
in them unless it is able to procure the necessary foreign exchange to pay
for its subscription.
Analysis

of

Replies

The great majority of t h e replies were in t h e affirmative, only
three of t h e persons consulted being definitely opposed t o permitting
investment in these classes of securities. The reason given for one
of these negative replies was t h a t experience shows t h a t gold clauses
and currency options can always be annulled unilaterally by t h e

PERMISSIBLE CLASSES OP INVESTMENTS

97

public auth'ority if this is to the borrower's advantage. The other
two considered t h a t the funds of social insurance institutions should
be invested only in securities expressed in terms of the currency of
the country where the insurance scheme applies.
As a rule, t h e replies made no distinction between the loans issued
inside t h e country where the insurance scheme operates and those
issued abroad by the authorities of t h a t country. Nevertheless, in
the opinion of one of the persons consulted, loans issued abroad
provide a higher degree of safety regarding t h e observance of t h e
gold clause or currency option. I n the opinion of another, additional
guarantee clauses are more open to amendment in t h e case of loans
issued abroad. I t was the general view, however, t h a t in no case
should the place of issue be a major or decisive reason for systematically
preferring one or other type of loan ; moreover, in practice, in m a n y
countries, only internal loans are available for insurance institutions.
Further, according to one reply, the currency option in principle
gives the investor a less complete and less absolute guarantee t h a n
the gold clause. The guarantee m a y even be reduced t o nil if all
the currencies stipulated in the option are similarly depreciated. On
the other hand, currency option loans have the advantage, as compared
with loans expressed simply in gold currency, t h a t t h e y specifically
provide for the right to opt for payment in a particular currency,
and it would hardly appear t h a t this provision can be evaded. I n
any case, for a n insurance institution t o subscribe t o a loan with
currency option cannot be contemplated unless t h e national currency
is included in the alternatives t o which t h e option applies.
Conclusion

--....-..

The Committee of Experts adopted without a m e n d m e n t t h e t e x t
submitted by the Office.
Issues made by public authorities with a gold clause or a currency
option present, if n o t a n absolute guarantee against m o n e t a r y
devaluation, a t any rate a substantial defence, and insurance institutions m a y be well advised to have recourse t o such laws.

OBDINABY OE COMMON SHABES OB STOCK

Rules concerning Permission to Invest
Belgium
The Miners' Insurance Act of 1 August 1930 does not provide expressly
for investment in stocks and shares. I n fact, however, certain shares
of financial and industrial undertakings are treated as debentures, the
purchase of which is expressly authorised for investment purposes. On
31 December 1935 about 10 per cent, of the assets of the National Miners'
Pension Fund consisted of investments in financial and industrial under.
takings.
Brazil
Legislative Decree No. 1186 of 3 April 1939, which set up the Brazilian
Re-insurance I n s t i t u t e — a public institution with whiclr private_ insurance
companies are required to re-insure part of the risks they cover — provides
that of the capital of the Institute, fixed at 30,000 contos, 70 per cent.
shall be subscribed by the compulsory social insurance funds.
7

98

INVESTMENT OF SOCIAL INSTTBANCE FUNDS

Chile
At 30 J u n e 1937, ordinary shares and stocks accounted for about
15 per cent, of the total holdings in negotiable securities and 10 per cent..
of the total investments. Of 32.5 million pesos invested in such shares
and stocks, about one-third was represented by preference shares and
two-thirds by ordinary shares of various companies, some of which enjoyed
a concession or monopoly.
Finland
The Pensions Act of 31 May 1937 (compulsory national invalidity
and old-age insurance) and the Regulations for its administration of
1 April 1937 provide t h a t the funds of the office responsible for the
administration of insurance shall be invested, with reference to the needs
of production, also in the shares of Finnish companies (banking, commercial,
and other companies affording every guarantee of security) up to not
more than 10 per cent, of the share capital of the company.
France
At 31 December 1936, the assets of the accumulative funds (administration of old-age and widows' and orphans' insurance) included a certain
number of shares of various kinds, although the total amount involved
•was insignificant compared with the total holdings (3,185,205 francs out
of a total of about 5,000,000,000 francs).
Great Britain
The regulations allow the investment of funds in :
(a) stock of the Bank of England or the Bank of Ireland ;
(b) preference stock of railways and statutory water companies,
provided that during the previous ten years they have paid at
least 3 per cent, on their ordinary stock in the case of railways
and 5 per cent, in that of water companies.
Italy
Investment in stocks and shares is not expressly mentioned in the
list of securities in which insurance funds may be invested. Nevertheless,
it may be allowed, either in the case of participation, authorised by an
Act or Decree, in the subscription of the capital of a company run for
profit and engaging in work of recognised public utility, or, in t h a t of an
exception, under an Act or Decree issued on the recommendation of the
Minister of Corporations in agreement with the Minister of Finance, to
the methods of investment expressly designated in laws or regulations.
On 31 December 1934, the balance sheet of the Fascist National
Social Welfare Institute (administration of workers' invalidity, old-age
and widows' a n d orphans' insurance) included about 58,000,000 lire in
various shares, out of the total assets of about 7,815,000,000 lire.
Sweden
Investment in stocks and shares is possible only under the legal
provision authorising, by way of exception, the purchase of other securities
than those expressly enumerated, provided they are recommended by
the central insurance authority and are approved as safe by the Government.

The rules concerning the investment of insurance funds in
ordinary or common shares and stocks are evidence of the extreme
caution with which this class of security is regarded, a caution
that is even more marked than in the case of debentures. In
Belgium and the Netherlands, for example, where the purchase

PEBMISSIBLB CLASSES OF INVESTMENTS

99

of debentures is ordinarily allowed on condition t h a t the securities
are of the first class, investment in stocks and shares is either
completely excluded or is allowed only by way of exception.
Yet shares in general, and ordinary or common stocks or shares
in particular, are sometimes considered (for instance in the United
States) particularly suitable for long-term investment.
This
theory, which has been developed by Professor Irving Fisher and
E. L. Smith *, amounts to considering an investment in ordinary
shares as one in real property and an investment in debentures
as one in money. The writers mentioned agree in preferring " real
property " (as understood by them) to money, in the first place
because the value of money may in some circumstances fall indefinitely, and secondly because, as a rule, the social classes t h a t
benefit by a fall in the value of money are more powerful than
those t h a t benefit by a rise.
I t is true that the yield and the value of shares are in all cases
extremely liable to be affected by speculation, but t h a t is a risk
which can be reduced and ultimately eliminated if investments
are sufficiently well distributed. According to E. L. Smith, capital
invested in the ordinary or common shares or stock of a single
company is affected by events t h a t suddenly occur in difficult
times, and there is a risk of total loss, should a radical cBange
take place in the management of the company, b u t such a change
has never had a serious lasting effect on the majority of the big
companies in the principal industries, and the risks of investment
in ordinary shares can be eliminated by buying the shares or
stocks of a number of companies. 2
To this Professor Irving Eisher adds :
" The shareholder does not merely suffer the risk of loss in the
event of the company's bankruptcy. If business is good, he earns
profits. It has been shown that on an average, and in the long run,
ne is in a better position than the debenture holder, owing to his
chance of earning a profit even when he suffers a risk of loss.
" The debenture holder pays dearly for his so-called security and
the regularity of his income. On the other hand, a man who
subscribes, for a share to some extent buys a lottery ticket, and
experience shows that the price he pays for this ticket is lower than
that corresponding to the mathematical probability of profit. Taking
into account the traditional privileges of debentures, it will be seen
that the purchase price is lower than that of debentures, owing
precisely to that privilege.
1
E d g a r L a w r e n c e S M I T H : Gommon Stocks as Long-^Perm
Investments,
N e w Y o r k , 1928.
2
Cf. J u s t H A B I S T O Y : L'épargne
des travailleurs,
la spéculation
et le
néo-capitalisme
aux Etats-Unis,
p . 39. P a r i s , G i a r d , 1932.

100

INVESTMENT OF SOCIAL INSURANCE FUNDS

" A rise in price directly injures both debenture holders and
shareholders, who suffer in their capacity as consumers, but where
the debenture holder finds that the real value of his capital and
income declines when the value of money falls, the shareholder finds
that the profits have increased as well as the value of his dividends.
Taken altogether, the shareholder gains what the debenture holder
loses. The purchasing power of the one declines while that of the
other increases. In a word, depreciation of the currency injures the
debenture holder and benefits the shareholder.
" If prices fall, the opposite process takes place. Both shareholders and debenture holders benefit, for their money requires
greater purchasing power. In addition, many companies devote part
of the profits earned in good years to keeping out of difficulties in
bad years without increasing their capital or issuing new debentures.
It often happens that a company will pay a dividend out of its
reserves, so that in bad years some companies continue to live on
the profits of good years. "
I t is in periods when prices fluctuate widely that shares are found
superior to debentures. Professor Irving Fisher noted that from
1866 to 1922 the income from a particular type of debenture was
never higher than that from a particular type of share. Estimated
in " purchasing power dollars ", the income from debentures fluctuated
between 11.7 per cent, during the period of falling prices from 1866
to 1885 and 0.08 v per cent, during the period of rising prices from
1906 to 1922. The income from shares, on the other hand, fluctuated
between 14.0 per cent, and 3.2 per cent. During the period of relative
stability of prices from 1892 to 1911, debentures earned 4.4 per cent.
and shares 7.6 per cent., both being estimated in purchasing-power
units. The shareholder had thus an advantage over the debenture
holder not only in that
his real income was higher, but also in that
it was more stable. 1
Professor Irving Eisher concludes that the stability of income
from debentures is illusory as long as the value of money is not
stabilised, and t h a t it might just as well be said of debenture
holders as of shareholders t h a t they speculate in the uncertainty
of the future purchasing power of money.
There is n o doubt some truth in the theory, particularly as
regards the risk t h a t debenture holders run in the event of currency
devaluation ; but people who advocate investment in ordinary
or common shares or stock are a p t to forget how difficult it is to
estimate the value of any given company's shares.
A holder of capital is often almost powerless not only to form
an opinion about the shares of individual companies and the future
of the branch of industry or trade concerned, b u t also, and above
all, to forecast possible changes in the management of companies
and the vicissitudes to which individual undertakings are exposed. 2
1
Cf. Just HARISTOY : L'épargne des travailleurs, la spéculation et le
nêo-capitalisme aux Etats-Unis, p. 43. Paris, Giard, 1932.
2
Ibid., p. 58.

PERMISSIBLE CLASSES OF INVESTMENTS

101

During a period of normal trade, it is no doubt possible, b y
purchasing the shares of a large number of companies, to reduce
the risk of loss, but during a slump, or even at times when t r a d e
is relatively depressed, the spreading of investments only affords
a limited and very uncertain security. At such times undertakings
collapse in a great variety of industries, and it is both risky and
difficult to protect investments by selling some securities with
a view to purchasing others 1 .
Preference shares are a safer investment than ordinary shares,
since they confer on the holder priority over ordinary shares as
regards both future profits and capital repayment. Whereas the
holder of ordinary shares runs the risk of receiving no dividend
during one or more years, the holder of preference shares m a y
recover out of the profits of a prosperous year any arrears of
dividends. Moreover, dividends on these shares are usually fixed,
and often guaranteed. I t may be provided, for example, t h a t
preference shares shall be entitled to a minimum dividend out
of the annual profits a t a specified percentage of their amount
before the ordinary shares can claim any distribution.
But even the preference shares of the most prosperous and
.soundest companies .cannot, be accepted for the investment of
insurance funds until a careful examination has been made of
each individual case on its merits.
I n the first place the very widespread practice to-day of
creating shares to which plural voting rights are attached m a y
mean that the holders of other shares (ordinary or preference
shares) can be outvoted at the general meeting of the company,
and their rights restricted. I n other words, the value of their
security can be diminished.
Secondly, the repayment of shares a t their nominal rate when
the company is wound up — or before such date if the capital is
gradually paid off —•- always entails a twofold risk, t h a t of a loss
on the paid-up capital if the share was bought above par, and
the even more serious risk of repayment below par owing to a
shortage of assets when the company is wound u p . Now, the
fact is t h a t an at least partial shortage of assets when a company
is wound up, or inadequate repayment of capital before liquidation,
is by no means infrequent, and is difficult to foresee, especially
1
On this point, cf., among others, Chelioe C. BOSLAND : The Common
Stock Theory of Investment; its Development and Significance.
Ronald
Press Co., New York, 1937.

102

INVESTMENT OP SOCIAL INSURANCE FUNDS

in the case of industrial undertakings formed for a period which
is limited either by their nature or by agreement.
The difficulties indicated above of forecasting with some
certainty the yield, redemption or repayment of the capital are
undoubtedly even greater in the case of founders' and management shares and the like, over which preference and ordinary
shares are given priority when the assets are distributed in the
case of the winding up of the company, or even when the dividends
are allotted (as in the case of actions de jouissance in France).
Analysis of Replies
The replies received may be divided into three groups :
(1) those which objected to the purchase of any sort of shares
or stock ;
(2) those which approved the purchase of preference or ordinary
shares or stock of companies holding concessions or monopolies ;
(3) those which approved the purchase of any shares or stock,
provided they are first-class securities, even when they are
not issued by companies holding concessions or monopolies.
The replies condemning the purchase of every sort of shares or
stock were in a minority, but a large one (9 out of the 22 persons who
gave a definite reply).
One of these replies brought forward arguments in support of this
objection. After remarking that it is regrettable that insurance capital
can hardly be invested otherwise than in the purchase of real estate
or in loans issued by public bodies, and asking whether it would not
be advisable to re-invest such capital more directly in business, this
reply concluded that on reflection, such ideas, " seductive though they
may appear, should be rejected. " It pointed out that investment
in shares or stock " cannot fully attain the object in view unless it
forms a major proportion of the holding of the insurance institution.
The institutions have to choose between Government funds or funds
with a Government guarantee and investment in private companies,
and in doing so they choose between fairly complete dependence on
the public authorities and considerable, if not absolute, independence.
In a serious situation, making it impossible for the State and local
authorities to meet their Habüities, a large number of private undertakings would certainly be affected, so that it is by no means sure that
commercial or industrial shares or stocks would always prove as safe
a refuge as is sometimes imagined.
" Moreover, insurance institutions should not contemplate
participating in new businesses, but only in undertakings which have
already stood the test of time. But in most cases the shares of such
undertakings are quoted at rates which mean a mediocre yield, lower
than that of many loans with a Government guarantee. Even supposing
that participation in a private undertaking would make it easier to
maintain the purchasing power of the capital, account must be taken
of the probable yield of each investment when comparing the respective
advantages of commercial or industrial shares or stock and of debentures

PERMISSIBLE CLASSES OP INVESTMENTS

103

guaranteed by the public authorities. I t is not certain that, even in
case of currency depreciation, the situation will necessarily favour such
shares or stock.
" In addition, the essential fact would appear to be the difficulty
which insurance institutions might find in obtaining help from the
community if, having clearly shown by their choice of investments that
they desired autonomy, they were to suffer losses on such investments,
or were even affected by a very general embarrassment making it
impossible to keep up, by their unaided efforts, the purchasing power
of the benefits promised to insured persons.
" Lastly, it will be realised that the investment of very large sums
in the shares or stock of a few private undertakings would be quite
likely to cause regrettable speculation, harmful both to the insurance
institutions and in its psychological effects. "
As against this view, there were 13 replies which approved, on
certain conditions, the purchase of the shares or stock of commercial
and industrial companies.
Very few replies were in favour of investment in shares or stocks
of companies other than those holding concessions or monopolies, and
even these few were accompanied by substantial reservations.
According to two of the persons in question, such companies should
be " approved ", or at least " strictly supervised " by the Government,
while another considered that only " powerful undertakings, whose
conduct leaves no room for chance " should be qualified.
Lastly, according to one reply, in order that their shares or stock
may be acquired by insurance institutions, the companies in question
must have been set up for purposes of social utility or of national
economic .development.
It would appear, therefore, that, according to the View expressed
by the great majority of the persons consulted, the shares or stock
of companies other than those holding concessions or monopolies should
be excluded.
It remains to be considered whether investment should be permitted
in the preference shares or stock only, or also in the ordinary shares
or stock of companies holding concessions or monopolies.
Among the replies approving the purchase of shares, only two
were against the acquisition of ordinary shares or stock of companies
holding concessions or monopolies, and there were ten in favour of
such acquisition. Most of the latter, however, insisted that the
companies must be carefully chosen, and that the quantities of the
shares or stock purchased should be strictly limited. It was suggested
that for the investments of insurance institutions the choice must be
restricted to the shares or stock of first-class companies which have
long been paying dividends and which engage in no operations of a
speculative character (railway companies, collieries, electricity undertakings, estate agencies, banks of issue) and the shares or stock bought
should not represent more than 5 to 10 per cent, of the total capital
invested ; or the choice should be restricted to the shares or stock of
first-class companies whose capital has been entirely paid up and
which are recommended as well-organised and sound by the Government
authority responsible for their supervision ; or again to the shares or
stock of companies which have had a good yield record in the past
and, by reason of their type of activity, seem likely to run no more
than very low business risks.
Lastly, two replies, although against the purchase of shares, would
make an exception in favour of those of banks of issue.

104

INVESTMENT OF SOCIAL INSUBANCE FUNDS

Discussion

and

Conclusion

T h e Office t e x t was as follows :
Ordinary shares or stock of commercial or industrial
companies should only be entertained as possible investments
for insurance funds if t h e interest or dividend and redemption
of capital are sufficiently guaranteed.
Only t h e shares or stock of companies enjoying long-dated
concessions or monopolies would appear to fulfil these conditions.
Main points t o consider :
W h a t method should be followed in examining the prospects
of p a y m e n t of interest or dividend a n d of redemption of capital.
W h e t h e r there is likely t o be a n increase in the present
potentialities of investment in commercial or industrial ordinary
shares or stock as the result of t h e increasing intervention of
public authorities in the economic sphere.
Mr. G É R A R D stated t h a t , although he did not propose t o move a
formal a m e n d m e n t , he did n o t consider it expedient t o suggest t h a t
the increase in the present potentialities of investment in commercial
or industrial shares or stock was connected with or even the result of
the increasing intervention of public authorities in the economic sphere.
Such a suggestion would without doubt be received with reserve, a t
least in certain quarters, particularly among employers.
The Committee accordingly decided to delete the passage in question,
and the Office t e x t was adopted without other modification, against
Mr.

H E N R Y ' S vote.

R E A L ESTATE

Rules concerning Permission to Invest
Belgium
The Miners' Insurance Act provides that the National Miners' Pension
Fund may invest funds in real property other than that occupied by its
own services, the object being to enable the fund, if need be, to acquire
a property serving as security for a mortgage loan should the foreclosure
of the mortgage yield only a smaller sum than the amount of the loan
granted.
I n the salaried employees' insurance scheme the rules of the National
Fund and the approved insurance institutions state that with the approval
of the Ministry of Agriculture forest land or land for afforestation situated
in Belgium m a y be purchased.
Chile
Out of some 325 million pesos representing the total investments,
real estate accounted for about 126 million pesos, or nearly 40 per cent.,
a t 30 J u n e 1937. This sum consisted as to nearly 40 per cent, of rural
property, as t o 40 per cent, of urban property, especially letting property,
and as to 20 per cent, of buildings for health and administrative services.
Fiance
The purchase of real estate is allowed in the case of buildings completely
finished and situated in towns with a population of over 100,000 or in the
Department of the Seine.
The total investments of an insurance institution in real estate, including
buildings used for the administration of the institution, may not exceed
15 per cent, of its total holding.

PERMISSIBLE CLASSES OJ? INVESTMENTS

105

Germany
The acquisition of real estate situated in Germany requires the consent
of the authority responsible for the supervision of the institution in question.
The establishment of hospitals, convalescent homes, rest homes, dental
clinics and similar institutions requires the consent of the National Insurance
Office (that is to say, the supreme supervisory authority for social insurance),
even though no construction is involved (e. g. purchase of real estate).
Great Britain
Insurance funds may be used for the purchase of a freehold property.
Italy
The purchase of rural or urban real estate is allowed for the investment
of insurance funds provided that the total amount invested in mortgage
loans and the purchase of real estate as shown at the stocktaking does
not exceed 10 per cent, of the total assets.
Sweden
Insurance funds may not be invested in letting property unless the
property bought served as security for a claim and has been distrained
in connection with the claim. Property so acquired must be disposed
of again as soon as the proper administration of the insurance funds will
allow.
*
#

*

The investment rules concerning the acquisition of real estate
allow the investing authorities ' considerable freedom.
Investment in real estate is fairly generally permitted and t h e
rules concerning the purchase of such property are much wider
t h a n those relating to the purchase of ordinary shares and stocks
for example, where these are included among permissible investments. The reason is t h a t among variable-yield investments
those involving the least risk of total loss are no doubt urban
and rural real estate.
Their yield, on the other hand, is slow in adjusting itself to
variations in the purchasing power of money. During a period
of monetary depreciation the yield of letting properties is usually
affected by laws protecting tenants. These laws limit any increase
in rents at a time when the cost of upkeep and taxes tend t o rise.
On the other hand the owners of such premises must expect a
fall in rent in the event of an economic depression. They also
have to face the risk of depreciation owing to a fall in building
costs or the shifting of the centres where people live and work.
On the whole, rural property is less likely to depreciate in
value than urban real estate, at least over a long period of time.
The yield on investments, however, may vary considerably from
one year to another, for even during a period of economic stability

106

INVESTMENT OE SOCIAL INSURANCE ETJNDS

the net yield on rural property is very unsteady, being liable to
rise or fall as the season is good or bad, and it tends to fluctuate
violently when economic disturbances occur. .
Nevertheless, the purchase of real estate is usually made
subject to special formalities or very marked restrictions : the
special authorisation of the supervisory authority may be required
(e.g. in Germany) ; the proportion of real estate to the total
holding m a y be restricted (e.g. in France and Italy) ; the permission to purchase real estate may be limited to cases in which
a claim of the insurance institution must be protected (e.g. in
Sweden and in t h e Belgian miners' insurance scheme).
The reason is t h a t this kind of investment is open to the objection that i t is difficult to manage real estate. But the difficulty
should not be overestimated ; it may be overcome by setting up
a special department to manage the property or b y making use
of existing institutions such as estate agencies.
In practice, the main obstacle to the investment of considerable sums i n real estate is the difficulty of purchasing property
or of building in such circumstances t h a t the capital and interest .
will not be affected b y the payment of a price out of proportion
to the real value of the property acquired. This difficulty is enhanced b y t h e fact t h a t real estate is naturally in great demand
when there seems reason to fear a devaluation of the currency
or when devaluation gives rise to speculative activity which is
liable to diminish the value of any purchases made.
Analysis of Beplies
Only three of the persons consulted were against acquisition of
any urban building property for letting purposes. Two of these
replies were based on the difficulties of acquiring and managing real
property of any considerable size.
Further, one expert, without definitely opposing the acquisition
of building property for letting purposes, pointed out that in some
countries this form of property has lost a considerable proportion
of its value in recent years and that to purchase it would probably
involve a substantial loss.
The other persons consulted were in favour of permitting the
investment of insurance funds in urban letting property. " It would
be irrational ", said one, " to permit investment in mortgages and
yet to prohibit in all cases the acquisition by the insurance institution
of the mortgaged property, although such acquisition is sometimes
the only method of safeguarding the invested capital as to both
principal and interest. "
It is true that important conditions are attached to the permission
just mentioned ; either a maximum limit is fixed for the percentage
of the holding invested in building property or rules are laid down
for such purchases in order to avert subsequent disappointment.

PERMISSIBLE CLASSES OF INVESTMENTS

107

Definite opinions as to what proportion of an insurance institution's
funds may be invested ,in building property for letting purposes were
few. Most of the replies merely indicated that such investments
should be made " t o a limited extent only " or " i n limited proportions " or subject to a maximum to be fixed, or that they should
account only for a " small " or " reasonable " fraction of the total
holding. The percentages proposed ranged from 2-5 per cent, to
10-40 per cent.
Very few of the replies discussed in detail the rules to be observed
for selecting suitable real property. One of them, however, pointed
out that " the choice of the insurance institutions should fall on
buildings already constructed which are situated in towns of some
size and especially in those where the population is increasing. It
also appears preferable to choose buildings of recent construction
but already in use. This precaution will enable the institution to
avoid the disappointments caused by unreliable estimates of gross
yield and, overhead costs (including repairs and depreciation)
It
would be better to confine purchases to buildings in quarters in
course of improvement and appearing to enjoy special public favour
From the financial point of view, apart from social considerations,
it appears preferable to acquire buildings not intended for commercial
purposes and composed of dwellings of medium size equipped with
all modern conveniences
Purchases of real property should be
made for preference in periods of depression when the prices of such
property are particularly low
Clearly, reasons of social utility may
justify departure from some of the above rules when it is a question
of acquiring workers' dwellings intended more particularly to house
.insured persons. But it is the duty of the public authorities to
promote the construction of workers' dwellings, and the institutions
responsible for administering social insurance funds should never
lose sight of the conditions of safety and yield, which should take
precedence of all other considerations. "
According to another reply, preference should, on the contrary,
be given systematically to the construction of buildings and not to
the acquisition of those already constructed.
The acquisition of urban property for letting purposes was
generally approved, but the advisability of including rural property
among permissible investments was much more contested, although
a majority of the replies were favourable on this point (11 for and 8
against).
One of the experts who objected to the acquisition of rural real
estate for investment purposes pointed out that his objection did
not apply to the purchase of rural properties intended for certain
social purposes (the establishment of homes for the aged, holiday
camps, sanatoria, etc.) rather than for producing an income in cash.
Discussion and Conclusions
(a) Urban Letting Property

,

Two observations were made on the text submitted by the Office.
Mr : LEÎTGYEL stated that it would.no doubt be expedient from
the standpoint of safety to give preference to the acquisition of
existing buildings rather than to the construction of new buildings,
but it should be borne in mind that new building means more

108

INVESTMENT OF SOCIAL INSURANCE FUNDS

employment, and that this is a particularly important consideration
in periods when unemployment in the building industry is severe.
Without putting forward an amendment, Mr. HENNING expressed
the view that social insurance institutions ought as far as possible
to avoid acquiring buildings, whether in towns or in the country,
unless they were necessary for their insurance activities, and that
in any case such investments should be made with the greatest
caution. The management of urban or rural letting property was
clearly outside the proper functions of insurance institutions, and
it would impede their development and complicate the whole process
of their administration.
Subject to these observations, the Office text was adopted in the
following form :
Besides the buildings which they use themselves for current
purposes (administrative buildings, sanatoria, curative or convalescent establishments) insurance institutions may acquire
urban letting property as an investment which entails the
least risk of loss of capital.
Main points to consider :
Whether preference should be given to new buildings to
be constructed to the order of the insurance scheme or to
the acquisition of buildings of recent construction.
How to determine which classes of buildings lend themselves best to insurance investment purposes : buildings in
urban areas of a certain size and still increasing ; blocks of
flats ; the average size and standard of the flats ; dwelling
houses intended mainly for the insured class, etc.
In the case of the acquisition of real estate make a careful
valuation of its real value in order to make a plan assuring
the redemption of the capital and a regular yield.
Arrange for the approval of a controlling authority for all
important transactions relating to real estate.

(b) Rural Property
The expediency of allowing insurance institutions to acquire rural
property for profit-making purposes was disputed by Mr. HENBY.
Mr. GARCIA OLDINI and Mr. BISQUERET contended that it would
be difficult to exclude entirely this type of investment, which
admittedly should be undertaken with the greatest caution, but that
the necessary reservations had been made in the Office text.
The Committee then decided by 8 votes to 7 to include among
the permissible investments the acquisition of rural property for
profit-making purposes, subject to the following conditions :
The acquisition of rural property for investment purposes
and not for the purposes of the curative establishments of the
insurance scheme would not appear to be advisable save in
exceptional circumstances when all precautions have been taken
to obtain a reasonable yield on the capital and a guarantee
for its repayment.

