ECB/Eurostat Work on Pensions in the Context of the

SNA Update

The 2008 World Congress on National Accounts and Economic Performance Measures for Nations

Key Bridge Marriott, Arlington, Virginia12 to 17 May 2008

Reimund Mink

Reasons for changing the current SNA (i) Future treatment of employer pension

schemes is one of the key issues of the current SNA update

Three reasons for changing the current SNA: Different accounting of funded and unfunded

employer pension schemes leads to different ‘effects’ on variables like income, saving, financial assets or liabilities

Unfunded employer pension schemes are particularly significant for general government and the public sector (statistical information on commitments of governments and on impacts of pension reforms)

Convergence of international statistical standards and international accounting standards (IAS) is aimed at (current SNA deviates from IAS and IPSAS which treat unfunded employer pension entitlements as liabilities)

Reasons for changing the current SNA (ii)Different ‘effects’ on variables

Country / area End-2005

Euro area 53

Of which: Germany 53

France 59

Italy 38

Netherlands 167

United Kingdom 140

United States 96

Japan 86

Holdings of (private) life insurance reserves and pension entitlements by

households (as a percentage of GDP)

Sources: ESCB, ONS, Federal Reserve Board, Bank of Japan, and OECD.

Reasons for changing the current SNA (iii) Commitments of governments

Demographic projections: Process of ‘double ageing’ Projected decreasing fertility and increasing life expectancyEuro area and in the US (in Mio)

Retirement age population

20

60

100

140

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Working age population

160

200

240

280

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Population

280

320

360

400

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Recording of pension schemes in the new SNA (i) Work done since 2002

IMF electronic discussion group (2002 – 2005) Eurostat’s Task Force on pensions (December

2004) IMF/BEA Task Force on pensions (September 2005) AEG recommendations (Frankfurt 2006 meeting) to

treat all employer pension schemes in the same way

Conclusions of the UN Statistical Commission (February 2006) and follow-up

Compromise (summer 2006) Flexibility of recording (refers to the treatment of

unfunded government employer pension schemes) Supplementary table on pensions

Recording of pension schemes (ii) Households hold

pension entitlements as financial assets

Change in stock of pension entitlements between balance sheets arises from: Social contributions (actual

and imputed) Pension benefits Financial services Other economic flows

Revaluations Other changes in the

volume of assets

Transfers between pension schemes

Pension reforms

Social contributio

ns Actual

Imputed (of which:

property income)

Pension benefits

Financial services

Other economic

flows

Revaluations

Other changes

Increase in pension

entitlements

Pension entitlements at the end of

the period

Pension entitlements

at the beginning of the period

Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet

Recording of stocks and flows of government pension schemes in the updated SNA will be formally identical to the recording of non-government pension schemes

Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet

Based on model

estimations

Recording of government pension schemes (iii)

Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet

Social contribution

s Actual

Imputed (of which:

property income)

Pension benefits

Financial services

Other economic

flows

Revaluations

Other changes

Increase in pension

entitlements

Pension entitlements at the end of

the period

Pension entitlements

at the beginning of the period

Pension schemes in Europe (iv) Challenges identified in Europe to implement the compromise for government employer (unfunded)

pension schemes (borderline with social security pension schemes) The predominant types of pension schemes in European countries are social security pension

schemes and defined benefit (unfunded) government employer pension schemes

Social insurance

Individual insurance(third pillar)

Social security schemes, (unfunded) general government

employee defined benefit schemes(first pillar)

Defined contribution schemes, private defined benefit schemes, (funded)

general government employee defined benefit schemes(second pillar)

Belgium

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

United Kingdom

United States

The Eurostat/ECB Task Force (v) Mandate agreed by Committee on Monetary,

Financial and Balance of Payments Statistics (CMFB) in June 2006 Methodological work (supplementary table) Modelling work

Six Task Force meetings Participants from ten European countries, the

European Commission (ECFIN), OECD, IMF, SNA Editor

Report presented to the CMFB in January 2008 (www.cmfb.org)

Compilation Guide

The supplementary table (i) Standard table for the new SNA (new

chapter 17) Covers all pension schemes in social

insurance, including social security pension schemes (thus boundary of social insurance/social assistance important)

Shows pension schemes data together and helps to compile comparable national accounts

Follows stock-flow relationship and covers transaction and other flow data as economic events for changes in pension entitlements

Includes survivors and disability pensions which are part of pension schemes

The supplementary table (ii)Core / non-core national accounts

To-tal

Core Non-core

Counter-parts: Of which:

Resident households

Sponsor Non-general government General government

Scheme

Position / transaction /other flowTo-tal

DC sche-mes

DB schemes

and other

non-DC schemes

DC sche-mes

General government employer DB schemes

Social security pension scheme

s

Of which:

Schemes

classified in

general govern-ment

Row number / column number A B C D E F G H I J

Opening balance sheet

1 Pension entitlements

Transactions

2Social contributions relating to pension schemes

Employer actual social contributions

Employer imputed social contributions

Employee actual social contributions

Employee imputed social contributions/ property income

Self employed and non-employed social contributions

3

Other (actuarial) accumulation of pension entitlements in social security pension schemes

4 Pension benefits

5 Change in pension entitlements (rows 2+3-4)

6Changes in pension entitlements due to transfers of entitlements

Other economic flows

7 Revaluations

8 Other changes in volume

Closing balance sheet

9 Pension entitlements (rows 1+5+6+7+8)

Related indicators

The supplementary table – columns (iii)

Core-non-core… Core schemes’ entitlements recorded in core national

accounts Task Force found a basket of criteria:

