UK PENSIONS SUPPLEMENTARY TABLE Tim Gibbs David Ainslie ONS Pensions Analysis Unit

Aims Introduce how the UK ST work was communicated Introduce the table for the UK and QA Look in some detail at the methodology for: - ST column G ‘Classified in general government’ - ST column H ‘Social security pension schemes’

Development of the ST 4 years to research/develop Major contribution from Government Actuary’s Department (designed and quality assured the methodology) 2010 and 2011 tables successfully delivered to Eurostat (voluntary, until mandatory delivery of year 2015 in 2017)

April 2012 launch seminar Venue: Royal Statistical Society Over 70 attendees UK government departments, including: - ONS - HM Treasury - Business Innovation and Skills - Work and Pensions - National Audit Office - Government Actuary’s Department Representatives from other EU statistical institutes Eurostat and ECB The Pension Regulator, Bank of England and Financial Services Authority

Seminar attendees: Media and research National newspapers (eg Financial and Sunday Times; Daily Telegraph) Pensions policy and research institutes: - Intergenerational Foundation - Centre for Economics and Business Research - Pensions Policy Institute - Oxford Institute of Population Ageing - Centre for Policy Studies

Other attendees: Industry and academics Pensions providers and pensions consultants (eg Towers Watson; Eversheds; John Ralfe(Consultant)) Trade Union representatives UK universities

Publications to support launch Main supporting publication 2 December 2011: ‘Compiling estimates of state pension obligations for the National Accounts (a methodology article)’

Publications to support launch Main article 27 April 2012: ‘Pensions in the National Accounts – A fuller picture of the UK’s funded and unfunded pension obligations’

Pensions Supplementary Table Recording Total Pension Counter-parts: Pension manager Schemes entitlements of non- resident households Defined contri- bution schemes Column number A B C D E F G H I J 1 Pension entitlements (incl contingent pension entitlements) NA 2.1 to 2.4 – 2.5 2 Increase in pension entitlements due to social contributions 2.1 Employer actual social contributions 2.2 Employer imputed social 2.3 Household actual social 2.4 Household social contribution supplements 2.5 Less: Pension scheme service charges 3 Other (actuarial) change of pension entitlements in social security pension schemes 4 Reduction in pension entitlements due to payment of pension benefits 2 + 3 - 4 5 Changes in pension entitlements due to social contributions and pension benefits 6 Transfers of pension entitlements between schemes 7 Change in entitlements due to negotiated changes in scheme structure 8 Changes in entitlements due to revaluations 9 other changes in volume 1+ 5 to 9 10 Pension entitlements (incl. contingent pension entitlements 11 Output Changes in pension entitlements due to other flows Changes in pension entitlements due to transactions Defined benefit schemes and other non-defined contri- bution Closing balance sheet Social security pension Related indicator Classified in financial corporations general government Classified in general Opening balance sheet General government Standard national accounts Relations Row No. Not in the standard accounts Non-general government Defined benefit schemes for general government employees

Pensions Supplementary Table: Columns

Pensions Supplementary Table: Rows

ST overview ST covers all UK pensions schemes in ‘social insurance’ (excludes individual personal pensions which, in the National Accounts, are regarded as a form of life insurance) ST is in two parts: - ‘General government’ (the public sector) Columns D to H - ‘Non-general government’ (the private sector) Columns A and B, Column C = A+B

ST Quality Assurance Developed working closely with ONS National Accounts Methods Committee (NAMC) Approach approved by Pensions Statistics Advisory Group (PSAG), a group of government and non-government pensions experts Worked closely with Eurostat, including contributions to the Technical Compilation Guide Issues referred to NAMC / PSAG / Eurostat, on an ongoing basis

ST overview – Columns G and H ST covers two areas, columns G and H, not previously covered and not part of the core National Accounts under ESA 2010: - Column G, ‘Classified in general government’ (unfunded public sector schemes) - Column H, ‘Social security pension schemes’ (the state pension)