PERMISSIBLE CLASSES OF INVESTMENTS

109

OTHER VARIABLE-YIELD INVESTMENTS

Rules

Concerning

Permission

to

Invest

Variable-yield i n v e s t m e n t s o t h e r t h a n t h o s e e n u m e r a t e d
. a b o v e c a n t a k e t h e f o r m of t h e a c q u i s i t i o n o r c o n s t r u c t i o n of
b u i l d i n g s t o h o u s e t h e a d m i n i s t r a t i v e a n d m e d i c a l services of t h e
insurance institutions.
S u c h i n v e s t m e n t s a r e v e r y g e n e r a l l y allowed for i n s u r a n c e
f u n d s o n t h e sole c o n d i t i o n t h a t t h e b u i l d i n g s used for t h e a d m i n i s t r a t i v e a n d m e d i c a l services of t h e i n s u r a n c e i n s t i t u t i o n s m a y
n o t r e p r e s e n t m o r e t h a n a specified p r o p o r t i o n of t h e t o t a l h o l d i n g .
I n Sweden, for example, where the acquisition of real estate is ordinarily
allowed only when the object is to protect an insurance claim, t h e regulations
provide that insurance funds, up to one-thirtieth of their amount, m a y
be invested in real property which is intended to be used for preventing
or eliminating the risks of incapacity for work. Such investments, however,
require the consent of the Government.
In France the insurance institutions or their federations m a y be
authorised by the General Guarantee Fund to purchase land and buildings
and to construct and adapt buildings for their administrative services (the
acquisition of building property for letting purposes being allowed as a
rule only-when the property is situated in a town with a population of
over 100,000 or in the Department of the Seine).
' " "
" •-

Analysis

of Replies

Two replies stated t h a t if a social insurance institution does not
possess t h e buildings needed for housing its administrative services,.
it must rent such buildings and this m a y involve e x t r a expense.
Three of t h e persons consulted considered t h a t it should be possible
to use a p a r t of t h e reserve funds for t h e construction or purchase of
hospitals, sanatoria' and other establishments for t h e promotion of
health. This class of building property, as one of t h e experts pointed
out, also produces a regular income, a n d though its yield is lower
t h a n t h a t which m a y be obtained from other investments (or even
though a loss m a y be made), it must be considered as helping t o
perform t h e functions a n d achieve t h e objects of social insurance.
The p cquisition of this class of property should therefore be authorised
a n d even recommended, particularly when t h e yield of t h e other
investments is above t h e actuarial rate.
The two remaining replies on this point considered, on t h e other
hand, t h a t even as regards investment in hospitals, sanatoria a n d
other curative estabhshments, provision m u s t be made for a longt e r m yield sufficient t o guarantee p a y m e n t of interest a n d redemption
of capital.
Where t h e health a n d medical faculties created or developed b y
means of insurance funds exceed t h e institution's own needs, public
assistance institutions a n d the public in general m u s t obviously be
encouraged t o m a k e use of such facilities if a yield on t h e capital is

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INVESTMENT OF SOCIAL INSURANCE EXJNDS

to be obtained. An operation of this, sort will not be sufficiently
safe and remunerative for the investment of reserves unless the
facilities in question can be fully used. When this last condition is
fulfilled, the creation of such facilities is a highly desirable form of
investment.
Similar considerations apply with regard to homes for the disabled.
Such establishments enable the insurance institution to house part
of its pensioners, and " the saving so made on the payment of pensions
must naturally cover the cost of maintenance, interest on capital, and
redemption ".
Conclusions
Investment in building property or rural property for letting purposes
does not exhaust the openings for investment in real estate if* certain
investments of a limited monetary yield are to be permitted by reason
of their social utility. The question which rises is whether certain of
the buildings which the insurance institution requires for its own
working (headquarters, premises for administrative services, sanatoria,
convalescent homes and other curative establishments) can be made
to figure as assets balancing the legal reserves. The reply would appear
to be in the affirmative provided that the value at which such buildings
are assessed does not exceed the sum which they would fetch in case
of sale.
Establishments for health purposes belonging to the insurance
institutions themselves are, however, not interest-bearing investments
— and the earning of interest is essential to the constitution of
reserves — except in so far as they exceed the needs of the institution
itself and bring in an absolutely certain pecuniary yield.
In determining what sums may be devoted to the purchase of the
buildings required for the needs of the insurance institutions themselves
(headquarters, convalescent homes, hospitals, etc.), the decisive factors
to be taken into account are the possible yield of these establishments,
their balance-sheet value, the proportion they form of the total holding
and, lastly, the influence of their acquisition on the average yield of
the invested capital.
When considering the conditions of yield that must be satisfied by
investments, the Committee of Experts had defined the circumstances
in which the acquisition of preventive and curative institutions, for
example, might be permitted. The conclusions adopted on this point
may be repeated here.
In special circumstances the insurance scheme may...
content itself with a rate of interest lower than that which is
currently obtained where the investments procure advantages
for insured persons as a social group, for instance, by acquisition
of preventive or curative establishments, construction of
workers' dwellings, etc. In order that the making of such
investments may be entertained it appears to be essential that
there should be obtained on the total holding a yield at least
equal to the rate of interest which was taken as a basis when
the contribution and the benefit tables of the insurance scheme
were drawn up, plus a slight margin of security.

PERMISSIBLE CLASSES OF INVESTMENTS

C. — COMPOSITION

OF INSURANCE

111

HOLDING

The proportions t h a t should be fixed and possibly maintained
between the various classes of investments of which the insurance
holding is composed are, so to speak, the resultant of various
forces and tendencies, some favouring a particular investment
on account of certain of its features, others unfavourable to t h a t
same investment on account of certain other features.
Safety, yield, liquidity, economic and social utility, and, in
general, ease of administration and market tendencies are competing factors. The weight to be assigned to each class of investment will depend both on the relative importance attached to the
conditions t h a t it is considered the investment must fulfil and on
the degree to which the class of investment in question satisfies
the desired conditions.
Finally, the possibility of investment in a particular class of
security is sometimes automatically limited, whatever the merits
of the security and the interest of including it in the holding,
by the small amount available (securities of very safe companies,
instalments of loans on the point of being redeemed, etc.). Moreover,
even where i t is actually possible to buy a first-class-security, itsacquisition can hardly absorb the whole or the greater p a r t of
the reserves. The distribution of the investments over as m a n y
kinds of securities as possible (Government funds and similar
securities, provincial and municipal loans, mortgage loans, real
estate, etc.) is necessary in order not only to spread the risks as
far as possible but also to use the funds a t the disposal of the
insurance scheme, if not in all branches of the national economy,
a t least in those in which investments satisfy the fundamental
conditions laid down for the formation of reserves.
Account has already been taken of considerations of this kind
in the analysis of the conditions on which certain classes of
investments may or should be permitted for insurance funds.
The condition t h a t an investment must not exceed, for example, a
small fraction of the total holding was one t h a t could n o t be
ignored.
An attempt will be made here, however, to sum up and group
the arguments p u t forward with regard to the relations t h a t
should be established between the various classes of investments
composing the holding and the minimum or maximum percentages
of the total insurance assets that some of them should form. The

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INVESTMENT OF SOCIAL INSURANCE FUNDS

problem is still t h a t of knowing whether or not it is possible to
lay down a n y general rules or fixed proportions which, without
setting the institution responsible for selecting the investments
entirely free from trying to arrive at a rational balancing of the
holding, will nevertheless serve as a guide as regards the minima
to be reached or the maxima not to be exceeded.
*

*

*

The questions raised in this connection related to :
(1) the investments which must be included in the holding of
social insurance institutions ;
(2) the investments which may represent only a prescribed
proportion of the holding ;
(3) the proportion of the various classes of investments to the
total holding.

INVESTMENTS
IN

WHICH
THE

MUST

BE

INCLUDED

HOLDING

The persons consulted were asked to state whether they
considered t h a t social insurance institutions should be bound
to include in their holdings certain classes of investments, and,
if so, whether these classes of investments should constitute a
prescribed proportion of the holdings of the institutions and what
the proportion should be.
Analysis of Replies
On the substance of the question — obligation of the insurance
institution to use a more or less considerable part of its funds for the
purchase of certain investments — seven of the persons consulted
replied in the negative. Two of these replies related to actuarial reserves
only, but the others made no distinction between actuarial and contingencies reserves. One stated that to require insurance institutions to
purchase certain classes of securities is a restriction of their independence
regarding investment. Further, if such an obligation exists, it will
as a rule be imposed on the institution in the interest of the State and
not in that of the duties which the institution is required to perform.
Another reply pointed out that a provision of this sort can only have
a harmful effect on the flexibility necessary to an investment policy ;
moreover, to establish an obligation by law would be pointless, since
even without such a provision, the Government can call upon the
insurance holdings in support of the loans it issues.
Besides the clearly negative replies, there were others which very
much doubted the advisability of compelling an insurance institution
to include certain investments in its holdings, but would nevertheless
approve this obligation as regards Government funds. The most
restrictive of these replies contemplated a position in which the insurance

PERMISSIBLE CLASSES OF INVESTMENTS

113

funds have been furnished largely by the State itself ; it would be n a t u r a l
enough in such a case t o provide t h a t the p a r t of these reserves
furnished by the State should be invested in the public debt.
Three other replies were less restrictive, and though opposed t o t h e
principle of compulsion t o invest in a given way, nevertheless approved
such compulsion in t h e case of Government funds or Governmentguaranteed funds.
Sixteen replies were in favour of compulsion t o invest p a r t of t h e
institutions assets in certain classes of investments.
As regards the specification of t h e investments which must be
included in the holdings, t h e replies m a y be divided into two very
unequal groups.
Most of the persons consulted who approved of compulsion were
of the opinion t h a t only Government funds or Government-guaranteed
funds should be compulsory investments. The arguments used in
favour of the proposed obligation were, first of all, the formal safety
of Government bonds, a n d then the guarantee — a t least, moral —
which the State gives t o bodies administering compulsory insurance ;
in return for this guarantee, the insurance scheme m a y be expected
to support its guarantor's credit, the investment in Government funds
being, so to speak, merely the counterpart of the assistance which t h e
insurance scheme m a y claim in case of emergency.
Two of the replies advocated extending the obligation to securities,
quoted on the stock exchange, of regional or local authorities which
have power to levy rates and taxes, and to loans guaranteed by these
authorities. Another would extend it t o the securities (stocks a n d
shares, or debentures) of particularly reliable companies or of big banks
linked up with the economic life of the country.
Lastly, two replies proposed t h a t t h e risk "of currency devaluation or conversion involved in fixed-yield investments, andv particularly
in the purchase of Government funds, should be offset by compulsory
acquisition of real estate. One of these replies made it clear t h a t in
view of the social value of the promotion of cheap housing, t h e
compulsory acquisition of real estate should apply in particular t o
houses for letting to insured persons.
The proportion in which the compulsory investments should be
required to figure in insurance holdings was the subject of suggestions
which varied considerably.
Among the replies, which proposed a definite percentage for t h e
compulsory acquisition of Government funds, two suggested 50 per cent.
of the total holding ; in point of fact, one of these replies contemplated
a strict minimum proportion, whereas the other would make t h e
application of the percentage subordinate to the condition t h a t t h e
national financial and monetary situation gives rise to no. apprehension
and t h a t there is no reason t o expect an early realisation of the capital
of the reserves such as might result in an excessive increase in t h e
proportion of investments in real estate. The other percentages
suggested for Government funds were 33 per cent., 25 to 30 per cent.,
25 per cent., and 16 per cent.
One expert, although in principle opposed t o the obligation t o
invest a specified proportion of the total holding in Government funds
or in loans to other regional or local authorities, considered t h a t if
such an obligation were accepted, t h e proportion should not exceed
20 per cent, or 30 per cent, a t the most. Another was against a n y
system making the investment of all reserves in Government funds
compulsory.
v

8

114

INVESTMENT OF SOCIAL INSURANCE FUNDS

Finally, one reply stated that all reserves should be invested in
Government funds ; only if it becomes difficult to acquire such funds
should arrangements be made for the purchase of other classes of
investments.
As to investments other than Government funds which it was
considered should be made compulsory, only two proportions were
suggested, namely that real estate should figure to the extent of
30 per cent, or 50 per cent, in the insurance holding.
Moreover, there was considerable opposition to any attempt to fix
beforehand an unvarying percentage of insurance holdings which should
be invested in specified securities, even among persons who approved
the obligation to invest part of such holdings in Government funds or
Government-guaranteed funds.
The seven replies which took up this attitude pointed out that it
must, in fact, prove extremely difficult, if not impossible, to fix a priori
proportions applicable tp nearly every case, the reason being the
diversity of the circumstances justifying the obligation to invest in
certain classes of security : the relative size of the funds used by the
Government in pursuit of its economic and social policy ; the financial
and monetary situation of the State ; the more or less pressing need
to support public credit ; the payments which the insurance scheme
is required to make ; the degree of liquidity which must be required
of reserves ; the probable variations in the reserves ; the degree of
safety offered by public funds ; the yield from other securities or real
estate, and the actual possibility of purchasing these, etc.
Conclusion
The Committee adopted the following text submitted by the Office :
It appears certain that among the investments which must
be included in the holdings there should figure Government
funds or Government-guaranteed funds.
The main considerations which should be taken into account
in determining the proportion of the total holdings which the
above-mentioned investments should represent are :
On the one hand, the advisability, if not necessity, of
supporting the credit of the State or its economic or social policy ;
the high degree of safety offered by Government funds or
Government-guaranteed funds ; what opportunities there are
in practice of acquiring other investments which offer an equal
degree of safety, yield, and, if need be, of liquidity ;
On the other hand, the advisability of distributing the
investments among the various approved kinds and of reserving
a more or less considerable place in the holding to investments
other than in Government funds so as to further the interests
of the various elements of the national economy, for instance
local authority loans, mortgage bonds, direct loans by way of
mortgage, etc.
Investments other than in Government or Governmentguaranteed funds which should be included in the holding up
to a fixed amount may be : local authority loans quoted on the
stock exchange (by reason of the social utility which the works
financed by such loans usually present) and urban letting
property (by reason of the real security which it offers in case
of monetary devaluation).

PERMISSIBLE CLASSES OP INVESTMENTS

115

INVESTMENTS WHICH MAY REPRESENT ONLY A PRESCRIBED
PROPORTION OF THE H O L D I N G

On this point the persons consulted were asked whether certain
classes of investments should represent only a prescribed proportion of the holding, and if so, how this proportion should be
fixed.
Analysis of Replies
Five replies were opposed to fixing beforehand any quota restricting
the proportion that certain investments may form of the total holding.
One of these stated that the order of merit of the various classes
from the point of view of investment policy varies with the rate of
interest, the direction in which this rate is moving, the relative yield
of the different classes, and the composition of the total holding at
the moment of decision (spreading of risks).
The proportions in which the different classes of investment will
finally appear in the total holding depend, first of all, on the range
of investments offered, and secondly on the selection made among
them ; these two factors together will ensure a preponderant place
for fixed-yield investments, and in particular for loans issued or
guaranteed by public authorities and mortgages. The demand for
credit by public authorities arid for mortgage ~ loans is large and
relatively steady, besides which these classes of investments fulfil
the fundamental conditions attached to the selection of securities :
safety, satisfactory yield, and reliable yield.
It therefore appears to be both superfluous and inconvenient to
limit the remaining field of selection, which is already so small.
The proportion to be maintained between the two principal classes
and between the different parts in each will be found automatically.
Even supposing that a body responsible for investment were inclined
unwisely to extend the amount of mortgage loans, the competition
with other lenders on mortgage and the natural limits laid down by
the demand for these loans would soon put an end to such a policy.
Besides the five absolutely negative replies, there was one which,
though not so absolute, yet objected to a specified maximum, except
at the most for classes of investments involving an excessive immobilisation of the holding, and in particular for the purchase of real
estate.
•
As against the five or six negative replies, there were 16 in the
affirmative, which stated that certain classes of investments should
figure in the insurance holding only to a specified extent.
The following are the classes of investment and the maximum
percentages suggested :
Loans to regional and local authorities other than the
Government : 25 per cent., 10 per cent.
Loans to other public bodies : 10 per cent.
Debentures of housing societies : 10 per cent.
Mortgages : 5 per cent., 10 per cent., 15 per cent., 25 per cent.

116

INVESTMENT OF SOCIAL INSURANCE FUNDS

Securities (debentures or shares) of commercial and industrial
companies fulfilling the prescribed conditions as to safety :
10 per cent.
Real estate — the maxima proposed range from 5 per cent.
to 66 per cent.
Mortgages and real estate (together) : aggregate of 33 per cent.
Health establishments : 3 per cent.
Investments other than Government funds, Governmentguaranteed funds and real estate : 40 per cent.
Investments difficult to realise, such as real estate, shares
and loans not quoted on the stock exchange, loans on private
contract : 40 per cent.
Loans to insured persons : 7*4 per cent.
This enumeration shows clearly enough the diversity pi the opinions
expressed, whether as regards the classes of investments for which
a maximum percentage might be fixed or as regards the actual maxima.
I t may also be noted that a fair number of the replies merely
stated that certain investments should form only a certain proportion
of the holding, but that the proportion should vary according to
circumstances and according to each particular case. This system
should be applied to mortgages, loans to housing societies, investments
made exclusively on account of their social utility, real estate, commercial, industrial and bank debentures, deposits at sight and on
short-term, and the shares of commercial, mining and industrial
companies whose profits are affected by the fluctuations of market
prices.
The fixing of a maximum percentage should, in the opinion of
one expert, apply also to securities issued by the Government or under
its guarantee, for although these investments may be more remunerative
than others such as real estate, they have the disadvantage of being
particularly sensitive to currency devaluation and fluctuations in
prices.
Conclusion
The Committee adopted the following text submitted by the
Office :
I t may be advisable to limit the proportion of the holding
represented by certain classes of investments if those investments,
while satisfying the general conditions laid down, call, nevertheless,
for particular care when compared to other forms of investment for
one or other of the following reasons, namely less safety, lower yield,
doubtful liquidity, uncertain social utility.
Ways of limitation to be considered :
(1) Either by statutory determination of a maximum percentage varying, not only according to the class of investment,
but also according to the scheme of insurance and the character
of the reserves (whether actuarial or contingencies) ;
(2) or by supervision by the controlling authority of the
proportions between the various classes of investment forming
the holding.

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PERMISSIBLE CLASSES OF INVESTMENTS

PROPORTION OP THE VARIOUS CLASSES OP INVESTMENTS TO THE
TOTAL H O L D I N G

The persons consulted were requested to state whether in
their opinion the rules governing investments should prescribe :
(a) the ratio of fixed-yield investments to variable-yield investments ;
(b) the ratio of holdings in negotiable securities to holdings in
real estate.
Analysis of Replies
Only four replies were in favour of prescribing in the rules the
ratios between the different classes of investments included in the
holding.
According to one of these replies, the rules should not only enumerate
the various classes of permissible investments but should also prescribe
the maximum and minimum ratios of the investments in the different
classes to the total holding. These ratios should be modified as
occasion requires. The proportion of the holding to be reserved for
real estate should be 30 per cent, of the total, and this 30 per cent.
should be composed very largely of urban letting property. In order
to avoid useless complication in the administration of investments,
each insurance institution should itself determine thé minimum amount
to be invested in each class ; further, in order to limit risks, it should
fix the maximum amount for each investment in real estate and the
maximum amount to be lent to any one borrower.
One reply proposed 50 per cent, as the proportion of the holding
to be reserved for real estate.
Another stated that the proportion of fixed-yield investments
should undoubtedly exceed that of variable-yield investments, and
that a larger part of the holding should be placed in negotiable
securities than in real estate ; the ratio between the two latter classes
should be 2 : 1.
Lastly, one reply proposed the following distribution :
Percentage
of all long-term
investments

(a) Fixed-yield investments
Variable-yield investments
securities)

about 60
(real

estate

and

(b) Real estate
Other investments (negotiable securities) . . .

about 40
up to 20
up to 80

According to the other replies, this is a question which should
be settled with reference to the economic and monetary position of
each country and the probable development of the. different insurance
institutions.

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INVESTMENT OE SOCIAL INSURANCE FUNDS

Conclusion
It would seem that while a limitation of the permissible proportions
of certain classes of investments in the holdings of insurance institutions may be definitely regarded as advisable owing to the lower
degree of safety or utility, the smaller yield, or the insufficient
liquidity of,the investments in question, yet the ratios between these
different classes cannot be fixed once and for all.
The best method of avoiding any undesirable use of funds appears
on due consideration to be that of requiring the supervisory authority
to give its approval in advance in the case of any investment whose
safety, yield or (in appropriate cases) liquidity is open to doubt.
If, as appears advisable, the investment rules are to include general
standards for the proportions of total reserves which certain classes
of investments may not as a rule exceed, these standards should of
course take into account first of all the differences in the risks covered
and in the nature of the reserves in question, the probable trend of
the insurance scheme's liabilities, and the extent to which its membership remains constant, and, secondly, the wide differences in the
degree of uncertainty which the less reliable classes of investment
present in one or other, respect.

D. — POSSIBLE

GUARANTEE

BY PUBLIC

AUTHORITIES

N A T U R E OF THE PROBLEM

A t the present time, owing to the investment rules in force,
the assets of insurance institutions consist b y law mainly of fixedyield securities and especially Government funds.
Investments in fixed-yield securities chiefly include public
funds (Government, provincial, county and municipal bonds),
mortgage bonds, and finally mortgages.
Investment in industrial debentures is usually either prohibited
or very strictly regulated, being unattractive for insurance institutions, since it does not protect them against currency devaluation
and yet entails the risk of losing the capital. This risk is no doubt
smaller than t h a t attending investments in stocks and shares,
but it is nevertheless serious enough to justify prohibition or
strict regulation.
Investment in invariable-yield securities is at present allowed
only in very exceptional circumstances.
Even investment in
real estate is strictly regulated : special permission must be obtained
and only a small proportion of the holding may be invested in
this way.
I t is not difficult to understand why legislative authorities
have been suspicious of variable-yield investments, whether in

PERMISSIBLE CLASSES OE" INVESTMENTS

119

securities or in real estate. Nevertheless, the rules so far accepted
for the investment of insurance holdings might be amended so
as to allow an increase in these investments. I t would certainly
be possible to increase the proportion of insurance assets invested
in real estate, while taking steps to avoid ill-considered purchasing
or building.
The case for the rejection of all variable-yield investments
has not been proved. Some of the preference shares, and even
some of the ordinary or common shares or stock of big companies
holding concessions or monopolies might well be accepted as
suitable investments for an insurance scheme.
Opportunities of developing investment in variable-yield
securities are fairly limited, however, if risks t h a t cannot properly
be assumed by an insurance scheme are to be avoided. In the
future, as in the past, it would seem that the investments of an
insurance scheme must consist mainly of fixed-yield securities
suitably distributed both geographically and with a view to
spreading risks ; and, in so far as the balance consists of real
estate, yield can only slowly adapt itself to monetary depreciation. The extent to which expenditure can be covered by the
return on investments again depends mainly on whether interest
rates and the purchasing power of money aré maintained." ~
"
An exception to this argument could be allowed only if it
were possible to invest the assets in securities t h a t normally
yield a fixed return expressed in terms of gold or subject to a
currency option. But i t is still unusual for such securities t o be
issued, a t least in the home market, which is as a rule the only
market open to social insurance authorities. And the guarantee
afforded by issues made with a currency option or a gold clause
is far from complete.
The currency in which a claim is expressed is no guarantee
against the debtor's insolvency.
There is no need to refer here to the bitter discussion and
many lawsuits which have arisen out of the application of the
gold clause, the borrower only too often claiming the right to
p a y in devalued currency which has retained only p a r t of the
gold value it had when the loan was issued. Sometimes even,
interest is paid and capital redeemed only in a currency with an
official rate of exchange which in practice cannot be exchanged
for gold.
I t is more difficult to object to loans with a currency option.
When such loans are issued in the form of certificates ex-

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INVESTMENT OF SOCIAL INSUEANOE FUNDS

changeable, irrespective of their series or numbers, in several
large centres, they form arbitrage securities of the first class,
providing the greatest facility of negotiation and the best
guarantee of stability of rates, subject only to the condition
t h a t the debtor must remain solvent.
Nevertheless, the option is of no value unless at least one of
the currencies in terms of which the debt is made out has not
been devalued. Moreover, it provides no protection against forced
conversion or special taxes on interest 1 .
Thus, insurance assets will remain very sensitive to currency
depreciations and to forced conversions or reductions in rates of
interest, and i t is hardly possible to make them less so even by
very careful administration of the insurance holding.
I t is true t h a t by devoting special attention to the composition of the holding, certain losses can be avoided and even certain
surpluses be earned out of the average yield of the capital sums
provided for when the actuarial estimates were made. Now if
there is a margin between the actuarial rate of interest and the
actual yield on the capital, it can, and in certain cases should,
be used to form a special reserve, by means of which a future
deficiency in yield may be made up or benefits may be increased
in order to compensate for a fall in the purchasing power of
money.
The efficacy of such a measure is limited, however. The existence of a margin of 1 per cent, between an actuarial rate of interest
of 4 per cent, and an actual return on investments of 5 per cent.
means t h a t the pension payable a t 60 years of age in return for
a regular annual contribution during t h i r t y years can be increased
by 30 to 35 per cent. Here lies a means, therefore, of remedying
a slow and n o t too marked monetary devaluation. But it is
obvious t h a t n o margin of interest can be a protection against
the effects of a heavy fall in yield or a sudden and particularly
marked devaluation.
Investment in variable-yield securities and, in particular,
in real estate cannot, as already mentioned, be an absolute
protection against monetary fluctuations, even if these investments
form a large proportion of the total holding. I t therefore becomes
n e c e s s a ^ to contemplate measures to make good any deficiency

1

See the analysis of the replies to the question concerning permission
t o invest "insurance assets in public funds with a gold clause or currency
option, p p . 96 et seq.

PERMISSIBLE CLASSES OE INVESTMENTS

121

in reserves in face of a depreciation in the purchasing power of
money or of a conversion or forced reduction of interest.
/
What such measures always amount to is an appeal to the
persons paying insurance contributions or to the public authorities,
who spread the burden either on all or on some classes of
taxpayers.
Persons contributing to the insurance scheme may in theory
be appealed to, even before a deficiency in reserves has arisen.
Special reserves might conceivably be built up for the purpose
either of making good a deficiency in the normal actuarial reserves
or of increasing benefits so as to maintain the purchasing power
originally promised to the insured persons. B u t the efficacy of
this measure is limited ; the contribution required to ensure
equilibrium between the receipts and expenditure of the insurance
scheme, with due regard to the return t h a t may reasonably be
expected on capital, can hardly be increased to such an extent
as to afford protection against large-scale conversions, and still
less against substantial devaluations.
Any deficiency which arises can no doubt be made u p more
easily after the event by a levy on the persons contributing to
the scheme ; the existence of a deficit — especially if accompanied
by financial difficulties — will afford a much stronger incentive
than any forecast of a possible deficit for making the necessary
sacrifices to prevent any diminution of benefits.
This way of making u p a deficiency may be justified when the
deficiency is due to faulty management or to some accident ; when
the deficiency is considerable and is due either to currency
devaluation or to forced conversion or some other measure of the
same kind, the assessment of contributing members of the
insurance scheme entails a considerable increase in the burden
to be borne by them, and it is questionable whether the increase
is justified. If not, an appeal to the national community, through
the Government, must be contemplated.
The argument for such an appeal is t h a t the building u p of
reserves to balance part of an insurance institution's expenditure
means that each contributing person during a considerable part
of his life will have to make an effort, the sole purpose of which
is contribution towards the collective saving represented by the
accumulated reserves.
This saving has a counterpart in the form of new means, of
production, the return on which is due to the persons who have
contributed to them ; when the time comes, the insurance scheme

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INVESTMENT OF SOCIAL INSTJKANCE FUNDS

must therefore receive the return it has been promised on the,
capital it has accumulated, in other words the agreed proportion
of the goods it has directly or indirectly helped to produce.
As need hardly be said, there is nothing uneconomic about
adjustment t o currency devaluations by restoring the purchasing
power promised to lenders, or readjusting an annuity t h a t has
been converted compulsorily, so as to make it correspond to
the rate of interest t h a t could have been paid had there been
no compulsory conversion.
Assuming that purchasing power will be restored after a
currency devaluation, as is much the most likely event, it may
be said t h a t when contributions have been invested, placed to
reserve, on t h e basis of a certain equation between money and
the goods a n d services which money will buy, in other words on
the basis of a certain purchasing power, the beneficiaries of loans,
or of the amounts invested, have agreed to levy on the national
income, consisting, in the final analysis, of the total quantity of
goods available for consumption, a certain percentage t h a t the
lenders may dispose of. If prices rise and consequently the
currency depreciates, any additional levy on the national income,
to restore the original purchasing power of the yield on the capital
lent, merely restores the equilibrium t h a t the lender and the
borrower originally had in mind.
When the real value of the national income remains the same,
as expressed i n goods available for consumption, b u t its nominal
value doubles, all t h a t can happen, if the amounts t h a t were
originally to have been set aside for the payment of interest on
loans are multiplied by two, is t h a t the. percentage originally
contemplated will be paid. This may bear on other productive.
classes than those who would have had to pay the interest
on the first loan arranged, it may counteract the - advantages
conferred by a rise in prices on. the bodies liable to pay pensions
or annuities, b u t it is not uneconomic for those reasons.
I t may of course be objected that, if the necessity is admitted
of compensating for the consequences of currency devaluations
or forced conversions, the same principle will apply in the case
of all collective or individual saving.
As a rule, depreciations of capital or forced reductions in the
return on capital are due to the fact t h a t the liabilities previously
incurred by borrowers or persons who have to pay annuities are
too high ; in a n y case the result is to lessen the burden on these
classes.

