Transcript Employer retirement pension schemes UN STATISTICS DIVISION Economic Statistics Branch National Accounts Section UNSD/ECA National accounts workshop November 2005

Employer retirement pension
schemes
UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/ECA National accounts workshop November 2005
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Background
Current SNA
Evaluation of the problem
Recommendations of the EDG
Implications
Examples
General Government Unfunded Employee Scheme:
- 1993 SNA recording
- Proposed recording
Defined benefit autonomous scheme: proposed recording
Issues raised by Eurostat
Recommendations of the AEG
Background
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In 2001 the Intersecretariat Working Group on
National Accounts (ISWGNA) requested the Statistics
Department of the IMF to establish an Electronic
Discussion Group (EDG) on pensions.
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Initially, the task of this EDG was to make proposals
to account for employers’ pension schemes.
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Later the EDG was asked to broaden its review all
pension arrangements.
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The extension of the EDG’s mandate was related to
ongoing policy debates on the fiscal sustainability of
the government social security schemes in times of
demographic change.
Current SNA
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Promises to pay future pensions are recognized as
assets/liabilities for funded employers’ pension
schemes, not for unfunded.
• The values that the 1993 SNA records as
“employers’ actual social contributions” to defined
benefit pension funds reflect amounts paid rather
than the true cost to the employer of the pension
entitlements that staff accrue.
• Underfunding or overfunding of defined benefit
employers’ pension schemes is not shown as an
obligation or a claim of the employers.
Evaluation of the problem
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The “core question”: Are the promises from unfunded employer
pension schemes definite enough to be recorded as assets and
liabilities in statistics ?
The EDG considered that a promise to pay future pensions
answers the definition of a financial asset if
(i) honoring such promise is legally enforceable, or
(ii) the promise has the character of a “constructive obligation”
The EDG agreed that all such assets should be recognized
irrespective the institutional form the pension plan may take.
The case of employers’ pension funds would pose no
problems in this respect as the pension obligations
directly arise from their deferred compensation nature
and therefore should be either legally enforceable or
constitute constructive obligations.
Evaluation of the problem
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EDG: For other types of scheme the situation may be less clear.
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Social security
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Household behavior influenced by expectations on benefits
Political pressure not to reduce the rights
Need of knowledge about future obligations
Innovation has blurred distinction between social security and
other social insurance (warrant equal treatment)
- Government can change conditions
Future benefits not economic assets (cannot enforce
ownership rights)
Variable systems
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The EDG considered that the cost of employment
would be better measured if employers’ social
contributions to defined benefit schemes would be
recorded according to actuarial standards.
Furthermore, the EDG found it also appropriate to
measure property income attributed to insurance
policy holders according to actuarial norms.
The EDG recommended that the employers’ final
responsibility should be disclosed by recording a
liability/claim of the employer in case of
underfunding/overfunding.
GFSM 2001 recognizes unfunded obligations as
liabilities (NZ, Australia, Canada).
Recommendations by the EDG
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The EDG recommends the following:
• Treat unfunded employers’ pension schemes
identically to funded employers’ pension schemes;
• For all defined benefit employers’ pension schemes,
use actuarial valuations to measure (i) employers’ social
contributions and (ii) property income attributed to
insurance policy holders;
• Allocate the net assets of defined benefit employers’
pension schemes to the sponsoring employers.
“In view of the wide range of conditions under which
social security schemes operate, the EDG considered it
was too early to make concrete proposals regarding
such schemes for the present SNA update.”
No changes for defined contribution schemes
Implications
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The first recommendation implies a significant
change to the 1993 SNA. In practice, the
effects will be particularly important for the
government. Increased deficit and increased
GDP.
The second recommendation changes the
accrual of employers’ social contributions and
property income attributed to insurance policy
holders; actual payments that employers
make to defined benefit pension schemes
would be treated as pure financial
transactions.
Implications
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The third recommendation changes the 1993 SNA by
setting the net worth of all employers’ pension
schemes at zero by definition.
No change for the treatment of defined contribution
pension schemes because by definition these
schemes cannot be under- or overfunded.
No changes in social securities.
The recommendations are consistent with the market
value principle and the accrued principle – and
GFSM2001.
Issues raised by Eurostat
It can be questioned whether unfunded or pay-as-you-go
schemes are economically the same as funded schemes.
One consideration is whether the capacity of the debtor to
unilaterally alter the value of the pension promises should be a
main criterion for asset recognition.
