Adriaan Bloem, IMF John Ruser, BEA Co-chairs Report on the Meeting of the Task Force on Employers’ Retirement Schemes Washington, DC September 21-23, 2005 Adriaan Bloem, IMF John Ruser, BEA Co-chairs

Origin of Task Force At December 2004 meeting, the Advisory Expert Group on National Accounts (AEG) asked for a task force (TF) to prepare AEG’s further discussion on recording pension funds in the national accounts That TF would prepare a discussion paper for the AEG’s meeting in January 2006

Task Force planning IMF and BEA put together the TF Drafted a Terms of Reference (TOR) Circulated TOR for comments among the Inter-secretariat Working Group on National Accounts (ISWGNA) After some discussion the ISWGNA agreed Focused TF on defined benefit pension schemes Some discussion of defined contribution schemes and the borderline with social security Invited participants for the TF, asking them to draft discussion papers on the topics identified in the TOR Task Force meeting held in Washington, DC from September 21 to 23, 2005

Task Force participants IMF and BEA co-chairs Representatives of international organizations ECB, Eurostat, IMF, OECD, UN, World Bank Country representatives Australia, Canada, Denmark, India, Netherlands, Sweden, USA US pension actuaries

What are employers’ pension schemes? TF Conclusions Schemes set up to provide retirement benefits to participants, based on employer-employee relationship Funded, unfunded, or over- or under-funded May or may not be mandated by government Autonomous or non-autonomous Autonomous schemes involve institutional units separate from employers Non-autonomous schemes are managed by employers, with or without segregated reserves

1993 SNA treatment of pensions Output Autonomous pension schemes: measured separately Non-autonomous schemes : not recorded separately Ancillary to employer’s main output Employers contributions (part of compensation): Funded schemes: actual contributions Unfunded schemes: imputed In principle, SNA recognizes imputation should be based on actuarial considerations In practice, SNA suggests using benefits paid in current period

1993 SNA treatment of pensions Employee contributions Recognized for all pension schemes Property income Attributed to beneficiaries Only recorded for funded pension schemes As investment return on fund assets (insurance technical reserves) Investment return includes only property income, not holding gains Anomalous treatment of interest-bearing versus non-interest bearing securities

Shortcomings of 1993 SNA treatment Output from non-autonomous funds ancillary to main employer activity Fails to recognize that pension schemes provide services to beneficiaries, not employers Estimating employer contributions based on amounts paid SNA does not do this for any other liability Employers’ contributions should reflect liabilities to employees, regardless of funding PV of future pension benefits from service in current period

Shortcomings of 1993 SNA treatment SNA internally inconsistent Compensation of employees in income account includes imputed employer contributions for unfunded schemes But, the concomitant 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

Output – TF conclusions There is output 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 is consumed by the beneficiaries (i.e. households) More work required to determine if the output of autonomous pension funds should be based on actual or expected transactions and holding gains/losses

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 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

Developing actuarial estimates Actuaries develop estimates from Information on individual workers and pension plans External information (e.g. discount rate) Actuarial standards require that the discount rate be based on high quality bond rates relevant to employer and with relevant time to maturity Present value of pension liabilities is sensitive to discount rate

Developing actuarial estimates There are a number of different valuation approaches Projected benefit obligation (PBO) 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

Developing actuarial estimates TF conclusions The accumulated value of benefits should only be calculated based on service to date (ABO) Should not take projected future wages and salaries into account (PBO) PBO estimates could be provided in memoranda The value of household pension assets is consistent with the actuarial value of the employer’s liability to provide future retirement benefits Due to service provided to current date

Actuarial and accounting standards TF conclusions Professional practice confirms the consistency of actuarial estimates and accounting conventions Accounting conventions are likely to move from including PBO to ABO based estimates in the balance sheet PBO based estimates are expected to continue to be available

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

Multi-employer schemes TF conclusions A multi-employer defined benefit pension scheme typically assumes the liabilities of all employers within the scope of the scheme In that case, an employer does not incur any further liabilities once it has joined the scheme, apart from regular contributions to the scheme, until he withdraws from the scheme

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

Recording issues - papers Four papers were presented, with different proposals for the recording of pensions Brian Donaghue (consultant, IMF) Record both funded and unfunded pension schemes in the core accounts Record based on actuarially-determined accrued liabilities Reimund Mink (ECB), Dieter Glatzel (Eurostat) Leave core accounts unchanged Record unfunded pension schemes and social security identically in supplementary accounts

Recording issues - papers François Lequiller (OECD) A compromise between the two previous positions Incorporate unfunded pension schemes in the core accounts Treat stocks and flows of unfunded schemes separately from funded schemes leading to alternative balancing items Keep stocks and flows of social security outside core accounts Include an estimate of contributory social security liabilities in supplementary accounts Record pension liabilities associated with government employees in the core accounts regardless of label

Recording issues – TF conclusions A clear majority of the task force recommended the following: All pension liabilities of employers should be recognized, irrespective of the degree to which the schemes are funded Stocks and flows of all pension schemes should be recorded in the core accounts Specific guidance needs to be given to so-called “notional defined contribution” schemes Recognizing practical problems and user needs, stocks and flows of funded and unfunded schemes should be separately identified

Social security borderline TF conclusions 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 which combine 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