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123

If, immediately after a depreciation, all liabilities and
expediture are restored to their previous level, as expressed in
real values, the previous situation is restored and the depreciation
no longer has any effect ; a vicious circle is thus set up.
While it is, in principle, clearly just as necessary to compensate
for the effects of currency devaluation or forced conversions in the
case of one class of capital holders as in t h a t of another, special
consideration ought to be given to persons of small means whose
only source of subsistence is the return on their savings, and
particularly to social insurance beneficiaries. Persons insured
under a social insurance scheme are in a special position ; since
they are compulsorily insured and their capital must be managed
in accordance with certain rules, their claims are particularly
well founded. I n addition, the d u t y to readjust social insurance
benefits is rendered more binding by the fact t h a t these benefits
afford a minimum of security and of purchasing power t h a t an
insurance scheme cannot sacrifice without failing in its purpose.
Thus maintenance of the purchasing power of benefits would
appear to be the counterpart of compulsory insurance. I n
making insurance compulsory, the State assumes, according to
this view, a certain responsibility for seeing t h a t the assets,
consisting of contributions or subsidies", are properly managed ;
a certain measure of safety is guaranteed, and the value of the
benefits should not be merely nominal b u t effective and real.
Nevertheless, 'while the need for affording as much compensation
as possible for losses incurred by an insurance scheme owing to
currency devaluation, forced conversions, or similar measures,
seems hardly questionable, this does not mean t h a t provision
ought to be made in advance for a definite undertaking on the
part of the Government to restore, if necessary, the purchasing
power of the accumulated reserves.
The objection might be raised t h a t an undertaking of this
kind would weaken the sense of responsibility of the authorities
whose duty it is to invest the funds. If the funds are to be invested
in the best possible manner, t h a t sense of responsibility must be
maintained. Further, such an undertaking would give the
Government increased influence over t h e investment policy of
insurance schemes and increased power to interfere with their
choice of securities. Lastly, a n y obligation assumed in advance
to restore the valué of reserves affected by monetary manipulations
would be taken as proof t h a t the currency is unsettled and t h a t
contracts are unreliable, and would make large classes of the

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INVESTMENT OF SOCIAL INSURANCE FUNDS

population less interested in the maintenance of monetary stability.
I t is of course difficult to forecast the significance and the
psychological consequences of an undertaking given in advance
to make good any deficiency in the yield of investments.
All t h a t one can reply to the arguments suggested above is,
firstly, t h a t a n undertaking to repair the consequences of currency
devaluation or of forced conversion should rather deter Governments from having recourse to such measures, since, after giving
the undertaking, the Government would have nothing to gain
by them.
Secondly, it has yet to be proved t h a t an undertaking to make
good any deficiency in the yield of reserves in certain specified
circumstances for which the responsible authority is in no way
to blame would lead to less care being taken in the selection of
investments ; it might just as well be argued that, in the absence
of any such undertaking, the authority responsible for seeing to
investments will try to guard against currency devaluations, for
instance by buying securities with a variable yield, and will thus
run unwarranted risks.
However t h a t may be, an undertaking to make good currency
devaluations or forced reductions in the yield of investments has
never been expressly stipulated so far. At most a move in this
direction may be inferred from certain legal provisions to the effect
that the State guarantees a minimum percentage yield on insurance
investments (3 per cent, on the reserves accumulated under the
United States Social Security Act, for example) or t h a t the insurance scheme shall receive the proceeds of certain taxes, varying
as a rule with the purchasing power of money, such as a tax
on the price of railway tickets or a percentage of customs
duties'.
On the other hand, since the war, pensions have often been
revalued as a result of currency depreciation.
The devaluation of currency t h a t has taken place in many
countries has in fact led as a rule to the granting to persons in
receipt either of accident pensions or of invalidity, old-age or
widows' and orphans' pensions of an additional pension (cost-ofliving bonus) or compensation calculated with reference to the
level of wages after devaluation, this compensation taking the
place of t h a t which was originally specified and had lost all or
part of its purchasing power. Sometimes the nominal rate of
insurance benefits has been changed after currency devaluation
and stabilisation in order fully to maintain ,$heir real rate.

PERMISSIBLE CLASSES OE INVESTMENTS

125

In any case the bodies responsible for paying benefits, t h a t
is to say the insurance institutions whose reserves were generally
invested in fixed-yield securities, so t h a t their purchasing power
fell with the depreciation of the currency, could not obtain out
of their income the sums needed to pay for the cost-of-living
bonuses or the new compensation that took the place of the amounts
fixed before devaluation.
If, after a total collapse of the currency, insurance reserves
themselves were " revalued ", such revaluation related only t o
certain kinds of loan or security, and ultimately — for example,
in the German scheme — inflation reduced the total reserves by
about 85 per cent., whereas the obligations towards insured persons were after some time maintained at their original value or
restored to it almost in full.
The above remarks may be illustrated by the following account
of the method of distributing the new burdens arising from the
revaluation of benefits t h a t could not be borne out of the income
drawn from reserves. Obviously all t h a t can be considered here
is the first or initial distribution of this burden and not its
final incidence, since the particular social category which
ultimately has to bear it must depend on the balance of forces
involved, and these it is impossible to measure even approximately.

CoVEB FOB THE REVALUATION OF PENSIONS

(1) Accident Pensions
(Belgium, France, Germany, Great Britain, Poland)
In most cases the provisions of workmen's compensation legislation
that deal with the distribution of the cost of any pension increases
allowed are based on the principle that it must be borne by all the
economic factors involved in the occurrence of an accident. I t is
for the community as a whole to bear the burden resulting from a
fall in the purchasing power of money, since the real value of its
property or income is but little affected, if at all, by devaluation.
Thus, in Belgium, the pension supplements are charged to all the
taxpayers as a body, while in France, Germany and Poland they
are borne by all employers together.
The only exception to this rule is in Great Britain, where currency
devaluation — which incidentally was slight as compared with that
which took place in the. other countries considered — .has been
compensated not by the whole community or the employers as a
group, but individually by each person or institution responsible for
the payment of compensation.

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INVESTMENT OP SOCIAL INSURANCE FUNDS

The methods adopted in each of these countries are described
below :
Belgium
The Welfare and Relief Fund for the dependants of the victims of
industrial accidents is responsible for the payment of pension supplements.
The funds it needs for this purpose are paid to it by the Ministry of Labour
out of a special credit. I n other words, it is the State which bears the
burden of t h e said supplements.
France
Supplements to accident pensions are paid by the Guarantee Fund 1,
which makes» a special levy fixed and collected in the manner prescribed
by the Act of 30 September 1922 for the financing of this Fund.
The levy is charged in respect of every insurance premium paid under
the industrial accident legislation by insured employers. During 1933
the contribution was fixed at 11 per cent, of these premiums (industry
and commerce).
For employers who are not insured,. except the State in its capacity
of employer, the levy is charged in respect of the capital value of the
pensions which they have to pay. During 1933 it was fixed at 27 per cent.
of the said, capital value (industry and commerce).
Germany ; Poland
The cost of supplements is borne b y the insurance institution to which
employers are bound to belong, that is to say it is spread over the whole
group of employers in proportion to the premiums they pay as cover for
their present risks.
I n Germany, the insurance institution consists of an industrial association
formed for t h e whole country or for a specified area by all the heads of
undertakings engaged in kindred occupations.
I n Poland, a general mutual association of national scope has the
monopoly of accident insurance.
Great Britain
Supplements are treated in the same way as the principal of the
compensation itself, the cost being borne solely by the employer or insurance
carrier. They can be redeemed by the payment of the capital sum securing
the payment of a life annuity equal to the supplement due.

(2) Invalidity,

Old-Age and Widows' and Orphans'

Pensions

The distribution of the charges due t o the revaluation of invalidity,
old-age a n d widows' a n d orphans' pensions is usually much less
definite t h a n t h a t of the charges due to the revaluation of accident
pensions. Owing t o currency devaluation the financial systems and
the benefits of invalidity, old-age and widows' and orphans' insurance
schemes h a v e frequently undergone far-reaching changes, in most
cases concealing t h e manner in which the cost of revaluation has
been met, or making it impossible t o define it and separate it from t h e
other insurance charges.

* The Guarantee Fund, which is administered b y the National Accident
Insurance'Fund, ensures the payment of pensions to the victims of accidents
in case of default by an employer or insurance carrier. The Fund is financed
out of the contributions payable by all employers coming under the
Industrial Accident Insurance Act.

PEEMISSIBLB CLASSES OF INVESTMENTS

127

An a t t e m p t will be made, however, t o determine t h e methods
b y which the cost of the revaluation of invalidity, old-age and widows'
a n d orphans' pensions has been m e t a n d distributed in three insurance
schemes, which are of special importance owing to their nature a n d
the p a r t they play in the national economy of the countries i n
question. These are the Belgian miners' insurance scheme, t h e French
insurance scheme for the staffs of the main railways, and t h e German
manual workers' insurance scheme.
Belgium
Miners' invalidity, old-age and widows' and orphans' insurance.
Compulsory pension insurance for miners was introduced by an Act
of 1911.
I n normal circumstances the compulsory payments to be made into
the pension accounts specified b y the Act of 5 J u n e 1Ö11 were to be
sufficient, if regularly made, to form, together with the bonuses granted
by the State, a pension of 360 francs a year, payable from the age of 60.
Half of this pension was revertible to the widow.
During the transition period, the Act provided that the whole cost
of paying supplementary pensions and the pensions granted to specified
categories of aged miners and to widows was to be met by the provident
funds. For this purpose the financial resources of the funds were fixed
as follows :
(a) An employer's contribution proportionate to the total wages paid
during the year ; the rate of contribution varied according to
the annual expenditure
but could not be less than iy2 per cent.
or more than 2 % P e r cent. If the annual expenditure exceeded
2y2 per cent, of the total wages, half the difference was borne
~ '"'
"by the State a n d half b y - t h e province in whose territory the
provident fund carried on its activities ;
(b) As a temporary measure in the case of workers who were not
less than 30 years old at 1 January 1912, a monthly worker's
contribution of 0.50 franc ; since workers in this category were
entitled to a pension supplement, it was held reasonable t h a t
they should participate in accumulating the funds needed for
the purpose ;
(o) A subsidy of 2 francs a year for each pension account, granted
under the Act of 10 May 1900 in respect of every account into
which 3 francs had been paid during the financial year (for workers
born before 1891 only).
Without examining all the many stages in the development of the
benefit system, it may be stated with certainty that in spite of the
devaluation of the Belgian franc, the pensions secured to miners and
their dependants much exceed in purchasing power the benefits promised
by the 1911 Act.
These pensions, due after the completion of a qualifying period of
mining employment — being thus independent of the contributions paid
before insurance became compulsory — consist in the main of the following :
The old-age pension, payable at the age of 60 for surface workers
and 55 for underground workers after 30 years' employment, ranges from
4,302 to 7,080 Belgian francs a year according to the nature of the work •
done and family responsibilities. If the miner reaches the age of 55 or
60 years, as the case may be, before having completed 30 years' service,
he is entitled to a proportionate pension.
The invalidity pensión payable in "the event of a loss of- earning capacity
of at least two-thirds ranges from 3,200 to 6,300 Belgian francs according
to the nature of the work done, length of service, and family responsibilities.

128

INVESTMENT OF SOCIAL INSURANCE FUNDS

The widows' pension ranges for a widow of 60 years from 2,100 to
3,000 Belgian francs a year according to the nature of the husband's work
and his length of service. In addition to the widow's pension, orphans'
allowances m a y be paid, fixed at 630 Belgian francs a year for each dependent
child.
Besides their pension, pensioners receive free of charge an allowance
of 3,400 kilogrammes of coal a year.
The expenditure resulting from the amendments made in the benefit
system, which have, among other things, compensated for the effects of
devaluation, has been met by a considerable increase in contributions,
which since the Act of 25 June 1937 have amounted to 11 per cent, of
wages (6.50 per cent, being paid by employers and 4.50 per cent, by
workers).
Further, in the ordinary course the State pays a contribution which
is normally equal to one-third of the sums due to pensioners but may
not exceed 1,200 francs a year per pensioner. This contribution is increased
by one-third in the case of underground workers pensioned at the age
of 55. Finally, the State has hitherto borne a considerable proportion
of the charges resulting from the transitional provisions.
The total State subsidy granted to the National Miners' Pension Fund
rose from 12.5 million francs in 1925 to 37.5 million francs in 1930 and
142 million francs in 1935.
The consolidated Miners' Pensions Act of 25 August 1937 providés
for a regular State subsidy, in addition to which the State
guarantees the
benefits payable by the National Miners' Pension Fund 1.
The effects of the fall in the purchasing power. of the Belgian franc
have thus been counterbalanced, while at the same time benefits have
been generally improved by means of increased contributions and a public
subsidy.
France
Insurance of staffs of main railways.
The compulsory insurance schemes for employees of main railway
systems of general importance were set up not by ordinary legislation
but by special regulations for railway employees approved by the Minister
of Public Works.
Nevertheless, apart from earlier schemes which may now be regarded
as merely transitional, the essential principles of the present scheme of
old-age, invalidity and widows' and orphans' pensions covering the bulk
of the staffs were fixed by the Act of 21 July 1909, on which were based
the pension regulations of 1911. These regulations have been amended
on various occasions, more particularly to bring them into harmony with
section 49 of the Social Insurance Act of 5 April 1928 and 30 April 1930,
by which this special scheme was co-ordinated with the general scheme.
Various measures to lighten {.he cost of pensions were promulgated by
Decrees of 19 April and 30 October 1934. The provisions of the former
Decree t h a t relate to the financial system are still in force.
The benefits secured to employees of the main railway systems are
linked up with wages even in the case of current pensions, so that they
follow fluctuations in the cost of living fairly closely, the devaluation of
the currency having been compensated by the granting of a cost-of-living
bonus or b y a rise in the wages giving a claim to pension. The actual
connection t h a t has long existed between current pensions and wages was
confirmed by the Act of 30 March 1936 and the Finance Act of 1937. The
sums paid to pensioners must always be adjusted to the scale of wages
that would have applied to them if they had been in active employment.
This provision establishes a permanent and definite correlation between
the pension a n d the wage in active employment. The pension varies
with the wage and follows its fluctuations.
1
Declaration of the Minister of Labour to the Senate, sitting of
18 J u n e 1937.

PERMISSIBLE CLASSES OF INVESTMENTS

129

So far the considerable cost of adjusting current pensions to the
increase in wages — a cost which it was impossible to meet out of the
interest on reserves — has been left for future generations to cover.
The insured persons' contributions, theoretically fixed a t 5 per cent.
of wages, have it is true, been raised somewhat, and at present they m a y
be estimated as approximately 5.6 per cent, of wages. But the contributions
of the railway systems remain at the 15 per cent, of wages which was
fixed in the 1909 Act. I n addition it should be noted t h a t the Decree
of 19 April 1934 replaced the system of collective accumulation which
was formerly employed in the insurance scheme by one of assessment.
While there may have been no reduction in the insured persons' contributions
on this account, there has for some years been a decline in the contribution
of the railway systems.
A Bill introduced on 27 April 1937 provides for a return to the former
financial system. The explanatory memorandum attached to the Bill
points out that it is desirable to retain the principle t h a1 t the railway systems
should be bound to maintain actuarial equilibrium .
Germany
Manual workers' invalidity, old-age and widows' and orphans' insurance.
The financial system adopted for the manual workers' invalidity,
old-age and widows' and orphans' insurance scheme was for many years
t h a t of collective accumulation with an average contribution. I t remained
in operation from the date the scheme came into force in 1891 until the
years of inflation 1921 to 1924. At the end of this period the accumulated
reserves had almost entirely disappeared. They amounted to only 329.6
million RM. a t the end of 1924 as compared with 2,105.5 million marks
at the end of 1913. If the increase in reserves that should normally have
taken place between 1913 and 1924 is taken,into account, it m a y be
estimated that the war and the depreciation of the currency together
meant a loss of 4,000 million gold marks to the workers' invalidity,-old-age
and widows' and orphans' insurance scheme.
When the question arose at the end of the period of inflation of
reconstructing the scheme, it was organised on the assessment system.
The estimates drawn up in 1927, according to which income and
expenditure were to be balanced over a period of five years, were soon
exceeded owing to the various increases of expenditure that were authorised
after 1 January 1927 and in particular owing to a profound change in the
economic situation. Economic depression and rationalisation led in fact
to a steady but considerable decline in the number of insured persons and
the amount of wages paid, t h a t is to say, in the part of income drawn
from contributions. At the same time the insurance institutions found
their investments had become " frozen " and t h a t they could not realise
their assets.
The situation became critical in 1930 and grew more and more
threatening as unemployment increased and hours of work declined, and
as wages consequently fell.
The severe restrictions imposed in 1931 and 1932 were not found
sufficient, and an Act dated 7 December 1933 was promulgated t o set
the insurance scheme on a sound financial footing. This Act is still in
force.
From the legal and formal point of view, the Act of 7 December 1933
contains clear and definite regulations dealing with the effects of the
disappearance of assets due to the inflation. Whereas the legislation
hitherto in force made the State responsible for meeting the cost of
supplements to pensions payable in respect of contributions paid before
the inflation — a cost which must gradually decrease until it naturally
expires — the Act of 7 December 1933 provides that the scheme shall
1
CHAMBEB OF DEPUTIES : Documents parlementaires,
No. 2234.

16me législature.

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INVESTMENT OF SOCIAL INSURANCE FUNDS

receive from t h e Government the fixed sum of 200 million RM. a year
for the purpose of meeting the deficit due to the disappearance of assets.
The annual subsidy of 200 million RM. takes the place of the charges
previously borne by the State, including various contributions towards
the cost of administering the scheme.
The Government thus meets the loss of interest due to the disappearance
of assets resulting from inflation, since it pays a perpetual annuity
corresponding to 5 per cent, of the total capital which was lost or not
accumulated. But this is true only to the extent that at 1 January 1934,
the date when the present legislation came into force, the loss resulting
from the disappearance of assets did not exceed 4,000 million RM. I n
order t h a t this might be the case, it would have been necessary for a special
subsidy to have been paid from 1924 to 1933 exactly compensating the
loss of interest due to the disappearance of assets. This does not appear
to have been t h e case. Apart from refunding the fixed part of pensions
which is statutorily payable by the State, the Government subsidy for
the revaluation of supplements to pensions payable in respect of contributions
p ü d before the inflation was not more than 24 million RM. in 1927, rising
gradually to 171 million RM. in 1930.
I t may be argued, however, that a perpetual annuity of 200 million RM.
approximately balances the disappearance of assets, for on the assumption
that the loss amounted to 5,000 million RM. a t 30 December 1933, the
annuity would represent interest on the loss at 4 per cent, a year (the
actuarial rate of interest).
The effects of inflation on the rights and obligations of insured persons
considered individually are much more complex than the general effect
on the insurance scheme as a whole. Among other things, this complexity
is due to the changes made in the financial system in 1924 and those made
since that date in the benefit system.
Taken altogether, these changes have led to a considerable increase
both in the insurance charges (contributions due) and in the benefits
secured (insured pensions).
The increase in benefits does not in itself prove t h a t the rights in
respect of contributions paid before the inflation have been maintained,
for it might have been the result of an increase in the benefits payable
in respect of contributions paid since the scheme was set on its feet again
in 1924. I n t h a t case the fact that the State has become responsible for
the interest t h a t should have been earned on the lost assets would be of
benefit only to persons acquiring " n e w " rights and not to those whose
rights date from before the disappearance of these assets.
Without considering in detail all the changes that have been made
in the benefit system since 1923, it is easy to show that such a hypothesis
cannot be accepted.
The pension secured to insured persons consists of two parts :
(1) A fixed part, payable by the insurance scheme and the State up
to 1 January 1934 and reduced by the reform of 7 December 1933 to the
fixed sum payable by the State (72 RM. a year). The reduction applies
only to pensions awarded after 1 January 1934 ; those awarded before
that date continue to include a fixed part equal to 156 RM. a year
(84 RM. paid b y the insurance institution and 72 RM. by the State) ;
(2) A variable part, varying with the amount of contributions paid,
each contribution giving a right to a pension supplement in proportion
to the amount of the contribution.
During the various reforms that have taken place, the rights in respect
of contributions paid before 30 September 1921 have, as regards the part
of the pension varying with contributions, been not only maintained but
increased. (The annual pension supplement per contribution paid is
30 Rpf. in the higher wage class if the pension was awarded before 1 January
1934, and 32 Rpf. if it was awarded after that date, as compared with
12 Pf. in 1914.)
This increase in the variable p a r t of the pension is sufficient to
compensate the cancellation of payments between 30 September 1921

PERMISSIBLE CLASSES OF INVESTMENTS

131

and 1 January 1924 and, in the case of pensions awarded
after 1 January
1934, the reduction in the fixed part of these pensions 1 .
The average pension of insured men awarded in 1933 (first quarter)
was 40.15 RM. a month,
or in round figures 480 RM. a year for 1,340
contribution weeks 2 . An insured person who had contributed during
the same period in the highest wage class would have been entitled under
the 1914 scale to a pension of about 411 marks a year.
The average pension of insured men awarded in 1936 (first quarter)
was 37.70 RM. a month, or in round figures 452 RM. a year for 1,350
contribution weeks. An insured person who had contributed during the
same period in the highest wage class would have been entitled under
the 1914 scale to a pension of about 413 marks a year.
As a matter of fact, allowing for the rise in the cost of living since
1914, the purchasing power of pensions is at present much the same
as it used to be, whether the right to pension is newly acquired or
was acquired before the inflation. The Government bears the charges
resulting from the disappearance of assets, and the increase in the contributions of insured persons and employers should be ascribed to the change
in the financial system (transition to assessment system from 1924 onwards)
and to the increase in benefits compensating at least approximately for
the increase in prices.

*

*

On t h e b a s i s of t h e c o n s i d e r a t i o n s a n d p a r t i c u l a r s set forth.
above, the persons consulted were asked to state whether t h e y
considered t h a t t h e i n v e s t m e n t r u l e s s h o u l d c o n t a i n p r o v i s i o n s
" a i m e d " at securing maintenance " of the purchasing - power •-•
of the benefits promised t o insured persons in cases where,
as a result of currency depreciation or of legal measures
reducing income from investments, the insurance scheme cannot
maintain such purchasing power, and if so, what should be
the nature of these provisions ; and, in particular, whether
it should be the d u t y of the public authorities, on t h e one
hand, to restore the real value of assets which have depreciated
or to make good deficiencies resulting from forced reductions
in yield, or, on the other hand, to compensate for diminished
yield by means of annuities."
Analysis

of Replies

These questions led one of the persons consulted t o m a k e t h e
preliminary observation t h a t , if special care is devoted t o t h e
composition of the holding, certain types of loss can be avoided and
surpluses m a y even be obtained, as compared with t h e average yield
from capital as estimated when the actuarial calculations were made.
1
For persons in receipt of pensions awarded after 1 January 1934,
the fixed part is reduced to the supplement payable by the State, or 72 RM.
a year, a sum smaller than that composed in 1914 of the State supplement
and the fixed part of the pension payable by the insurance institution.
(The total "of these two items then" varied with t h e average wage of the
insured person between 110 and 150 marks a year.)
2
" Versicherungsmathematischer Bericht ", Reichsarbeitsblatt, 25 December 1933, p . 27.

132

INVESTMENT OP SOCIAL INSURANCE FUNDS

" The investment authorities should take account when acquiring
negotiable securities of the danger of buying at rates exceeding the
redemption price. However high the yield may be, the purchaser runs
the risks of loss in case of conversion or of premature redemption
Other conditions being equal, preference should be given to securities
on which the nominal rate of interest is the lowest, so as to reduce,
if not entirely to avoid, the disadvantages of conversion
Estimates
of the effective value of redemption at a premium should always be
conservative. If the loan contract provides for • redemption by
purchase on the stock exchange, and if the final redemption is not
due within a brief period, it is hardly possible to rely on a higher
yield than that represented by the interest that the redemption
premium left out of account."
As regards the insertion in the investment rules of provisions
intended to maintain the purchasing power of the benefits promised
to insured persons, despite depreciation of assets owing to monetary
devaluation or legal measures reducing the yield of investments, the
replies received may be divided into three groups :
1. Eight replies which considered that the reliability of the public
authorities towards insurance institutions cannot go beyond issuing
carefully drawn up investment rules and supervising their enforcement ;
2. Six replies which recognised that the public authorities must
intervene if the reserves are insufficient, owing either to currency
depreciation or to forced reductions in yield, but stated that a
previous undertaking to this effect would be inoperative or even
unadvisable ;
3. Ten replies which stated that an undertaking to restore the
value of reserves is possible and desirable, however moderate its
effects may be.
The eight replies in the first group argued, in particular, that to
maintain the purchasing power of the reserves when it has been
affected by manipulations of currency or credit would unduly favour
insured persons as compared with other annuitants.
" How, asked one expert, can it be imagined that Governments,
which had depreciated their currency or had made forced reductions
in interest rates not only on their own debts but also on those of
provinces, local authorities, public bodies and even private individuals,
or which had increased fiscal charges on income from capital, would
make an exception in favour of social insurance institutions and restore
to their former value the depreciated assets of the institutions or their
diminished interest or their assets and income in general. Further,
does not the insurance institution, like the public authorities and
private individuals, fulfil its obligations by making payment of benefits
in legal tender without taking account of purchasing power ? "
Two other replies in this group pointed out that the suggested
intervention could at the most apply only to the Governmentguaranteed funds in which the insurance authorities had been required.
to invest.
Lastly, one reply stated that as regards the losses resulting from
currency depreciation or devaluation, insurance institutions should
protect themselves as far as possible " under the law of private
contracts, without, however, forgetting that in case of need the State
can declare all agreements in this field to be null and void. They

PERMISSIBLE CLASSES OF INVESTMENTS

133

should also seek some measure of protection b y spreading their
investments and, in particular, b y placing p a r t of their funds in real
estate ".
The six replies of the second group pointed out first of all t h a t
a previous undertaking on the p a r t of t h e public authorities would
hardly be of practical value " since restoration of t h e value of reserves
depends on circumstances and possibilities which cannot be foreseen
even a short time in advance. Further, it would diminish t h e sense
of responsibility of the investing authorities, a n d this responsibility
is indispensable if funds are t o be invested in t h e best way ". Besides,
such a n undertaking would possess the drawback of implying t o some
extent devaluations of currency and of regarding them, if not as certain,
a t least as so probable as to need provision beforehand and would
t h u s only add to lack of confidence in the future of the currency a n d
increase the uncertainty of transactions whose successful operation is
based on monetary stability. Moreover, it could not give insured
persons a real guarantee t h a t the value of benefits would be restored
b y public intervention " for, although it is almost inevitable t h a t the
Government will help to re-establish t h e purchasing power of benefits,
the rapidity and efficacy of its intervention m u s t apparently depend on
its own financial position and on very general political considerations " .
Lastly, in t h e opinion of one of t h e persons consulted : " Where
the- insurance legislation which the workers demand has not yet been
enacted, the opposition t o the principle of such legislation would
certainly be stiffened if a statutory undertaking t o maintain t h e
purchasing power of the promised benefits were required " .
On the other hand, ten of the persons consulted, while stating
(in some cases) t h a t a clause guaranteeing maintenance of the
purchasing power of reserves would, of course, add little t o t h e
obligations which have been assumed towards insured persons —
a t least tacitly, in the absence of such a clause — considered t h a t
it would have the merit of forming a clearly defined undertaking
and, as such, would be justified.
One of these replies pointed out, however, t h a t it is vital t h a t
the Government should not break faith with the insured persons,
and for this reason a n unconditional guarantee m a y be of doubtful
value. Verj' certainly t h e Government is a t • least under a moral
obligation to m a k e good a n y losses of social insurance institutions
which m a y result from currency depreciation a n d legal regulations,
if it can possibly do so. I t can do so most easily by paying subsidiary
benefits out of public moneys. A declaration t h a t it is t h e purpose
of the Government t o maintain t h é purchasing power of promised
benefits unless a great emergency renders such action against the
best interests of the nation m a y be desirable.
Discussion

and

Conclusions

The text proposed by the Office was as follows :
I t would appear t h a t in t h e future as in the p a s t the
holdings of insurance schemes will have to consist in t h e main
of fixed-yield investments suitably apportioned both from t h e
point of view of locality and from t h e point of view of distribution of risks. E v e n if allowances are made for à gradual
increase in t h a t p a r t of the holdings likely to be t a k e n by
investment a n d real estate or in variable-yield securities, t h e

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INVESTMENT OP SOCIAL INSUBANCE FUNDS

average yield on the whole holding will still remain very
sensitive to monetary devaluation and to measures reducing
the income from investments.
The following are means which may serve to maintain the
purchasing power of the benefits promised to insured persons
arising from the insufficiency of reserves or of their yield (not
attributable to bad administration or- to fortuitous circumstances) :
Make a levy upon the contributors to the insurance scheme
either before or after the insufficiency has been established.
Appeal to the national community or to the public authorities
when the insufficiency is substantial and is essentially attributable to monetary devaluation or to statutory provisions which
have reduced the capital or the yield of insurance holdings.
The Committee considered first of all whether it ought to include
in a document which was intended to serve as a kind of guide for the
selection of insurance investments any reference to the consequences
of devaluation or forced reductions in yield and to ways of counteracting such measures.
An affirmative decision was given by seven votes to six, and
then two amendments to the Office text were submitted, one • by
Mr. HACKFOBTH, the other by Mr. HENBY. F.urther, Mrs. DULLES
suggested that, seeing the Committee had admitted that insurance
investments were liable to suffer from devaluation and reduction in
yield, it should declare that the precise methods to be used to meet
such circumstances lay outside the scope of the discussion. This
suggestion was rejected, however, and the Committee adopted the
following text incorporating Mr. HACKFOBTH'S and Mr. HENRY'S
amendments :
It must be made clear that it is not suggested that, if the
investment of the funds of social insurance institutions is
carried out in accordance with the foregoing recommendations,
the maintenance of the purchasing power of the benefits can
thereby always be secured. In spite of all the precautions
recommended, there may be overriding causes beyond the
control of the social- insurance authorities, which may result
in the benefits payable to insured persons becoming insufficient
to realise the objects of the scheme. If, in order to meet this
position, it is necessary to re-establish the purchasing power
of the benefits, this could only be secured by an increase of
the contributions and possibly by financial aid being provided
by the State ; such aid would be the more justified the greater
the proportion of their assets that insurance institutions are
required to invest in Government funds or Governmentguaranteed funds.

