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1 Report to the AEG Findings of the Task Force on Employers Retirement Schemes Adriaan Bloem, IMF John Ruser, BEA Co-chairs.

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Presentation on theme: "1 Report to the AEG Findings of the Task Force on Employers Retirement Schemes Adriaan Bloem, IMF John Ruser, BEA Co-chairs."— Presentation transcript:

1 1 Report to the AEG Findings of the Task Force on Employers Retirement Schemes Adriaan Bloem, IMF John Ruser, BEA Co-chairs

2 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 3 Attributes of employers pension schemes TF 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 SNA treatment of pensions Output 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 SNA treatment of pensions Assets/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 SNA treatment of pensions Compensation 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 SNA treatment of pensions Compensation 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 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 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 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 11 Use of expected holding gains/losses TF 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 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 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 > ABO, with large difference in early years decreasing towards retirement date

14 14 Developing actuarial estimates TF 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 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 16 Pension scheme sectoring TF 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 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 18 Social security borderline TF 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

19 19 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?


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