ESA2010: Recording of pension schemes in national accounts

1. ESA2010: Recording of pension schemes in national accounts OECD Workshop on the implementation of the 2008 SNA Paris, 25-27 October 2011 Ismael Ahamdanech Zarco. Eurostat. Unit C5.

2. OUTLINE • BACKGROUND • COMPILATION OF DATA ON PENSIONS: ADL approach and assumptions 3. SUMMARY AND CONCLUSIONS

3. Important definitions • Social insurance vs social assistance vs individual insurance policies • Funded vs unfunded pension schemes • Defined contribution vs defined benefit vs notional defined contribution pension schemes

4. 1. BACKGROUND Starting Point • Future treatment of employer pension schemes was one of the key issues of the 1993 SNA update • Three reasons for changing the 1993 SNA: • Different accounting of funded and unfunded employer pension schemes leads to different ‘effects’ on variables like income, saving, financial assets or liabilities • Unfunded employer pension schemes are particularly significant for general government and the public sector (statistical information on obligations of governments and on impacts of pension reforms) • Convergence of international statistical standards and international accounting standards (IAS) is aimed at (1993 SNA deviates from IAS and IPSAS which treat unfunded employer pension entitlements as liabilities)

5. 1. BACKGROUND Latest Developments and Outlook: • November 2010: • Seminar on pensions in Eurostat • 20 DEC 2010: • Commission decision on ESA 2010 covering table 29 (supplementary table) which is envisaged to be mandatory from 2014. • DEC 2010-2012: • Annual voluntary Eurostat/ECB questionnaire on pensions (covering supplementary table) • Technical compilation guide developed jointly by Eurostat and the ECB to help countries in compiling pension data. • Next seminar on pensions compilation: Spring 2012

6. 2. COMPILATION Outline • The supplementary table: Table 29 in ESA 2010 TP • Overview of the concept of accrued-to-date liabilties (ADL) • Distinction of pension schemes covered in the supplementary table • Measuring unfunded public pension entitlements • A) Calculation procedure • B) Key assumptions • C) Data requirements

7. 2. COMPILATION The supplementary table on pension schemes in social insurance

8. 2. COMPILATION Scope of pension liabilities

9. 2. COMPILATION Scope of pension liabilities

10. 2. COMPILATION Scope of pension liabilities

11. 2. COMPILATION Which type of entitlements are included in the new supplementary table? • pensions vs. non-pensions • gross vs. net concept • social insurance vs. social assistance

12. 2. COMPILATION Which type of entitlements are included in the new supplementary table?

13. 2. COMPILATION Which type of entitlements are included in the new supplementary table ? • funded vs. pay-as-you-go (new: public schemes) • defined contribution (DC) vs. defined benefit (DB) vs. notional defined contribution (NDC)

14. 2. COMPILATION Measuring unfunded public pension entitlements Actuarial Model A) Calculation procedure B) Key assumptions C) Data requriements

15. 2. COMPILATION A) Calculation procedure Overview of the calculation of pension entitlements

16. 2. COMPILATION A) Calculation procedure • Forward looking approach: • estimation of future pension benefits accrued-to-date • requires a projection of historical data into the future • Stock concept: • sum of accrued future pension benefits in present value of a given base year • Dependent on present and future demography

17. 2. COMPILATION A) Calculation procedure The example of a 70 year old retiree: Discounting and summing up future expected pension benefits

18. 2. COMPILATION A) Calculation procedure • ABO vs. PBO - what makes the difference? • Future wage growth due to: • promotions • general wage growth in the economy To ensure comparable results across Europe the PBO approach should be applied

19. 2. COMPILATION B) Key assumptions: The discount rate The discount rate answers the questions: Future (pension) payment in year t +1 What are future payment streams worth today? Which amount do I have to set aside today in order to finance a future (pension) payment ? Presentvalue in baseyear t Discount rate

20. 2. COMPILATION B) Key assumptions: The discount rate What is the appropriate choice of the discount rate for the estimation of ADL? • “High quality” government bonds are a suitable proxy for the discount rate. • The maturity of these bonds should be similar to the respective entitlements. • A stable discount rate should be applied to avoid the noise which arises from frequent changes. • To ensure comparability the same discount rate should be applied for all EU countries and for all government-managed pension schemes. • One discount rate of 3 % (5 %) in real (nominal) terms for all EU countries and pension schemes (applied in the AWG context) Sensitivity analysis of the discount rate – case study Portugal

21. 2. COMPILATION B) Key assumptions: Wage growth AWG productivity/wage growth paths – the example of Germany, Poland and Spain Wage growth based on the AWG labour productivity forecasts Note: The assumptions on wage growth and discount rate are not independent from each other and determine the level of pension entitlements to a large extent.

22. 2. COMPILATION B) Key assumptions: Demographic assumptions Future increase of the life expectancy Changes of the life expectancy based on the newest EUROPOP population projection

23. 2. COMPILATION C) Data requirements • Demographic data: • Population by age and sex • Age- and gender-specific mortality data in the base year • Age- and gender-specific fertility data in the base year • Pension data: • Aggregate of pension benefits by age and sex • Data on past contribution career (e.g. reference earnings, contribution years) • Benefit formula design: • - accrual factor, indexation of pensions - adjustment of parameters (e.g. sustainabilty factor) • 4) Recent reforms of the pension system (e.g. change of retirement age, reference earnings)

24. 3. SUMMARY AND CONCLUSIONS • Important changes in treatment of pensions from SNA 93 to SNA 2008 looking for more international comparability. • This change implies: • Better understanding of Government sector. • Knowledge of important data to understand household behaviour. • Eurostat is involved in the development of this new dataset: • Chapter 17 in the proposal of ESA 2010. • Table 29 (supplementary table) compulsory in the proposal of new TP • Technical Compilation Guide and seminars to support countries in the compilation.

25. 3. SUMMARY AND CONCLUSIONS VERY IMPORTANT • Scope of pensions liabilities: Different approaches to measurement, different implications for economic analysis and economic policy recommendations. • Regarding compilation: • Compilation procedure. • Key assumptions (especially interest rate). • Data requirements.

26. THANKS FOR YOUR ATTENTION¡¡