Pension schemes

1
Employer retirement pension schemes
Reimund Mink and Richard Walton
Luxembourg, 7 and 8 July 2005
Paper prepared for the meeting of the CMFB
2
Employer retirement pension schemes

• Current position in the 1993 SNA and in
  related manuals
• Reasons for changing the 1993 SNA
• Evaluation of the proposed alternative
  solutions
• Recording of unfunded pension obligations as
  liabilities in the core accounts
• Recording of unfunded pension obligations in a
  set of supplementary accounts
• Preferred recommended solution
• Implications for the System

3
Employer retirement pension schemes

• Current position in the 1993 SNA and in
  related manuals
• 1993 SNA does not recognise unfunded
  obligations as liabilities of employer
  pension schemes and as financial assets of
  beneficiaries however, it proposes to show the
  net present value of assets and liabilities as
  memorandum items
• 1995 ESA like 1993 SNA it further proposes to
  only include provisions if they are calculated
  according to actuarial criteria similar to those
  used by insurance
• GFSM 2001 recommends to record government
  unfunded obligations as liabilities

4
Employer retirement pension schemes

• Reasons for changing the 1993 SNA
• Mainly three reasons
• Unfunded employer schemes are particularly
  significant for government. In the light of
  ageing populations, there is a well-founded
  interest to have more comprehensive statistical
  information on future commitments of governments
• Different accounting for funded and unfunded
  schemes leads to different effects on key
  variables like income, net lending/net borrowing,
  financial assets or liabilities
• Some convergence of international statistical
  standards and international accounting standards
  (IAS) is aimed at.

5
Employer retirement pension schemes

• Evaluation of the proposed alternative
  solutions
• Two options of the recording of unfunded
  pension obligations
• As liabilities In a set of
• in the core accounts supplementary accounts
• This is the proposal made This is
  the view presented in
• by the IMFs EDG on pensions
  various papers presented to the
• Eurostat Task Force on SNA

6
Employer retirement pension schemes

• Evaluation of the proposed alternative
  solutions
• Recording of unfunded pension obligations as
  liabilities in the core accounts
• Implications
• Unfunded schemes treated as if they were funded
  schemes strong assumptions have to be made in
  relation to the discount rate, the average life
  expectancy of the scheme members, and their final
  salaries
• Changes in assets and liabilities for pensions
  due to various kinds of (imputed) financial
  transactions
• Changes in assets and liabilities for pensions
  due to revisions of the actuarial assumptions

7
Employer retirement pension schemes

• Evaluation of the proposed alternative
  solutions
• Recording of unfunded pension obligations as
  liabilities in a set of supplementary accounts
• Reasons
• It is arbitrary to treat only the obligations of
  unfunded employer pension schemes as liabilities
  especially valid for economies with a large
  proportion of pensions organised on a
  pay-as-you-go basis
• Intractable measurement issues arise if no stock
  and flow data are available based on actuarial
  criteria especially valid for government
  accounts
• Pay-as-you-go schemes imply different economic
  behaviour of employers and employees (households)
  than funded schemes
• Pay-as-you-go schemes imply different structures
  of financial markets than funded schemes

8
Employer retirement pension schemes

• Preferred recommended solution
• Recording of stocks and flows related to unfunded
  pension schemes operated by governments or other
  sectors for their employees and to social
  security pension schemes in a set of
  supplementary accounts
• Same rules are applied as for funded schemes,
  but assumptions should be made explicit
• A sensitivity analysis should be conducted
• As a result, the current treatment of unfunded
  schemes in the core accounts does not change,
  while all supplementary model estimates are
  recorded in a separate set of (implicit)
  transaction accounts, other flow accounts, and
  balance sheets.

9
Employer retirement pension schemes

• Implications for the System
• As unfunded employer pension schemes and social
  security schemes are often close substitutes to
  each other, they should be treated in the same
  way
• As actuarial calculations are often not
  available, rather complicated model calculations
  would have to be carried out
• The supplementary set of accounts could be
  extended to other types of implicit assets and
  liabilities like loan provisions or one-off
  guarantees.
• The compilation of a supplementary set of
  accounts has the advantage to provide the users
  with a consistent and comprehensive set of data,
  also useful for financial stability analysis of
  corporate and government sectors.

10
Employer retirement pension schemes
Does the CMFB agree with the recommended
treatment of (a) Unfunded employer pension
schemes? (b) Social security schemes in a
separate set of supplementary accounts?