UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/ECA National accounts workshop November 2005









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


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.

Initially, the task of this EDG was to make proposals to account for employers’ pension schemes.

Later the EDG was asked to broaden its review all pension arrangements.

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.


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.


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.


EDG: For other types of scheme the situation may be less clear.

Social security





+ 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


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).






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


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.


The third recommendation changes the setting the net worth of all employers’ pension schemes at zero by definition.
1993 SNA by

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.

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.

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.

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.

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

That TF would prepare a discussion paper for the AEG’s meeting in January
2006



IMF and BEA put together the TF

Drafted a Terms of Reference (TOR)


Circulated TOR for comments among the Intersecretariat Working Group on National Accounts
(ISWGNA)
After some discussion the ISWGNA agreed


Focused TF on defined benefit pension schemes

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





IMF and BEA co-chairs
Representatives of international organizations

ECB, Eurostat, IMF, OECD, UN, World Bank
Country representatives

Australia, Canada, Denmark, India,
Netherlands, Sweden, USA
US pension actuaries





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



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



Employee contributions

Recognized for all pension schemes
Property income


Attributed to beneficiaries
Only recorded for funded pension schemes

As investment return on fund assets (insurance technical reserves)

Investment return includes only property income, not holding gains

Anomalous treatment of interest-bearing versus non-interest bearing securities



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



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





There is output for both autonomous and nonautonomous funds
Output of pension funds should be measured at cost

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



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
For autonomous funds: The fact that some property income may be funded from holding gains is not a reason to exclude this amount




Actuaries develop estimates from


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





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



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


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


An acceptable discount rate would be the interest rate on high quality securities relevant to the sponsor of the pension scheme


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



Autonomous schemes

Include in the pension subsector of the financial corporations sector
Non-autonomous schemes


Include in the sector of the sponsor
Unless, quasi-corporations can be established for funds

In which case they are sectored the same as autonomous funds




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


François Lequiller (OECD)






A compromise between the two previous positions
Incorporate unfunded pension schemes in the core accounts
Treat stocks and flows of unfunded schemes separately from funded schemes
 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






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 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