Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department Bank of Japan Measurement for the Retirement Benefit Obligations in Japans Flow of Funds Accounts (Practice of recording unfunded private pension liabilities)

1. Overview of Japans Pension Plan 2. Coverage by JFFA (Japans Flow of Funds Accounts) 3. Revision in JFFA 3.1 Overview of Revision in JFFA 3.2 What is Retirement Benefit Obligations (RBO)? 3.3 Treatment of RBO in 08SNA 3.4 Unrecorded Portion of RBO in JFFA 3.5 Volume of Unrecorded Portion 3.6 Recording Method in JFFA 4. Remaining Tasks Outline of Presentation

Types of pension plans and outstanding of pension reserves 1.Overview of Japans Pension Plan Three tiers of pension plan: 1) Corporate Pensions (Employees Pension Fund, Qualified Retirement Pension Plans etc),other pensions (National Pension Funds etc), and personal pensions. 2) Earning-related pension (Employees Pension insurance, Mutual Aid Pension). 3) National Pension (Basic Pension). Most of pension plans in Japan are defined benefit schemes.

2. Coverage by JFFA (Japans Flow of Funds Accounts) JFFA covers: corporate pensions (Employees Pension Fund, Defined Benefit Corporate Pensions Funds etc), other pensions (National Pension Funds etc), and personal pensions (Tire 1). JFFA does not cover: National pension funds, Employees Pension Insurance, and Mutual Aid Pension (Tire 2 and 3) as public pensions are considered as transfer benefits from social security funds (government) in which contribution does not link directly to benefits. Coverage of Retirement Benefit Obligations by the JFFA

(Before Revision) A part of actuarially calculated retirement benefit obligations, which was not covered by corresponding financial assets, was not recorded because of the lack of data source. (After Revision) JFFA has revised to record the full coverage of retirement benefit obligations. Background: (1) The data became available after the implementation of Retirement Benefits Accounting Rule from April The rule required to disclose in financial statements the underfunded situation of corporate retirement benefit plans including pension plans. (2) Treatment in SNA 93SNA: The liability of DB pension plan is equal to the present value of the promised benefits. 08SNA: Employment-related pension entitlements should be recognized as liabilities towards households, irrespectively of whether the necessary assets exist or not. 3.1 Overview of Revision in JFFA

3.2 What is Retirement Benefit Obligations (RBO)? Image of Retirement Benefit Obligations (RBO) Retirement benefit obligations is defined as expected total benefits at retirement earned to date and discounted to the present value. Retirement Benefit Obligations is calculated by three steps; A) Expected Benefit Payments in full values. B) Expected Benefit Payments which have accrued at the end of current term. C) Discounted at present value (Retirement benefit obligations).

3.3 Treatment of RBO in 08SNA (1) Retirement benefit obligations should be recognized as liability of corporate pensions sector, and asset of households sector. (2) Introduction of Actuarial calculation The level of the employers contribution should be determined actuarially. (3) Clarify relationship between pension fund and employer Any excess of the liabilities over the available assets should represent a claim of the pension fund on the employer. (4) Presentation of supplementary table The table shows the liabilities and associated flows of all private and government pension schemes, whether funded or unfunded and including social security.

3.4 Unrecorded Portion of RBO in JFFA Retirement Benefit Obligations Unrecorded Portion of RBO : Retirement Benefit Obligations + Prepaid Pension Costs – Pension Assets = Unrecognized Liabilities + Accrued Pension Costs Unrecognized liabilities includes Transition Obligations, Actuarial Gains/Losses, and Past Service Liability (PSL) which are not recognized in the B/S. Accrued Pension Costs should be recorded on the B/S as liability for retirement benefits. If it becomes asset, it will be Prepaid Pension Costs.

Non-financial Corporations Banks 3.5 Volume of Unrecorded Portion Unrecorded Portion of RBO : 25 trillion yen Unrecognized liabilities : 10 trillion yen Accrued pension costs : 15 trillion yen Unrecorded Portion of RBO : 1.8 trillion yen Unrecognized liabilities : 0.6 trillion yen Accrued pension costs : 1.2 trillion yen Figures are the sum of individual companies. (Source) Consolidated financial statements of listed companies.

3.6 Recording Method in JFFA JFFA records a part of actuarially calculated retirement benefit obligations which corresponds to unrecognized liabilities and accrued pension costs as below. The unrecorded portion has been retroactively revised in three sectors from Q.

The remaining tasks on unrecorded portion of RBO are; 1. Refine stock data: include companies other than banks and private nonfinancial corporations. include unlisted companies. 2. Estimate transaction data: make a distinction between transaction and reconciliation. Currently, the stock difference of unrecorded portion of RBO from the previous term is recorded in the reconciliation table only. - Thank you for your attention - 4. Remaining Tasks