CHAPTER I V

BODIES RESPONSIBLE FOR SELECTING INVESTMENTS

ANALYSIS OF LEGISLATION

The selection to be made among the securities in which insurance institutions' investments are allowed may either be centralised, being entrusted to a central authority or insurance institution, or it may be decentralised, being left to the insurance institutions themselves.
If selection is centralised, a distinction must be drawn according
as it is made by an insurance institution based on the representation of insured persons or by an authority outside the insurance
scheme, such as an independent public financial institution (e.g.
the French Deposit and Trust Fund) or a committee -under t h e
public authorities (e.g. under the Ministry of Finance).
Whatever its nature, the central authority or institution
may either have full freedom to choose among the various permissible investments or it may have to obtain the implicit or
formal approval of the public authorities before making its investments.
If the choice is left to the insurance institutions themselves,
their freedom is not necessarily complete. Apart from any statutory
obligations or the need of obtaining a permit in regard to certain
classes of investments, the p a r t played by the public authorities
in the administration of insurance institutions is sometimes so
great that, in practice, the institutions cease to have any freedom
of choice. The presence of a Government commissioner with a
right of veto on the governing body or investment committee of
the institution is sufficient to restrict, not to say cancel, the freedom
t h a t in principle it enjoys in the choice of its investments.
Finally, the selection of investments may be affected by the
rules laid down, for giving effect, to. decisions with regard to t h e
administration of assets (e.g. execution of orders to b u y or sell
on the stock exchange). Here there are two possible situations :

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INVESTMENT OF SOCIAL INSURANCE FUNDS

either the authority responsible for selecting investments is free
to entrust the execution of its orders to whomever it pleases, or
else it has no such freedom. In the latter case a further distinction
should be made, according as the body responsible for the actual
investment, that is to say for executing the orders, merely has
a right of supervision and may not refuse to carry out the order
if issued regularly, but at the most may delay execution in view
of the state of the market, or has a right to refuse to carry out the
order and, for example, to substitute one security for another.
In the last case it is the body responsible for actually making
the investments which, in fact, can direct investment policy by
taking the place, should it think fit, of the authority responsible
for making the selection in the first place.
The various methods of regulating investments that have
been summarised above may also be combined. The right of the
central authority to select among the permissible investments
those which are in fact to be made may very well apply only to
part of the insurance funds, for example, a quarter, a third or
a half, the insurance institutions being completely free as to the
investment of the remainder.
Similarly, an investment plan drawn up for a specified period
does not necessarily apply to the whole of the funds that can be
invested.
The above are the criteria used for the following analysis of
the statutory regulations in certain countries which designate
the authorities responsible for selecting investments and define
their function, whether it is that of examining in what securities
funds shall be invested as and when they accrue or of drawing up
a plan that is binding for a specified period.
I t is considered sufficient in this analysis to give only one or
two examples of the main forms of organisation of investment
without reverting to the question of. the permissible classes of
investments and the authorisation required for certain methods
of using funds that call for special precautions (e.g. investment
in real estate).
(a) Investments

selected by Insurance Institutions

alone

The Luxemburg legislation (Social Insurance Code of 17 December 1925)
leaves the insurance institutions full freedom to select among the permissible
classes of investments those in which the funds shall in fact be invested.
Section 286 of the Code provides t h a t the Accident Insurance Association,
the sickness funds, and the Old-Age and Invalidity Insurance Institution
may without any authorisation or restriction invest their funds either

BODIES RESPONSIBLE FOB SELECTING INVESTMENTS

137

in the Savings Bank, or in the National Debt securities, or in bonds of
the State Land Bank, or in communal bonds or in a direct loan to the
State or a Luxemburg commune. The institutions may also, with the
consent of the Government, purchase bonds of foreign States or towns.
Finally, they may with the consent of the Government invest their funds
in other ways, e.g. in real estate and especially in mortgage loans for the
promotion of the construction of workers' dwellings.
As the procedure for executing orders to buy or sell is not laid down
in the Code, the orders issued by the insurance institutions to the various
bodies entitled to carry out the transactions are binding as soon as any
authorisation required by law has been obtained.
(b) Investments selected partly by Insurance Institutions
by Body outside Insurance Scheme

and partly

This system is to be found in France (sickness insurance for employed
persons) and Great Britain (sickness and invalidity insurance for employed
persons).
France
The assets of sickness insurance institutions in excess of the moneys
they are authorised to retain are divided into two halves, only one of which
is invested on the initiative of the insurance institution, the other being
invested as required by the Deposit and Trust Fund.
The actual purchase of bonds, stocks and shares, etc., is always entrusted
to the Deposit and Trust Fund, with which the securities bought are
deposited. If an insurance institution decides to invest part of the assets
a t its disposal in real estate or a loan, the Deposit and Trust Fund places
the amount of the investment at the disposal of the institution.
Great Britain
The receipts and expenditure of the national health insurance scheme
are all paid into a fund under the control of the Central Department r .
I n this National Health Insurance Fund each approved society has a
current account, to which are credited the value of the contributions paid
in respect of its members and to which are debited its expenditure on
benefit and administration.
At the end of each year, or at shorter intervals if necessary, the Central
Department ascertains the balance in the current account of each society
which is available for permanent investment. This balance is divided
in halves, of which the one is invested by the National Debt Commissioners
and the other by the approved society or by the Central Department on
its behalf.
Investment by National Debt Commissioners
The National Debt Commissioners, whose main duty is to manage
the National Debt, have also been entrusted with the duty of managing
several public funds, including the Local Loans Fund, and of investing
savings banks funds and part of the Unemployment Fund and the National
Health Insurance Fund. I n reality, the duties of the National Debt
Commissioners are performed by a permanent civil servant.
The Central Department keeps an Investment Account, in which
each society is credited with that half of its balance available for permanent
investment which is handed over to the National Debt Commissioners.
Each society is also credited with a share of the interest earned b y temporary
investments.
The Commissioners invest the sums handed over to them in securities
which are authorised by law as investments for savings banks funds, namely
securities the payment of the interest on which is provided for, or guaranteed
by, Parliament.
1

The Ministry of Health, or the Department of Health for Scotland.

138

INVESTMENT OF SOCIAL INSURANCE FUNDS

Investment by or on behalf of approved societies
That half of its balance available for investment which is not transferred
to the National Debt Commissioners may be dealt with by an approved
society in either of two ways :
1. I t m a y require the sum be paid over to it and itself select the
securities and effect the investment ; or
2. I t m a y leave the sum with the Central Department to be invested
in accordance with its instructions.
(c) Investments selected partly by Insurance Institutions and partly
by Body outside Insurance Scheme acting according to Plan
I n France (invalidity and old-age insurance for employed persons)
investments were made until 15 March 1934 by the Deposit and Trust
Fund, which acted on its own initiative as to one half of the sums to be
invested and on the recommendation of the insurance institutions as to
the other half.
The Decree of 15 May 1934 withdrew three-quarters of the assets of
those institutions which operate on the accumulative system and of the
Augmentation and Joint Business Fund from the above procedure, while
leaving it in force for the remaining quarter. As a temporary exception
to the provisions of the Act, the accumulative institutions, and the General
Guarantee F u n d are required from 1 June 1934 to 31 December 1940 to
devote 75 per cent, of their available moneys to constituting a joint fund
managed by the Deposit and Trust Fund. This joint fund, opened with
a view to financing a scheme of large public works to counteract unemployment out of the moneys of the social insurance institutions, is called the
Joint Employment Fund.
The moneys of this joint fund are invested by preference in loans to
the bodies which participate in the carrying out of works for the purpose
of reducing unemployment in accordance with a plan drawn up by the
National Committee on Public Works for the Reduction of Unemployment.
The contracts are made out on a uniform basis discussed and adopted
by a national committee, consisting of members of the Government and
representatives of the public authorities, the administrative departments
concerned, and the groups of insured persons. They are concluded by
the Deposit a n d Trust Fund.
At the present time and up to 31 December 1940 the investments of
the invalidity and old-age insurance institutions are thus left as to oneeighth to the initiative of the institutions ; they are entrusted as to
one-eighth to the Deposit and Trust Fund, and reserved as to the remaining
six-eighths for financing the Joint Employment Fund.
All investments are purchased through the Deposit and Trust Fund,
with which t h e assets of the insurance institutions are deposited. I n the
case of bonds, stocks.and shares, etc., the Deposit and Trust Fund makes
the purchase direct, being the only body entitled to do so. I n the case
of real estate and loans, the Deposit and Trust Fund places the necessary
sums at the disposal of the insurance institution.
The investment system is to be modified from 1 January 1941 onwards,
in virtue of t h e Legislative Decree of 28 October 1935 as amended by
that of 24 May 1938. The modified svstem is described in Appendix I I I ,
P. 172.
(d) Investments selected by Insurance Official responsible
to Public Authorities
I n Germany (invalidity, old-age and widows' and orphans' insurance
for manual workers and salaried employees), investments are selected by
t h e responsible head of each insurance institution.
This head is appointed as regards salaried employees' insurance by
the Führer a n d Chancellor and as regards manual workers' insurance by
the regional government after agreement with the National Government.
l i e is responsible to the authority by whom he was appointed.

BODIES RESPONSIBLE FOR SELECTING INVESTMENTS

139

Orders concerning the purchase of securities, investment in mortgages
or real estate, and loans are carried out by the bank or savings bank which
administers the cash assets of the insurance institution.
The law defines the conditions under which the savings banks and
other banks have authority to receive insurance assets on deposit (sections
26 of the Social Insurance Code and 205 et seq. of the Salaried Employees'
Insurance Act).
Banks and savings banks have no right to revise any orders for
payment, purchase or sale transmitted to them.
(e) Investments selected by Body outside Insurance

Scheme

This system is used in Belgium, the Netherlands, and Sweden for the
investment of the funds of pension insurance.
Belgium
The administration of the assets of the manual workers' old-age and
widows' and orphans' insurance scheme is entrusted to the General
Savings and Pension Fund.
This institution works under a State guarantee and is subject to State
supervision. I t is managed by a general council, a governing body, and
a managing director appointed by the Crown. The members of the general
council and governing body are usually chosen from among administrative
officials and members of Parliament.
The general council, which consists of 26 members, draws up the rules,
concludes contracts for the Fund and fixes the rate of interest to be paid
on savings deposits. It administers the assets of the Fund, and all its
decisions are subject to approval of the Government.
The governing body consists of six members of the general council.
Its task is to direct and supervise business operations, to prepare the
. decisions„of the general council, and t o apply the general principles adopted
b y the latter.
"
"'
""
~
- •
The general manager carries out the decisions of the governing body
and the general council, directs and supervises the work of the offices,
represents the Fund before the courts and in dealings with public or private
bodies, and makes a report on the working of the Fund to the gorerning
body every year.
Netherlands
The compulsory invalidity, old-age and widows' and orphans' insurance
scheme for employed persons is administered by the State Insurance Bank,
for the activities of which the State alone is responsible.
The Bank is administered by a management and a supervisory committee. All decisions as to its investments are made by a Central
Investment Committee set up outside the Bank.
The Central Investment Committee was established by an Act of
29 December 1928 concerning the investment of public funds. I t consists
of seven members, five of whom are appointed by the Crown and two
by the governing body of the Bank of the Netherlands.
Proposals for the purchase and sale of securities are submitted by
the Insurance Bank. A decision concerning purchases or sales which
has not been proposed by the management of the Bank requires previous
consultation of the Bank, except in urgent cases.
Orders for purchases and sales issued by the Central Investment
Committee must be carried out as they stand.
Sweden
The financial administration of the Pensions Fund (formed out of
contributions-from eompulsorily and voluntarily insured persons and from
the public authorities) is entrusted not to the Pensions Board, the body
responsible for the administration of the insurance scheme, but to a special
Committee.

v

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INVESTMENT OF SOCIAL INSURANCE FUNDS

This Committee consists of seven members, namely, the head of the
Pensions Board as Chairman, the Deputy Chairman, the head of the financial
department of the Pensions Board, and four persons appointed by the
Government for a term of three years. Three of the persons appointed
by the Government must have experience of financial questions and the
fourth must have a knowledge and experience of social questions as well
as practical knowledge of the needs and living conditions of the less
well-to-do classes.
Five members of the Committee constitute a quorum. Decisions are
taken by a simple majority, and, if the voting is equal, the Chairman
has the casting vote.
Any decision concerning the investment of funds must be approved
by not less t h a n four members of the Committee, or, in the case of social
investments (loans to public health institutions or buildings intended for
the prevention of invalidity), five members.
The Committee may call on experts for assistance and consult other
competent public institutions.
The execution of the Committee's decisions is entrusted to the Pensions
Board, which is required to report to the Committee on the investments
made and the action taken on the other measures ,it has ordered.
On 1 November each year the Committee must submit a report to
the Minister of Social -Affairs on its activities during the past year.

On the basis of the various investment regulations set forth
above, the Committee of Experts were consulted in 1937 on the
question of the centralisation or decentralisation of investments,
the advantages and disadvantages of the two systems, and the
designation of the body responsible for selecting investments
(the insurance institution itself or a body other than the institution).
CENTRALISED OR DECENTRALISED SELECTION
OF INVESTMENTS

The experts were asked to state whether in their opinion,
account being taken of the advantages and disadvantages of
centralisation and decentralisation respectively, the selection of
investments should be entrusted to a central body or to decentralised bodies.
Analysis of Replies
The majority of the experts were in favour of centralising the selection of investments and gave their reasons for this view. In the first
place they pointed out how necessary it is that the body responsible
for such selection should not only be thoroughly familiar with the
general condition of the stock market but should also be able to appraise
the safety, liquidity and yield now and — still more important — in
the future of each investment made. It should also closely examine
the social utility and the utility for the economic interest of the country

BODIES RESPONSIBLE FOB. SELECTING INVESTMENTS

141

of each investment which it intends to make. Lastly, it is hound to
act in such a manner that its investments will in no way hinder the
financial policy of the Government and other public bodies. In the
opinion of the experts who recommended centralisation the above duties
are so numerous and so comprehensive that they can be fulfilled only
by a body of national scope and not by more or less numerous insurance
institutions which are decentralised and therefore unco-ordinated in
their action.
Another argument, of an administrative nature, was based on the
fact that the selection of investments calls for a service specialising in
the administration of investments and in the preparation of decisions
on the subject. It is only through the work of such a service that the
body responsible for the actual selection can be in a position to follow
economic and financial movements and have the necessary contacts
with other financial authorities. By means of such a service the whole
situation can be known at any time. Decentralised insurance institutions, which usually have no occasion to invest sums justifying the
costly maintenance of a special service for the purpose, cannot expect
proposals for investment placed before them to have been carefully
studied and prepared. The experts who put forward this argument
therefore considered that centralisation alone can guarantee a position
in which decisions respecting the choice of investments will be prepared
with all the necessary care.
Further, in the opinion of several experts, separate decentralised
insurance institutions are not as independent as a central body, but
are subject to powerful local influences. A central body, on the other
hand, is less exposed to such pressure and is therefore freer to judge
.applications for credits in an impartial frame of mind.
The replies favourable to centralisation also pointed out how desirable it is that the operations of social insurance institutions on the
money market should be on as large a scale as possible. Only in this
way can large sums be invested at a stroke without prejudice to the
principle of risk spreading. For this reason a central body with the
capital of all the institutions at its disposal may be a regulating factor
of great strength, whereas-the various activities of isolated insurance
institutions on the money market cannot have this advantage and
may lead to dangerous friction ; for lack of co-ordination, they may
even cause an unfortunate rise or fall in the rate of interest.
The experts also pointed out that sometimes a central body, being
a powerful financial agent, can obtain more favourable conditions from
a Government or public corporation which desires to borrow than
would be accorded to an isolated insurance institution.
Lastly, certain experts observed that centralisation has the great
advantage of enabling a clear view to be obtained at a single glance
of the actual composition of all insurance holdings and argued that
it is for this reason above all that centralisation is valuable to the
Government services concerned, especially the service responsible for
supervising insurance institutions.
The experts opposed to centralisation argued that the principle
of the autonomy of insurance institutions, which it is indispensable
to apply for social, economic and political reasons, is incompatible
with a position under which the institutions lose the power to administer
their assets. In their view autonomy becomes meaningless if. the institutions are deprived of this essential function. By taking away with
one hand the counterpart of what it gives with the other, the legislature
itself would be departing from the principle which led to the formation

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INVESTMENT OF SOCIAL INSURANCE FUNDS

not of one but of several autonomous institutions. If only for this
reason — respect for autonomy — the idea of centralising the selection of investments must be set aside, whatever the practical advantages
which would otherwise militate in its favour.
Other experts, also opposed to centralisation, had various reasons
for their view. In the first place, they pointed out that nearly everywhere the choice of investments is governed by rules prescribed in detail
by laws or regulations, and that the strict observance of these rules
by the insurance institutions is a sufficient guarantee of the appropriate
investment of funds. Secondly, they stressed how important it is for
the satisfactory working of insurance that each institution should be
directly and immediately responsible for its activities ; and some
replies stated that it is primarily this consciousness of direct responsibility which awakens among the institutions a spirit of emulation
and a desire to do better than the rest.
Some of the experts started from the assumption that in the selection
of investments only the special needs of each insurance institution
should be taken into account. They argued that a central body necessarily bases this selection on general. considerations and therefore
performs its functions less efficiently. Further, it cannot act with the
same flexibility and speed as the competent service of a smaller institution, since a central body composed of a number of responsible persons
is more cumbersome than the governing body of a single insurance
institution ; and as regards investments, speedy decision is often
essential and in any ease its value should never be under-estimated.
Several replies pointed out that a fair distribution of investments
over the different parts of the country and the different branches of
industry and trade must be secured and that each insurance institution — by its knowledge of the situation in its own area and its closer
contact with the demands for credit in the district for which it is competent — is better placed than a central body to secure such appropriate distribution and to allot the available capital to the advantage
of the economic groups which bear the expense of contribution.
Another argument put forward in favour of decentralisation was
that it is desirable to enable the insured persons, who are nearly always
represented on the competent bodies of the insurance institutions,
to give their views regarding any investment contemplated and that
centralisation is likely to suppress or at best to weaken this influence.
Lastly, one reply, more or less opposed to centralisation, stated
that it necessarily increases costs of administration, whereas another
took the exactly opposite view — that decentralisation leads to an
increase in overhead costs.
Several replies, although favourable to the principle of decentralisation, recognised the need for some sort of co-ordination of the investment activities of the different insurance institutions. With this object
the establishment of a single body with purely advisory powers was
recommended. The insurance institutions would be required to keep in
close touch with such a body and not to make any important decision
with regard to the selection of investments before consulting it. But
as this method would leave the institution entirely free to decide, it
would be compatible with the principle of complete autonomy.
To sum up, the arguments invoked for and against the principle
of centralising the selection of investments were based on practical
considerations, the sole exception being one on the side of decentralisation — namely that the unification of investments is incompatible
with, the principle of autonomy of insurance institutions.

BODIES RESPONSIBLE FOR SELECTING INVESTMENTS

143

I t is clear t h a t if a u t o n o m y is recognised as a n essential a t t r i b u t e
of insurance institutions, t h e practical reasons in favour of centralisation will n o t be decisive. Nevertheless, t h e consultation brought o u t
the advantages of centralisation : a homogeneous investment policy
on a national scale, investment of large sums a t a time, weakening of
local a n d regional influences, t h e possibility of instructing a special
service t o prepare decisions regarding investments, a n d easy supervision
of the holdings of insurance institutions as a whole.
The consultation also made it clear t h a t decentralisation has appreciable advantages : it strengthens t h e feeling of responsibility of each
separate insurance institution, enables t h e institution t o t a k e its own
special needs into account, a n d makes it possible t o use t h e available
capital for t h e direct advantage of t h e groups which have provided
t h e contributions. •
Discussion

and Conclusions

The t e x t proposed b y t h e Office was as follows :
If the administration of t h e insurance holdings is centralised,
a national a n d uniform policy of investment can be followed,
large-scale financial operations on t h e money market c a n be
effected a n d inopportune regional or local influences can be
avoided. T h e central body can moreover easily supply t h e
specialised services necessary t o prepare, on investment m a t t e r s ,
decisions based on a full consideration of t h e actual situation
of t h e entire holding.
Decentralised selection of investments h a s a tendency t o
emphasise regional a n d locaL.needs a n d interests a n d t o rouse
a spirit of competition among t h e decentralised bodies. T h e
necessary co-ordination of t h e policies of investment of t h e
decentralised bodies could be obtained, either directly b y precise
statutory regulation and by careful supervision of the investments,
or by t h e creation of a central investment council whom t h e
bodies concerned should h a v e t o consult before t a k i n g a n y
decision.
Various amendments were proposed t o this text b y Mr. AGALLOPOULOS a n d Mr. B I S Q U E R E T for t h e purpose, on t h e one h a n d ,

of

bringing out more clearly t h e respective advantages of centralisation
and decentralisation and, on t h e other, of showing t h a t it is impossible
t o decide a priori in favour of either method.
F u r t h e r , Mrs. D U L L E S a n d Mr. GONZALES G A L E pointed o u t

that

it was hardly t o be regarded as a n advantage t h a t decentralisation
of investments tended t o create a spirit of competition between t h e
insurance institutions.
Lastly,

Mr.

MACÊDO

SANTOS

suggested

that

the

respective

advantages of centralisation a n d decentralisation might be sufficiently
protected by a mixed system which would co-ordinate individual initiative
in t h e interests of t h e community as a whole.
On t h e basis of these observations t h e Committee adopted t h e
first paragraph of t h e Office t e x t subject t o drafting amendments,
while t h e second paragraph was amended t o read as follows :
Decentralised selection of investments h a s a tendency t o
emphasise regional a n d local or occupational needs a n d interests.
I t arouses, maintains a n d develops a sense of responsibility

144

INVESTMENT OF SOCIAL INSURANCE FUNDS

among the managements of the various bodies. The necessary
co-ordination of the policies of investment of these bodies could
be obtained either directly by precise statutory regulation and
by careful supervision of the investments or by the creation of
a central investment council whom the bodies concerned should
have to consult before taking any decision.
SELECTION OF INVESTMENTS BY THE INSURANCE
INSTITUTION

The persons consulted were asked whether they considered
that the selection of investments should be entrusted preferably
or exclusively to the insurance institution itself, acting in
accordance with the rules laid down, and if so whether and to
what extent decisions concerning the selection of investments
should require the approval of the public authorities.
Analysis of Replies
The experts in favour of decentralisation all agreed that the selection
of investments should be left to the insurance institution itself, but
that its decision must remain within the framework of the rules laid
down.
On the question whether the selection of investments should require
the approval of the authorities, the great majority of the replies favouring
decentralisation stated that either the presence of one or more
representatives of the central authorities on the governing body of the
institution or the supervision exercised by the authority competent
in this respect is sufficient to ensure due co-ordination of investment
policy.
It should be added that several experts, though opposed to a rule
making the selection of investments subject as a matter of principle
to the approval of the central authorities, considered that such a rule
should be laid down for certain types of investment. It would apply
in particular to investments in real estate which, by their very character,
are not first-class securities, and to any others whose yield is below
standard or whose liquidity is not sufficiently certain.
No expert objected to the idea of consultation with other public
bodies responsible for administering investments, but some of them
were against rigid regulations under which insurance institutions
would be prohibited from making decisions on investments without
consulting other bodies competent in the matter but outside the
insurance scheme.
Some of the experts, while opposing such a regulation for investments
in general, considered that it would be 0 advisable to make certain
operations depend on previous consultation with a specially competent
body.
Only a minority of the replies were unreservedly in favour of placing
on insurance institutions a general obligation to refer all the investments
contemplated by them to other specified bodies for opinion. None of
them gave reasons for this view, but it was presumably based on the
idea that, failing any such obUgation, the institution may be led to
take a decision without due consideration, and that this disadvantage
would be avoided by a system of compulsory consultation which, though

BODIES RESPONSIBLE FOB. SELECTING INVESTMENTS

145

it did not bind the institution, would prevent it from putting its
proposal into effect without careful re-examination.
When the legislature refrains from imposing centralised selection
of investments, it recognises that each autonomous institution has the
right to take for itself any necessary decision regarding the use of its
capital ; but of course such decisions must keep within the prescribed
investment rules.
Further, the relative freedom of action needed by insurance
institutions under the above system would be subject to certain
restrictions, aimed at guaranteeing the co-ordination on a national
scale of the investment activities of the different institutions. Such
co-ordination is particularly necessary int he case of insurance schemes
administered by a large number of autonomous institutions, whose
view of general economic movements and of capital fluctuations can
never be as comprehensive as that of a powerful central body.
This same consideration also militates in favour of as close
collaboration as possible between the insurance institutions and bodies
with special competence in economic and financial matters. The
problems involved in selecting investments are so complex and difficult
that the governing bodies of isolated insurance institutions cannot
find a satisfactory solution without the aid of persons experienced in
this field and able to provide the necessary detailed information.
As was argued in the replies favourable to decentralisation, no
decentralised investment system can be of real value unless it is based
on a method ensuring the highest degree of co-ordination, under the
guidance of the central authorities, of the financial operations of the
different institutions. The Government should not be content with
exercising-supervision, after the. investment has been.made, but should
secure concordance between all decisions regarding insurance investments.
Lastly, according to several replies, there is reason to consider that
the governing bodies of decentralised insurance institutions should
be in regular touch with other bodies competent in financial and
economic matters.
' Conclusion
The Committee of Experts adopted without amendment the text
submitted by the Office.
Where the administration of the insurance holding is
considered to be the natural consequence of the administrative
and financial autonomy accorded to the insurance institutions,
they have themselves to choose their investments within the
limits imposed by statutory regulation and subject to the
approval of the controlling authority in cases where it is required
for special classes of investment.
The more numerous insurance institutions are and the less
experience they have, the more advisable is if that the investment policy should be co-ordinated on a national basis.
For the purpose of taking decisions on investments for
which preparation has been made by the specialised officials
of the insurance institution, it may be useful to call on the
services n o t only of representatives of the public authorities,
of insured persons, and of employers, but also of experts
particularly cognisant of the conditions of the money market
and of the economic and social policy of the State.
10

146

INVESTMENT OP SOCIAL INSURANCE FUNDS

SELECTION O F .INVESTMENTS BY A B O D Y OTHER THAN THE
INSURANCE INSTITUTION

The experts were asked to give their opinion on the competence
and composition of the body responsible for the selection of
investments, supposing such selection were not entrusted to the
insurance institution itself. They were asked to say, more
particularly, whether the body responsible for the selection of
investments should include representatives of the public authorities
and of other bodies administering investments, as well as representatives of t h e insured persons and of their employers and
(in appropriate cases) of, the insurance institution.
Analysis of Replies
Several of the replies first of all defined the degree of centralisation
and indicated the kinds of capital whose investment can or should
be entrusted to a single body ; they also defined the composition of this
body. Some of these replies advised against applying the principle
of centralisation too strictly ; in a country in which there are only a
few large insurance institutions, it seems undesirable to centralise the
whole selection of investments, since the practical effect of insurance
legislation is a certain degree of centralisation, which prevents a harmful
subdivision of insurance holdings and produces sufficient concentration
of the capital to be invested.
Reference should, however, be made to one reply, which
recommended unreserved and unlimited centralisation, extending not
only to insurance institutions but to all other bodies which accumulate
capital under public supervision, such as savings banks and civil
servants' superannuation funds.
As regards the nature of the investments whose selection should
be entrusted to a single body other than the insurance institution,
some of the replies recommended complete centralisation in respect
of reserves, while others • would entrust a central body with the
administration of the capital corresponding to the actuarial reserves
only, the investment of other funds (contingencies reserves, working
capital) remaining within the separate competence of each insurance
institution.
As regards the composition of the single body to be responsible for
selecting investments, all the persons consulted agreed that, as well as
representatives of the insured persons and their employers and of the
public authorities, it is advisable to include experts particularly familiar
with the money market and with Government economic and social
policy.
The conclusion to be drawn from the consultation would appear
to apply both where the insurance scheme is administered by a public
institution or directed by an administrative service of the State and
where it is entrusted to an institution having administrative and
financial autonomy but whose holding is administered by another
body. In every case it seems advisable to associate representatives

BODIES RESPONSIBLE FOB SELECTING INVESTMENTS

147

of the insured persons and of their employers in the decisions of the
body responsible for selecting investments, as well as experts specially
familiar with the conditions of the money market and with the
economic and social policy of the Government.
Discussion and Conclusions
The text submitted by the Office was as follows :
Whether the insurance is administered by a public
institution or directly by an administrative service of the State,
in preparing the decisions of the body responsible for selecting
investments, it may be useful to call on the services not only
of experts particularly cognisant of the conditions of the money
market and of the economic and social policy of the State, but
also on representatives of insured persons and their employers.
This procedure is particularly indicated where the insurance
scheme is administered by an institution which has financial
and administrative autonomy but whose holding is administered
by some other body.
Mr. BISQUERET suggested that reference should be made to the
necessity of associating representatives of insured persons and their
employers in the decisions of the body responsible for selecting
investments.
Mr. MATJASIC supported the Office text, which appeared to him
complete as it stood.
Mr. JÏENBY stated .that he was in favour of the participation of
insured persons and employers in the management of social insurance"
funds.
Mrs. DULLES made no objection to this principle, but observed
that it could not be applied in the United States.
Mr. BISQUEBET'S proposal was adopted, and in consequence the
first paragraph of the Office text was amended to read as follows :
Whether the insurance is administered by a public institution or directly by an administrative service of the State, in
preparing the decisions of the body responsible for selecting
investments, it is expedient to call upon the services not only
of experts particularly cognisant of the conditions of the money
market and of the economic and social policy of the State,
but also on representatives of insured persons and of their
employers.
The second paragraph of the Office text was adopted without
amendment.

