Pension schemes An intrepretation of the AEG short minutes François Lequiller OECD

Status of paper The AEG made significant progress on pension schemes Adopted a number of recommendations that will improve the SNA See extracts of short minutes Present paper is limited: –To explain the minutes of the AEG regarding pension schemes –Propose some directions of work for these « additional criteria » It is only a small contribution in a sequence of work that will continue (Eurostat, IMF-BEA Task Force on Pension Schemes)

Main AEG recommendation Record a liability for all employer pension schemes, even if the scheme is unfunded –« All » includes general government schemes for their own employees Same rationale as in business accounts: –the employment contract gives to the pension promise the status of a liability Focus is on the liability –not on the mode of financing as in SNA 93 (where the criterion was whether the scheme was funded)

Interpretation Employer scheme: scheme where the pension promise is made based on an employment contract (relation employer/employee) –The employer continues to be responsible for the pension obligation even after he has paid its contribution The AEG recommendation –does not apply to schemes where the employer is no more responsible for the pension promise after it has paid its contribution (multi-employer schemes) –Thus does not extend to « social security » even if contributions are based on salary, thus on an employment contract

Interpretation (continued) The SNA 93 criterion was to recognise a liability only when the scheme was funded The new criterion does not replace the old one, but extends it In the new SNA: one recognises a liability when the scheme is funded and/or when it is an employer scheme

Justification of main AEG recommendation Is in line with the principles of the recognition of an asset (the pension asset) Reconciles SNA and business accounting Avoids treating differently defined benefit schemes and defined contribution schemes Clarifies the measurement of cost of labour (actuarial calculation of contribution)

However the AEG… Recognised that there remained some issues were to be clarified: –In some countries, the delineation between general government employee schemes and social security schemes is not so clear Opened the possibility that supplementary accounts be created in which to record social security « liabilities » Opened the possibility to record « liabilities » of some general government employee schemes in these supplementary accounts IMPORTANT: consensus on non government schemes

Two issues in the AEG 1.Conceptual issue: borderline between employer and social security: focus on general government schemes for their own employees 2.Implementation issue: accuracy of estimates

Conceptual issue The three pillars First pillar: « basic » social security (benefits are not linked to contributions) –Consensus: no pension liability Second pillar: collective schemes, often compulsory –?????? Third pillar: individual retirement schemes (e.g. life-insurance) –Consensus: pension liability

The second pillar Two different « paradigms » –« anglo saxon »: the second pillar is organised through employer schemes the role of the government in retirement is limited to its own employees The recommendation of the AEG is perfectly adapted –« continental Europe paradigm »: The second pillar is organised through a government sponsored multi-employer scheme for the private sector (sometimes called social security) In addition, the government has also a scheme for its own employees The recommendation of the AEG is more difficult to implement

General government schemes In the « continental Europe paradigm »: – the pension promise made by the government for its own employees is not significantly different –from the pension promise made by the government sponsored multi-employer scheme for private sector employees  It is difficult to understand why the SNA would recognise a pension asset for civil servants and not for private sector employees!  Wrong message to policy makers…

Include or Exclude? If the nature of the pension promise for government sponsored multi employer scheme is the same as the pension promise by government as an employer, =>why not recognise a liability for both? However: –Is the pension promise of a sufficient strength to record it as a liability? –massive negative net worth of government, –massive property income generating structural deficit even if scheme is systematically balanced –record « contribution assets » (Swedish Inkomstpension) => Better not include in core accounts but in supplementary accounts

Implementation issue Main AEG recommendation implies the use of complex actuarial methods Can be applied only if employers participate Some governments do not make these calculations It would be difficult for the statistical office to estimate (specially for government) However, the AEG did not retain these considerations. Business accounts are going in this direction Public sector accounts will follow up Period of transition between now and 2012 can be used to make pilot exercises Europe can calculate a special deficit for the EDP procedure, excluding these amounts

New criteria: nature of the pension promise The conceptual issue remains The AEG requested to explore new criteria The criterion of employer/non employer is not sufficient One possibility: –focus on the nature (on the « strength») of the pension promise

Liabilities, provisions and contingent liabilities Business accounts make distinction between: –Liability –Provision (liability of uncertain value and timing) –Contingent liabilities (liability depending on a future event outside the scope of the business)

Supplementary accounts When pension promised is strong => liability (F6) in the core accounts When pension promise is weak => Provision recorded in supplementary accounts Importance of those supplementary accounts for international comparability

Nature of pension promise Strong (F6): –Guaranteed by the sponsor –Legal ground –The sponsor shows a liability in its own accounts –Contsructive obligation Weak (Supplementary accounts) –Value not guaranteed even retroactively –No legal ground (German case)

Other AEG decisions Explicit exchanges of implicit pension obligation: –When the obligation to pay pensions from one unit to the other, this should be recorded as a transaction in pension liability even if neither unit has previously recorded them. Mixed social security –A liability should be recorded for schemes that are funded and where the benefits are related to the contributions even though the scheme may be discribed as a social security scheme.