Pension schemes An intrepretation of the AEG short minutes

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Pension schemesAn intrepretation of the AEG
short minutes

• François Lequiller
• OECD

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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)

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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)

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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

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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

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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)

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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

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Two issues in the AEG

• Conceptual issue borderline between employer and
  social security
• focus on general government schemes for their own
  employees
• Implementation issue accuracy of estimates

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Conceptual issueThe 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

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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

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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

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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,
• gtwhy 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)
• gt Better not include in core accounts but in
  supplementary accounts

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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

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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

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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)

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Supplementary accounts

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

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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)

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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.