APPENDICES

APPENDIX I
CONSULTATION OF EXPERTS WITH A VIEW TO STUDYING
THE PROBLEM OF THE INVESTMENT OF THE FUNDS OF SOCIAL
INSURANCE INSTITUTIONS
(Geneva, 8, 9, 10 December 1937)

L I S T OF PEBSONS ATTENDING THE M E E T I N G

Representatives of the Governing Body of the International Labour Office
Government Group :
Mr. Fernando GABCIA OLDINI, Envoy Extraordinary and Minister
Plenipotentiary, Berne ; Representative of the Chilean Government on
the Governing Body of the International Labour Office.
Substitute Member :
_ . .. .
Mr. W. Ellison CHALMERS, Acting U.S. Labor Commissioner, Geneva.
Employers' Group :
Sir John Ballingall FOBBES WATSON, Director ¿>f the National Confederation of Employers' Organisations, London.
Substitute :
Mr. Harold Stewart KIBKALDY, Assistant Secretary of the National
Confederation of Employers' Organisations, London.
Workers' Group :
Mr. E. KTJPEBS, President of the Netherlands Federation of Trade
Unions, Amsterdam.
Experts
Mr. Frank BANE, Executive Director, Social Security Board, Washington,
D.C. (United States of America).
Mr. Léon BISQITEBET, Director-General of Old-Age Pensions, Ministry
of Labour and Social Welfare, Brussels (Belgium).
Dr. Tadeusz DYBOSKI, Director, Social Insurance Department, Ministry
of Social Welfare, Warsaw (Poland).
Mr. Mihail ENESCO, Director-General, Central Social Insurance Fund,
Bucarest (Rumania).
Mr. Edgar HACKFOBTH, C.B., Controller, Insurance Department,
Ministry of Health, London (Great Britain).
Mr. E. HENNING, Chief of Section, Royal Pensions Board, Stockholm
- (Sweden.)..
Mr. Paul H E N B Y , Auditing Actuary, Ministry of Labour, Paris (France).
Dr. Etienne HOBVATH, Director-General, Central Social Insurance
Institution, Budapest (Hungary).

150

APPENDIX I

Dr. Armand KAYSEB; ( Government Counsellor, President, Central
Committee of Sickness Insurance Funds, Luxemburg (Luxemburg).
Dr. Vladislav KLTTMPAR, Director, Central Social Insurance Institution,
Prague (Czecho-Slovakia).
Dr. Friedrich STEINBACH, Government Counsellor, Deputy SecretaryGeneral, Workers' Insurance Fund, Vienna (Austria).
Miss G. J . STEMBEBG, Director in the Ministry of Social Affairs, The
Hague. (Netherlands).
Other

Participants

Mr. CONOLLY, Bank for International Settlements, Basle.
Mr.

B.

CHABBON.

Mr. B. A. ROSBNBOBG, Financial Section and Economic Intelligence
Service, Secretariat of the League of Nations, Geneva.

The Chairman of the Meeting was Mr. Léon BISQTTEBET (Belgium).

QUESTIONNAIRE ADOPTED
I.

—

l

.

GENEBAL CONDITIONS TO BE SATISFIED BY INVESTMENTS

(1) Determination

of General Conditions

(a) Do y o u consider t h a t the long-term investments of the funds
of compulsory social insurance institutions should be subject to national
regulation ?
(b) If so, do you consider it desirable that such regulations should
determine the general conditions to be satisfied by the investments in
question ?
(c) Do you consider that, in the determination of investments, regard
should be h a d to the following aspects among others : safety, yield,
mobility, social utility and utility for the economic interest of the country ?
(Questions 2-6).
(2) Conditions as to Safety
(a) How do you propose to define these conditions : in the form
of a guarantee to the social insurance institution, of recovery of capital
invested and of payment of interest at their nominal value ?
(b) Do you further consider that these conditions should be extended
to include the maintenance of the real value, i.e. purchasing power, of
capital and interest ?
(c) Do you consider t h a t a suitable distribution of investments among
the different classes of securities is likely to strengthen appreciably the
safety of the whole of the assets invested ?
(d) Do you consider that the conditions as to safety to be satisfied
by investments should be formulated in a general provision defining the
permissible types of real property or, where loans are concerned, requiring
the personal solvency of the debtor, and also an undertaking from him
to furnish genuine guarantees ? What other guarantees, if any, should
b e required in such general provision in order that these conditions may
be realised ?
1

Please give grounds for replies, especially in relation to Questions 9,
10, 11, 12, 13, 14.

151

APPENDIX I

(e) Do you further consider it desirable, in order t h a t these conditions
may be realised, to make investment rules to include, among others,
provisions defining the various classes of securities permissible as investments
and the proportions in which these different classes should be represented
in the assets of social insurance institutions ?
(3) Conditions as to Yield
(a) Given that the average yield on the whole of the investments
should never be lower than the actuarial rate of interest, do you consider
t h a t that yield should attain at least :
(i) the net rate of interest on long-term Government debt where
this rate is higher than the actuarial rate ?
(ii) or, in the case of investments made in the course of a given period,
the average net rate of interest on the market during t h a t period,
where this rate is higher than the actuarial rate ?
(b) Nevertheless, do you not consider t h a t social insurance institutions
may, or even must, for certain investments be satisfied with a rate of
interest lower than that generally current for the class of investment in
question, provided that the average yield on all the investments is not
lower than a prescribed rate ? If so, what should be the classes of investment in question ?
(4) Conditions as to

Mobility

(a) How do you propose to define these conditions for the purposes
of social insurance of long-term risks :
(i) as to actuarial reserves ;
(ii) as to contingencies reserves ?
(b)~ Do "you consider t h a t from the-one or-the other type of reserves,
certain classes of securities should be excluded as being too difficult to
realise ? If so, which classes, and from which type of reserves ?
(c) Do you consider that a prescribed proportion of contingencies
reserves should be invested in securities deemed to be immediately
realisable ?
(d) If so, how do you propose to fix this proportion ?
(e) Should the conditions as to mobility of the invested funds of social
insurance of long-term risks apply likewise to social insurance of shortterm risks, or is it desirable to lay down different conditions for the latter ?
(5) Conditions as to.Social

Utility

(a) Would you accept as a criterion of social utility the importance
attaching to investments which exercise an especially favourable effect
on the situation of the insured community and of the national community ?
Do you propose any other criteria ? If so, which ?
(b) Do you consider that the responsibility for deciding the social
utility of investments should be placed upon the body responsible for
selecting investments from among those allowed by law ?
(c) Is it desirable to lay down as a general rule for the guidance of
the body responsible for selecting investments that, wherever the conditions
are satisfied as to safety, yield and — where required — mobility, preference
should be given to investments which exercise an especially favourable
effect on the situation of the insured community and the national community, e.g. relating to campaign against disease, improvement of sanitary
and housing conditions, execution of schemes of urban improvement,
provision of means of communication, etc. ?

152

APPENDIX I

(6) Conditions as to Utility for the Economic Interests of the Country
(a) Do you consider that, regard being had to the conditions mentioned
in questions 2-4 and to the financial policy of the State and of public
authorities, the utility of the investments for the economic interests of
the country should be judged by the contribution the insurance holdings
make :
(i) to a balanced distribution of industrial and agricultural production
in different parts of the country (given t h a t insurance funds
should contribute to the development of the natural resources
and t h e complementary production of each region, wherever such
contribution is most required) ;
(ii) to the development of means of transport, especially roads and
waterways in regions least favoured in this respect ;
(iii) to a better geographical distribution of investments in real estate
and of dwelling houses ?
(b) Do you propose any other criteria of the utility of investments
for the economic interests of the country, given that a contribution to
those interests should always result in a raising of the standard of living
and in the prevention of unemployment ?
(7) Other General Conditions
(a) Do you consider
ider it desirable to lay down 8any general conditions
besides those dealt with
ith above ?
(b) If so, how do you propose to define these other conditions ?

II.

(8) Determination

—

INVESTMENT R U L E S

of Classes of Investments to be Regarded
as Permissible

(a) Do you consider that it would be expedient to enumerate, to the
exclusion of all others, the classes of investments permissiblo for the funds
of social insurance institutions ?
(b) What, in your opinion, are the advantages of enumerating, to the
exclusion of all others, the classes of permissible investments ?
(c) W h a t are the disadvantages of this procedure ?
(9) Fixed-yield

Investments

to be Considered

Permissible

(a) Do you consider t h a t all or certain of the following should be
regarded by social insurance institutions as possible investments for their
funds :
1. Government funds ;
2. Government-guaranteed funds ;
3. Loans (quoted on the Stock Exchange) of regional or local
authorities empowered to levy rates or taxes ;
4. Loans guaranteed by the authorities indicated in 3 ;
5. Direct loans, or loans through land mortgage banks, to provinces,
counties or other local authorities ;
6. Loans of public corporations (chambers of commerce, social insurance institutions) other than the regional authorities indicated in 3 ;
7. Loans of land mortgage banks or building societies ;
8. Mortgages ;
9. Commercial or industrial debentures ?
(b) Please indicate the conditions under which these investments,
or certain of them, should, in your opinion, be regarded as permissible.

153

APPENDIX I
(10) Variable-yield Investments to be Considered

Permissible

(a) Do you consider that all or certain of the following should be
regarded by social insurance institutions as possible investments for their
funds :
1. Loans with gold clause or currency option issued by public
authorities (Government, province, county, or local authority)
in the country where the insurance scheme operates ;
2. Loans with gold clause or currency option issued abroad b y public
authorities (Government, province, county, or local authority) of
the country where the insurance scheme operates ;
3. Preference shares or stocks of commercial or industrial companies
enjoying a concession or monopoly ;
4. Ordinary or common shares or stocks of companies indicated in 3 ;
5. Shares or stocks of companies other than those enjoying a v concession
or monopoly ;
6. Urban and other letting property : workers' dwellings ;
7. Rural property 1
(b) Please indicate the conditions under which these investments,
or certain of them, should, in your opinion, be regarded as permissible.
(11) Other Investments to be Considered

Permissible

(a) Do you consider that any investments other than those mentioned
in Questions 9 and 10 should be regarded by social insurance institutions
as possible for their funds ? If so, which and under what conditions ?
(12) Investments which must be included among the Holdings
of Social Insurance
Institutions
(a) Do you consider that, having regard to the purposes of social
insurance and the sources of its funds, social insurance institutions should
be bound to include among their holdings certain classes of investments ?
If so, which ?
(b) Should these classes of investments constitute a prescribed
proportion of the holdings of the institution ? If so, what proportion ?
(c) Should this proportion be attained from the outset, or by applying
to the purchase of these classes of investments a prescribed portion of
the annual increase of the assets ?
(13) Investments which may only Represent a Prescribed Proportion
of the Holdings of Social Insurance
Institutions
(a) Do you consider that certain classes of investments should only
represent a prescribed proportion of the holdings of social insurance
institutions ?
(b) If so, which should be these classes of investments and how do
you propose to fix the maximum proportion ?
(14) Proportion of the Various Classes of Investments
constituting the Holdings of Social Insurance
Institutions
(a) Do you consider that any rules other t h a n those mentioned in
Questions 12 and 13 should be laid down concerning the constitution of
the holdings of social insurance institutions ?
(b) If so, should these rules prescribe :
(i) The ratio of fixed-yield'investments to variable-yield investments ;
(ii) The ratio of holdings in movables to holdings in real estate ?
Please specify the ratio, if any is proposed.

154

APPENDIX I
(15) Possible Guarantee by Public

Authorities

(a) Do you consider that the investment rules should contain provisions
aimed at securing maintenance of the purchasing power of the benefits
promised to insured persons in cases where, as a result of currency
depreciation or of legal measures reducing the capital or income of investments, the insurance scheme cannot maintain such purchasing power ?
If so, what should be the nature of these provisions ?
(b) Do you consider, in particular, that it is the duty of the public
authorities, on the one hand, to restore the real value of assets which have
depreciated in consequence of currency depreciation, or to make good
reductions in t h e assets caused by legal measures reducing the capital
or income of investments, or, on the other hand, to compensate for
diminished yield by means of annuities or by other means, in order to
maintain the purchasing power of the benefits promised to insured persons ?
(c) Are there any other steps which you would suggest in cases of
depreciation of assets resulting from currency depreciation or from legal
measures reducing the capital or income of investments ?

III.

—

B O D I E S RESPONSIBLE Ï O B SELECTING INVESTMENTS

(16) Centralised or Decentralised Selection of Investments
(a) Given t h a t the body responsible for investment should take
account, on the one hand, of market conditions and, on the other hand,
of the safety, yield and mobility of the investments, of their social utility
and their utility for the economic interests of the country as well as for
the financial policy of the State and of public authorities, do you consider
that the selection of investments should be entrusted to a central body
or to decentralised bodies ?
(b) I n the selection of investments, what are the respective advantages
and disadvantages of
— centralisation ?
— decentralisation ?
(17) Selection of Investments

by Insurance

Institution

(a) Do you consider that the selection of investments should be
entrusted preferably or exclusively to the insurance institution itself,
acting in accordance with the rules laid down, and, where any such is
drawn up, in accordance with the periodical investment scheme (Question
19) ?
(b) If so, do you consider that, for the purpose of realising the
conditions mentioned above in Question 16 (a), decisions of principle
concerning the selection of investments should be taken by the insurance
institution :
(i) with the approval of the public authorities, and
(ii) in consultation with other public bodies administering investments ?
(c) Do you further consider that investment in certain classes of
holdings should be subject to special authorisation by the authority in
control of the insurance institution ? If so, which classes ? ,
(18) Selection of Investments by a Body other than
the Insurance
Institution
(a) If your reply to Question 17 (a) is in the negative, do you
consider that the selection of investments should be entrusted :
(i) either entirely to a body other than the insurance institution
itself ;

155

APPENDIX I

(ii) or for part of the investments to an outside body, and for the
other part to the insurance institution itself ? I n this case, how
do you propose to fix the part reserved for selection by the
insurance institution ?
(b) If investments are to be selected in whole ór in part by a body
other than the insurance institution itself, is it desirable that, with a
view to taking due account of the conditions mentioned above in question
16 (a), that body should collaborate in that selection, and if so should
that body be constituted in such a way that it includes :
(i) representatives of the insurance institution ;
(ii) representatives of other public bodies administering investments ;
(iii) representatives of the public authorities ;
(iv) representatives of the insured persons and of their employers ?
(19) Periodical Investment

Scheme

(a) Do you consider that it would be useful to make investments
in accordance with a periodical scheme drawn up beforehand and taking
account of the conditions mentioned above in Question 16 (a) ?
(b) If so, for what period should this scheme be drawn up '!
(c) Or at what intervals should it be revised ?
(d) How should the body responsible for drawing up or revising the
periodical investment scheme, be constituted ?

APPENDIX

II

INVESTMENT OF THE FUNDS OF SOCIAL INSURANCE INSTITUTIONS
MEETING OF THE COMMITTEE OF EXPERTS
(5, 6, 7, 8, 9 December 1938)

L I S T OF PERSONS ATTENDING THE MEETING

Representatives

of the Governing Body of the International

Labour Office

Government Group :
Mr. Fernando GABOIA OLDINÍ, Envoy Extraordinary and Minister
Plenipotentiary, Berne ; Representative of the Chilean Government on the
Governing Body of the International Labour Office.
Employers' Group :
Mr. Gustave L. GÉBABD, Director-General, Central Industrial Committee of Belgium, Brussels.
Workers' Group :
Mr. L. KTTPEBS, President of the Netherlands Federation of Trade
Unions, Amsterdam.
Experts
Dr. Chr. N. AGALLOPOULOS, Director-General, Social Insurance Institute,
Athens (Greece).
Mr. Léon BISQTJEBET, Director-General of Old-Age Pensions, Ministry
of Labour and Social Welfare, President of the Governing Body of the
National Pension Fund for Salaried Employees, Brussels (Belgium).
Dr. A. BOHREN, Director, Swiss National Accident Insurance Fund,
Lucerne (Switzerland).
'
Mr. Paulo P E R E I B A D A CÁMARA, Chief Actuary, Chairman of the Actuarial
Council, Ministry of Labour, Bio de Janeiro (Brazil).
Dr. Eleanor L. DULLES, Chief, Division of Old-Age Benefits Research,
Social Security Board, Washington, D. C. (United States of America).
Dr. Tadeusz DYBOSKI, Director-General, Central Social Insurance
Institute, Warsaw (Poland).
accompanied by :
Mr. Kazimierz TEISSEYBE, Chief of Section, Central Social Insurance
Institute, Warsaw (Poland).
Dr. José GONZALEZ-GALE, Professor of Mathematics in the Faculty
of Economics of Buenos Aires University (Argentina).
Mr. Edgar HACKFOBTH, C.B., Controller, Insurance Department,
Ministry of Health, London (Great Britain).
Mr. Edward HENNING, Chief of Section, Royal Pensions Board, Stockholm (Sweden).
Mr. Paul H E N B Y , Director, Autonomous Miners' Fund, Paris (France).
Dr. Ervin LENGYEL, Director-General, National Social Insurance
Institute, Budapest (Hungary).
Mr. K. LINDNER, Consultant Actuary, State Insurance Bank, Amsterdam (Netherlands).

APPENDIX II

157

Dr. Frederico de MACÊDO SANTOS, Deputy Secretary-General, National
Institute of Labour and Social Welfare, Technical Adviser for Social Welfare,
Lisbon (Portugal).
Mr. Radovan MATJASIO, Director-General, Central Workers' Insurance
Office, Zagreb (Yugoslavia).
Mr. Stoitcho MOCHANOFF, Chairman of the Sobranie, former Minister
of National Economy, former Director of Labour and Social Insurance,
Sofia (Bulgaria),
Other Participants
Mr. Georges ROYOT, Secretary of the Banking Department, Bank for
International Settlements, Basle.
Mr. A. ROSENBORG, Financial Section and Economic Intelligence
Service, Secretariat of the League of Nations, Geneva.
The Chairman of the meeting was Mr. Stoitcho MOCHANOFF (Bulgaria).

CONCLUSIONS ADOPTED
CHAPTER I

Basic Principles of Investment Regulations
(1) Necessity of Begulations
The constitution and management of the insurance holding should
be the „subject of statutory regulations. These should be so framed as to
achieve the purpose of the reserves, namely, either to afford security for
the payment of the benefits due, now or in the future, to the persons covered
by the insurance scheme, or to guard against the consequences of accidental
increases in the frequency and severity of the risks covered, or of an accidental falling-off in receipts.
(2) Form of Regulations
The regulations should be sufficiently precise to be used as a practical
guide to the bodies responsible for selecting investments and wide enough
to leave them sufficient liberty of action to serve in the best way the interests
of the insured community, while allowing, if necessary and subject to the
conditions laid down in Chapter I I , for the interests of the national community.
(3) Scope of Regulations
The regulations should apply to social insurance institutions possessing
financial autonomy. Where the management of their holding is not entrusted
to the institutions themselves, the regulations should apply to the bodies,
funds or public accounts charged with the management of the insurance
holding.
CHAPTER

II

General Conditions to be satisfied by investments
(4) Basic General Conditions
The regulations should determine the general conditions which should
apply to investments, namely, safety, yield and liquidity, as explained
hereinafter. I n choosing between securities which satisfy these basic conditions, it is desirable t h a t consideration should be given to the measure of
social or economic utility which they provide.

158

APPENDIX H

A.

SAFETY

(5) Safety the First Condition
The first concern of the body responsible for selecting investments
should be to satisfy itself t h a t their value is secure as regards the recovery
or conservation of the .nominal value of the capital invested and the regular
receipt of interest. •
(6) Maintenance of the Seal Value of the Investments
I n order to protect the insurance scheme against measures such as
devaluation which reduce the capital of, or income from, the investments,
it is desirable t h a t the body responsible for selecting investments should
be authorised, in so.far as is consistent with Point 4, to seek investments
which maintain also their real value in purchasing power. The acquisition
of variable-yield securities should be subject to special regulation, as provided
in Chapter I I I .
The regulations should require appropriate provision to be made for
the depreciation of the various kinds of investments.
(7) Provisions Relating to Safety
To ensure the highest possible degree of safety for the investments,
the regulations should :
(a) set out a general definition of the conditions to be observed in
the selection of investments, namely : suitable types of negotiable
securities or of holdings in real estate ; character or legal status
of t h e borrower ; duty to obtain a charge or preferential right
as security for the debt ; geographical distribution of investments,
etc. ;
(b) draw up an exclusive list of the classes of investments which
accord with the general definition and which are deemed in principle to satisfy the condition of safety (the acquisition of certain
kinds of investments may be made subject to the approval of
the controlling authority to which the body charged with the
selection of investments is responsible) ;
(c) in order to reinforce the safety of the whole of the invested holding,
prescribe an appropriate distribution of the investments among
the various classes included in the list.
B. YIELD

• . . . • •

(8) Optimum Yield on Capital
I t is essential that the insurance scheme should obtain for its investments
the highest yield consonant with safety and with ,the degree of liquidity
which is held to be indispensable. The average yield of the whole of one
kind of investments made within a given period should not be less than
the net rate of interest generally current on the market for investments
of the same kind and made during the same period.
(9) Investments at Low Bate of Interest
I n special circumstances, however, the insurance scheme may content
itself with a rate of interest lower than t h a t which is currently obtained
for investments of the same kind where the investments procure advantages
for insured persons as a social group, for example : by acquisition of
preventive or curative establishments, construction of workers' dwellings,
etc. I n order t h a t the making of such investments may be entertained, it
appears to be essential that there should be .obtained, on the total holding,
a yield at least equal to the rate of interest which was taken as basis when
the contribution and benefit tables of the insurance scheme were drawn
up, plus a slight margin of security.

159

APPENDIX I I

C.

LIQUIDITY

(10) Liquidity of Actuarial Reserves
I t is necessary to provide for the liquidity of the investments, in
particular when, in the normal course of events and as a result of the nature
of the benefits or of the financial structure of the scheme, a part of the
actuarial reserves will have to be realised at a given date. I n these
circumstances the liquid assets required may be provided by sums received
on account of redemption or capital repayment which fall to augment
current receipts at the same date. Moreover, the necessity for a rapid
realisation of part of the actuarial reserves may result from substantial
reductions in receipts arising from a severe fall in wages or employment
or from the discontinuance of insured membership which may occur, for
instance, where the insurance is compulsory but the choice of insurer is
free, or where the insurance is organised by industries and is particularly
affected by an unemployment crisis.
(11) Liquidity of Contingencies Reserves
The contingencies reserves should, in principle, be capable of immediate
realisation ; it would appear to be advisable to invest a certain proportion
of them either in short-term Government securities, or in other securities
which are readily marketable or are subject to early redemption.
D. SOCIAL

AND ECONOMIC

UTILITY

(12) Use of Reserves for Social or Economic Purposes
The insurance scheme should, by means of its investments, lend
assistance to the national economy, so long as the basic conditions of
safety, yield; and, if need be, liquidity, are observed^ By -improving health conditions and housing and by facilitating directly or indirectly
the creation of new means of production, the financial help of the insurance
funds, co-ordinated with the economic and financial policy of the public
authorities, can make a substantial contribution to the improvement
of the standard of living and to the prevention of unemployent.
(13) Special Guarantees for Investments of a Social or Economic Character
In respect of any investments of a social or economic character in
which the insurance scheme is required to participate, it is desirable t h a t
the public authorities should guarantee the highest possible degree of
safety, yield, and, if need be, of liquidity. The public authorities should
either give their guarantee directly to the insurance scheme or to the bodies
entrusted with distributing among borrowers funds placed a t their
disposal by the insurance scheme, such as agricultural, industrial, or handicraft credit associations, or assure wto such bodies a source of income (for
instance, from monopolies) which iU enable them to issue hypothecated
loans.
(14) Criterion of Social Utility
As a criterion of social utility one can accept the degree of influence
exercised on the health situation, the cultural level and, in a more general
way, on the living conditions of the insured community in the first place
and of the national community in the second place, by the campaign
against disease, the improvement in health and housing conditions, town
planning, the establishment of schools, etc.
(16) Criterion of Economic Utility
As a criterion of the utility of the investments for the national economy,
one can accept the contribution made by the investments of the insurance
scheme towards, for example :

160

APPENDIX H
(a)

(b)
(c)

a harmonious distribution of industrial and agricultural production in the various parts of the country, the insurance funds being
called on to assist in the development of natural resources and of
production complementary thereto in areas where the necessity
is greatest ;
the development of means of transport, in particular of roads
and waterways, in areas least favoured in this respect ;
the better geographical distribution of investments in real estate
and in housing.

