Pension schemes An intrepretation of the AEG short minutes

1. Pension schemesAn intrepretation of the AEG short minutes François Lequiller OECD

2. Status of paper • The AEG made significant progress on pension schemes • Adopted a number of recommendations that will improve the SNA • See extracts of short minutes • Present paper is limited: • To explain the minutes of the AEG regarding pension schemes • Propose some directions of work for these « additional criteria » • It is only a small contribution in a sequence of work that will continue (Eurostat, IMF-BEA Task Force on Pension Schemes)

3. Main AEG recommendation • Record a liability for all employer pension schemes, even if the scheme is unfunded • « All » includes general government schemes for their own employees • Same rationale as in business accounts: • the employment contract gives to the pension promise the status of a liability • Focus is on the liability • not on the mode of financing as in SNA 93 (where the criterion was whether the scheme was funded)

4. Interpretation • Employer scheme: scheme where the pension promise is made based on an employment contract (relation employer/employee) • The employer continues to be responsible for the pension obligation even after he has paid its contribution • The AEG recommendation • does not apply to schemes where the employer is no more responsible for the pension promise after it has paid its contribution (multi-employer schemes) • Thus does not extend to « social security » even if contributions are based on salary, thus on an employment contract

5. Interpretation (continued) • The SNA 93 criterion was to recognise a liability only when the scheme was funded • The new criterion does not replace the old one, but extends it • In the new SNA: one recognises a liability when the scheme is funded and/or when it is an employer scheme

6. Justification of main AEG recommendation • Is in line with the principles of the recognition of an asset (the pension asset) • Reconciles SNA and business accounting • Avoids treating differently defined benefit schemes and defined contribution schemes • Clarifies the measurement of cost of labour (actuarial calculation of contribution)

7. However the AEG… • Recognised that there remained some issues were to be clarified: • In some countries, the delineation between general government employee schemes and social security schemes is not so clear • Opened the possibility that supplementary accounts be created in which to record social security « liabilities » • Opened the possibility to record « liabilities » of some general government employee schemes in these supplementary accounts • IMPORTANT: consensus on non government schemes

8. Two issues in the AEG • Conceptual issue: borderline between employer and social security: • focus on general government schemes for their own employees • Implementation issue: accuracy of estimates

9. Conceptual issueThe three pillars • First pillar: « basic » social security (benefits are not linked to contributions) • Consensus: no pension liability • Second pillar: collective schemes, often compulsory • ?????? • Third pillar: individual retirement schemes (e.g. life-insurance) • Consensus: pension liability

10. The second pillar • Two different « paradigms » • « anglo saxon »: • the second pillar is organised through employer schemes • the role of the government in retirement is limited to its own employees • The recommendation of the AEG is perfectly adapted • « continental Europe paradigm »: • The second pillar is organised through a government sponsored multi-employer scheme for the private sector (sometimes called social security) • In addition, the government has also a scheme for its own employees • The recommendation of the AEG is more difficult to implement

11. General government schemes • In the « continental Europe paradigm »: • the pension promise made by the government for its own employees is not significantly different • from the pension promise made by the government sponsored multi-employer scheme for private sector employees • It is difficult to understand why the SNA would recognise a pension asset for civil servants and not for private sector employees! • Wrong message to policy makers…

12. Include or Exclude? • If the nature of the pension promise for government sponsored multi employer scheme is the same as the pension promise by government as an employer, • =>why not recognise a liability for both? • However: • Is the pension promise of a sufficient strength to record it as a liability? • massive negative net worth of government, • massive property income generating structural deficit even if scheme is systematically balanced • record « contribution assets » (Swedish Inkomstpension) => Better not include in core accounts but in supplementary accounts

13. Implementation issue • Main AEG recommendation implies the use of complex actuarial methods • Can be applied only if employers participate • Some governments do not make these calculations • It would be difficult for the statistical office to estimate (specially for government) However, the AEG did not retain these considerations. • Business accounts are going in this direction • Public sector accounts will follow up • Period of transition between now and 2012 can be used to make pilot exercises • Europe can calculate a special deficit for the EDP procedure, excluding these amounts

14. New criteria: nature of the pension promise • The conceptual issue remains • The AEG requested to explore new criteria • The criterion of employer/non employer is not sufficient • One possibility: • focus on the nature (on the « strength») of the pension promise

15. Liabilities, provisions and contingent liabilities • Business accounts make distinction between: • Liability • Provision (liability of uncertain value and timing) • Contingent liabilities (liability depending on a future event outside the scope of the business)

16. Supplementary accounts • When pension promised is strong • => liability (F6) in the core accounts • When pension promise is weak • => Provision recorded in supplementary accounts • Importance of those supplementary accounts for international comparability

17. Nature of pension promise • Strong (F6): • Guaranteed by the sponsor • Legal ground • The sponsor shows a liability in its own accounts • Contsructive obligation • Weak (Supplementary accounts) • Value not guaranteed even retroactively • No legal ground (German case)

18. Other AEG decisions • Explicit exchanges of implicit pension obligation: • When the obligation to pay pensions from one unit to the other, this should be recorded as a transaction in pension liability even if neither unit has previously recorded them. • Mixed social security • A liability should be recorded for schemes that are funded and where the benefits are related to the contributions even though the scheme may be discribed as a social security scheme.