Column G - Why is it important? Column G represents unfunded public sector schemes (e.g., Civil Service, Teachers, National Health Service) Almost all the information for Column G is available from published Resource Accounts Problems include: - locating the appropriate Accounts - late, or irregular, publication of Accounts - identifying the correct figure (without an accountancy background) Example of Resource Accounts ‘Cabinet Office: Civil Superannuation Accounts 2011-12’

Compiling Column G Resource Accounts are financial year. Need to adjust to calendar year (eg, for calendar year 2011, take 2010-11 and 2011-12 Accounts) Police and Fire Resource Accounts unavailable. Use ‘Whole of Government Accounts’ to obtain rating up figure

Compiling Column G –Service charge New row, 2.5 ‘Less: Pension scheme service charges’ Not available for all schemes, but is available for small number of very large column B schemes Estimate for the other schemes based on the proportions in the schemes where available

Compiling Column G – Discount rate For the ‘General government’ part of the ST and, therefore, for ST column G, ESA 2010 requires all Member States to use the same rate of 5 % This is usually conceptualised as: - 5% nominal - 3% real (5% nominal: the additional 2% represents inflation) The 5% is generally referred to as the discount rate

Column G - Sensitivity Analysis Earlier article presented detailed sensitivity analyses: Pensions in the National Accounts, July 2011 Covered liabilities of four largest schemes: - NHS - Teachers - Civil Service - Armed Forces 1% fall in discount rate increased liabilities by 16% 1% increase in discount rate reduced liabilities by 14%

ST column H ‘Social security pension schemes’ The contributory state pension: - Basic State Pension (BSP) - Additional State Pension (ASP) Accrued to date basis for ST Excludes - social assistance (income-related benefits) - Pension Credit (a means-tested benefit for pensioners) - Excludes other non-contributory state pensions eg winter fuel allowance.

ST column H: Defering pensions People can defer receipt of state pension beyond SPA Initial entitlement increased at fairly generous rate for deferral Can take additional amount as a lump sum if deferred for more than a year

ST column H: Not debt State pension liabilities are not debt - Possible to change the obligations by enacting legislation referred to as ‘contingent pension obligations’

ST column H: How we get data? Data from Department of Work and Pensions (2 models) DWP estimates take into account future accumulation of pension rights DWP data needs to be adjusted to ST basis

ST column H: The BSP model The BSP is a payouts-based model for SPA and above - people currently over working age (pensioners) - inflows of workers to SPA Life expectancy projections for single year of age and by sex Additional adjustments eg country of residence, marital status and widowhood

ST column H: The AP model The AP is an accruals-based model. Estimates based on entitlements built up during working lives Then revalued by earnings growth After SPA, ASP is increased each year in line with inflation, until death Again, mortality rates based on ONS national population projections Additional adjustments made for earnings level, number of jobs, single year of age, marital status and contracting-out of ASP.

ST column H: ASP entitlments Consequently, accrued ASP entitlements = - Earnings x rate of accrual, revalued in line with earnings growth until SPA - Earnings x rate of accrual, uprated in line with inflation from SPA

ST column H: Adjusting to a ST basis Need to remove any future accruals Relatively simple for AP as an accruals-based model More complex for BSP. Need to rework to entitlement to date rather than entitlement at SPA For both BSP and AP, had to further adjust DWP estimates to reflect only legislation enacted to date All discounted by the standard rate for government schemes: 3% real; 5% nominal

ST column H: Sensitivity to discount rate Based on UK state pension entitlements at end 2010: Nominal discount rate (%) 4.00 4.50 5.00 5.50 6.00 Change in pension entitlements (£ billion) 1,174 532 0 -443 -815 Change in pension entitlements (%) 31% 14% 0 -12% -21%

Conclusion 4 years to research/develop. Will continue to review the methodology and improve quality until 2017 mandatory delivery Pleased to work with other countries, if helpful (although UK is not using the model-based approach) Questions?

UK PENSIONS SUPPLEMENTARY TABLE Tim Gibbs David Ainslie ONS Pensions Analysis Unit