CHAPTER

III

Classes of Investments to be Regarded as Permissible
(16) Periodical Investment Plan
I t is advisable that the body responsible for selecting investments
should draw up a periodical plan setting out the broad lines which investment operations should follow during the period covered by the plan.
I t is also advisable t h a t this plan should include a table, to be revised
if circumstances require, determining, in particular, what proportions of
the holding should be invested in fixed-yield and variable-yield investments respectively.
Such a plan would render possible the carrying ou tof a co-ordinated
investment policy, since the extent to which the various requirements
could and should be satisfied can be fixed in advance and all funds available
for long-term investment can be immediately placed.
A. FIXED-YIELD

INVESTMENTS

(17) Government Funds or Government-guaranteed Funds
Government funds or Government-guaranteed funds are particularly
suitable for insurance investment purposes by reason of the safety which
they present.
Main points to consider :
Desirability of giving preference to securities quoted on the Stock
Exchange over direct loans in which the legal rights are not transferable
and the terms of which are fixed by the public authorities themselves ;
Desirability of giving preference to redeemable, rather than to
irredeemable, securities.
(18) Loans of Provinces, Towns and Other Local Authorities and Loans
Guaranteed by such Authorities
The loans of local authorities and the loans guaranteed by them are
particularly suitable for financing from insurance funds when their object
is to cover expenditure of a social character likely to improve the standard
of living and the health of the community, for instance : the establishment
or development of means of communication, the provision of water supply,
the construction of hospitals, schools, workers' houses, etc.
Main points t o consider :
The financial standing of the authority which issues the loan, and the
necessity of obtaining guarantees, for instance, in the form of the revenues
of certain taxes ;
Whether the loan should be used for new work to be undertaken ;
Whether preference should be given to securities quoted on the Stock
Exchange as against direct loans effected by private contract.

161

APPENDIX II
(19) Loans Issued by Public Bodies other than Regional
or Local Authorities

Social insurance funds should not be invested in loans to public bodies
other than provincial, county, or municipal authorities, unless such bodies
have unquestionable and adequate resources with which to guarantee the
payment of interest and repayment of principal, for instance, proceeds
of charges for the use of certain establishments, such as railway stations,
ports, etc., for the building of which such loans may be issued.
The following might be deemed to be public bodies for the purpose of
the above provision, for example : chambers of commerce, public enterprises, water and electricity services, where, in virtue of the legislation
governing them, these bodies possess the character of public authorities.
Main points to consider :
The opinion of the authorities responsible for administrative supervision both of the borrowing and of the lending party ;
Period specified for the redemption or repayment of the loan or advance.
(20) Loans of Land Mortgage

Banks or Building

Societies

The loans of land or building credit associations of unquestionable
solvency and the acquisition of mortgage bonds whether issued directly
or through a trustee (lettres de gage, cédules hypothécaires), enable the
insurance scheme to carry out, with the minimum of risk, a policy of affording
credit for workers' housing schemes.
Main points to' consider :
Conservative appraisal of the security offered, and the measures taken
to guard against depreciation ;
Whether the securities issued by such societies are included in the list
of investments permissible to trustees (trustee securities).
(2\) Direct Mortgage

Loans

Mortgage loans made directly to the owner of a building call for valuation beforehand of the worth of the security and for determination of the
amount and of any special conditions for the loan, to ensure the effectiveness
of the security.
Main points to consider :
Nature of the security : preference to be given to urban buildings,
constructed neither for commercial nor for industrial purposes, and situated
in towns of a certain size in quarters in process of development, more
particularly if they are of recent construction and let at reasonable rents
and offer modern conveniences ;
Limitation of the maximum of the loan to half, or not more than twothirds, of the building to be determined by taking into account the
return it gives, its nature, and its situation. Nevertheless, for reasons
of social utility, this maximum might be increased in the case of mortgage
loans for the purposes of the construction or purchase of dwelling houses
for the use of insured persons, provided that such loans absorb only a
limited proportion of the holding ;
Necessity to obtain a first mortgage and to take measures to avoid
depreciation of the security owing to poor upkeep of the building, too low
rents, or too long leases, or owing to assignment of the rent to third parties,
or owing to the setting up of prior charges.
(22) Commercial or Industrial

Debentures

Commercial or industrial debentures can only be regarded-as suitable
investments for insvirance funds if, in addition to affording sufficient security
as to repayment of capital, they offer a yield markedly higher than debentures of the same kind issued by public authorities.
II

162

APPENDIX I I

Main points to consider :
Nature and scope of activities pursued by the concern in question ;
the degree of publicity given to the results of its management ; future
prospects ;
Whether there exists a necessity of approval by a controlling authority
such as to rule out debentures of a speculative character.
B. VARIABLE.YIELD

INVESTMENTS

(23) Loans of Public Authorities with Gold Clause or Currency Option
Issues made b y public authorities with a gold clause or a currency
option provide, if not an absolute guarantee against monetary devaluation,
at any rate a substantial defence, and insurance institutions may be well
advised to have recourse to such loans.
(24) Commercial or Industrial Ordinary Shares or Stock
Ordinary shares or stock of commercial or industrial companies should
only be entertained as possible investments for insurance funds if the
interest or dividend and redemption of capital are sufficiently guaranteed.
Only the shares or stock of companies enjoying long-dated concessions
or monopolies -would appear to fulfil these conditions.
. Main point's to consider :
What method should be followed in examining the prospects of payment of interest or dividend and of redemption of capital ; .
Whether .there is likely to be an increase in the present potentialities
of investment in commercial or industrial ordinary shares or stock.
(25) Urban Letting Property
Besides the buildings which they use themselves for current purposes
(administrative buildings, sanatoria, curative or convalescent establishments), insurance institutions may acquire urban letting property as an
investment which entails the least risk of loss of capital.
Main points to consider :
Whether preference should be given to new buildings to be constructed
to the order of the insurance institution or to the acquisition of buildings
of recent construction ;
Determination of the classes of buildings which lend themselves best
to insurance investment purposes : buildings in urban areas of a certain
size and still increasing ; blocks of flats ; the average size and standard
of the flats ; dwelling nouses intended mainly for the insured class, etc ;
Conservative appraisal of the value of the building in question in order
to establish a plan assuring the redemption of the capital and a regular
yield ;
Necessity for the approval of a controlling authority for all important
transactions relating to real estate.
(26) Rural Property
The acquisition of rural property for investment purposes and not for
the purposes of the curative establishments of the insurance scheme, would
not appear to be advisable save in exceptional circumstances, and when
all precautions have been taken to obtain a reasonable yield on the capital
and a guarantee for its repayment.
C. COMPOSITION

OF

HOLDINGS

(27) Investments which must be Included in the Holdings
I t appears certain t h a t among the investments which must be included
in the insurance holding there should figure Government funds or Government-guaranteed funds.

163

APPENDIX H

The main considerations which should be taken into account in determining the proportion of the total holdings which the above-mentioned
investments should represent, are :
On the one hand, the advisability, if not necessity, of supporting the
credit of the State or its economic and social policy ; the safety offered
by Government funds or Government-guaranteed funds ; limited opportunities in practice of acquiring other investments which offer an equal
degree of safety, yield, and, if need be, liquidity ;
On the other hand, the advisability of distributing the investments
among the various permissible kinds and of reserving a more or less considerable place in the holding to investments other than Government funds
so as to further the interests of the various elements of the national economy,
for instance : local authority loans, mortgage bonds, direct loans by way
of mortgage, etc.
Investments other than Government or Government-guaranteed funds
which should be included in the insurance holding up to a fixed amount
may comprise : local authority loans quoted on the Stock Exchange (by
reason of the social utility which the works financed by such loans usually
present) and urban letting property (by reason of the security which they
offer in case of monetary devaluation).
(28) Investments which may only Represent a Prescribed
of the Holdings

Proportion

I t may be advisable to limit the proportion of the insurance holding
represented by certain classes of investments which, while satisfying the
general conditions laid down, call, nevertheless, for particular care when
compared to other forms of investment, for one or other of the following
reasons, namely, less safety, lower yield, insufficient liquidity, doubtful
social utility.
- .
.
.
Ways of limitation to be considered :
Either by statutory determination of a maximum percentage varying,
not only according to the class of investment, but also according to the
scheme of insurance and the character of the reserves (whether actuarial
or contingencies) ;
Or by supervision by the controlling authority • of the proportions
between the various classes of investment forming the holding.

D. POSSIBLE

Necessity of Maintaining

GUARANTEE
BY
AUTHORITIES

THE

PUBLIC

the Purchasing Power of the Benefits
to Insured Persons

Promised

I t must be made clear that it is not suggested that, if the investment
of the funds of social insurance institutions is carried out in accordance
with the foregoing recommendations, the maintenance of the purchasing
power of the benefits can thereby always be secured. I n spite of all precautions, there may be overriding causes beyond the control of the social
insurance authorities which may result in the benefits payable to insured
persons becoming insufficient to realise the objects of the scheme. If, in
order to meet this situation, it is necessary to re-establish the purchasing
power of the benefits, this could only be secured by an increase of the
contributions and possibly by financial aid being provided by the State ;
such aid would be the more justified the greater the proportion of their
assets that insurance institutions are required to invest in Government
funds or Government-guaranteed funds.

164

APPENDIX I I

CHAPTER

IV

Bodies Responsible for Selecting Investments
(30) Centralised

or Decentralised

Selection

of

Investments

If the administration of the insurance holding is centralised, a national
and uniform policy of investment can be followed, large scale financial
operations on the money market can be effected, and inopportune regional
or local influences can be avoided. The centralised administration can
moreover easily supply the specialised services necessary to prepare, on
investment matters, decisions based on a full consideration of the actual
situation of the entire holding.
Decentralised selection of investments has a tendency to emphasise
regional and local or occupational needs and interests. I t arouses, maintains
and develops a sense of responsibility among the managements of the
various bodies. The necessary co-ordination of the policies of investment
of these bodies could be obtained, either directly by precise statutory
regulation and by careful supervision of the investments, or by the creation
of a central investment council whom the bodies concerned should have
to consult before taking any decision.
(31) Selection of Investments

by the Insurance

Institution

Where the management of the insurance holding is considered to be
the natural consequence of the administrative and financial autonomy
accorded to t h e insurance institutions, they have themselves to choose
their investments within the limits imposed by statutory regulation and
subject to the approval of the controlling authority in cases where it is
required for special classes of investments.
The more numerous insurance institutions are and the less experience .
they have, the more advisable is it t h a t the investment policy should be
co-ordinated on a national basis.
For the purpose of taking decisions on investments for which the preparation has been made by the expert officials of the insurance institution,
it may be useful to' call on the services, not only of representatives of the
public authorities, of insured persons, and of employers, but also of experts
particularly cognizant of the conditions of the money market and of the
economic and social policy of the State.
(32) Selection of Investments by a Body other than the Insurance

Institution

Whether t h e insurance is administered by a public institution or directly
by an administrative service of the State, in preparing the decisions of the
body responsible for selecting investment, it is expedient to call on the
services, not only of experts particularly cognizant of the conditions of the
money market and of the economic and social policy of the State, but
also on representatives of insured persons and of their employers.
This procedure is particularly indicated where the insurance scheme
is administered by an institution which has financial and administrative
autonomy but whose holding is managed by some other body.

APPENDIX

III

INVESTMENT OF FUNDS OF SOCIAL INSURANCE INSTITUTIONS

PEBMISSIBLE CLASSES or

INVESTMENTS I N CBBTAIN COUNTRIES

I n most social insurance schemes the permissible classes of investments
for the funds of the scheme are enumerated in a restrictive list in the laws
or regulations governing the scheme, and those not so enumerated are
excluded.
An account is given below by way of example of the provisions of
laws or regulations which enumerate the permissible classes of investments
for the funds of the general insurance schemes of the following countries:
Argentina
France
Netherlands
Belgium
Germany
Poland
Brazil
Great Britain
Sweden
Chile
Hungary
Yugoslavia
Czecho-Slovakia
Italy
Finland
Luxemburg
The lists of permissible investments are as far as possible reproduced
in their entirety, closely following the text of the original regulations.
(The abbreviation L. S. refers to the Legislative .Series.oí the International Labour Office.)
Argentina
Pension Insurance for Persons Employed in Public Utility
Undertakings
Act No. 11,110 of I I February 1921.
Section 8 of the Act concerning invalidity and old-age pensions for
persons employed in private undertakings running public utility services
(tramway, telephone, telegraph, gas, electricity and radio) provides t h a t
all the moneys of the Pension Fund shall be deposited in a special account
with the Argentine National Bank, with the exception of the amounts
considered by the Insurance Board to be necessary for current payments.
Section 9 is as follows :
" Notwithstanding the provisions of the preceding section, the moneys
of the Fund shall, after the amounts necessary for current payments have
been deducted, be invested, in each case at the discretion of the Board, in
such a way as to earn the best rate of interest. The moneys shall be invested
in funds of the National Government or in funds guaranteed by the Argentine
Republic. Up to 50 per cent, of the moneys may, at the discretion of the
Board, be used for making loans to the workers and salaried employees
covered by insurance under Act No. 11,110; the workers and salaried
employees to whom such loans have been granted shall have been in employment for more than ten years and shall give a first mortgage as security,
These loans shall be devoted solely to the construction or acquisition
of houses for the occupation of the owner ; they may not exceed 10,000
pesos in amount and shall be in proportion to the worker's or salaried
employee's wages. The wage shall be equivalent to not less than three
times the amount that the worker or salaried employee is to p a y monthly
for the service of the loan.

166

APPENDIX H I

The loans shall bear interest, which may not exceed 7 per cent, per
annum and shall be repaid within a period of not more than 15 years ;
the borrower shall have the right at any time to pay off all or part of the
remainder of his debt in accordance with a schedule fixed by the Regulations issued under the Act. The loans may be combined with an ordinary
life insurance policy.
The Fund may also grant personal loans to workers and salaried
employees who have been in employment for more than five years, up to
an amount not exceeding the equivalent of their wages for three months.
These loans shall be repaid in monthly instalments not exceeding 12 in
number.
. The fulfilment of the obligations which the workers or salaried employee
may have contracted under the sections of the Act authorising the grant
of loans to insured persons shall take precedence of any rights arising out
of t h e insurance scheme established by the Act. "
Belgium
Old-Age and Widows' and Orphans' Insurance for Salaried Employees
Act of 18 June 1930, section 19, as amended by
Act of 3 March 1933, section 7 1.
Each insurance institution administers the actuarial reserves which
are accumulated in respect of the insured persons affiliated to it and are
credited to individual accounts.
The assets of the National Salaried Employees' Pension Fund and of
approved insurance institutions may be invested in the following :
(1) Belgian public funds or those of the Colony, and other funds
guaranteed by t h e Government ;
(2) loans to provinces, communes, polders, and drainage syndicates ;
(3) titles t o property (cédules hypothécaires) or mortgages ;
(4) debentures issued by Belgian companies which for at least five
years have met their liabilities out of their ordinary resources ;
(5) loans for the acquisition of land or the construction or purchase
of buildings in Belgium or for the establishment or adaptation of curative
institutions ;
(6) the acquisition in Belgium, subject to approval by the Minister
of Agriculture, of forest land or land for afforestation ;
(7) real estate situated in Belgium.
Old-Age and Widows' and Orphans' Insurance for Manual Workers
Act of 16 March 1865. ,
"
The investments of this scheme are made by the General Savings and
Old-age Pensions Fund. The investments which this Fund is authorised
to make in virtue of the Act of 1865 governing the Fund are practically
the same as those permissible for the salaried employees' scheme, which
have been enumerated above.
Brazil
Invalidity,

Old-Age, and Widows' and Orphans' Insurance for
Persons employed in Commerce
Legislative Decree No. 24,273 of 24 May 1934 2.
Section 6 of the Decree establishing a Pension Fund for persons employed in commerce provides that, with the exception of the amounts
necessary to cover the cost of administration and of benefits due to insured
persons, the available moneys shall be invested as follows :
1
2

L. S. 1930, Bel. 6 ; 1933, Bel. 2.
£ . S., 1934, Braz. 2.

APPENDIX i n

167

( 1 ) in bonds of the Federal public internal or external debt ;
(2) in the purchase or construction of dwellings for insured persons
or of premises for the services of the Pension F u n d ;
(3) in loans to insured persons : the total amount of the loan granted
may not exceed 60 per cent, of the actuarial reserve accumulated in respect
of the person concerned — the detailed conditions for the grant of such
loans are laid down in special administrative regulations.
Section 7 provides that any available moneys shall, pending investment, be deposited on current account with the Bank of Brazil or its
branches or with the Federal Savings Bank.
Pension Insurance of Persons employed in Industry
Act No. 367 of 31 December 1936.
Section 5 of the Act establishing a Pension F u n d for persons employed
in industry provides t h a t the Fund shall invest its moneys in accordance
with a systematic scheme, which shall take the following factors into account :
(a) the security afforded by investments in real estate or guaranteed
by the Federal Government in the case of negotiable securities ;
(b) the interests of the community, and more especially of the insured
community ;
(c) regularity of yield ;
(d) the utilisation of 50 per cent, of the available moneys in the areas
from which the contributions were drawn and in proportion to
the amounts collected in each area.
According to section 6, the utilisation of moneys in the interest of
insured persons is to take the form, among other things, of personal loans,
mortgage loans, or building loans granted to the insured persons themselves.
Act No. 454 of 9 July 1937 authorising the Bank of Brazil to finance
loans to agriculture and industry.
These loans must be used for the development of agriculture, stock-raising, and industry. They are financed by the issue of bonds at a rate of
interest not exceeding 8 per cent, per annum in the case of issues for the
development of agriculture. Social insurance institutions are required to
subscribe to such issues, the percentage of the money so invested being
fixed by the Federal Government after consultation with the governing
body of the institution.
Legislative Decree No. 1186 of 3 April 1939 establishing a Re-insurance
Institute in Brazil.
The Re-insurance Institute is required to t a k e over p a r t of the risks
incurred by commercial companies. I t will have a working capital of 30,000
contos, 70 per cent, of which will be subscribed by the social insurance
institutions, including the pension funds for persons employed in commerce
and for persons employed in industry.
The dividend paid to shareholders m a y not exceed 8 per cent, per
annum. No minimum dividend is guaranteed.
The fulfilment of the obligations which workers or salaried employees
may have contracted in virtue of the sections of the Act authorising the
grant of loans to insured persons take precedence of any rights arising out
of the insurance scheme established by the Act.
Chile
Sickness, Invalidity and Old-Age, Insurance for Manual Workers
Decree No. 34 of 22 January 1926 to consolidate Act No. 4054 and
subsequent amendments 1 .
1

L. 8., 1926, Chile 1.

168

APPENDIX III

Administrative Regulations- No. 205 of 8 April 1925.
Section 54. of the Administrative Regulations issued under the Sickness
and Invalidity Insurance Act provides as follows :
" The moneys of the Workers' Insurance Fund and reserves shall be
invested in accordance with the decisions of the Governing Body of the
Fund, in the same manner as moneys belonging to savings banks are
invested under the provisions of the Acts of 22 August 1861 and 22 August
1910.
Apart from the above-mentioned investments, the Governing Body
may grant loans, properly secured by mortgages, to institutions or
individuals, for the construction of workers' dwellings or. for the purposes
of social assistance or social insurance.
Pending their investment, moneys shall be deposited with the National
Savings Bank or the Santiago Savings Bank under the same conditions
as those on which these banks receive deposits from the public."

Invalidity, Old-Age and Widows' and Orphans
Insurance for Salaried Employees
Act No. 6172 of 31 January 1938 ;
Act No. 6259 of 15 September 1938.
The Act of 31 J a n u a r y 1938, which raised the r¡ate of the employer's
contribution to sickness, invalidity and old-age insurance from 3 to 4 per
cent, of the insured person's wages, provides that the yearly income accruing as a result of this increase in contributions shall be lent to a public
institution, the Building Fund, with a view to the construction of dwellings
for manual workers. The dwellings so built are the property of the
Workers' Insurance Fund, which may sell them to persons insured with
it, who to this end may obtain a mortgage loan from the Fund bearing
interest a t not more than 3 per cent., and repayable at the rate of 1 per cent.
of the loan per annum.
The Act of 15 September 1938 requires the Workers' Insurance Fund
and the other insurance institutions to lend 2 % per cent, of their annual
gross income to the Central Committee for Social Assistance and Welfare,
with a view to the construction of hospital centres for the treatment of
insured persons suffering from tuberculosis.
The loans so granted bear interest at 6% Ver cent, per annum, and
are repayable a t the rate of 1 per cent, of the loan per annum. When
the total of the loans granted amounts to 10,000,000 pesos, the insurance
institutions will have to advance a new loan of 8,900,000 pesos for the
same purpose, for which they must set aside 3 per cent, of their annual
gross income.

*

*

*

The Workers' Insurance Fund, which until 1933 invested its moneys
in Government funds and mortgage bonds, has subsequently placed a
considerable proportion of its funds in real estate, and has purchased
ordinary or preference shares of industrial undertakings.
The following extracts from the balance-sheet of the Fund at 30 June
1937 show the classification and amounts of the different classes of investments held b y t h e Fund.

APPENDIX n i

169

M S T OF INVESTMENTS AT 3 0 JUSTE

Real estate

Chilean Pesos

Agricultural property
Urban building land
Urban letting property
Administrative and medical premises
Hospitals, etc
Gross total
Depreciation
Nettotal
Rural first-aid posts
Depreciation
Net value
Houses under construction
Net total of real estate
Fixed-yield

1937

34,877,541
8,182,903
44,703,120
7,019,248
14,283,315
109,066,127
1,229,976
107,836,151
2,345,737
140,744
2,204,993
15,905,260
125,946,404

Securities

Internal debt, 7 %
Internal debt, 6% %
Department of Public Assistance, 7 % loan. .
Mortgage Bank, 6 3/4 %
Railways, 6 % debentures
City of Santiago, 7 % loan
Northern Chile Electricity Company, 6 % . . .
City of Osorno, 7 % loan
Land Settlement bonds, 6 %
Aconcagua Dairy Products Company, 7% %
debentures
Total fixed-yield securities
Variable-yield

49,595,277
26,190,000
31,790,998
16,127,253
9,000,000
2,579,360
380,000
272,600
31,670,000
800,000
168,405,488

Securities

Preference shares :
Industrial Credit Institution
National Sack Manufacturing Company
Miscellaneous
Total preference shares
Ordinary shares :
Bank of Chile
Santiago Gas Company
Oil Company
Chile Laboratory
Graneros Dairy Products Company
Chilean Tobacco Company
Chilean Land Bank
."
Pure Milk Centre
" Acción Social " Insurance Company
Total ordinary shares
Total variable-yield securities

8,000,000
2,277,300
613,780
10,891,080

;..

1,949,069
400,894
148,030
5,559,427
2,907,940
12,478
68,750
10,200,000
300,000
21,546,588
32,437,668

\

170

APPENDIX III

Czecho-Slovakia
Invalidity, Old-Age and Widows'
and Orphans' Insurance for Manual Workers
General Act of 9 October 1924, as amended by the Acts of 8 November
1928 and 15 J u n e 1934 K
Sections 180-185 of the Workers' Insurance Act determine the
permissible classes of investments as follows :
" 180. (1) The moneys of the social insurance institutions shall not be
used for any purposes other than those prescribed or authorised by this
Act.
(2) Except as otherwise provided in this Act, the moneys of the Central
Insurance Institution shall be invested as follows :
(a) in Czecho-Slovak securities satisfying the conditions imposed for
the investment of trust funds, or loans on such securities ;
(b) in loans a t interest to the Government, provinces, districts or
municipalities, or in loans guaranteed by these authorities ;
(c) in Czecho-Slovak mortgage loans satisfying the conditions imposed
for t h e investment of trust funds ;
(d) in Czecho-Slovak financial institutions if the Government, a
province, a district or a municipality guarantees the total
liabilities of the institution or at least the investments of the
social insurance institutions ;
(e) in loans a t interest to public bodies entitled to levy taxes.
(3) At least 20 per cent, of the moneys of the Central Insurance
Institution available for long-term investment shall be invested in Czechoslovak Government funds, and at least 10 per cent, in other securities
specified b y t h e Minister of Social Welfare in agreement with the Minister
of Finance. The Government may lower this limit, or fix a different
proportion between Government and other securities.
(4) (Investment of the moneys necessary for current expenses.)
(5) The Central Insurance Institution shall draw up guiding principles
for the investment of its moneys which shall require the approval of the
Minister of Social Welfare, given in agreement with the Minister of Finance,
and after consultation with the National Bank of Czecho-Slovakia. The
guiding principles shall include a rule to the effect t h a t a scheme of financial
administration shall be drawn up annually.
182. (1) The Central Insurance Institution may invest not more than
one-third of its moneys available for long-term investment in productive
real estate in Czecho-Slovakia, provided that the charges thereon are not
more t h a n one-third of the ordinary value of the property, and in loans
on mortgage.
(2) I n making long-term investments, care shall be taken that the
investments in each of the several provinces are proportionate to the
insurance contributions collected in the last three years by the sickness
insurance institutions in the province.
185. (1) T h e moneys of the
invested in such a way t h a t the
the rate of interest taken as a
equilibrium under the Act were
economic yield are increased. "
1

Central Insurance Institution shall be
average. return thereon is equivalent to
basis when the conditions of financial
calculated, and t h a t productivity and

L. S., 1924, Cz. 4 ; 1928, Cz. 2 ; 1934, Cz. 4.

APPENDIX

m

171

Invalidity, Old-Age and Widows'
and Orphans' Insurance for Salaried Employees
Act of 21 February 1929, as amended b y the Act of 21 J u n e 1934 1.
The investments of the moneys of the General Pension Institution for
•Salaried Employees is regulated by sections 162—168 of the Salaried
Employees' Pensions Act as follows :
162. (1) The moneys of the General Pension Institution for Salaried
Employees and the substitute funds shall not be used for any purposes
other than those prescribed or authorised by this Act.
(2) At least 20 per cent, of the moneys available for long-term investment shall be invested in Czecho-Slovak Government funds and at least
10 per cent, in other trustee securities specified by the Minister of Social
Welfare in agreement with the Minister of Finance. The Government
may vary these limits and fix a different proportion between Government
and other securities.
(3) The remainder of the moneys available for long-term investment
may be invested only in :
(a) Czecho-Slovak securities satisfying the conditions imposed for the
investment of trust funds, and loans guaranteed by such securities ;
(b) loans to the Government, provinces, districts, municipalities, a n d
other administrative bodies authorised by law to defray their
expenses by means of taxes or levies supplementary thereto, and
loans guaranteed by the said authorities and bodies ;
(c) Czecho-Slovak mortgage loans satisfying the conditions imposed
for the investment of trust funds ;
(d) Czecho-Slovak financial institutions whose total liabilities are
guaranteed by the Government, a province, district or municipality.
(4) Except with the "consent of "the "Ministry of Social Welfare, not •
more than 40 per cent, of the moneys available for long-term investment
may be invested in real estate and mortgage loans.
(5) (Investment of the moneys necessary for current expenses.)
(6) The General Pension Institution shall draw up guiding principles
for the investment of moneys which shall require the approval of the
Government.
163. (1) A part of the moneys of the insurance institutions which
are available for long-term investment may also be invested as follows,
with the approval of the Minister of Social Welfare :
(a) in buildings for offices for the institution itself ;
(b) in productive real estate or letting property... ;
, (c) in institutions and organisations devoted wholly or mainly to
the benefit of insured persons, and intended for preventive or
curative treatment, the combating of social diseases, or the raising
of the general standard of health among insured persons a n d
their dependants.
164. (1) I n making long-term investments, care shall be taken t h a t
the investments in each of the several provinces are proportionate to the
insurance contributions collected in the province.
(2) The moneys of the insurance institutions shall be invested in such
a way t h a t the average return thereon is equivalent to the rate of interest
taken as a basis when the conditions of financial equilibrium under the
Act were calculated, and that the national economic productivity is
increased. "
1

L. S., 1929, Cz. 1 ; 1934, Cz. 5.

172

APPENDIX n i

Finland
National Invalidity and Old-Age Insurance
Act of 31 May 1937 ;
Order of 1- April 1937 concerning the application of the Act.
The moneys of the Pensions Office, which is the body responsible for
administering the compulsory insurance scheme, are to be invested, with
due regard for the need of production, in the following :
(1) Bonds issued by credit institutions granting loans to agriculture,
industry and commerce, and bonds issued by undertakings ;
(2) Government bonds and other Government securities up to not
more t h a n 10 per cent, of the total investments of the Office ; in the case
of short-dated securities which are repayable at a fixed date and have
been issued by the Government during an emergency with a view to
preventing or reducing unemployment, the total investment in such
Securities a n d in other Government securities together may be as much
as 20 per cent, of the total investments of the Office ;
(3) bonds issued by solvent municipalities in Finland ;
(4) shares of Finnish companies (financial, commercial, and other
companies affording every guarantee of security) up to not more than
10 per cent, of the share capital of the company ;
(5) bearer bonds secured by a mortgage (mortgage bonds or titles
to property), provided that the claim of the Pensions Office, together
with claims of the same rank or with priority over the Pension Office claim,
does not exceed 50 per cent, of the value of the mortgaged property ;
(6) deposits with safe banks ;
(7) by way of exception, debentures, bonds and other kinds of securities l
provided the investment appears to be fully secured.
France
Invalidity, Old-Age and Widows'
and Orphans' Insurance for Employed Persona
Decree of 28 October 1935 to amend the law relating to social insurance 2.
Decree of 15 May 1934 respecting the carrying out of an extensive programme of public works to relieve unemployment b y utilising the
available moneys of the insurance institutions 3.
Both while the Social Insurance Act was being prepared and since
it came into
force, investment questions have been among the most
discussed 4. As a compromise between the demand for absolute freedom
of management for the social insurance institutions and t h a t for supervision owing t o the size of the sums to be administered, the Act originally
provided t h a t investment operations should be carried out by the Deposit
and Trust Fund, which was to have entire freedom of action as to half
of the available sums and was to invest the other half in accordance with
the instructions of the insurance institutions.
The Decree of 15 May 1934 made important changes in this initial
arrangement. In the first place, it provided as a temporary measure,
t o operate from 1 June 1934 until 31 December 1940, that the old-age
insurance institutions, the old-age and invalidity institutions and the
General Guarantee Fund should appropriate 75 per cent, of their available
1

