Retained earnings of Mutual funds

SNA review issue 42

UN web Problem statement

“In the 1993 SNA retained earnings of an entity are generally treated as the income and saving of the entity, rather than the owner. However, exceptions are made for life insurance companies, pension funds and foreign direct investment companies, where there is an imputed flow to the policyholders, beneficiaries, and owners, with an equal financial account flow.

UN Problem statement (cont’d)

The ESA 95 introduces an imputed transaction for the retained earnings of the mutual funds where income is attributed to the investors and then reinvested in the fund. That treatment brings about consistency with the treatment of life insurance and pension funds which are other types of collective investment schemes. Other symmetries of the treatment of retained earning have been suggested, either to expand or to reduce the imputations. “

SNA93 and BPM5 treatment

• Interest on loans, deposits, bonds– Accrued, as if paid out and reinvested

• Insurance and Pension funds– Property income attributed to policy-holders– Returned as premium/contribution

supplements if social insurance– Or directly net equity in financial account

• But nothing about Mutual funds

IMF five options

1. The status quo as in SNA93 and BPM5

2. The ESA95 approach– Distribute as D41 Interest, D42 Dividends

3. The modified ESA approach – Distribute as D46 Retained earnings of

mutual funds.

IMF five options

4. Treat the retained earnings of pension funds in the same manner as mutual funds in SNA93 and BPM5, but leave technical reserves of life insurance as they are in SNA93.

5. Treat the retained earnings of life insurance and pension funds in the same manner as mutual funds in SNA93.

European proposal

Transactions

• Distribute Investment income of mutual funds to owners of shares as D46 “Property income attributed to holders of investment funds”.

• Reinvested in financial accounts as F.5 Equity

European proposal (cont’d)

Definition of investment funds and sectoring• Collective investment undertakings investing in

financial and non-financial assets to the extent that their sole objective is the investment of capital being raised from the public.

• Pension funds are excluded and also investment funds issuing highly liquid liabilities of a monetary nature. The latter institutions, known as money market funds are classified in Other depository corporations (S.122)

Justifications

• Align treatment with other forms of collective investment.

• Best estimates of household income and saving

• Simplest solution

Questions to AEG

1. Does the AEG agree on the principle of recording retained earnings of investment funds in a similar way to income attributed to policy holders?

2. Agree to record as new D46

3. Agree definition of “investment funds”

4. Agree to separately identify funds issuing monetary liabilities within S.122 ?