Canadian Pension Satellite Account

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Canadian Pension Satellite Account

Presentation to the OECD Working Party on
Financial Statistics and Working Party on
National AccountsPatrick OHagan October 3rd,
2007
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Pensions in the SNA

• SNA was developed in a period when an aging
  population was not an issue
• The impact of this phenomenon now evident on
  post-war economies, and economic issues
  surrounding pensions coming to the forefront
• Coincidentally, treatment of pensions garnered
  significant attention in the revisions to SNA93
• In Canada the SNA, while developed was not set up
  to address some of these emerging issues related
  to pensions therefore a Pension Satellite
  Account (PSA) was conceived to better articulate
  pension stocks and flows and to fill in gaps in
  data
• PSA is largely analytical in nature
• Last year Canada agreed to present an overview of
  the PSA at the 2007 WPFS-WPNA meeting

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CSNA sector-based

• Institutional sector-based accounts architecture
  to the CSNA are designed to articulate economic
  behaviour. The sector accounts include the
  income and outlay account the capital account,
  the financial account and the balance sheet
  account (including the other changes in assets).
• Incomes and current and expenditures in the
  sector accounts consolidate to GDP income arising
  from production and GDP final expenditure on
  production

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CSNA Core Sector Accounts and Satellite Accounts
in Income and Expenditure Accounts Division
Real GDP by expenditure component - PE - I -
X,M
GDP Income arising from production
GDP Final expenditure on production
Persons Corporations Governments Non-residents
Current account transactions
- Incomes, outlays
Capital account transactions
- Capital investment, saving
Financial account transactions
- Financial asset flows
- Liability flows
Satellite Accounts Non-profit Tourism Pension
s
Other changes in assets account
Revaluations and other volume changes
Balance sheet account
Non-financial assets
Financial assets
Financial Liabilities
Net worth
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Diverse treatment of pensions in the CSNA sector
accounts

• Income and outlay, saving
• Financial transactions
• Accumulated saving (wealth)
• Benefit payments / withdrawals
• Gains and losses on pension assets
• Actuarial evaluations
• Pension flows not fully articulated in CSNA

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Dimensions to the PSA

• The PSA adopts the stock-flow structure to the
  sequence of sector accounts
• Supplementary detail to sectors in particular
  to the household sector
• PSA covers the entire universe of the retirement
  regime in Canada in considerable detail
• The three tiers are (i) government-sponsored
  social security, (ii) employer-sponsored pension
  plans (including both private and public, as well
  as funded and unfunded) and (iii) voluntary
  individual retirement saving plans

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Structure of the PSA
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Social security plans

• Canada/Quebec Pension Plan
• Funded (invested) assets are recorded in
  Government sector, and affect net debt of
  government
• No liability of government is recognized to
  households for this social program
• Household pension transfer income
• Old Age Security
• No assets -- PAYG social program system benefit
  payments (expense) out of government general
  revenue
• Household pension transfer income

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Individual retirement saving plans Accumulation
and payout products

• Registered retirement saving plans (RRSP)
  introduced in 1957. Contributions to RRSP are
  tax-sheltered with a limit and are on a voluntary
  basis. Withdrawals are allowed but subject to
  income tax at the time of withdrawal
• The amount will be converted to payout vehicle
  such as registered retirement income fund (RRIF)
  or an annuity when the owner turns age 69
• Typically part of insurance companies and banks
  or investment funds liabilities to households. A
  self-directed RRSP (sometimes referred to as a
  self-administered plan) allows many more
  investment options than a regular RRSP
  measurement issues

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Composition of individual retirement saving plans
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Employer-sponsored contributory plans detail

• Defined benefit, defined contribution, hybrid
• Others (e.g., profit-sharing)
• Funded, unfunded public, private
• Surplus, deficit
• By institutional investor
• ?by asset type
• Assets, income valuation issues

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Trusteed Pension Funds Bulk of
Employer-sponsored pension plans
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Two features of the Canadian SNA treatment of ESPP