More especially, real estate.
L. S., 1935, Fr. 12.
ä
L. S., 1934, Fr. 5, C.
* Cf. Manuel pratique des assurances sociales, published by the Central
Social Insurance Committee, Paris, 1937.
2

APPENDIX I I I

173

moneys for the purpose of constituting a joint fund managed by the Deposit
and Trust Fund, these moneys to be invested preferably in loans to the
bodies which participate in the carrying out of works for the purpose of
reducing unemployment (Section 1). Secondly, it made substantial amendments in the ordinary rules for the investment of funds. The changes
were made even more marked by the Legislative Decrees of 24 May and
14 June 1938 K
The following points will be considered below :
(1) The methods of application of the transitional scheme in force
from 1 June 1934 to 31 December 1940 under the Decree of 15 May 1934 and the Legislative Decree of 24 May 1938.
(2) The rules for the investment of funds laid down in section 33 of
the Decree of 28 October 1935
as amended b y the Legislative Decrees of
24 May and 14 J u n e 1938 3 (normal method of investment, now followed
for 25 per cent, of the available moneys).
§ 1. Provisional

Measures

A. Joint Employment Fund
(Investment of 75 per cent, of available moneys)
Under the Decree of 15 May 1934 old-age insurance institutions, old-age
and invalidity insurance institutions, and the General Guarantee F u n d
must from 1 J u n e 1934 until 31 December 1940 appropriate 75 per cent.
of their available moneys for the purpose of constituting a joint fund for
combating unemployment 4 (section 1).
Constitution of Joint Fund. — The Deposit and Trust Fund must
within the first five
days of each month transfer seven-eighths of the
available moneys 6 of the accumulation funds to the account of the
Investment
Fund, six-eighths being credited to t h e Joint Employment
Fund 6. Consequently, the sums intended for the Joint Fund pass first
of all through the Investment Fund, from which they are then transferred
to the Joint Fund.
Administration. — The Joint Fund is administered by the Deposit
and Trust Fund under the supervision of a National Board, the composition
of which was determined by a Decree issued under the Decree of 15 May
1934 (section 3).
Grant of loans. — The moneys belonging to the Joint Fund must be
invested by preference in loans to the bodies which participate in the
carrying out of work for the purpose of reducing unemployment (departments, communes, federations of communes, main railway systems, public
institutions, colonies, protectorates, etc.) (sections 1 and 2).
The programme of works has to be drawn up by the National Board
(section 3), and the loans granted from the Joint Fund must be made
by means of contracts of a uniform type adopted by the Board and
providing for repayment within 30 years (this time limit may be increased
to 50 years for the main railway systems). The annual instalments in
1

L. S., 1938, Fr. 7.
L. S., 1934, Fr. 5, C.
3
L. S., 1935, Fr. 12.
* This fund is called the Joint Employment Fund.
5
The remaining one-eighth is invested in a manner decided b y the
insurance institutions and does not appear in the Investment Fund.
6
I n this way, one=eighth of the available moneys (or one^seventh
of the Investment Fund) is invested in the manner decided b y the Deposit
and Trust Fund and thus does not form part of the Joint Employment
Fund.
2

174

APPENDIX I H

-which the loans are to be repaid are assessed according to a uniform rate
of interest fixed periodically by an Order of the Minister of Labour and
the Minister of Finance after consultation with the National Board. The
loan contracts must require the borrower to pay interest for the period
between the conclusion of the contract and the appropriation of the sums
borrowed from the Joint Fund (section 4).
Settlement of accounts with insurance institutions. — At the end of each
of the years from 1934 to 1940, the Deposit and Trust Fund is required
to transmit t o the General Guarantee F u n d and the social insurance
institutions concerned a debt certificate containing a statement for the
subsequent years of the share which will be assigned to them from the
annual instalments in respect of the loans granted during the last preceding
year and assessed according to the payments made to the Joint Fund
during the same year on their behalf.
During the whole period of the repayment of the loans the Deposit
and Trust F u n d credits the account of each insurance institution every
year with the fraction of the annual instalment due to it and also with
the portion of interest due to it over and above the instalments. If after
31 December 1940 its financial situation renders this necessary, an institution
may transfer all or p a r t of the debts due to it to another institution.
In default of a direct agreement, the Deposit and Trust Fund must
deduct the moneys necessary for this operation from the portion of
the available moneys for the investment of which it is responsible in
pursuance of the Social Insurance Act (section 5).
B. Other Investments
The surplus moneys available for investment (25 per cent, or twoeighths of the total) are invested as to one half by the Deposit and Trust
Fund directly, and as to one half by the same Fund, but on the instructions
of the governing body of the insurance institution in question or of a
committee selected from among the members of that body and duly
authorised by it.
The permissible clauses of investments for such moneys and the
conditions, if any, concerning their selection, are described below.
§ 2. Normal Method of Investment
General Principles
The available moneys of each old-age insurance institution or old-age
and invalidity insurance institution are to be invested as follows :
(a) One quarter in loans to the Departmental and Communal Credit
Fund, with a view to financing the public works of the departments
and communes and of the public establishments supervised by
these authorities ;
(b) One quarter, on the instructions of the governing body of the
insurance institution concerned or of a committee selected from
among the members of t h a t body and duly authorised by it, in
loans t o departments, communes and public establishments, with
a view to financing their public works ;
(c) One qtiarter directly by the Deposit and Trust Fund ;
(d) One quarter by the Deposit and Trust Fund on the instructions
of the governing body of the insurance institution or of a committee
selected from among the members of that body and duly authorised
by it.
Investments made a t the request of insurance institutions and their
unions must, however, be submitted for approval :
(1) to the Departmental and Communal Credit Fund in the case of
loans made to departments, communes or public establishments supervised
by such authorities with a view to financing their public works ;

APPENDIX I H

175

(2) to the governing body of the General Guarantee F u n d or to a
committee duly authorised by t h a t governing body in the case of investments other than those covered by the preceding paragraph and those
made in Government securities, securities of the Autonomous Sinking
Fund or negotiable securities quoted on the Paris Stock Exchange.
Permissible Classes of Securities
The Social Insurance Act of 30 April 1930, in fixing the permissible
classes of investments, had differentiated between those made on the
initiative of the insurance institution and those made on the initiative
of the Deposit and Trust Fund.
Under section 33, subsection 1, of the Decree of 28 October 1935,
however, the same classes of investments are permissible in both cases.
The only difference is t h a t the insurance institutions are required to obtain
the approval of certain authorities, whereas the Deposit and Trust F u n d
has no such obligation.
The permissible classes of investments for social insurance institutions
may be divided into three groups, as follows :
(a) Government securities or negotiable securities quoted on the
Paris Stock Exchange, comprising : Government and Governmentguaranteed funds. ; securities of the Autonomous Sinking F u n d ;
bonds and debentures of the National Credit Fund ; bonds and
debentures of the main railway systems ; communal land bonds
and titles to maritime property issued by the Land Bank ; bonds
issued or guaranteed by departments, communes, federations of
communes, public establishments, colonies, protectorates and
mandated territories ; bonds of the National Agricultural Credit
Fund ; and all stocks accepted by the Bank of France as security
for advances.
(b) Simple loans, comprising loans to departments, communes,
-federations of .communes, public establishments, colonies, protectorates and mandated territories.
(c) Mortgage loans and purchases of real estate, comprising the
purchase of buildings completely finished and situated in towns
with a population of over 100,000 or in the Department of the
Seine, and loans on first mortgage on real estate satisfying the
same conditions up to a total amount of 50 per cent, of the value
of the property.
Under section 33, subsection 3, of the Decree, insurance institutions
may, however, be authorised by the General Guarantee F u n d to purchase
land or buildings and to construct or adapt buildings in localities other
than those mentioned above with a view to the housing of their administrative services.
The total amount invested b y a social insurance institution in real
estate, including the property referred to in the preceding paragraph,
may not exceed 15 per cent, of its total investments. No further investment
in real estate may be made b y or on behalf of an institution where this
percentage has already been exceeded, until the situation of the institution
has been readjusted K
Investments made by Insurance
Institutions
The following rules apply to investments selected by insurance institutions :
(a) For all investments placed in the first group above (Government
securities and negotiable securities quoted on the Paris Stock
Exchange), the orders are given directly to the Deposit and Trust
1
The institutions whose financial ' system is t h a t of accumulation,
unlike the sickness and maternity insurance institutions and their regional
unions, are not allowed to invest their moneys in establishments for the
promotion of public health.

176

APPENDIX i n
Fund by the legal representative of the insurance institution.
The selection must have been made by the governing body of
the insurance institution or b y a committee to which t h a t body
has delegated all or part of its powers and which must comprise
a t least six members chosen from among the various interests
represented on the governing body. (Regulations of 19 March
1936, section 124.)
(b) For investments in real estate, the insurance institutions must
obtain beforehand the approval of the Governing Body of the
General Guarantee Fund or of a committee appointed b y that
Body. The orders for investments must therefore mention that
the approval of the General Guarantee Fund has been obtained.
(c) •• For loans to departments, communes and public establishments
supervised by such authorities, the approval of a central
institution, t h e Departmental and Communal Credit Fund 1 , must be
obtained.

Investments made by the Deposit and Trust Fund
The Deposit and Trust Fund makes its investments directly without
having to obtain the approval of the General Guarantee Fund.
Minimum rate of interest
The rate of interest on the long-term and short-term investments of
the social insurance institutions may not be less than the minimum rates
periodically prescribed b y an Order of the Minister of Labour and the
Minister of Finance.
The Order prescribes a minimum rate of interest for investments in
real estate made with a view to the installation of administrative services
devoted to the application of the social insurance scheme. The corresponding charge is made to the annual administrative expenses account.
Germany
General Insurance for Employed

Persons

Social Insurance Code of 15 December 1934, sections 26 et seq. 2
Salaried Employees' Insurance Act of 28 May 1924, sections 205 et seq. 3
The moneys of the insurance institutions must be invested at interest
and so far as possible in a manner to protect the investments against depreciation.
The following are the permissible classes of investments :
(1) Bonds of the National Government or a State or of a credit institution belonging to the National Government or a State, or loans entered
in the public debt register of the National Government or of a State ; the
National Government may fix the fraction of the moneys to be invested
in this way (50 per cent, of the available moneys under the Order of 14
February 1928).
(2) Bonds t h e interest of which is guaranteed by the National Government or a State or by a credit institution belonging to the National Government or a State.
(3) Loans t h e security for which is a safe mortgage on land in Germany,
or safe trusts on real estate or annuity bonds on land in Germany.
1
The Departmental and Communal Credit Fund was set up by an
Act of 28 December 1931 and reorganised by the Legislative Decrees of
7 September and 9 November 1936, 24 May 1938 and 21 April 1939.
t
L. S„ 1924, Ger. 10.
"L.S., 1924, Ger. 6.

APPENDIX m

177

A mortgage, a trust on real estate or an annuity bond is deemed t o be
safe if the loan does not exceed two-thirds of the value of the property.
As a rule, the loan may be made only on a first mortgage.
Loans may not be made on building land and on new buildings which
are not yet completed and capable of yielding income, or on land not yielding
a permanent income such as pits, quarries and mines. The Federal Minister
of Labour may authorise exceptions in particular cases.
The value of the property for the purpose of the loan m a y not exceed
the ordinary value as ascertained by careful investigation. I n ascertaining
this value, only the permanent qualities of the property and the income
which it can yield permanently to any owner using it in a suitable way
may be taken into account.
(4) Securities, in particular mortgage deeds, and bonds of all kinds
issued by German public bodies or by credit institutions belonging to such
bodies, provided t h a t the said securities or bonds are approved by the
National Government as suitable for the investment of trust funds.
(5) Securities satisfying the conditions imposed b y a State for the
investment of trust funds.
(6) Mortgages of German joint-stock mortgage banks which are payable
to bearer and on which the Federal Bank makes loans in Class I.
(7) Bonds on the securities and mortgages mentioned under heads
(l)-(5) above in so far as such securities or mortgages are issued on the
terms applied by the National Loan Fund or the Reichsbank.
(8) German public savings banks which are approved by the competent authority of the State where the head office of the bank is situated
as suitable for the investment of trust funds.
(9) The Reichsbank, a State bank or any other German bank recognised by law.
(10) . Bonds .of German public bodies mentioned under head (4) above
and of school districts and denominational bodies, provided t h a t these
bonds can be called in by the creditor or t h a t provision is made for their
regular amortisation.
(11) Bonds guaranteed by German publie bodies or by credit institutions belonging to such bodies (head (4)), public savings banks (head (8))
or recognised banks (head (9)).
'
(12) Short-term loans for which sufficient security is given.
I n addition, the moneys may be invested in real estate in Germany,
in loans for public utility purposes, and in shares in undertakings for such
purposes. Public utility undertakings are deemed to include co-operative
societies and their federations if their operations under their rules are
carried on exclusively or mainly for the benefit of persons insured under
the invalidity, old-age, and widows' and orphans' insurance schemes for
manual workers and salaried employees.
The approval of the National Insurance Office is required for the
acquisition of land at a price above that fixed by the National Minister
of Labour or for the erection or extension of buildings at a cost above t h a t
fixed by the Minister (up to the present the Minister has not fixed such
limits). A similar rule applies to investment in dental clinics, holiday
homes, convalescent homes and health establishments of all kinds (no limit
has yet been fixed).
The National Minister of Labour may grant authority, subject to
revocation, for the investment of moneys which are temporarily available
in ways not provided for in the foregoing list.
The approval of the National Insurance Office is required for investments of the classes mentioned under heads (11) and (12) above or in land
in Germany or i n public utility undertakings. The National Minister of
Labour may issue general instructions for these investments, and in particular may fix maximum limits for the total amount so invested (up t o the
present the Minister has not issued such instructions).
12

178

APPENDIX

m

Great Britain
Sickness and Invalidity

Insurance for Employed P.ersons

National Health Insurance Act, 14 July 1936 1.
Half the moneys belonging to the National Health Insurance Fund
are invested b y the National Debt Commissioners, and the other half by
the approved societies or on their behalf by the Ministry of Health.
The permissible classes of investments are defined by the National
Health Insurance Act as follows :
1. " Any securities which are for the time being authorised by Parliament as investments for savings banks' funds ", preference being given
" to stocks or bonds issued under the provisions of the Acts relating to
borrowing for raising capital for the purposes of the Local Loans Fund,
where the purpose for which the capital is required is the making of advances
for the purposes of the Housing Act, 1936 " (section 158).
2. " Any investments in which trustees are for the time being by law
empowered to invest trust funds, o r . . . stocks, mortgages or other securities
issued b y any local authority within the meaning of the Local Loans Act,
1875, and charged on any rates levied by or on the order or precept of that
authority o r . . . any other securities for the time being approved by the
Minister,(of H e a l t h ) " (section 143, subsection 1).
The second of these groups comprises all the classes of investments
contained in the first group. The only reason for the distinction between
the two in the Act is t h a t investments made by the National Debt Commissioners are limited to the securities in the first group, whereas investments
made b y or on behalf of approved societies may be selected from the wider
range of the second.
The following is an analysis of the investments comprised in the second
group :
1. Securities of British and Foreign
(a)
(b)
(c)

(d)

(e)

Governments

Securities which are issued under authority of British Acts and
constituting the National Debt, the payment of the interest on
which is provided for by Parliament.
Securities issued in respect of any loan raised by the Government
of Northern Ireland.
Securities issued by the Secretary of State in Council for India
under the authority of British Acts and charged on the revenues
of India, and any other securities the interest in sterling on which
is payable out of, and charged on, the revenues of India.
Securities authorised under the Colonial Stock Act, 1900, as
amended. These are securities issued by the Governments of
the Dominions, Crown Colonies, and Mandated Territories, which
fulfil certain conditions prescribed by the British Treasury.
Securities issued by certain foreign Governments (see 3 (b)).

2. Securities of Local Governments and Public Utility

Undertakings

(a) Local governments in the United Kingdom.
Local government securities consist of the following principal types :
(i) stock issued by certain local authorities (especially larger municipal
corporations) under special Acts (local Acts) ;
(ii) stock issued by a local authority under general Acts, in conformity
with regulations made by the Ministry of Health and with its
approval ;
i

L. S., 1936, G.B. 8.

17 9

APPENDIX III

(iii) mortgages on the rates of a local authority (see 4 (a)) by mean
of which money is borrowed from the Central Government (ses
3 (a) and 7) or from banks, insurance companies, approved
societies, etc.
(b) Public utility undertakings (see 5).
(i) stock of the Bank of England or the Bank of Ireland ;
(ii) debentures or preference stock of those railways in the United
Kingdom which have for the previous 10 years paid at least
3 per cent, on their ordinary stock ;
(iii) debentures of Indian railways the interest in sterling on which
is paid or guaranteed by the Secretary of State in Council for
India, and stock of Indian railways on which a fixed or minimum
dividend is likewise paid or guaranteed ;
(iv) debentures or preference stock of those statutory water companies
in the United Kingdom which have for the previous 10 years paid
a t least 5 per cent, on their ordinary stock ; also the stock issued
by statutory commissioners supplying water to the areas with a
population of over 50,000, when the commissioners are empowered
to levy rates up to a prescribed amount, and the rates actually
levied during each of the previous 10 years have not exceeded
80 per cent, of that amount.
3. Securities

guaranteed

by

the British

Government

(a) The British Government guarantees the payment of interest on
sums advanced to local authorities out of the Local Loans Fund.
The loan is raised by the National Debt Commissioners at the
market rate for the purpose of public works (see 2 (a) (iii) and 7)
'(b) The British" Government also guarantees the payment of interest
on certain loans to foreign countries, e.g. Turkey, Greece.
4. Mortgages
(a)

Mortgages issued by any local authority in the "United Kingdom,
and charged on the rates levied by t h a t authority (see 2 (a) (iii)).
(b) Mortgages on freehold land in the United Kingdom.
5. Loans to Private

Undertakings

Investments may not be made in ordinary private undertakings, b u t
only in public utility undertakings, whether working for profit or not, which
operate under special Acts (see 2 (b)).
6. Real Estate
Freehold property in the United Kingdom.
7. Housing

Loans

A large proportion of local government securities has been issued in
order to finance expenditure on housing for the working classes.
In particular the sums advanced to local authorities out of the Local
Loans Fund have been largely used for this purpose. The National Debt
Commissioners, in investing moneys of the National Health Insurance
Fund, are bound to give preference to securities issued for the purpose of
enabling advances to be made out of this F u n d to local authorities
requiring them in order to finance expenditure on housing.
13

180

APPENDIX III

Hungary
Invalidity,

Old-Age and Widows' and Orphans'

Insurance

Act No. X L of 1928, as amended by Order No. 6500 of 1935 (section 133) 1 .
The moneys of the Contribution Reserve Fund of the invalidity, oldage and widows' and orphans' insurance schemes administered by the
National Social Insurance Institution and the Insurance Institution for
Salaried Employees may be invested only in the following securities :
(1) Hungarian State bonds ;
(2) Fixed interest-bearing securities suitable for the investment of
trust funds ;
(3) Real estate, provided that it is the property of the insurance
institution, produces a suitable yield, and is free of charges, including :
(a) Institutions, offices, dispensaries, curative establishments, sanatoria and homes for the disabled, and the equipment necessary
for their operation ;
(b) Letting property, houses for wage earners and officials ;
(c) Other property used for the purposes of the institution ;
4. Loans raised b y municipalities and towns for the purpose of :
(a) financing the establishment, development or transformation of
their public health institutions or other public works of importance
from the point of view of public health (water supply, sewerage,
etc.), or
(b) promoting ether profitable investments, provided that the revenue
or excess revenue therefrom is sufficient to provide for the service '
of the loan ;
(5) Loans to promote the construction and renovation of hotels which
are of importance from the point of view of tourist traffic ;
(6) The loan raised by the Budapest Danube Bridge Fund ;
(7) Loans raised by the Office for the Provision of Industrial Employment for the purpose of creating opportunities for employment in industry,
provided t h a t the said Office increases its share capital by a sum equal
to the nominal value of the loan called for (section 133, subsection 1).
The following provisions apply to certain classes of investments.
(a) Investments specified under heads (1) and (2) above :
The Minister of the Interior, in agreement with the Minister of Finance,
may specify in advance the amounts to be invested in this way, with due
reference to the liability of the Reserve Fund for the payment of pensions
and to the general economic and financial situation (section 133, subsection 2).
(b) Investments specified under heads (3), (4), (5) and (6) :
Not more than 40 per cent, of the moneys of the Reserve Fund may
be invested in this way (section 133, subsection 3).
(c) Investments specified under heads (4) and (5) :
These loans may not be raised without sufficient security and as a
rule must be subject to entry in the land register. In certain cases other
suitable and adequate security may be accepted'instead of entry in the
land register, provided that sufficient reasons aie given. The Minister of the
Interior, in agreement with the Minister of Commerce, decides in each
individual case respecting the hotels which are to be deemed to be of importance from t h e point of view of tourist traffic (section 133, subsection 4).
The sums required ' for the regular discharge of current insurance
liabilities, a n d the sums in excess thereof which are not yet invested, may
be invested in savings accounts, on deposit receipts or in current accounts
1

L.S.

1935, Hung. 2.

181

APPENDIX H t

with the Hungarian Royal Post Office Savings Bank, the Central Financial
Institution or its branches. After consultation with the governing body
of the insurance institution, the Minister of the Interior, in agreement
with the Minister of Finance, specifies every year with which of the
above-mentioned financial institutions, up to what amount, and under
what circumstances and subject to what conditions the sums in question
may be invested (section 133, subsection 5).
Italy
Insurance

Schemes Administered
Welfare

by the Fascist National
Institute

Social

Legislative Decree of 4 October 1935 1, as amended by the Legislative
Decree of 14 April 1939 a.
The provisions of the Legislative Decree of 4 October 1935 apply to
compulsory invalidity and old-age insurance and also to other insurance
schemes administered by the Fascist National Social Welfare Institute.
According to this Decree the permissible classes of investments are the
following :
(1) securities issued or guaranteed by the Government ;
(2) interest-bearing loans to provinces, municipalities and federations
of municipalities, including loans for the redemption of the pension liabilities
of these authorities ;
(3) purchase of annuities due from the Government for the execution
of public works, land improvement or irrigation schemes, etc. ;
(4) bonds issued b y institutions authorised to grant loans on t h e
- security of_land,. and securities legally equivalent to .the said bonds ;
(5) participation in the subscription of capital for institutions or
establishments engaging in work of public utility, if such participation
is expressly authorised by an Act or Royal Decree ;
(6) real estate, both urban and rural, provided that investments
under this head may not exceed one-tenth of the total investments of the
insurance institution ; •
(7) interest-bearing loans on mortgages granted for the purpose of
building workers' dwellings and promoting institutions for the prevention
and cure of disease or for social assistance ; the amount of the loans granted
under this head may not exceed one-tenth of the total investments of the
insurance institution ;
(8) loans at interest to consortiums for land improvement, drainage
and irrigation, or hydraulic works, provided that they offer the same degree
of safety as is required by the Deposit and Loan Fund ;
o
(9) deposits at interest with (a) the Deposit and Loan Fund, (b) the
Bank of Italy, (a) various other financial institutions of repute designated
by the executive committee of the insurance institution ;
(10) advances for the execution of public works and land settlement
schemes intended for the solution of population problems.
Finally, the Decree as a general measure permits any other investment
which is or may be authorised by Act or by a Royal Decree issued on t h e
recommendation of the Minister of Corporations in agreement with the
Minister of Finance (section 35).
1

L.S.
-L.S.,

1935, It. 5.
1939, It. 1.

182

APPENDIX III

Luxemburg
Invalidity, Old-Age mid Widows' and Orphans' Insurance for Manual Workers
Act of 17 December 1925, as amended *.
The Act of 17 December 1925 respecting the Social Insurance Code
defines the classes of securities in which insurance funds may be invested
without any authorisation or restriction, as follows :
(1) national debt securities ;
(2) direct loans to the Government ;
(3) bonds of Luxemburg municipalities ;
(4) direct loans to Luxemburg municipalities ;
(5) bonds of the Grand-Ducal Land Bank ;
(6) deposits with the Savings Banks.
With t h e consent of the Government, insurance funds may also be
invested in':
(1) bonds of foreign Governments;
(2) bonds of foreign municipalities ;
(3) mortgage loans ;
(4) purchase of real estate ;
(5) undertakings for the provision of workers' dwellings ;
(6) deposits with financial institutions other than the Savings Bank
(as a temporary measure).
(Social Insurance Code, Art. 286.)
Invalidity, Old-Age and Widows' and Orphans' Insurance for
Salaried Employees
Act of 29 J a n u a r y 1931 2.
The regulations are the same as for the manual workers' scheme, except
that the Salaried Employees' Pension Fund may, with the consent of the
Government, invest moneys in undertakings for thé promotion of public
health (section 92 of the Act).
Netherlands
Accident Insurance ; Invalidity, Old-Age and Widows' and Orphans' Insurance
for Employed Persons
Act of 29 December 1928, as amended by the Acts of 29 November 1935
and 30 December 1938.
The Act of 29 December 1928, as amended, lays down rules for the
investment of those social insurance funds which are administered by the
State Insurance Bank. These include (1) the funds of the compulsory
invalidity, old-age and widows' and orphans' insurance scheme and the
subsidised «voluntary old-age insurance scheme, which were amalgamated
in 1936 ; (2) the funds of the voluntary self-supporting old-age insurance
scheme ; and (3) those funds of the accident insurance schemes that are
managed by the State Insurance Bank 3.
l

L. S., 1925, Lux. 2 ; 1929, Lux. 4.
'L.S., 1931, Lux. 2.
3
Under the accident insurance scheme for industry and commerce,
employers m a y insure with other insurance institutions than the State
Insurance Bank. Under the agricultural accident insurance scheme they
may insure with employers' mutual insurance funds. The first of these
schemes is administered by the State Insurance Bank alone, even though
the other insurance institutions undertake the compensation of risks.
The agricultural mutual insurance funds, on the other hand, are responsible
both for the compensation of risks and for the administration of insurance.

