Canadian Pension Satellite Account

1. Canadian Pension Satellite Account Presentation to the OECD Working Party on Financial Statistics and Working Party on National AccountsPatrick O’Hagan October 3rd, 2007

2. 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

3. 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

4. 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 Satellite Accounts: Non-profit Tourism Pensions

5. 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

6. 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

7. Structure of the PSA

8. 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

9. 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

10. Composition of individual retirement saving plans

11. Employer-sponsored contributory plans detail • Defined benefit, defined contribution, hybrid • Others (e.g., profit-sharing) • Funded, unfunded …public, private • Surplus, deficit • By institutional investor ۰by asset type • Assets, income … valuation issues

12. Trusteed Pension Funds: Bulk of Employer-sponsored pension plans

13. 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

14. 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

15. 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

16. 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

17. 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

18. Downward trend in personal saving supported by pension saving

19. 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

20. Downward trend in personal saving supported by pension saving

21. Capital gains result in a different interpretation of personal saving

22. 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

23. 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 ofESPP pension benefit payments and individual retirement plan withdrawals • Need to systematically articulate this detail drawn from the PSA for users

24. 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

25. 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 projectionsand assessmentsto study sustainability

26. Shifting composition of pension assets

27. 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

28. Risk: Gains and losses on largest segment of funded ESPP

29. Individual risk …shift from defined benefit to defined contribution ESPP

30. 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