Joe Wilkinson

Public Sector Employee Pension Liabilities and Assets:

Implication for Canada’s Total Government Debt Measures

23-04-10Statistics Canada • Statistique Canada2

Outline

Introduction Public Service Pension Plans Treatment in Canadian System

of National Accounts Background on Public Sector Pensions Outlook and Conclusion

23-04-10Statistics Canada • Statistique Canada3

Treatment in Canadian National Balance Sheet Accounts

In the CSNA, funded public sector pension plan assets are attributed to Trusteed Pension Plan (TPP) sector

The net asset of the fund is recorded as a liability of the TPP sector Unfunded portion of pension obligation recorded as a liability of the

government sector, impacting the surplus-deficit and gross and net debt measures

The unfunded and funded pension obligation show up as an asset to the household sector

This presentation is transparent and makes the treatment of funded and unfunded plans symmetrical, impacting the surplus-deficit and gross and net debt measures

23-04-10Statistics Canada • Statistique Canada4

Pension Liabilities and International Debt Comparisons

Canada is one of few advanced economies that recognize unfunded pension liabilities when measuring gross and net debt

These liabilities are removed from gross and net debt measures for international comparisons by the OECD

The adjustment ignores impact of the funded portion of public sector plans on debt

Is the current approach a reasonable method of comparison? A better question may be: Should the OECD adjust the Canadian measure or should the OECD adjust the other measures to align with Canada?

23-04-10Statistics Canada • Statistique Canada5

Balance Sheet Impact of Funding Pension Plan Liabilities and Assets

Including Unfunded Pension Liabilities Excluding Unfunded Pension Liabilities

Pension Benefits

Obligation100% of GDP

Assets Liabilities

Country A

Pension Benefits

Obligation100% of GDP

Assets Liabilities

Country B

Total Liabilities0% of GDP

Assets Liabilities

Country A

Assets Liabilities

Country B

Pension Assets 20% of GDP

Unfunded Pension

Obligation80% of GDP

Market Debt 20% of GDP

Total Liabilities

100% of GDP

Borrowed to found

Market Debt 20% of GDP

Total Liabilities20% of GDP

Total Liabilities

100% of GDP

23-04-10Statistics Canada • Statistique Canada6

Current Canadian Method

Unfunded Pension

Obligation

$222.6 billion12.6% of GDP

Pension Plan Assets

$710.9 billion40.3% of GDP

Funded Pension Obligation

$710.9 billion40.3% of GDP

Funded Pension Obligation

$710.9 billion40.3% of GDP

Unfunded Pension Obligation

$222.6 billion12.6% of GDP

Total Pension Asset

$933.5 billion52.9% of GDP

Assets Assets AssetsLiabilities Liabilities Liabilities

Government Sector Trusteed Pension Plans (TPP) Household Sector

23-04-10Statistics Canada • Statistique Canada7

Alternate Method 1

Unfunded Pension Obligation

$222.6 billion12.6% of GDP

Pension Plan Assets

$710.9 billion40.3% of GDP

Funded Pension Obligation

$710.9 billion40.3% of GDP

Funded Pension Obligation

$710.9 billion40.3% of GDP

Unfunded Pension Obligation

$222.6 billion12.6% of GDP

Total Pension Asset

$933.5 billion52.9% of GDP

Total Pension Obligation

$933.5 billion52.9% of GDP

Assets Liabilities Assets Liabilities

Government Sector Household Sector

23-04-10Statistics Canada • Statistique Canada8

Alternate Method 2

Total Pension Obligation

$933.5 billion52.9% of GDP

Less: Pension Plan Assets

($710.9 billion)-40.3% of GDP

Funded Pension Obligation

$710.9 billion40.3% of GDP

Unfunded Pension Obligation

$222.6 billion12.6% of GDP

Total Pension Asset

$933.5 billion52.9% of GDP

Unfunded Pension Obligation

$222.6 billion12.6% of GDP

Assets Liabilities Assets Liabilities

Government Sector Household Sector

23-04-10Statistics Canada • Statistique Canada9

G-7 Net Debt Before and After Pension Adjustment (2011)

Net Asset

Source: OECD Economic Outlook 90, Department of Finance calculations

percent of GDP

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Outlook/Conclusion

Current situation: Different treatments across countries and misunderstanding of unfunded pension liabilities by international organizations

Financial indicators like net debt should harmonized across economies if the goal of international comparability is to be met

• Users who develop related indicators pose a risk to comparability and interpretability of a key aggregate

• Example of comparable household debt to personal disposable income with the U.S .

• http://www.statcan.gc.ca/pub/13-605-x/2012005/article/11748-eng.htm Government gross and net debt form a significant part of G-20 data gaps initiative.

This goal is consistent with more recent G-20 objectives of maintaining uniformity across the databases of international agencies if these are to be as relevant as possible for decision-making