For Official Use
STD/NAES/FA(2003)3
Organisation de Coopération et de Développement Economiques
Organisation for Economic Co-operation and Development
24-Sep-2003
___________________________________________________________________________________________
_____________
English - Or. French
STATISTICS DIRECTORATE
STD/NAES/FA(2003)3
For Official Use
Cancels & replaces the same document of 18 September 2003
National Accounts and Economic Statistics - Financial Accounts
NOTE ON THE METHODOLOGY FOR DEVELOPING A MORE PRECISE CLASSIFICATION OF
HOUSEHOLD WEALTH
By André Babeau, Honorary Professor, Dauphine University and European Savings Institute (OEE)
OECD Working Party on Financial Statistics
Château de la Muette, Paris
6-7 October 2003
Room 2
Beginning at 9:30 on the first day
English - Or. French
JT00149951
Traduction n° 19731
Document complet disponible sur OLIS dans son format d'origine
Complete document available on OLIS in its original format
STD/NAES/FA(2003)3
NOTE ON THE METHODOLOGY FOR DEVELOPING A MORE PRECISE CLASSIFICATION
OF HOUSEHOLD FINANCIAL ASSETS
At the meeting of OECD National Accounts Experts on 8-11 October 2002, the results of a study of
household assets in the broad sense (S14+S15), involving a classification for financial assets somewhat
different from that used, for example, in SNA 1993/ESA 19951. The October 2002 report illustrated this
use of a somewhat more precise classification of financial assets by comparing the composition of
household wealth in Europe (six countries), the United States and Japan2. It was an interim report which,
given the frequent absence of sufficiently detailed information, often relied on estimates.
Before applying such a classification more generally, one should first, of course, consider whether it
is appropriate and feasible.
1.
Appropriateness of a more detailed classification of financial assets than those normally used
1.
In the European System of Accounts, the current classification of financial operations and
financial assets and liabilities is primarily based on the degree of liquidity and the legal characteristics of
financial assets3. It is independent of the classification of institutional units with which it is, however,
often crossed. The risk of the asset in question, moreover, seems to have a broadly “orthogonal”
dimension in relation to its liquidity and even in relation to its legal nature.
2.
Thus the varying degree of risk attached to household financial investment is not directly taken
into account in this classification. In recent years, however, this dimension has assumed greater
importance, both during the strong rise in share prices during the period 1997-2000 as in the period 20002002 which was marked, as we know, by a sharp downturn in the indexes.
3.
Knowing who, at a given time in an economy, bears the risks on their financial assets and what
is the precise nature of the risks borne by each will, during the coming decades, take centre stage in
economic and political thinking. In a context of markets tending towards increased volatility, the various
risks borne by financial assets will certainly not diminish and it is very important to know precisely how
these risks are shared between the different sectors of the economy. It has often been remarked, of course,
that the numerous financial innovations which have emerged, especially during the last decade, make it
very hard sometimes – for example in the case of "securitisation" of debt – to “pinpoint” precisely who is
bearing a certain type of risk. This difficulty cannot be denied, but it does not, however, prevent one from
making considerable progress in ascertaining the distribution of risks across the economy as a whole, even
if here and there one inevitably encounters problems which really are very difficult to solve.
1
System of National Accounts, SNA 1993, EC/IMF/OECD/UN/WB, New York, 1993, 711 pages / European
system of accounts, ESA 1995, EUROSTAT, Luxembourg, 1996, 383 pages.
2
Household Wealth in the National Accounts of Europe, the United States and Japan, paper prepared by André
Babeau (European Savings Institute) and Teresa Sbano (Pioneer Investments), 36 pages.
3
SNA 1993, op.cit., page 251, 11.53 / ESA 1995, op.cit., page 95, 5.20. The present note has also been prepared
with the support of Pioneer Investments.
2
STD/NAES/FA(2003)3
2.
The proposed classification
4.
This classification “slots in” to the various headings of the SNA 1993/ESA 1995 classification
and does not require them to change in any way. It is just a matter, at various levels, of introducing
additional distinctions to allow a better analysis of the risks borne by the sector concerned. The proposals
set out below were made from the perspective of “households”, and their significance and appropriateness
from the point of view of other sectors of the national economy would still need to be tested. This question
to some extent overlaps that of the “feasibility” of this classification (see below) since the information
required to go into greater detail will only actually be available if the distinctions required make sense for
sectors of the economy other than households (in particular the financial companies in sector 12, and even
more specifically those in sectors 123, 124 and 125).
5.
The extensions of the classification proposed concern only headings F5 (Shares and other equity)
and F6 (Insurance technical reserves) in the SNA 1993/ESA classification.
6.
In the table below, the proposed extension of the classification of financial assets are underlined.
Before describing them, it could be noted that the breakdown of F51 into three lines, Quoted shares,
Unquoted shares and Other equity can often cause serious problems in national published accounts.
