The accrual recording of property
income in the case of liabilities
between a pension manager and a
defined benefit pension fund
Herman Smith
UNSD
10th Meeting of the Advisory Expert
Group on National Accounts
13-15 April 2016, Paris
Introduction

2008 SNA states that a pension manager (PM) is
responsible for meeting the liabilities of a defined benefit
pension fund (DBPF)

When actual assets of DBPF is not equal to pension
entitlements a claim of the DBPF on the PM is recorded
in the financial accounts and balance sheets in the case
of underfunding and conversely in the case of
overfunding
=> Net Worth of DBPF is equal to zero, by definition
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Introduction




Unwinding of the discount factor on the pension
entitlement is shown as property income flowing from the
DBPF to households to account for past service increase
When DBPF is persistently under or over funded the
investment income promised to pension beneficiaries
would not be equal to the actual property income earned
by the DBPF
AEG in 2014 agreed that to account for this difference an
explicit accrued property income flow should be recorded
between the PM and the DBPF
This would reflect the difference between the unwinding of
the discount factor and the actual property income
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Property income

Actual and imputed components:
–
–
The actual component represents the investment
income receivable from the accumulated assets
held by the pension fund
The imputed component represents the investment
income receivable from the claim between the
DBPF and the PM.
 For practical purposes it is calculated as the
difference between the actuarially calculated
property income and the actual property income
from the accumulated assets of the pension fund
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Imputed property income

Underfunded DBPF with a claim towards the PM:
– Property income payable to households (unwinding of the
pension entitlements, related to increase in pension entitlements
from past service )
4.0
– Property income accrued on accumulated assets:
2.2
– Imputed property income receivable from claim on pension
manager (residual):
1.8

The AEG had two views on how to classify the imputed property
income on the claim towards the PM:
– As investment income payable on pension entitlements (D442)
– As interest (D41)
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Questions at the pensions w/s

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How to treat:
– the divergence between investment performance of the
actual assets of the pension fund and the discount
rate;
– holding gains and losses;
– asset value volatility;
– other economic flows affecting the value of the pension
entitlements (e.g. demographic changes);
Should the claim of the DBPF on the PM generate
property income.
To calculate the imputed property income by assuming
the return on the claim is equal to the discount factor
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The divergence between investment
performance of the actual assets of the pension
fund and the discount rate


follow the same procedure as with calculating
imputed pension contributions
when the actual investment income is more than
the actuarially determined investment income the
imputed investment income would be negative
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Holding gains and losses

Following the SNA principle to exclude
holding gains and losses in the measurement
of income it seems logical to also exclude
holding gains and losses from the actual
property income earned by the DBPF
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Asset value volatility and other flows

The investment income on pension
entitlements is actuarially determined
irrespective of the value of the actual assets.
To be consistent with the accrual recording of
the property income flow between the PM
and the DBPF it seems reasonable to expect
that changes in the size of the imputed
property income are related to the changes in
the claim.
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Should the claim of the DBPF on
the PM generate property income


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2008 SNA 7.144: “the source of the investment income payable
may not be investment income itself, but for the SNA, the
decisive criterion for recording this as investment income is that
of the recipient who regards these payments as the rewards for
putting financial assets at the disposal of the insurance
corporation.”
2008 SNA 7.148 states: “The investment income payable on
defined contribution entitlements is equal to the investment
income on the funds plus any net operating surplus earned by
renting land or buildings owned by the fund”
Use general concept of property income until there is more
clarity on the classification of the imputed investment income
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Alternative calculation of the
imputed property income



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To assume that the return on the claim is equal to the
discount rate would be more consistent with the
definition of interest.
This approach was basis for discussion at the previous
AEG meeting
As the investment income is actuarially determined the
residual estimate of the return on the claim is in
principle also equal to the discount factor.
the residual method has the advantage of being easier
to calculate in cases where there is a divergence
between investment performance of the actual assets of
the pension fund and the discount rate
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Classification as Investment Income Payable
on Pension Entitlements
2008 SNA links assets with the type of income derived from that asset

Claims of the pension fund on the pension manager are related to
asset type AF64 (Claim of pension fund on pension managers, which is
part of AF6: Insurance, pensions, and standardized guarantee
schemes)

The investment income categories related to asset type AF6 are shown
in income category D44 (Investment income disbursements), which has
a subcategory for pension entitlements (D442: Investment income
payable on pension entitlements)

This income is excluded from the definition of interest, which is defined
as the return on specified financial instruments that do not include AF6

The coherence of the general framework points to classifying the
accrued property income as D442

However, D442 was designed to only capture the claims of households
on pension funds and the flow from pension schemes to households
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Classification as Interest
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The income on the claim of a defined DB pension fund towards
a pension manager is income on an accrued claim, which:
–
Could have arisen for a number of reasons
–
Did not arise as a result of any special relationship between
households and the pension fund
SNA defines interest as “a form of income that is receivable by
the owners of certain kinds of financial assets, namely: deposits,
debt securities, loans and (possibly) other accounts receivable
for putting the financial asset at the disposal of another financial
institution…”
The claim under discussion is the claim of a creditor over a
debtor that has accrued and the income accruing is
compensation for the time value of money
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Other Issues

Separately identify the unwinding of discount factor in
defined benefit pension funds from investment
income on defined contribution pension schemes
–

Review the SNA definition of interest, taking into
consideration a more conceptual definition
–

These items are driven by different factors
Capacity to generate income or offset future expenditures
Consider the need for a separate category of
investment income related to the income on the
accumulated pension entitlements distributed to
households
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Issues for Consideration


Express its views on the pension w/s
questions and proposed solutions
Decide on the classification of the accrued
property income flow between a pension
manager and a defined benefit pension fund
arising from the difference between the
unwinding of the discount factor and the
actual property income
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Issues for Consideration
Express views on:
 Separately identify the unwinding of the
discount factor in DB funds from the
investment income on DC pension funds
 The conceptual definition of interest
 The need for a separate category of income
related to the investment income on the
accumulated pension entitlements distributed
to households
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Thank you
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