Will the use of this concept of constructive obligations be
extended to other areas of SNA, and what would be the criteria
against such extensions?
Can accumulated rights be converted into cash or transferred
between schemes?
In some schemes, pension rights cannot be transferred and can
even be lost upon change in employment.
Issues raised by Eurostat
There is also a concern that the inclusion of data on
pensions may put at risk the overall quality of statistics
produced.
It is argued that the use of models and the number of
imputations should be limited to the extent possible, to
avoid volatility in data and reduce scope for manipulations.
Issues raised by Eurostat
European government finance statistics …
ESA 1995…
Excessive Deficit Procedure (EDP)…………
fiscal surveillance in European Union…..
“Stability and Growth Pact”
The current proposals would impact government accounts, as
civil servants schemes are often unfunded. [European]
Government deficits and net worth would deteriorate, up to
1 to 2% of GDP.
Recommendations of the AEG
The group agreed that governments have an liability for
pensions of their employees, regardless of whether the
scheme is funded or unfunded.
Governments should also have a corresponding
“liability” under social security, but this might be of a
different nature and more difficult to quantify. The
problem in some countries is to disentangle unfunded
employers’ pension schemes from social security.
Recommendations of the AEG
Practical guidelines are needed to show national
accountants how to estimate employee pension liabilities
when public account estimates are not available.
The SNA definition of the output of pension funds needs
to be reviewed.
This topic is one of the most important in the SNA
review, thus there needs to be a speedy and clear
resolution of these issues to meet the deadlines. One
possibility was to create a task force would coordinate
with the TFHPSA.
Report on the Meeting of the
Task Force on Employers’
Retirement Schemes
Washington, DC
September 21-23, 2005
Origin of Task Force
At December 2004 meeting, the Advisory
Expert Group on National Accounts
(AEG) asked for a task force (TF) to
prepare AEG’s further discussion on
recording pension funds in the national
accounts
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That TF would prepare a discussion
paper for the AEG’s meeting in January
2006
Task Force planning
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IMF and BEA put together the TF
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Drafted a Terms of Reference (TOR)
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Focused TF on defined benefit pension schemes
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Circulated TOR for comments among the Intersecretariat Working Group on National Accounts
(ISWGNA)
After some discussion the ISWGNA agreed
Some discussion of defined contribution schemes and the
borderline with social security
Invited participants for the TF, asking them to
draft discussion papers on the topics identified in
the TOR
Task Force meeting held in Washington, DC
from September 21 to 23, 2005
Task Force participants
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IMF and BEA co-chairs
Representatives of international
organizations
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Country representatives
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ECB, Eurostat, IMF, OECD, UN, World Bank
Australia, Canada, Denmark, India,
Netherlands, Sweden, USA
US pension actuaries
What are employers’ pension
schemes? TF Conclusions
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Schemes set up to provide retirement benefits to
participants, based on employer-employee
relationship
Funded, unfunded, or over- or under-funded
May or may not be mandated by government
Autonomous or non-autonomous
 Autonomous schemes involve institutional units
separate from employers
 Non-autonomous schemes are managed by
employers, with or without segregated reserves
1993 SNA treatment of pensions
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Output
 Autonomous pension schemes: measured
separately
 Non-autonomous schemes : not recorded
separately
 Ancillary to employer’s main output
Employers contributions (part of compensation):
 Funded schemes: actual contributions
 Unfunded schemes: imputed
 In principle, SNA recognizes imputation should
be based on actuarial considerations
 In practice, SNA suggests using benefits paid in
current period
1993 SNA treatment of pensions
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Employee contributions
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Recognized for all pension schemes
Property income
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Attributed to beneficiaries
Only recorded for funded pension schemes
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As investment return on fund assets (insurance
technical reserves)
Investment return includes only property
income, not holding gains
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Anomalous treatment of interest-bearing versus
non-interest bearing securities
Shortcomings of 1993 SNA
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Output from non-autonomous funds ancillary to main
employer activity
 Fails to recognize that pension schemes provide
services to beneficiaries, not employers
Estimating employer contributions based on amounts
paid
 SNA does not do this for any other liability
 Employers’ contributions should reflect liabilities to
employees, regardless of funding
 PV of future pension benefits from service in
current period
Shortcomings of 1993 SNA
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SNA internally inconsistent
 Compensation of employees in income account
includes imputed employer contributions for
unfunded schemes
 But, the concomitant assets/liabilities related to
future benefits are not recognized in the financial
accounts or balance sheets
 In contrast, such assets and liabilities are
recognized for funded schemes
Under- and over-funding is not recognized as an
employer obligation or claim
Output – TF conclusions
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There is output for both autonomous and nonautonomous funds
Output of pension funds should be measured at cost
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Including the full management cost of any
insurance company managing a fund
Output is consumed by the beneficiaries (i.e.