• All ESPP pension plans have a similar treatment
  with respect to their impact on personal saving
  and wealth. Specifically, an government unfunded
  plan (no invested assets) ? by virtue of the fact
  that it is recognized as a liability (by
  government) ? is treated as a household sector
  asset, with corresponding saving flows
• Second, Canada has a treatment for that does not
  require the D8 adjustment described in SNA93 to
  bring personal saving and personal disposable
  income into line. Essentially the pension funds
  are consolidated in the household sector

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Institutional dimensions to pension saving and
wealth feed into PSA

• Trusteed pension plans
• Insurance companies
• Government consolidated revenue arrangements
• Deposit accepting institutions
• Mutual funds
• Other
• Social schemes

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Institutional investors assets drive net assets
pension growth

• Deposits
• Fixed income securities
• Equities
• Investment fund units
• Real estate
• Of which Foreign
• Investments, income, capital gains in PSA

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Key sources of data for the PSA

• Surveys of institutional investors (insurance,
  pension funds, banks)
• Enterprise surveys for employers
• Government public accounts and other government
  administrative data
• Tax data
• Household survey data
• Some degree of modeling and derived data
• FOCUS ON ANALYSIS

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Analytical issues

• Understanding personal saving and wealth
  accumulation
• Structure of the pension system
• Economic forecasts
• Projections to tax revenue
• Impact on capital markets
• Sustainability
• Dimensions of risk

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Downward trend in personal saving supported by
pension saving
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Evolution of pension saving and wealth

• Despite the downward trend in personal saving
  since 1990, household wealth has continued to
  accumulate at good pace essentially
  substituting capital gains (price appreciation of
  assets) for saving out of current income
• Pension saving is an increasing share of a
  downward trending personal saving pension wealth
  has been a significant contributor to the growth
  in household net worth
• Pension assets account for close to half of the
  size of the total financial assets and close to
  one-third of the net worth
• Impact of increasing pension payments/withdrawals
  

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Downward trend in personal saving supported by
pension saving
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Capital gains result in a different
interpretation of personal saving
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Forecasting the economy, with less spending out
of current income

• Personal expenditure accounts for about 60 of
  GDP
• As population ages, increasing sources of funds
  from other than income ? dis-saving in financial
  account
• Propensity to spend quite high out of retirement
  dis-saving
• Need to systematically articulate this detail
  drawn from the PSA for users

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Projecting tax revenue for fiscal purposes

• There is already a gap between reported SNA
  income and income taxes paid, largely because
  realized capital gains are excluded from SNA
  income
• Increasingly taxes will be generated out of ESPP
  pension benefit payments and individual
  retirement plan withdrawals
• Need to systematically articulate this detail
  drawn from the PSA for users

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Impact on capital markets

• Assets in ESPP, social security and individual
  saving plans are very significant
• As assets in these funds grew sharply beginning
  in about 1987-90s, they have had a substantial
  influence on capital markets both growth and
  fluctuations
• As these funds are drawn down by retirees over
  the years to come, the impact on these markets is
  unclear
• PSA provides the detail required to make
  assessments of this impact

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Sustainability

• The question of will there be enough (and what is
  the distribution by age and income class) to
  finance the wave of retiring baby-boomers
• If not, implications for standard of living for
  government fiscal balances
• Coverage by individual and ESPP
• PSA by soon adding a link to household survey
  micro data will provide the detail required to
  support projections and assessments to study
  sustainability

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Shifting composition of pension assets
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Pension system risks

• To employers, in particular corporations with DB
  ESPP, as asset values fluctuate
• To individuals as employers move towards DC ESPP,
  as known benefit streams provide income security
• To individuals in relation to returns on
  individual retirement saving plans
• PSA provides the detail required to undertake
  analysis of potential risks to pension assets

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Risk Gains and losses on largest segment of
funded ESPP
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Individual risk shift from defined benefit to
defined contribution ESPP
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Future PSA work

• Initial estimates released in paper in 2008
• Shift database frequency to quarterly
• Development of standard supplementary SNA tables
  on pension incomes, saving and wealth,
  payments/withdrawals, taxes paid and estimates of
  personal expenditure from retirees for current
  analysis
• Expand detail on actuarial deficits/surpluses
• Link up with household micro data to expand the
  analytical capability