Issues in the Treatment of
Defined Benefit Pension Schemes
Brent Moulton
Advisory Expert Group Meeting
UN Headquarters, New York
23–25 April, 2012
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Overview
▪ SNA 2008 treats defined-benefit pension
schemes as contractual obligations that result
in liabilities towards households, regardless of
funding level.
▪ In preparing to implement these changes in
the United States, we’ve identified two issues
that may need clarification:
 1. Issues arising with partially funded schemes
 2. Treatment of holding gains and losses
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Treatment under SNA 1993/2008
Production account
▪ Output (autonomous funds) in insurance and
pensions fund subsector (93/08)
Generation of income account
▪ Actual contributions: employer to households
(primary) (93/08)
▪ Imputed contributions to make benefits accrued
in current year = total contribution (08)
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Treatment under SNA 1993/2008
Allocation of primary income account
▪ Households’ (HH) receipt of actual employer
contributions to pension fund (PF) (93/08)
▪ Plus imputed employer contributions (08)
▪ PF receives property income (93/08)
▪ Property income attributed to plan participants:
 = property income received by PF (93)
 = increase in net present value (NPV) of entitlements
(08)
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Treatment under SNA 1993/2008
Secondary distribution of income account
▪ HH total pension contributions (HH to PF):
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Employers’ actual contributions (93/08)
Employers’ imputed contributions (08)
HH actual contributions (93/08)
HH pension contribution supplements* (93/08)
Less: pension scheme service charges (93/08)
▪ Pension benefits (PF to HH) (93/08)
* pension contribution supplements:
 = property income received by PF (93)
 = increase in NPV of entitlements (08)
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Treatment under SNA 1993/2008
Use of income account
▪ Pension scheme service charge recorded in HH final
consumption expenditure (93/08)
▪ Adjustment for change in pension entitlements = HH
net contributions in secondary distribution of income
account less pension benefits:
 Based on employers’ actual contributions; PF’s property
income (93)
 Based on employers’ actual + imputed contributions;
increase in NPV of entitlements (08)
▪ Net saving of pension fund: zero (93); depends on
imputed contributions & NPV of entitlements (08)
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Treatment under SNA 1993/2008
Financial account
▪ Change in pension entitlements (PF to HH) as
in use of income account (93/08)
▪ Claim of pension fund on pension manager
(08):
 Allows deficits in funding to be shown as liabilities
of the pension manager (usually the employer)
 Can be negative if there is an excess in funding
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Treatment under SNA 1993/2008
Balance sheet
▪ “pension funds are assets of the households entitled to
receive pensions.” But, DB pension fund “can have a
net worth… if assets of the fund exceed of fall short of
the fund’s liability for guaranteed benefits.” (93)
▪ “In the case where the employer retains the liability
for any underfunding or the benefit of any
overfunding, a claim on… the employer… by the
pension fund should be recorded for any deficit or
surplus… the net worth of the pension fund remains
exactly zero at all times.” (08)
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Issue: Underfunded plans
▪ BEA (Reinsdorf & Lenze) article in Survey of
Current Business August 2009:
▪ Ratio of plan assets to actuarial liabilities for
year-end 2004:
 Private DB plans
 State & local government plans
 Federal government plans
96.4%
88.2%
42.0%
▪ U.S. government plans are persistently
underfunded, especially at federal level
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Example (very simple)
▪ Assumptions:
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One employee. No uncertainty or variation.
Works for 30 years. Retirement lasts 20 years.
Salary = 1,000 / year.
Pension benefit = 1.5% × years service × salary = 450/yr
Discount rate = rate of return on investment = 5%
Case 1
▪ Employer fully funds plan based on accrued benefits.
 Employer contribution = 45 in the first year of
employment and increases each year (48, 50, 53,…) until
it reaches 187 in 30th year.
 Plan pays 9,000 in benefits from 3,017 in cumulative
contributions, 5,983 in cumulative property income
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Example (very simple)
Case 2
▪ For first 20 years, employer provides actual
contributions equal to 50% of change in pension
entitlement
▪ Employer actual contribution = 23 in the first year of
employment and increases each year (24, 25, 26,…)
until it reaches 57 in 20th year.
▪ At year 20, plan assets = 1148, plan liabilities = 2295
▪ Cumulative contributions: 751 actual contributions, 751
imputed contributions; forgone property income = 794
▪ SNA08 shows liability—claim of pension fund on
employer (2295 – 1148), but no interest on this liability
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Example (very simple)
Case 2 (continued)
▪ Year 21: Assume employer recognizes that plan is
underfunded and starts making payments covering
full change in entitlement (120) plus catch-up
contribution of 75 (=57 to cover forgone property
income + 18 reduction in underfunding)
▪ Employer liability reduced by 18
▪ If continues to pay catch-up contribution of 75 per
year for 30 years, allows pension to be paid in full.
▪ 18 is financial transaction – but recording of 57 unclear
▪ Not compensation of employees (paid during retirement)
▪ Conceptually, should represent imputed interest on
loan by pension fund to employer
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Underfunded plans: Proposal
▪ While SNA08 correctly recognizes property income
payable on pension entitlements and claim of pension
fund on the employer (“pension manager”), its
treatment is incomplete because it fails to show
interest associated with this liability of the employer
 Property income is essential to operation of pension
scheme, so it shouldn’t be ignored
▪ Recommend recording imputed interest payable by
pension manager to pension fund
 Calculated as claim of pension fund on pension manager
times interest rate used in calculating increase in NPV of
entitlements
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Issue: Pensions funded by holding gains
▪ According to U.S. flow-of-funds data, 2/3 of
assets of private pension funds are equities or
mutual fund shares.
▪ Holding gains represent a large share of
expected returns
 Implies gap between saving, change in net worth
▪ Under SNA93, this gap was passed to the
household sector
 For pension fund, saving = change in net worth = 0,
with effects of holding gains showing up in change
in household net worth
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Example (holding gains)
Case 3
▪ Same case 1 (fully funded scheme), except
assume that the 5% return represents 2%
property income and 3% holding gains
▪ In year 25:
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Contribution = change in entitlement = 146
Property income received by plan = .02 × 3348 = 67
Holding gains received by plan = .03 × 3348 = 100
Property income payable to plan participants = 167
Pension fund’s net saving = –100
Pension fund & employer’s change in net worth = 0
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Holding gains
▪ While there is no single right answer about
where to show gap between saving and change
in net worth:
 We usually interpret corporate saving as
undistributed operating surplus
 Will be difficult for users to interpret persistent
negative saving by fully funded pension plans
 Plans are operated on behalf of households, which
suggests continuing to show the gap in the
household sector (as under SNA93)
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Holding gains - Proposal
▪ Suggest that pension fund’s net saving =
change in net worth = zero (as in SNA93)
▪ Could be implemented by recording
households’ property income on benefit
entitlements as sum of pension fund’s actual
property income and imputed interest on
pension fund’s claim on employer
▪ Would reduce household sector’s property
income and saving and avoid persistent
negative saving by pension fund
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Questions for AEG - Underfunding
▪ Should the claim of pension fund on pension
manager include the full underfunding –
forgone contributions and forgone property
income?
▪ Should change in liability due to forgone
property income be recorded as imputed
interest payable by pension manager to fund?
▪ If not, how should the subsequent catch-up
contributions be recorded?
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Questions for AEG: Holding gains
▪ Does the AEG agree with Reinsdorf’s
suggested alternative approach for
recording property income?
 would set pension fund net saving = zero
 would use pension funds’ actual property
income on assets (plus employers’ imputed
interest for underfunded schemes) to
impute households’ property income on
pension entitlements
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