Degree of integration within the government structure (autonomous versus non-autonomous)

Risk exposure/ability to change the benefit formula (government does not have discretion to change unilaterally the benefit formula at any point in time and thereby partially default on its obligations)

Nature of the contract (generally not forced by law to participate) Legal framework close to social security pension schemes Funding (funding versus no funding)

To be developed further in the European System of Accounts (ESA) revision

Government or non-government sector Sponsored by government or not (concept of

sponsor) Defined contribution or defined benefit

(including hybrid) schemes

The supplementary table – rows (iv)

Pension entitlements at the beginning and the end of the period and flows in between

Social contributions Employer imputed social contributions are

commonly calculated as a residual Social security pension schemes have specific row to

reflect lack of employer imputed social contributions Household social contribution supplements =

imputed property income on all pension schemes Pension reforms

If affecting accrued entitlements, generally treated as transactions (other economic flows if imposed by third party)

Treatment of payments for financial services / output

Assets of pension schemes held for sole purpose of paying pensions

Modelling of government pension schemes (i) Lack of significant expertise amongst statisticians,

thus… rely on experts and existing data, and develop knowledge and modelling skills

Accrued-to-date liabilities concept

Use the actuarial approach Need to give guidance on assumptions to improve

comparability of data, but accept that sometimes data is available with assumptions already in place

Accrued-to-date liabilities (ADL) of a pension scheme are calculated as the present value of the current pension benefits and of the projected future pension benefits paid to all pensioners and to current workers living in the base year b:

, ,

,

( )(1 )

exis futb D bt k t k

b t kt bt b k b D

p pADL D

r

The pension entitlements of the existing retirees ( ) and the pension entitlement of the current workers (future retirees) are accrued to the base year ( ) and discounted by (1+r) for each future year (t-b) and multiplied with the corresponding number of members of the age cohort Dt,k.

,

exis

t kp

,

fut

t kp

Modelling of government pension

schemes (ii)

Modelling - key assumptions (iii)

Discount rate Favour government bond yields (suitable

maturity) But corporate bond yields could be used

Treatment of real wage changes Take account of future wage changes (ABO

versus PBO) Experience effects are transactions

Demographic data Other assumptions in some schemes

(diversity across Europe)

Modelling work (iv) Task Force looked at three approaches:

National models Pension Reform Options Simulation Toolkit (PROST)

developed by the World Bank Intergenerational accounting-based model

developed by the Research Center for Generational Contracts of the Freiburg University

Results of data show: Pensions entitlements very large, especially for

social security Models allow to carry out sensitivity analyses (by

varying key assumptions) Putting the data together is time-consuming Developing national models requires close

cooperation between the national statistical institutes, central banks and other national institutions like ministries and other government entities

Modelling of government pension

schemes (v) Pension entitlements Government employer pension schemes (column H of the supplementary table)

Country Year Model ABO/PBO

Pension entitlements (in national currency)

Pension entitlements

(in % of GDP)

2006 ABO 942 41

2006 PBO 1,129 49

2006 ABO 1,149 64

2006 PBO 902 50

2006 ABO 20 4

2006 PBO 24 5

2006 ABO 260 25

2006 PBO 303 29PL Freiburg

NL Freiburg

DE Freiburg

FR Freiburg

Social security pension schemes (column I of the supplementary table)

* FUS: Social Insurance Fund; ** FER: Disability and pension Fund (farmers)

Country Year Model Wage growth

Pension entitlements

in national currency

as a percentage

of GDP

Germany 2006 Freiburg ABO 942 41

PBO 1,129 49

Spain 2006 National PBO 223 23

France 2006 National PBO 941 53

Freiburg ABO 902 50

PBO 1,093 61

Netherlands

2006 Freiburg ABO 20 4

PBO 24 5

Poland 2006 Freiburg ABO 260 25

PBO 303 29

Country Year Model Wage growth Pension entitlements

in national currency

as a percentage of GDP

Czech Republic

2006 Freiburg ABO 5,231 162

PBO 6,474 200

Germany 2004 National ABO 4,169 186

PBO 5,669 253

2005 ABO 4,136 185

PBO 5,268 235

2006 Freiburg ABO 5,386 232

PBO 6,464 278

2005 World Bank PBO 6,710 289

Spain 2006 National PBO 2,349 240

Freiburg ABO 1,969 201

PBO 2,333 238

France 2005 National PBO 5,623 327

2006 Freiburg ABO 4,225 247

PBO 5,248 293

World Bank PBO 5,721 319

Hungary 2006 Freiburg ABO 54,272 228

PBO 65,220 275

Netherlands 2006 Freiburg ABO 690 129

PBO 872 163

Poland 2006 Freiburg ABO 2,695 255

PBO 3,037 287

World Bank PBO* 2,579 243

PBO** 464 44

Sweden 2002 National ABO 5,729 242

2003 5,984 243

2004 6,244 243

2005 6,461 242

2006 6,703 236

Freiburg ABO 4,760 168

PBO 5,620 198

* FUS: Social Insurance Fund** FER: Disability and Pension Fund (farmers)

Modelling of government pension

schemes (vi)

Source: Freiburg University

Modelling of government pension

schemes (vii)

Source: Freiburg University

Next steps Follow-up

Draft Chapter 17 of updated SNA Revised ESA will draw on Task Force work Questionnaire in the first half of 2008 Eurostat/ECB seminar in early 2009 Contact Group established for country experts Feedback to CMFB in January 2009

Since work on pensions is complex, countries should start work early on implementation

Support by: Compilation Guide Further modelling work on pensions