Sometimes the breakdown is not provided. When it is, some amounts seem barely plausible. In short, the
use of this breakdown is very frequently difficult. But this is not a problem of classification, but more
directly a problem of the quality of information available to provide figures for the various headings. As
this point is the subject of current reflection, we will not deal with these problems directly.
Table 1: Proposed extensions of the SNA 1993/ESA 1995 classification
Classification of financial transactions
Code level 1 Code level 2 Code level 3 Code level 4
Shares and other equity
F.5
Shares and other
Equity(excl.MFS)
F.51
Quoted shares
F.511
Unquoted shares
F.512
Other equity
F.513
Mutual fund shares
F.52
Money market funds
F.521
Equity funds et assim.
F.522
Bond funds et assim.
F.523
Hybrid funds
F.524
Insurance technical reserves
F.6
Net equity of households in life
insurance reserves
and in pension
funds reserves
F.61
Life insurance reserves
F.611
Unit linked vehicles
F.6111
Non unit linked vehicles
F.6112
Pension funds reserves
F.612
Defined contribution funds
F.6121
Defined benefit funds
F.6122
Prepayments of insurance premiums
and reserves for outstanding claims
F62
3
STD/NAES/FA(2003)3
7.
The proposed breakdown of F.52, Mutual fund shares, consists of four headings. This type of
breakdown is already practised to varying degrees in some countries. The identification of Money market
funds, which are risk free, does not raise any particular problems. On the other hand, the dividing line
between Equity funds and Bond funds is probably harder to define. Moreover, one can maintain that Bond
funds also bear not inconsiderable risks (not only exchange rate risk, but also risk of default). It has to be
admitted, however, that the risk attached to Equity funds is greater. But where does one put “guaranteed”
funds? On the side of Equity funds because shares are often the main underlying asset or on the side of
Bond funds because the risk is lower. Lastly, in the case of Hybrid funds, one can accept that the level of
risk is somewhere between that of Equity funds and Bond funds. Finally, one question is not resolved by
the proposals in this area: should a separate heading be created for funds invested in property? The
answer should clearly be affirmative since, otherwise, one would hardly know in which type of fund to
include funds mainly based on property. As regards heading F611, Net equity of households in life
insurance reserves, we propose to distinguish investment vehicles between those which consist of
securities (unit-linked) and those which carry a guaranteed rate (non unit-linked). We stress that it is the
investment vehicles which must be distinguished and not the contracts, because one can obviously find
unit-linked and non unit-linked vehicles in the same contract (the increasingly common case of so-called
“multi-vehicle” contracts). In the case of unit-linked vehicles, the market is risk is clearly borne by the
policyholder, while in guaranteed rate contracts, the risk is borne by the insurance company. The fact that
the risk is borne by the policyholder in the case of unit-linked vehicles does not necessarily mean that the
risk is very high: investing in property or bonds may involve a much lower risk than investing in quoted
shares, let alone unquoted shares. Above all, in unit-linked vehicles, especially since 2002, various forms
of “guaranteed funds” have made their appearance. These latter can clearly fudge the boundary between
unit-linked and guaranteed-rate vehicles since, if in the former the guarantees are not in the contract, they
re-appear in the vehicles. But that still does not eliminate the borderline and the distinction between unit
accounts (unit-linked), guaranteed rate vehicles (non unit-linked) still seems pertinent in analysing the
distribution of risks between sectors in our national economies.
8.
In the case of heading F.612, Net equity of households in pension funds reserves, we propose
to retain the traditional distinction between defined benefit (DB) schemes and define contribution (DC)
schemes. In the case of the former, the financial risk is borne by the companies which assume these
commitments4. As to the latter, the risk is very often borne by the individual. We say very often, and not
always, because some define contribution schemes are in fact managed in the context of group life
insurance schemes with a guaranteed rate. In that case, the financial risk is borne by the insurance
company and not the policyholder. Such is the case, for example, of defined contribution pension funds in
Denmark. In a country like the United States, on the other hand, defined contribution funds, which include
contracts under article 401k of the Tax Code, without exception place the burden of risk on the
policyholder. Neither, however, can one say that employees belonging to a defined benefit fund do not
bear any kind of risk. Certain recent court decisions, indeed, suggest that as long as a retirement pension
has not vested, employees may have to bear the consequences of a change in the provisions of a defined
benefit pension fund. Finally, there are intermediate forms between DB and DC schemes which
EUROSTAT calls “Hybrid Schemes”5 which should perhaps be given a separate heading.
9.
Despite these important nuances, we still think that the distinction in financial assets between
household debts in defined benefit pension funds and those in defined contribution funds is likely to help
the analysis of the location of risks in our different national economies.
