1. Benson Sim United Nations Statistics Division
Outcome of AEG consultation on the recording of flows between a
defined pension benefit fund and its sponsor
11th Meeting of the Advisory Expert Group on National Accounts
5-7 December 2017
New York, United States of America
Benson Sim
United Nations Statistics Division

2. Outline of presentation
Background
AEG consultation paper
Summary of comments
Questions for the AEG

3. Background
The 2008 SNA states that when a pension sponsor is responsible for meeting the liabilities of a defined benefit pension fund in case of any shortfall, the shortfall should be recorded as a claim of the fund on the sponsor
In this way, the net worth of the defined benefit pension fund is equal to zero at all times
The pension entitlements and the assets of the defined benefit pension fund are subject to many changes

4. Background
The claim between the sponsor and the defined benefit pension fund will also be affected by a variety of events
It may change for instance due to fluctuations in the entitlements because of
The unwinding of the discount factor
Changes in the discount factor and life expectancy
Shortfalls in the property income of the defined benefit pension fund to meet changes in these entitlements
How the change in the claim is recorded depends on the underlying event

5. Background
One event that may lead to changes in the claim between the defined benefit pension fund and the sponsor is when the property income earned by a defined benefit pension fund does not equal the change in pension entitlements due to the unwinding of the discount factor
This unwinding of the discount factor on the pension entitlement is shown as property income flowing from the defined benefit pension fund to households
The property income earned by the pension fund is not necessarily equal to this amount
In case of persistently over- or underfunding, the property income will differ

6. Background
The Advisory Expert Group (AEG) on National Accounts, at its meeting of 8-10 September 2014, agreed to explicitly accrue the property income on the claims between a defined benefit pension fund and its sponsor reflecting the unwinding of the discount factor on any over- or underfunding of the pension fund
However, the classification of this imputed flow still needs to be decided

7. Background
Also, there seems to be differences of opinion on the exact calculation and recording of the related amounts, to arrive at a zero net worth for the defined benefit pension fund
Does the shortfall (or surplus) in property income give rise to an imputed income flow between the defined benefit pension fund and the sponsor, or
Is this specifically triggered by any underfunding (or overfunding) at the start of the recording period?
There is also a lack of clarity on the possible impact of holding gains and losses on the accumulated assets, and discussion on how other economic flows, such as changes in life expectancy or changes in the discount factor, may affect the relevant flows

8. AEG consultation paper
OECD prepared a consultation paper outlining various options to calculate and classify the imputed property income flow and the impact of other changes on the claim between a pension fund and a sponsor

9. Summary of comments
The consultation paper was circulated to the members of the AEG for consultation on 16 February 2017
9 AEG members provided comments
7 responded with no comments

10. Summary of comments Question 1
Which of the two options is to be preferred to calculate the imputed property income flow between a defined benefit pension fund and a sponsor?
Equal to the shortfall (or excess) in property income
On the basis of the existing claim between the fund and the sponsor

11. There was a slight preference for option (a) because it
Summary of comments
There was a slight preference for option (a) because it
Is comparable with the sponsor recording a non-autonomous pension scheme on its balance sheet, this increasing comparability between countries
Ensures defined benefit pension funds with sponsor have no net income and saving
Is in line with the nature of the relationship between sponsor and defined benefit pension funds in that sponsor accounts for any shortfalls or surpluses of the fund
Results in the defined benefit pension fund with zero net worth but also zero saving and zero balance of
primary income
Is aligned with the overall residual approach for the claim/liability on the sponsor

12. There was some support for option (b) as
Summary of comments
There was some support for option (b) as
Non-zero savings were not seen as a great concern, and on the contrary it was seen as meaningful as that may indicate possible discrepancies between imputed property income on pension entitlements and property income on assets accumulated in the fund.
It would be less volatile than option (a), given that the defined benefit pension fund and the sponsor are separate units and from an economic point of view it seems not necessary to allocate the difference between actual and imputed interest
It leads to analytically more meaningful results for primary income, savings and net lending/borrowing for both the employer and the pension fund

13. Summary of comments
One member felt that neither option was completely satisfactory and instead proposed a hybrid option which distinguishes the three types of property income that flow through the defined benefit pension fund
Actual property income
Imputed income on claim on sponsors
Imputed investment income

14. How should the property income flow be classified?
Summary of comments
Question 2
How should the property income flow be classified?
Investment income disbursement
If so, what would be an appropriate term for this specific imputed flow?
Interest

15. Option (a) was preferred because
Summary of comments
Option (a) was preferred because
It was seen as being in line with option (a) for Question 1 and correctly indicates that this income depends on the return on investments
It also means that the accounts will indicate that this income flow is pension funding related.
The term ‘interest’ should be reserved for income from the commonly known interest-bearing instruments
Appropriate terms suggested were
Imputed investment income attributed to shortfall in defined benefit pension schemes
Imputed income between sponsor and pension fund for defined benefit schemes
Investment income payable on claim of pension funds on pension sponsors
Investment income payable on pension entitlements

16. Summary of comments
One member proposed that three property income flows should be separately recorded and classified
Property income earned on actual assets held by the fund should be classified as interest, dividends, or rents
Property income earned on the claim of the pension fund on the sponsor should be classified as interest and could be called ‘imputed interest on claim on sponsors’
Property income earned on the balance between benefits accrued on past service and actual property income and imputed interest on claim on sponsors should be classified as investment income disbursements and could be called “imputed investment income”

17. Summary of comments Question 3
Which of the two options is to be preferred to classify the impact of other changes on the claim between a defined pension fund and a sponsor?
In the revaluation account
In the other changes in the volume of assets account

18. Option (b) was preferred because
Summary of comments
Option (b) was preferred because
The claim should be regarded as a residual item and as per the SNA should therefore be recorded in the ‘other changes’ account, with the effect of balancing the assets and liabilities via the other changes account
Classifying changes such as changes in life expectancy, differences between assumed and actual retirement dates, etc. affecting the claim of the pension funds towards the sponsor as other changes in the volume of assets is in line with members’ understanding of the relationship between the sponsor and the fund
It maintains symmetry with the recording of the other changes in pension entitlements

19. There some reservations
Summary of comments
There some reservations
These included the concern that if the flow is measured as a residual, it may not be compatible with the general measurement of employer imputed social contributions as a balancing item as it would lead to two unknowns. For private schemes this could be addressed by attempting to measure imputed employer contributions by calculating the service cost/increase in entitlements for a year
One preferred applying the same principle to the claim on the sponsor and the underlying pension estimates, consequently matching revaluations of assets with the revaluation of liabilities (and therewith also challenging the validity of paragraph of the 2008 SNA)

20. Summary of comments Recap and next step Question 1 Question 2
Slight preference for option (a)
Calculate imputed property income flow as equal to shortfall/excess in property income
Question 2
Option (a) was preferred
Classify the imputed property income flow as investment income disbursement
Question 3
Option (b) was preferred
Classify impact of other changes on the claim between defined benefit pension fund and sponsor as other changes in volume of assets account
Recommend that the recommended treatment be published in the next issue of the SNA News and Notes

21. Questions for the AEG The AEG is requested to
Provide comments, if any, on the outcomes in the paper
Should the outcomes be considered as a clarification or an interpretation of the 2008 SNA?
Since the preference is to classify the imputed property income as investment income disbursement, should this transaction be described as “Imputed investment income attributed to shortfall in defined benefit pension funds”?
If yes, does this constitute a change in the SNA?
Comment on whether the outcomes can be published in the next issue of the SNA News and Notes pending the resolution of the above questions

22. Thank you