APPENDIX I I I

183

The permissible classes of investments for these insurance funds are
enumerated in section 5 of the Act. Section 6 provides t h a t part of the
available moneys of the Invalidity and Old-Age Fund (compulsory pension
insurance and subsidised voluntary old-age insurance) must be invested
in Government funds.
The provisions in question are as follows (extracts) :
5. (1) The available moneys may be invested in :
(a) the National Debt ; •
(b) bonds of Netherlands provinces and municipalities or of local
authorities responsible for the service of the polders (reclaimed
land), peat bogs or peat-bog polders (waterschappen, veenschappen
and veenpoldersj ;
(c) bonds directly and unconditionally guaranteed as regards both
interest and redemption by the Government, a Netherlands
province or municipality, or local authorities responsible for the
service of the polders, peat bogs or peat-bog polders ;
(d) bonds of the Netherlands Indies, Surinam or Curaçao, or bonds
directly or unconditionally guaranteed as regards both interest
and redemption by these authorities, as well as bonds of any
part of such territory with financial resources of its own ;
(e) bonds issued by companies which own or operate railways in the
Netherlands or in the Netherlands Indies.
(f) bonds of companies in which the Government holds not less than
one-half of the share capital ;
(g) bonds issued by mortgage banks set u p in accordance with Netherlands law and doing business exclusively in the Netherlands,
or issued by companies set up in accordance with Netherlands
law for the exclusive purpose of granting loans to or with the
guarantee of municipalities, provinces or polders in the Netherlands, or of granting loans to provinces of the Netherlands Indies
or to parts of such provinces which are authorised b y law t o raise
loans ;
(h) loans secured by first mortgage on real estate in the Netherlands ;
(i) debentures of companies set up in the Netherlands in conformity
with Netherlands law.
(2) Part of the available moneys may also be invested for a term of
six months or less in :
(a) loans on the security of funds recognised for this purpose by the
Bank of the Netherlands ;
(b) Netherlands or foreign bills of exchange bearing at least three
signatures ;
(c) short-term loans to provinces and municipalities.
Such investments, however, may not absorb more than 10 per cent.
of the total capital as regards the Invalidity and Old-Age Fund (compulsory
insurance), the voluntary old-age insurance fund, the two Accident Funds,
and the General Civil Pensions Fund, or more than 25 per cent, of the
total capital as regards the Post Office Savings Bank and the Postal Cheque
and Clearing Service.
(3) For the purpose of this section, investment in bonds shall include
subscription for loans to the extent of the full amount of the issue or part
of it.
(4) (Relates to Post Office accounts.)
«
(6) (1) If the Minister of Finance, in virtue of the authority conferred
upon him by law, proceeds tó issue ä.löah for the consolidation of the National Debt or of a Government-guaranteed debt, the Invalidity and OldAge Fund and the General Civil Pensions Fund shall, notwithstanding the
provisions of subsection (3) of this section, participate in such loan to the

184

APPENDIX i n

extent of the amount they have available for investment. This participaion shall not exceed the amount which is due from the Treasury to these
Funds in respect of the State insurance subsidy for the current year (year
of issue of the loan). The Minister shall, however, have power to suspend,
after consultation with the Central Investment Committee 1, the application
of this limit for compulsory participation, provided that the suspension
may apply only in the case of a loan for the conversion of the consolidated
debt and t h a t the obligation to participate may not affect more than half the
moneys otherwise available for investment in the year in which the loan
is issued.
(2) If the amount to be invested in Government securities within'
the meaning of the preceding subsection exceeds the total amount of the
securities t o be issued (amount of the loan), the participation shall be,
as far as practicable, proportionate to the moneys available for that purpose
in each of the two Funds.
(3) Irrespective of their obligation to invest in Government loans
as prescribed in subsection (1) of this section, the Funds and institutions
mentioned above shall subscribe to loans issued with a view to the conversion
of the consolidated debt in proportion to their holdings in securities subject
to conversion. The said Funds and institutions shall, when required,
supply the competent Minister with the necessary information concerning
the holdings in question, and the Minister shall fix the amount of the
subscription.
(4) The moneys available for investment and deposit with the Treasury
in accordance with subsection (7) of this section shall be set aside for use
in the event of subsequent loan issues, provided they are not needed during
the year in which they were deposited, unless the Minister of Finance does
not see fit to ask for the application of this provision.
(5) The subscriptions mentioned in subsections (1) and (3) of this
section shall be made at the price and rates of interest offered when the
loan is issued, and the Funds shall receive the same commission as the
intermediaries responsible for placing the loan.
(6) The Minister of Finance shall notify the Funds and the Central
Investment Committee as soon as possible of his intention to require their
participation in Government loans under subsection (1) of this section.
(7) The Funds shall collect the necessary amounts to fulfil their
obligations
The amounts so set aside shall be paid into the Treasury,
and shall bear interest at the rate fixed by the Minister of Finance on the
recommendation of the funds in question.
Poland
Accident, Sickness, Invalidity, Old-Age and Widows' and Orphans' Insurance
for Employed Persons
Social Insurance Act
of 28 March 1933, as amended by the Order of
24 October 1934 2 .
The moneys of the Social Insurance Institution, the body responsible
for the administration of invalidity, old-age and widows' and orphans'
insurance for manual workers and for intellectual workers respectively,
accident insurance and sickness insurance, must be safely invested (section
248, subsection (1)). The classes of investment deemed to be safe are enumerated in t h e Act itself (section 248) as follows :
(1) the purchase of real estate and the construction of buildings in
Poland ;
1
This Committee is responsible for carrying out the investment operations of the Funds mentioned above, and other insurance institutions.
%
L. S., 1933, Pol. 5 ; 1934, Pol. 4.

185

APPENDIX I I I

(2) the purchase of Government or Government-guaranteed securities ;
(3) the purchase of interest-bearing securities which are secured by
titles to property or mortgage bonds, and are issued by institutions or
undertakings situated in Poland ;
" Such investments shall not be deemed to be safe unless they are
secured in accordance with the rules of the credit institution concerned
by titles to prqperty amounting to not more than one-half of the actual
value of the real estate on which they are a charge, or, in the case of interestbearing bonds secured by a mortgage, unless the total amount of the
liabilities arising out of the issue of the bonds, including previous charges,
does not exceed one-half of the actual value of the real estate on which
they are a charge. "
(4) The granting of loans on the security of real estate situated in
Poland, or on mortgages created on such estate ; the granting of loans on
the security of mortgages, provided that the said loans may not exceed
75 per cent, of the value of the claim offered as security ;
" Such investments are not deemed to be safe unless the total amount
of the liabilities or the value of the mortgage on the security, including
previous charges, does not exceed one-half of the actual value of the real
estate on which they are a charge. "
(5) Deposits with State banks, the Post Office Savings Bank, and
municipal credit institutions ;
(6) Mutual loans between the Social Insurance Institution and other
social insurance funds.
Investments are subject to the previous consent of the Minister of
Social Welfare on each occasion, and must be made in pursuance of an
investment scheme drawn up annually by the Minister of Social Welfare
in agreement with the. Minister of Finance (section 248, subsection (2)).

Sweden
National Invalidity

and Old-Age

Insurance

Royal Regulations of 18 December 1036.
According to section 4 of the Regulations of 18 December 1936, which
govern the administration of the National Pensions Fund, the moneys of
the Fund may be invested in :
(1) bonds or other loans issued or guaranteed by the Swedish State ;
at least one-sixth of the moneys of the Fund must be invested in this
manner ;
(2) bonds of the General Mortgage Bank of Sweden or the Urban
Mortgage Bank of the Kingdom of Sweden ;
(3) bonds or other loans issued or guaranteed by Swedish municipalities
with the approval of the Government ;
(4) loans secured by mortgages on real estate, provided the loan
does not exceed 50 per cent, of the latest tax assessment-value of the property,
or 60 per cent, of the ascertained value in cases where a special assessment
is made at the instance of the Investment Committee of the Fund ;
(5) loans issued by the Swedish Agricultural Credit Fund ;
(6) such other securities as are recommended by the Investment
Committee in special cases, and are approved as safe by the Government ;
(7) bank deposits in accordance with the detailed regulations issued
by the Government ;
(8) loans to undertakings devoted to improving the national health,
such as the establishment of hospitals, sanatoria,, homes for the aged,
workers' dwellings, etc., provided t h a t the loans are certified as safe by the
Investment Committee, and not more than one-quarter of the total holding
is invested in them ;

186

APPENDIX i n

(9) real estate, with the consent of the Government, provided that .
it is intended to be vised for preventing or eliminating incapacity for work ;
at most, one-thirtieth of the total holding may be invested in this way.
Notwithstanding the above provisions, the Fund may purchase real
estate at public auction in order to protect a claim secured by a mortgage
on the property, if the property has been distrained in connection with
the claim. Property so acquired must be disposed of again as soon as a
suitable occasion arises.
Decisions concerning the investment of the moneys of the National
Pensions F u n d are taken by the Investment Committee of the Fund, which
consists of three members of the Pensions Board and four members appointed
by the Government.
Accident Insurance for Workers
Royal Regulations of 29 June 1917, as amended on 31 December 1924,
6 May 1927, and 17 October 1930.
The Regulations of 29 June 1917, as amended, which govern the
administration of the Accident Insurance Fund of the State Insurance
Institution, coincide in the main with those reproduced above concerning
the National Pensions Fund. The provisions set forth under heads 1, 4,
8 and 9 above are somewhat different, however, being as follows (section 3) :
( 1 ) Bonds or other loans issued or guaranteed by the Swedish State ;
at least one-tenth of the moneys of the Fund must be invested in this
manner.
(4) Loans secured by mortgages on real estate, provided the loan
does not exceed 50 per cent, of the latest tax assessment value or 60 per
cent, of the ascertained value in cases where a special assessment is made
by the State Insurance Institution — provided, however, t h a t the Institution may, with the consent of the Government, accept as security such
a mortgage amounting to two-thirds of the latest tax assessment value or
the value ascertained by the Institution.
(8) Loans to undertakings devoted to preventing loss or reduction
of the working capacity, or to raising the working capacity, of the insured
persons, provided that the competent authority considers the loan to be
sufficiently safe and consistent with the interests of the accident insurance
scheme ; at most one-quarter of the total holding of the Fund may be
invested in loans of this kind.
(9) Real estate, with the consent of the Government, which is intended
to be used for preventing the loss or reduction of the working capacity,
or for raising the working capacity, of persons insured with the State
Insurance Institution ; not more than one-twentieth of the total holding
may be invested in this way.
Decisions concerning the investment of the moneys of the Accident
Insurance F u n d are taken by three members of the' State Insurance Institution, together with two financial experts appointed by the Government.
Yugoslavia
Accident, Sickness, Invalidity, Old-Age, and Widows' and Orphans' Insurance
for Workers
Workers' Insurance Act of 14 May 1922, as amended by the Act of
5 December 1931 1.
Order of 17 March 1937 concerning invalidity, old-age and widows' and
orphans' insurance 2.
Regulations of 27 May 1933 concerning the Central Workers' Insurance
Institution.
1

L.S.,
L.8.,

t

1922, S. C. S. 2 ; 1931, Yug. 5.
1937, Yug. 2.

APPENDIX

m

187

According to section 135 of the Workers' Insurance Act of 1922, the
provisions as to the investment of funds were to be laid down in the Regulations governing the Central Workers' Insurance Institution. These Regulations were adopted by the governing body of the Institution, and approved
by the Minister of Social Affairs and Public Health on 20 May 1933. Sections
235-249 of the Regulations relate to the constitution of the various
funds and their investment. They are, however, of a very general character,
and it may be sufficient to reproduce below the rules concerning the investment of the funds of the salaried employees' insurance scheme.
Invalidity,

Old-Age and Widows' and Orphans' Insurance for
Salaried Employees
Act of 30 October 1933 K
The investment of the funds of the Pension Institution, which administers invalidity, old-age and widows' and orphans' insurance for salaried
employees in the former provinces of Slovenia and Dalmatia, is regulated
by sections 80 and 81 of the Act of 1933 as follows :
" 80. (1) The provisions governing the investment of the moneys
of insurance institutions shall be observed in the investment by the Pension
Institution of its moneys.
(2) The premium reserves may be invested in the following (section
30 of the Insurance Regulations) :
(i) Yugoslav trustee securities ;
(ii) loans to the Government and banovinas (provinces) ;
(iii) real estate in Yugoslavia producing a regular yield, provided
the charges upon it do not exceed one-third of the purchase price ;
(iv) mortgages on real estate in Yugoslavia which are approved for
the investment of trust funds ;
(v) deposits with Yugoslav savings banks established under the
Savings Bank Regulations, with the Post Office Savings Bank,
or the Mortgage Bank ;
(vi) bills which aré or may be discounted with-the National Bank-;
(vii) loans on the securities mentioned under head (i) above, u p to
80 per cent, of their market price, but, in the case of lottery bonds,
not beyond the minimum amount which can be obtained for them
under the lottery scheme after the deduction of the dues ;
(viii) loans to Yugoslav industrial co-operative societies under whose
rules the sums borrowed outside the society may not exceed
the amount of the fully paid-up shares ;
(ix) deposits with approved Yugoslav credit institutions in current
accounts or against deposit certificates, but only in so far as the
transaction of business necessitates the holding of money a t call.
(3) If the premium reserve is not covered by the above-mentioned
securities, the Institution shall ensure cover for it, and, in particular, shall
make provision for this when making new-investments.
(4) At least 20 per cent, of the moneys of the 'Pension Institution
which are available for long-term investment shall be invested in Yugoslav
Government securities, and, in addition to this, at least 15 per cent, shall
be invested in bonds, mortgage bonds, and loans of provinces and provincial
financial institutions.
(6) The Minister of Social Affairs and Public Health may authorise
the Pension Institution to invest its moneys otherwise than as laid down
in subsection (2) in particular cases, provided t h a t such investments shall
be of an equally safe character and shall not exceed one-half of the reserve
of the Pension Institution.
(7) A suitable proportion of the moneys shall be utilised for investments for the purpose of providing salaried employees with dwellings and
other advantages. "
*L.S.,

1933, Yug. 2.

BIBLIOGRAPHY
Works dealing with the Investment of Capital and the
of Private Fortunes

Administration

As is well known, the investment of the funds of social insurance
institutions raises very different problems from those involved in the
investment of t h e funds of private insurance companies or of savings
banks. Consequently a bibliography of works dealing with investments
of t h e latter t y p e — no m a t t e r how great the intrinsic value of the
volumes t h a t might be mentioned — would do little ,to solve the
fundamental questions t h a t have to be t a k e n into account by the
bodies responsible for investing t h e funds of social insurance institutions.
Moreover, studies dealing with the investment of the capital of
social insurance institutions are either very sketchy or deal only with
a few special cases in which difficulties have been encountered in the
enforcement of national legislation.
As t h e purpose of the present volume is t o compare-from quite
a general point of view t h e basic principles of and t h e practical conclusions
which can be drawn from the statutory, provisions concerning the
investment of insurance funds a n d t h e consultations of experts organised
by t h e I n t e r n a t i o n a l Labour Office, it has been thought desirable to
append a bibliography which indicates, by way of example, a few
important works dealing in a practical spirit with the investment
of capital a n d t h e management of personal fortunes.
Works of t h i s t y p e are so numerous t h a t the following bibliography
cannot claim t o exhaust t h e subject. The works selected were chosen
from among t h e best known a n d most recent studies on investment
questions, b u t i t is obvious t h a t the list cannot be considered complete,
or even approximately complete, for there are m a n y other volumes
and treatises t h a t might be studied with advantage. The following
volumes m a y b e consulted with profit b y all those who have t o deal
with the investment of funds or select from among various possible
securities, b u t t h e investor would nevertheless be wise to consider
very carefully t h e conditions under which a n y given stock or group
of stock can be bought in the light of the special circumstances of each
case.
Some of t h e volumes mentioned contain a bibliography which m a y
be of value to t h e reader.

*

*

*

AÎTGAS, L. L. B . Investment (L'art des placements). Translated by Gael
FAIN. Preface by Raoul HACATXLT. Editions M.-P. Tïémois, Paris,
1931. 402 p p . (out of print).
Placements rationnels et speculation raisonnée (Investment for appreciation). Prévision des mouvements de cours des valeurs. Technique
de valorisation des portefeuilles. Translated from the English by Gael
FAIN. Preface by Lucien BOMIEB. Payot, Paris, 1937. 482 pp.

BIBLIOGRAPHY

189

BOSLAND C. The Common Stock Theory of Investment. Its Development
and Significance. The Ronald Press Company. New York, 1937,147 p p .
BURTCHETT. Investments and Investment Policy. Longmans, Green & Co.,
New York, London, Toronto, 1938. 772 + 39 pp., with bibliography
classified by subjects.
CAVELESR and BERTBAND. La gestion des fortunes mobilières. Delagrave,
Paris, 1934. 520 pp.
EGGEB, Dr. J. G. Kapitalanlage und Vermögensverwaltung. Mohr, Tubingen, 2nd edition, 1939. 152 pp.
GBAHAM, Benjamin, and DODD, David L. Security Analysis. Whittlesey
House. McGraw-Hill Book Co., New York, 1934. 699 pp.
GILBERT, Harold. Bond Ratings as an Investment Guide. An Appraisal
of their Effectiveness. The Ronald Press Co., New York, 1938. 260 p p .
JOBDAN, David. Jordan on Investments. Third revised edition. Prentice
Hall, New York, 1934. 412 pp.
MOEEAU NÉBET, Olivier. Les valeurs mobilières. Sirey, Paris, 1939. 2 vols.
521 and 620 pp.
MURAT, F . La politique des placements à long terme en France et à l'étranger.
Thesis submitted to the Faculty of Law, Paris. Rousseau & Cie, Paris,
1932. 211 pp.
PBATO, G. L'Impiego dei capitali. Guida dei risparmiatori. Unione tipográfica. Editrice Torinese. Turin, 1938. 376 pp.
Taccuino deWasionista. Guida pratica a tutti i risparmiatori italiani.
S. A. S. I. P., Milan, 1939. 340 pp.

INDEX

A
Administration
of insurance by the
State
Consequences of, in event of disappearance of reserves 16.
Maintenance of capital and yield of
reserves essential, whatever the
' administering body 17.
Advances on securities
Characteristics of short-term investments 93.
Argentina
,
Legal provisions concerning permissible classes of investments
165.
Rules concerning permissible classes
of investments 67-105.

B
Belgium.
Bodies responsible for selecting investments 139.
Legal provisions concerning permissible classes of investments
166.
Revaluation of accident pensions
126.
Revaluation of miners' pensions
127.
Rules concerning permissible classes
of investments 67-105.
Bibliography
Selected list of works on the investment of capital and the administration of private fortunes 189.
Bonds, mortgage
See, Loans of land mortgage banks
or building societies.
Bonds, perpetual
See Bonds, redeemable.

Bonds, redeemable
Advantages as compared with perpetual bonds 71-74.
Brazil
Legal provisions concerning permissible classes of investments
166.
Object of investments, see Utility,
economic and social, of insurance
investments.
Rules concerning permissible classes
of investments 67-105.

c
Chile
Legal provisions concerning permissible classes of investments
167.
Rules concerning permissible classes
of investments 67-105.
Conclusions adopted by second meeting'
of experts
Text of conclusions 156-164.
Conditions, general, to be satisfied by
investments
Relative importance of conditions
of safety, yield, liquidity, economic or social utility. Order of
preference of these conditions.
See general statement pp. 20-22 and
special statements on safety,
yield, liquidity, etc. '
Consultation of Experts
Conclusions adopted by second meeting 157-164.
List of persons attending the meeting 149-150.
Questionnaire adopted by first meeting 150-155.

191

INDEX
Co-ordination of insurance investments
and investment of other collective
savings
See Utility, economic and social, of
insurance investments ; also investment scheme, periodical.
Conversion, forced
See Guarantee, possible, by public
authorities.
Czecho -Slovakia
Legal provisions concerning permissible classes of investments
170.
Rules concerning permissible classes
of investments 67-105.

D
Debentures, commercial and industrial
Maximum percentage which commercial or industrial debentures
may represent in total holding
116.
Rules concerning permission to
• invest 89-93.
Decentralised selection of investments
See Selection of investments, bodies
responsible for.
Devaluation, currency
See Guarantee, possible, by public
authorities.
Distribution of Investments
Distribution of investments on the
basis of the economic or social
utility 55.
Necessity of distribution 'from
standpoint of safety ; spreading
of risks by investment in variable yield securities 29-32 and 96-99.

E
Estate, real, urban and rural property
Proportion to be maintained in
total holding between stocks
and debentures and real estate
111-118.

Rules concerning permission
invest 31, 104-110.

to

F
Finland
Legal provisions concerning permissible classes of investments
172.
Rules concerning permissible share
investments 97.
France
Bodies responsible for selecting investments 137-138.
Legal provisions concerning permissible classes of investments
172.
Revaluation of accident pensions
126.
Revaluation of railwaymen's pensions 128.
Rules concerning permissible classes of investments 67-105.

G
Germany
Bodies responsible for selecting investments 138.
Legal provisions concerning permissible ciasses of investments
176.
Revaluation of accident pensions
126.
Revaluation of invalidity, old-age,
and widows' and orphans' pensions 129.
Rules concerning permissible classes
of investments 67-105.
Government funds and Governmentguaranteed funds
Minimum percentage which Government funds may represent in
total holding 115.
Rules concerning permission to
invest 68-74 and 96-97.
Great Britain
*
Bodies responsible for selecting investments 137.

192

INDEX

Legal provisions concerning permissible classes of investments
178.
Revaluation of accident pensions
126.
Rules concerning permissible classes
of investments 67-105.
Guarantee, possible, by public authorities, in case of forced reduction of
yield or currency devaluation
Nature of the problem, measures
taken in certain countries for
the revaluation of accident and
social insurance pensions, attitude
taken by the experts and conclusions 118-134.
Necessity for maintenance of capital
and yield of reserves whatever
the body administering insurance
16-17.

H
Homes, for the aged
See Hospitals, homes, etc.
Hospitals, homes, etc., purchase or
equipment of
Maximum percentage which hospitals, homes, etc., may represent
in total holding 116.
Rules concerning permission to
invest 109-110.
Hungary
Legal provisions concerning permissible classes of investments
180.

Investment requirements common
to voluntary and compulsory
insurance. Differences between
these requirements 13.
Investment regulations, necessity of
Objects, general principles, relative
strictness of regulations and their
scope 18-19.
Investment scheme, periodical
Conditions of establishment and
revision of periodical investment
schemes 63-65.
Investments, fixed-yield
Proportion to be maintained in
total holding between fixed-yield
investments and variable-yield
investments 111-118.
Rules concerning permission to
invest 68-96.
See also Safety, formal.
Investments, variable-yield
Proportion to be maintained in
total holding between fixed-yield
investments and variable-yield
investments 111-118.
Rules concerning permission to
invest 96-110.
See also Safety, Real.
Italy
Legal provisions concerning permissible classes of investments
181.»
Rules concerning permissible classes
of investments 67-105.

L

I
Insurance holdings, composition of
Establishment of composition 111118.
Insurance,
ance

private, and social insur-

Differences in conditions which investments must satisfy 1.
Insurance, voluntary
Exclusion of voluntary insurance
investments from this study 14.

List, exclusive, of investments
Advantages and disadvantages of
this method of regulating selection of investments 32.

/
Liquidity
Differences between the liquidity
required for contingencies reserves
and actuarial reserves. Secondary
importance of liquidity when
renewal of membership is assured
41-48.

193

IÍTDBX

Necessity for different liquidity
rules for reserves as a whole
(actuarial and contingencies) according as the risks covered are
short-term or long-term 47-48.
Loans, Iniilding
See Mortgages.
Loans contracted or guaranteed by
provinces, towns or other local authorities.
Minimum or maximum jjereentage
which such loans may represent
in total holding 113 and 116.
Rules concerning permission to
invest 75-78.
Loans of land mortgage banks or building societies
Maximum percentage which such
loans may represent in total
holding 115.
Rules concerning permission to
invest 82-84.
Loans of public bodies other than
regional or local authorities
Rides concerning permission to
invest 78-82.

Local authorities
See loans contracted or guaranteed
by provinces, towns or other
local authorities.
L/uxemburg
Bodies responsible for selecting investments 136-137.
Legal provisions concerning permissible classes of investments
182.

M
Monetary stability
Possibilities of monetary stability
and instability in times of economic and political unrest ; difficulty of forecasting such possibilities and their influence in
the selection of investments 3-9.
Mortgages
Maximum percentage which, mortgages may represent in total
holding 115.
Rules, concerning permission to
invest 84-89.

Loans, personal, to insured persons
Decision to delete all reference to
personal loans to insured persons
96.
Maximum percentage which such
loans may represent in total
holding 116.
Rules concerning permission to
invest ' 93-96.
Loans quoted on the stock exchange
Preference to be given, as a rule,
'to loans quoted on the stock
exchange as against loans under
a private contract 74 and 76.

N
Netherlands
Bodies responsible for selecting investments 139.
Legal provisions concerning permissible classes of investments
182.
Rules concerning permissible classes
of investments 67-105.

O
Loans with gold clause or ctirrency
option
Guarantees offered by .these loans
in case of currency devaluation
119,120.
Rules concerning permission to
invest in case of loans of public
authorities 96-97.

Obligation to include certain classes of
investments in the holding
Attitude adopted toward Government funds, loans of regional or
local authorities and real estate
112-114.

194

INDEX

P
Percentage, maximum, of certain classes
of investments in total holding
Difficulty of defining this maximum
115-116.
Percentage, minimum, of certain classes
of investments in total holding
Difficulty of defining this minimum
112-114.
Permissible classes of investments in
various countries
Analyses of legal provisions and
rules concerning permission to
invest in a few of the main insurance schemes 68-105.
Legal provisions concerning permissible classes of investments,
country by country and scheme
by scheme 165-187.
Poland
Legal provisions concerning permissible classes of investments
184.
Revaluation of accident pensions
126.
Rules concerning permissible classes
of investments 67-105.
Policy, economic and financial, of
public authorities
See Utility, economic and social,
of insurance investments.
Property, building
See Real estate.
Property, rural
See Real estate.
Property, town
See Real estate.
Property to house insurance administrative services
Rules concerning permission to
invest 109-110.
Proportion of various classes of investments to total holding
Establishment of this proportion
112-118.

Provinces
See Loans contracted or guaranteed
by provinces, towns or other local
authorities.
See Loans of provinces, towns or
other local authorities.
Public bodies other than regional or
local authorities
See Loans of public bodies, etc.
Purchasing power of money
See Safety, real, Monetary stability
and, more particularly, Guarantee,
possible, by public authorities.

Q
Questionnaire adopted by first meeting
of experts
Text of questionnaire 157-164.

R
Reductions, forced, of yield
See Guarantee, possible, by public
authorities in case of.
Replies öf persons consulted
See various parts of study which
these replies concern.
Reserves, actuarial, and contingencies
reserves
Differences in the objects of these
two classes of reserves.
Inclusion of investments forming
actuarial reserves and contingencies reserves in present study.

S
Safety, formal
Definition of nominal or formal
safety and the essential character
of such safety ; general methods
ensuring formal safety 23-24.

195

INDEX
Safety, real
Compatibility of real safety with
formal safety ; conditions in
which real safety may be sought
and risks connected with such
action 24-29.

Shares, industrial and commercial
Maximum percentage of shares in
total holding 116.
Preference and ordinary shares ;
rules concerning permission to
invest 97-104.

Safety required of investments
General definition of safety required. Rules which this definition must lay down in respect
of securities, real estate and
distribution of investments 30-33.

Short-term investments
Exclusion from study

Sanatoria, purchase and equipment of
Maximum percentage which sanatoria, hospitals, homes, etc., may
represent in total holding 116.
Rules concerning permission to
invest 109-110.
Savings banks and social insurance
Characteristics common to investments of savings banks and
social insurance funds ; differences between such investments
3.
Savings, individual, and social insurance
Characteristics common to the investment of individual savings
and social insurance reserves.
Differences in the conditions these
investments must satisfy 2 and 3.
Securities
Principles for assessing degree of
safety of securities 31.
Selection of investments
Bodies responsible for selection 136147.
Consideration of economic and financial policy of public authorities in selection of investments
50.
Existing methods of legal regulation
of selection of investments : general definition of rules to be
followed or exclusive list of permissible investments 30-33.
Selection by insurance institution
144-145.
Selection by body other than insurance institution 146-147.

12.

Social insurance funds, loans of
See Loans of public bodies other
than regional or local authorities.
Stability, monetary
See Monetary stability.
State
See Administration of insurance by
the State.
Stock exchange, admission to
See Loans quoted on the stock
exchange.
Surplus income and profits
Differences between investments of
surplus income or profits and
investments of statutory reserves ;
exclusion of investment or surplus income or profits from the
study 14.
Sweden
Bodies responsible for selecting
investments 139.
Legal provisions concerning permissible classes of investments
185.
Rules concerning permissible classes
of investments 67-105.

T
Titles to property.
See Loans of land mortgage banks
or building societies. Centralised
selection of investments 140.
See Selection of investments, bodies
responsible for the.

196

INDEX

u
United States
Rules concerning permissible classes
of investments 70.
Utility, economic and social, of insurance investments
Compatibility of economic and
social utility of investments with
safety, yield and liquidity 48-63.
Consideration
of economic and
social policy of public authorities
in assessing utility of investments 49 et seq.
Criteria of economic and social
utility 49 et seq.
Difficulty of clearly distinguishing
between economic utility and
social utility 49 et seq.
Guarantee b y public authorities
which ask insurance institutions
to make certain investments in
view of their economic and social
utility 49 et seq.

Preference to be given to investments of a social character 49
et' seq.
Relative importance of insurance
investments from the standpoint
of their general utility 2 and 48.

Y
Yield of investments
Differences as to relative importance of yield between actuarial
reserves and contingencies reserves. Problems raised by reduction of rate of interest below
the actuarial rate 33-36.
Investments a t a low rate of interest, conditions in which such
investments may be made 38-40.
Minimum yield 36-38.
Yugoslavia
Legal provisions concerning permissible classes of investments
186.