4
See, for example, on this point « Accounting for Occupational Pension Plans in the Main European Countries »,
Study on behalf of the OEE, April 2003, 80 pages.
5
EUROSTAT, Special feature on insurance and pension funds, Edition 2000, page 137.
4
STD/NAES/FA(2003)3
3.
“Feasibility” of the proposed new classification
10.
Naturally, the classification proposed above must be the subject of in-depth discussion among
experts. However, it is worth pondering even now on its “feasibility”. Can our various countries, within a
reasonable time, publish accounts containing the required details concerning collective investment funds,
vehicles for life insurance contracts and occupational pension funds.
11.
The answer will, of course, vary from country to country, but at first glance, without wishing to
gloss over the real difficulties that exist, the prospect seems quite promising. As regards investment
funds, professional bodies generally have the distinctions that we made above. In the European Union, an
organisation like FEFSI has very accurate information on the performance of different types of fund. The
same goes for the ICI in the United States. Some national central banks already publish a distinction,
under household financial assets, between the different types of fund which is not far removed from the
one suggested above. In general, however, what is most often missing is a comparison with other sectors
of the national economy of the amount of the different types of fund. Often only a global comparison is
available, for example, all funds compared with the “household” sector or “non-financial companies”.
Initially, there is quite often a comparison of monetary funds with the different sectors, but for medium and
long-term investment funds, it is often the case that no distinction is made between the various types of
funds held in a particular sector.
12.
Progress in this area will come, as it often does, from a dialogue between the national central
banks and the professional organizations concerned. Sometimes periodic surveys conducted by central
banks among depository institutions of the portfolios of different investors can provide highly valuable
indications of the various types of funds held by one or the other.
13.
To conclude, we should point out a distinction which quite often seems pertinent to the
professionals, namely the distinction between “domestic” investment funds (ones whose registered address
is in the country concerned) and “foreign” investment funds, but we do not consider that this distinction is
directly relevant to the analysis of the location of risk between sectors.
14.
In the case of vehicles for life insurance contracts, the distinction between the amount and
flows of unit-linked vehicles and the amount and flows of guaranteed rate vehicles certainly does not
currently appear in official published national accounts. However it is a distinction well known to
organizations such as EUROSTAT6 or the CEA7. It is also well known in various countries by the
Insurance Supervisory Authorities. In some countries, moreover, two totally separate technical accounts
appear in the annual report of the supervisory authority, one concerning unit-linked vehicles and the other
guaranteed rate vehicles. In addition, the European Savings Institute (OEE) carried out a survey in 20012002 among the various insurance supervisory authorities in the fifteen countries of the European Union 8.
The survey shows that the majority of supervisory authorities have reliable information on turnover and the
amount of provisions for both types of vehicle, “unit-linked” and “guaranteed rate”. It is also true that the
authors of the report raise a real difficulty in distinguishing between insurance statistics and pension fund
statistics when part of the latter are managed by insurance companies under group contracts. Here,
6
See, for example, Special feature on insurance and pension funds, EUROSTAT, Theme 4, Industry, trade and
services, Edition 2000, 146 pages
7
See, for example, The European Life Insurance Market in 2001, CEA ECO, n°17, mars 2003, 58 pages.
8
Survey in the Life Insurance Sector in Europe, 1997-2000, by André Babeau, Auguste Mpacko Priso and Laurent
Grillet-Aubert, OEE, final report, October 2002, 33 pages.
5
STD/NAES/FA(2003)3
however, it is the SNA 1993/ESA 1995 distinction between F.611 and F.612 which would be open to
question9.
15.
Finally, the distinction between defined benefit pension funds and defined contribution
pension funds, is, of course, a traditional one and a country like the United States regularly publishes
separate statistics for each type of fund in its “flows of funds”. But this is not the case in the majority of
countries. EUROSTAT places the emphasis on the distinction between “independent” pension funds and
“non-independent” pension funds, although a clear distinction is made in independent pension funds
between DB and DC schemes (and also hybrid schemes, as mentioned above). It can be seen that the
difficulties encountered here are quite serious, not to mention the major problem of the distinction between
life insurance and pension funds referred to above.
Conclusion
16.
This note had the modest aim of launching a debate. It is in no way exhaustive. In particular, we
did not deal with the question of the compatibility of the above proposals with classifications of financial
assets other than those in SNA 1993/ESA 1995. Nor did we discuss in detail the significance of the above
proposals for sectors other than households in the broad sense (S14+S15). It is also quite possible that the
proposals are not the only ones which would allow us to make progress in our thinking about risk along the
lines indicated.
17.
Much work therefore clearly remains to be done before a more detailed classification of financial
assets in the accounts can lead to a more detailed analysis of the distribution of risk across the various
sectors of activity in our national economies.
9
The accounts of the United States clearly show in this regard a heading “Pensions insured” which is clearly an
intersection of life insurance and pension funds.
6