Pensions Chapter 11.18: Transfer of pension obligations This presentation deals with a series of issues on pensions: Pension concepts in NA; On pension schemes On pension institutions Transfer of pension obligations in NA according to ESA95 and ESA 2010. The new pension table Chapter 11.18: Transfer of pension obligations

Pensions in ESA 2010 & the transfer of pension obligations ESA 2010 and Pensions ESA and lump sum transfers Treatment under ESA 2010 ESA 2010 separate chapter on pensions Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Pensions in ESA 2010 Separate chapter on pensions and pension funds Step closer to recording pensions assets and liabilities ESA 2010 mentions “social insurance” which includes: Social security schemes of government; Unfunded social insurance schemes operated by employers; Funded social insurance schemes operated by employers; Private funded social insurance schemes. This was visited during week 1: See Chapter 5.4 annex ESA 2010 separate chapter on pensions Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Pensions: brief recap 1 Funded schemes recognize AF.63 liabilities to participants; should have investments ≥ pension liabilities shortfall requires ‘top-up’ D.99 capital transfer ESA10 4.165(i) Unfunded schemes (PAYG) no liabilities to participants; no investments (apart for liquidity reasons) SNA rules on recording more strict than ESA10 Main breakdown is into 2 classes: funded or unfunded. The first aspect is recognising liabilities towards the participants. Essential is the obligation to have assets with a value at least equal to the technical liabilities. For prudential reasons, supervisory authorities request a significantly higher ratio, could go up to 150%. 100% should be the minimal objective. Temporarily shortages are allowed if the return to 100% is the objective. Other capital transfers D.99 includes ‘ extraordinary payments into social insurance funds made by employers (including government) or by government so far as payments are to increase the actuarial reserves of the funds. The accompanying adjustment to HHs from social insurance funds is also D.99 Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Pensions: brief recap 2 Social security schemes No formal liabilities to beneficiaries; Predominantly unfunded; Observed flows on an accrual basis: contributions when payable (by households) benefits when payable (to households) Are classified in general government sector (S.1314 mostly). Pension schemes often labeled PAYG. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer of pension obligations Government takes on pension obligations from another unit. Key issue is the recording in national accounts Treatment differs between ESA95 and ESA 2010 ESA95 solution was controversial ESA 2010 is better.. The issue to be discussed deals with the question whether the transfer would affect B.9 and EDP-debt. We should discuss separately: The value of the obligations; The lump sum; The difference between the two. Why would government take over pension liabilities from another unit/corporation? Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer of pension obligations, 2 Government’s objective: “Clean” the accounts of public corporation; Often a first step in privatisation process; or Government could also be building up the social insurance system If pension liabilities are no longer on the corporation's balance sheet the quality of the balance sheet will improve. Therefore, the price of the company's share will increase when being sold. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer of pension obligations, 3 1. Company - transfers pension obligations; - pays compensation (lump sum); 2. Government - takes on pension obligations; - receives payment (lump sum). Consider the scenario of a defined contribution scheme (to dismiss it from the analysis). Then go on to talk about defined benefit Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer of pension obligations, 4 As part of the process: Liabilities valued by actuarial principles; Payment may or may not correspond to the value of liabilities. Difference possibly is risk aspect, but could as well be sponsoring in the one or the other direction. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations 9

Transfer of pension obligations, 5 from corporation to government funded unfunded 1 2 3 4 Only 1 and 2 discussed. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to funded Recording in national accounts 1. funded funded - nothing in capital account; - financial account: F.2 & F.6. Net worth has not changed: - for government; - for corporation. In the short term at least, no impact on B.9 The net wealth has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset) Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to funded   Government Transferee Households Opening balance sheet A L A L AF.* 1000 AF.63 Financial account A L A L A L F.* -1000 F.63 B.9f Closing balance sheet A L A L The net wealth has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset) Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to funded Recording in national accounts What would the impact on government debt be? Consolidated gross debt could go down e.g. if financial assets transferred include F.3 In the future, is there an impact on B.9? Yes, when benefits are paid there will be an impact The net wealth has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset) Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to unfunded Recording in national accounts in the old MGGD 2. funded unfunded - government shows no F.6. Transactions: capital transfer D.99 & F.2. Effect on net worth: - government: increase; - corporation: nothing. The net wealth of the company has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset). Government received the cash but does not recognise the liabilities. unbalanced Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to unfunded GFS/EDP-course 2012 Transfer: funded to unfunded Recording in national accounts in ESA 10 2. funded unfunded - government shows no AF.6. Steps: Extinguish the AF.63 between HH & company As no AF.63 is recorded, record AF.89 asset for HHs and AF.89 liability for Government HHs AF.89 is a prepayment of future D.75 current transfers in proportion to the related pension payment The net wealth of the company has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset). Government received the cash but does not recognise the liabilities. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to unfunded   Government Transferee Households Opening balance sheet A L A L A L AF.* 1000 AF.63 Financial account A L A L A L F.* -1000 F.63 F.89 B.9f Closing balance sheet A L A L AF.89 The net wealth has not changed because the transferred liabilities are matched by a corresponding transfer of financial assets (cash or other financial asset) Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to unfunded Recording in national accounts What would the impact on government debt be? Consolidated gross debt could go down e.g. if financial assets transferred include F.3 In the future, is there an impact on B.9? Again when benefits are paid there could be an impact (the actuarial estimate may not turn out as anticipated) Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Transfer: funded to unfunded, year 1 Government   Transferee Households Non-financial account U R U R D.759 10 D.6211 11 B.9 -1 +1 Financial account A L A L F.2 -11 F.89 -10 B.9f Closing balance sheet A L A L AF.* 989 AF.89 990 Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Pension table in ESA 2010, 1 Uniform pension table: Non-government schemes; Government schemes; Funded schemes; Unfunded schemes; In ‘standard’ or core-accounts; Not in ‘standard’ or core-accounts. Outside the ESA-accounts: a separate table. Lot of discussions on the obligation to produce this table. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations

Pension table in ESA 2010, 2 Table describes: Opening pension rights; Changes in pension rights due to transactions; Other changes in pension rights; Pension rights at the end of the year. Pensions: Chapter 11.18 Chapter 11.18: Transfer of pension obligations