households)
More work required to determine if the output of
autonomous pension funds should be based on actual
or expected transactions and holding gains/losses
Property income – TF conclusions
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The value of property income should be
The expected property income on the accumulated
value of benefits (due to the unwinding of the
discount of these benefits)
Plus the service charge for funds management
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For autonomous funds: The fact that some property
income may be funded from holding gains is not a
reason to exclude this amount
Developing actuarial estimates
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Actuaries develop estimates from
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Information on individual workers and pension
plans
External information (e.g. discount rate)
Actuarial standards require that the discount rate be
based on high quality bond rates relevant to
employer and with relevant time to maturity
Present value of pension liabilities is sensitive to
discount rate
Developing actuarial estimates
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There are a number of different valuation approaches
Projected benefit obligation (PBO)
 Part of total pension benefits employee will earn
during entire career, due to years of service to
date
Accrued benefit obligation (ABO)
 Calculated for years of service to date based on
current wage and salary rates
PBO > ABO, with large difference in early years
decreasing towards retirement date
Developing actuarial estimates
TF conclusions
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The accumulated value of benefits should only be
calculated based on service to date (ABO)
 Should not take projected future wages and
salaries into account (PBO)
 PBO estimates could be provided in memoranda
The value of household pension assets is consistent
with the actuarial value of the employer’s liability to
provide future retirement benefits
 Due to service provided to current date
Actuarial and accounting
standards
TF conclusions
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Professional practice confirms the
consistency of actuarial estimates and
accounting conventions
Accounting conventions are likely to
move from including PBO to ABO based
estimates in the balance sheet
PBO based estimates are expected to
continue to be available
Discount rate - TF conclusion
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An acceptable discount rate would be
the interest rate on high quality
securities relevant to the sponsor of the
pension scheme
Multi-employer schemes
TF conclusions
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A multi-employer defined benefit
pension scheme typically assumes the
liabilities of all employers within the
scope of the scheme
In that case, an employer does not
incur any further liabilities once it has
joined the scheme, apart from regular
contributions to the scheme, until he
withdraws from the scheme
Pension scheme sectoring
TF conclusions
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Autonomous schemes
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Include in the pension subsector of the
financial corporations sector
Non-autonomous schemes
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Include in the sector of the sponsor
Unless, quasi-corporations can be
established for funds
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In which case they are sectored the same as
autonomous funds
Recording issues - papers
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Four papers were presented, with different proposals
for the recording of pensions
Brian Donaghue (consultant, IMF)
 Record both funded and unfunded pension
schemes in the core accounts
 Record based on actuarially-determined accrued
liabilities
Reimund Mink (ECB), Dieter Glatzel (Eurostat)
 Leave core accounts unchanged
 Record unfunded pension schemes and social
security identically in supplementary accounts
Recording issues - papers
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François Lequiller (OECD)
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A compromise between the two previous positions
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Incorporate unfunded pension schemes in the core accounts
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Treat stocks and flows of unfunded schemes separately from
funded schemes
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leading to alternative balancing items
Keep stocks and flows of social security outside core
accounts
Include an estimate of contributory social security liabilities
in supplementary accounts
Record pension liabilities associated with government
employees in the core accounts regardless of label
Recording issues – TF conclusions
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A clear majority of the task force recommended the
following:
All pension liabilities of employers should be
recognized, irrespective of the degree to which the
schemes are funded
Stocks and flows of all pension schemes should be
recorded in the core accounts
Specific guidance needs to be given to so-called
“notional defined contribution” schemes
Recognizing practical problems and user needs,
stocks and flows of funded and unfunded schemes
should be separately identified
Social security borderline
TF conclusions
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Social security is essentially a redistributive process
imposed and controlled by government
 benefits provided are not directly linked to the size
of contributions
Some governments operate schemes which combine
this basic social security function with what is
effectively a multi-employer pension scheme
The criteria for distinguishing basic social security
from employer-related pension schemes need to be
reviewed as a matter of urgency
Thank You