Evaluation of Unfunded Employer Retirement Pension Schemes

1. Employer retirement pension schemes Reimund Mink and Richard Walton Paris, 11 October 2005 Paper prepared for the meeting of the OECD National Accounts Working Group

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 IMF’s 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.