Derick Cullen Macroeconomic Research Australian Bureau of Statistics

1. Review and issues encountered in the application of SNA concepts of Income and savings on pensions fund measurements in Australia OECD Pensions Workshop Canberra 22-24 April 2013 Derick Cullen Macroeconomic Research Australian Bureau of Statistics

2. This presentation  • Australia’s pension schemes and experience in measuring them • Some underlying principles • Allocation of retained earnings of investment vehicles to investors • Imputation of stocks and flows • Some puzzles and clarifications

3. Australia’s pension (superannuation) schemes • Voluntary mostly funded private schemes • Mandatory employer contributions from 1992 • now 9% of wages • Ageing population • Low savings rates • Unfunded public sector schemes • Large but decreasing liabilities • Accrual accounting since 1998 for all levels of government (no arguments about most of the why and how of measurement)

4. Need to measure • Policy purposes • Decrease in reliance on social security for retirement • Economic purposes • Pool of savings • Now over $1.3tr • Collaboration of ABS with regulatory agencies • Australian Prudential Regulation Authority • Australian Taxation Office • Federal and State government agencies • No accident that SNA basis of measurement

5. Some measurement themes The conditions under which • earnings of a corporation or a fund are to be attributed to investors • Imputation of stocks and flows are required Also Importance of revaluations and other volume changes

6. Conditions for allocating Income to investors • Since the 1993 SNA and BPM5 retained earnings of direct foreign investment corporations have been treated as distributed then reinvested • Insurance technical reserves of • insurance policy holders have contained premium supplements • Pension fund participants contain an investment earnings component • Since the 2008 SNA and BPM6 retained earnings of investment funds have been treated as if distributed and reinvested.

7. Why? • Significant influence by investors over dividend and / benefit payout policies • Liquid market or sell-back plans enables investor to withdraw accumulated value independent of distribution policy • The roulette table analogy… the investor can leave winnings on the table or take them away away

8. Two questions arising • The definition of “investment income” / “retained earnings” • SNA does not include capital gains in undistributed income • There are inconsistencies in SNA concerning • resident direct investors versus non-resident direct investors • portfolio investors in non-investment fund corporations that nevertheless off easy exit to investors • For the record, the ABS supports further research on • The concept of income relevant to SNA (change to Hicksian income?) • the SNA treatment of retained earnings and liquid investments

9. Imputations for unfunded and underfunded schemes • In Australia this was controversial until the advent of accrual accounting for government was introduced in 1998 • For public sector employee funds the ABS introduced imputations when implementing the 1993 SNA (which was in 1998) • The ABS accepts the imputations made by actuaries for the various government jurisdictions • The ABS makes no imputations for underfunded private sector employee pension funds… working with APRA

10. Some puzzlesNeed discussion and clarification • 2008 SNA 17.18 It is common with life insurance policies for amounts to be explicitly attributed by the insurance corporation to the policyholders in each year. These sums are often described as bonuses. The sums involved are not actually paid to the policyholders but the liabilities of the insurance corporation towards the policyholders increase by this amount. This amount is shown as investment income attributed to the policyholders. The fact that some of it may derive from holding gains does not change this designation; as far as the policyholders are concerned it is the return for making the financial asset available to the insurance corporation. In addition, all the income from the investment of non-life reserves and any excess of income from the investment of life reserves over any amounts explicitly attributed to the policyholders, are shown as investment income attributed to policyholders, regardless of the source of the income. • the need for the imputed property income flow between the employer and an autonomous DB fund. There are a couple of different ways that it could be calculated. (i) Net unfunded liability times the discount rate (ii) Imputed property income payable from the fund to households less actual fund earnings.

11. Revaluations and OVCs • The Global Financial Crisis and the 711 aftermath both had a distinct impact on Australian pension funds • Revaluations (hits to asset prices) • Other volume changes (write offs) • Derivatives are an asset class that we find it very difficult to measure, and hence the revals/OVC impacts

12. Australian Economic Review December 2012 IGR = Intergenerational Report (Treasury)