Report to the AEG Findings of the Task Force on Employers

1
Report to the AEG Findings of the Task Force
onEmployers Retirement Schemes

• Adriaan Bloem, IMF
• John Ruser, BEA
• Co-chairs

2
Main points

• SNA is inconsistent in the treatment of funded
  and unfunded pension schemes
• To achieve consistency, a majority of the Task
  Force recommended that
• All pension liabilities of employers should be
  recognized, regardless of extent of funding
• Stocks and flows of all pension schemes should be
  recorded in the core accounts, based on actuarial
  estimates
• Recognizing practical problems and user needs,
  stocks and flows of funded and unfunded schemes
  should be separately identified
• Even though measurement issues exist, actuarial
  estimates are available in many countries
• Borderline between pensions and social security
  must be resolved

3
Attributes of employers pension schemesTF
conclusions

• Pensions schemes provide retirement benefits
  based on contractual employer-employee
  relationship
• May be funded, unfunded, or over- or under-funded
• May or may not be mandated by government
• May be autonomous or non-autonomous
• Autonomous schemes involve institutional units
  separate from employers
• Non-autonomous schemes are managed by employers,
  with or without segregated reserves

4
1993 SNA treatment of pensionsOutput

• Autonomous pension schemes recorded separately
• Non-autonomous schemes not recorded separately
• Ancillary to employers main output
• Treatment of non-autonomous funds fails to
  recognize that pension schemes provide services
  to beneficiaries, not employers

5
1993 SNA treatment of pensionsAssets/liabilities

• Employer liabilities and household assets only
  recorded for funded schemes
• Fails to recognize employer obligations
  (liabilities) and corresponding household assets
  for unfunded schemes
• Nowhere else in SNA is a liability recognized
  only when there is a matching asset

6
1993 SNA treatment of pensionsCompensation of
employees

• Recording
• Funded schemes actual employer contributions to
  pension schemes
• Unfunded schemes imputed
• In principle, SNA recognizes imputation should be
  based on actuarial considerations
• In practice, SNA suggests using benefits paid in
  current period

7
1993 SNA treatment of pensionsCompensation of
employees

• Economic principle
• Compensation should include the increase in
  employers pension liabilities from an additional
  years work, regardless of funding
• Shortcomings of current treatment
• Changes in employer pension liabilities bear no
  necessary relationship to actual employer
  contributions or actual benefits paid

8
1993 SNA treatment of pensions Property income

• Only recorded for funded pension schemes
• As investment return on fund assets (insurance
  technical reserves)
• Fails to recognize the increase in the
  assets/liabilities due to the passage of time,
  regardless of the existence of segregated assets
• Investment return includes only property income,
  not holding gains
• Anomalous treatment of interest-bearing versus
  non-interest bearing securities

9
Shortcomings of 1993 SNA treatment

• SNA internally inconsistent
• Compensation of employees in income account
  includes imputed employer contributions for
  unfunded schemes
• But, the 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

10
Output TF conclusions

• In principle, output should be recorded
  separately for both autonomous and non-autonomous
  funds
• Output of pension funds should be measured at
  cost
• Including the full management cost of any
  insurance company managing a fund
• Output should be recorded as consumed by the
  beneficiaries (i.e. households)

11
Use of expected holding gains/lossesTF
conclusions

• It is appropriate to use expected transactions
  and expected holding gains and losses to explain
  the service charge of autonomous pension funds
• But, further work is needed on the implications
  of using expectations in the practical
  calculation of pension fund output

12
Property income TF conclusions

• 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 imputed 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

13
Developing actuarial estimates

• There are a two main valuation approaches
• Projected benefit obligation (PBO)
• Calculated as 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 gt ABO, with large difference in early years
  decreasing towards retirement date

14
Developing actuarial estimatesTF conclusions

• In the accounts, the accumulated value of
  benefits should be based on only service to date
  (ABO)
• Should not take projected future wages and
  salaries into account (as would a PBO
  calculation)
• But, PBO estimates could be provided in memoranda
• The value of household pension assets is
  consistent with the actuarial value of the
  employers liability to provide future retirement
  benefits
• Due to service provided to current date

15
Discount rate - TF conclusion

• An acceptable discount rate would be the interest
  rate on high quality securities relevant to the
  sponsor of the pension scheme
• Securities with terms to maturity that are
  consistent with the time horizon of the pension
  liability

16
Pension scheme sectoringTF conclusions

• 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

17
Recording issues TF majority recommendation

• All pension liabilities of employers should be
  recognized, regardless of extent of funding
• Stocks and flows of all pension schemes should be
  recorded in the core accounts
• Recognizing practical problems and user needs,
  stocks and flows of funded and unfunded schemes
  should be separately identified
• Specific guidance needs to be given to so-called
  notional defined contribution schemes

18
Social security borderlineTF conclusions

• Basic 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 combining 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

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Does AEG agree that

1. Liabilities/assets and associated economic flows
   of all pension schemes should be recognized in
   the core accounts of 1993 SNA?
2. Accumulated benefits and related economic flows
   for all defined benefit schemes should be
   calculated using actuarial methods?
3. Output should be calculated for non-autonomous
   schemes on a cost basis, and cost attributed to
   the beneficiaries (i.e. household sector)?
4. Expected holding gains and losses can be used in
   order to explain the service charge imposed by
   autonomous pension schemes?