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Actuarial Measures of Defined Benefit Pension Plans for the National Accounts. Marshall Reinsdorf BEA Advisory Committee Meeting May 11, 2012. Preview of Questions. Tables in this presentation are illustrative, and are intended to facilitate discussion of questions, including:
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Actuarial Measures of Defined Benefit Pension Plans for the National Accounts Marshall Reinsdorf BEA Advisory Committee Meeting May 11, 2012
Preview of Questions • Tables in this presentation are illustrative, and are intended to facilitate discussion of questions, including: • Should the NIPAs leave DB pension plans in the personal sector or put them in their own sector? • Do DB plans have an implicit claim on the employer in the amount of the unfunded actuarial liability? • Do employers pay imputed interest on this claim? If so, can they receive imputed interest if the plan is over-funded? • Should government plans be measured on an ABO basis or a PBO basis? (For Federal plans, PBO is a more practical option.)
Treating DB Plans like DC Plans • In a defined contribution (DC) pension plan, the benefit level depends on the value of the assets in the participant’s account. • We therefore measure households’ DC plan wealth by the plan assets, and we measure the corresponding income flow by employers’ contributions + property income on plan assets. • In a defined benefit (DB) plan a formula that typically depends on years of service and final pay determines the benefit level. • Currently we account for DB plans in the same way as DC plans.
In 2013 Comprehensive Revision of the NIPAs Accounting for DB Pension Plans will change • Wealth of DB plan participants is the actuarial value of their claims to future benefits, and their compensation income is the value of the benefit claims accrued by working. • Treating plan assets as pension wealth and employer contributions as compensation is cash accounting approach to measuring DB pension plans. • Plan is to use actuarial estimates of accrued claims to benefits. • Will reduce volatility of compensation of employees covered by private plans; • Will give more accurate measures of saving by persons and by employers (but will have no effect on national saving).
Contributions aren’t always a good approximation for benefits accrued through covered employment • Unfunded actuarial liability (UAL) is the difference between the actuarial value of benefit entitlements of current and former employees and the value of the assets held by the pension plan. • Private DB plans are supposed to be fully funded (UAL = 0) (and indeed, aggregate UAL for these plans is often not far from 0). • Holding gains and losses can leave plans under- or over-funded. • Employer contributions respond to investment gains and losses as needed to move the UAL towards zero. Employers also tend to under-contribute when their cash flows are weak. • Sponsors of mature, underfunded plans must make high contributions just to maintain plan solvency.
New Treatment of DB Pensions in 2008 SNA • Besides providing better information about the economy, the change in treatment of DB plans is called for in the new SNA. Household DB pension wealth and income in the 2008 SNA: • Household wealth = value of participants’ benefit entitlement as measured using actuarial techniques. • Employer imputed contributions = benefit entitlements accrued during the time period – actual contributions. • Households’ imputed interest income = (interest rate) × (the actuarial value of the benefit entitlements). Even though DB plans pay imputed interest, they don’t receive any imputed interest. They are included with financial corporations.
Proposed Treatment • For an underfunded pension plan, proposal is to impute a claim on the employer equal to the unfunded actuarial liability and to impute payments of interest on this claim. Rationale: • When an employer puts off making an actuarially required contribution, the plan is deprived of the opportunity to invest the contribution and earn property income. • Both the contribution and the property income that it would have earned are needed for the plan to be able to pay the benefits that are due. • Failing to pay a contribution that is due creates an implicit loan from the pension planto the employer.
Basic Concepts for a DB Plan Benefit entitlement of plan participants = plan’s Actuarial Liability. Current change in benefit entitlement = benefits accrued through service to employer + interest on ben. entitlement – benefits paid. Current change in plan assets = employer & employee contributions + investment income on assets – benefits paid – administrative exp. Not included in national accounts definition of saving: Change in benefit entitlement due to actuarial gains & losses, assumption changes and plan amendments; and Change in assets from holding gains & losses and capital transfers. Private and state & local government plans attempt to fund much of their benefit expense from holding gains.
Implications of Holding Gains Multiplying interest rate assumed in actuarial calculations by the value of plan assets typically predicts a higher value for the plan’s property income than it actually receives. For a typical plan with a positive UAL (or unfunded benefit entitlement): interest accruing on the benefit entitlement = interest cost of UAL + predicted property income from assets Predicted property income from assets = expected holding gains + actual property income from assets With DB plans in their own sector, plans’ dissaving equals (expected holding gains on assets – plan’s actual property income from assets).
Receipts & Expenditures, State & local Government Plans (billions)
Effect on Estimates for State & Local Government Plans (billions or percent)
Receipts & Expenditures, Federal Government Plans (billions)
Questions for the Committee Should the NIPAs include the detailed data on DB pension plans shown in the illustrative Receipts & Expenditures tables of this presentation? Should the NIPAs leave DB pension plans in the personal sector or put them in their own sector (where plans will typically have negative saving equal to the difference between their actual property income and the property income implied by the interest rate assumption)? Do DB plans have an implicit claim on the employer in the amount of the unfunded actuarial liability (so that the plans’ net worth is zero)? Do employers pay imputed interest on this claim, and can they receive imputed interest if the plan is over-funded? Should government plans be measured on an ABO basis or a PBO basis? (For Federal plans, PBO is a more practical option.)
Concluding Th0ughts • Moving from cash to accrual measurement changes the economic picture significantly. • Based on the illustrative numbers in this presentation, under one of the accrual options, estimates personal saving would be revised up by over 3 percent points in 2007 (over 2 points from state & local government plans, 0.7 from private plans, and 0.3 from Federal government). • Allowing DB pension plans to have non-zero saving will require a modification of the breakdown by sector of national income.
