advisory committee presentation on pensions of May 7 2012

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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 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.

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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.

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 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.

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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.

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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 plan to the employer.

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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.

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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).

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Cash and SNA 2008 Measures of Households
Measurement Concept

Current Cash Measure

Accrual Measure of SNA 2008

Compensation income

Employer contributions

Benefits entitlements accrued
through service to employer net
of employee contributions +
plan administrative expenses

Household property
income

Property income on plan assets

Interest accruing on benefit
entitlement

Household saving

Employer contributions + income
from plan assets – administrative
expenses

Net benefits accrued through
service to employer + interest
on benefit entitlement

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Receipts & Expenditures for Private Plans

2000

Receipts
Employer contributions
Actual
Imputed
Employee contributions
Property income from assets
Imputed interest on claim on employer for unfunded liability
Expenditures
Benefit entitlements accrued through covered employment
Interest on benefit entitlements
Administrative expenses
Saving (property income – interest_rate × Assets)
Current change in assets
Current change in claim on employer for UAL (4+7)
LESS: Current change in household benefit entitlement
Household income from participation in DB plans (8-5)
Employer expenses (2+7)
Change in net worth of DB pension plans

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2001

2002

122.9 131.3 144.1
73.1
77.0

81.9
32.8
48.6
99.8
40.3
28.4 -17.9
0.8
0.7
1.1
63.3
58.0
49.1
-14.3
-4.4
12.0
180.3 188.4 200.3
66.6
70.5
76.1
106.4 110.7 117.3
7.3
7.2
6.9
-57.4 -57.1 -56.2
-28.6 -24.4
8.3
26.0
24.0
-5.9
54.8

56.7
58.6
179.5 187.7 199.2
58.8
72.6
93.9
-164.0 -273.2 -214.3


Effect on Estimates for Private Plans
(billions or percent)

Revision to employer saving
Revision to household saving
Pension plans' saving (new concept)
Revision to national saving

2000
-26.0
83.4
-57.4
0.0

2001
-24.0
81.1
-57.1
0.0

2002

5.9
50.3
-56.2
0.0

Revision to employer saving if employers don't benefit from
plan overfunding

-40.3

-28.4

5.9

Corporate profits with IVA and CCAdj

819.2

784.2

872.2

-3.2

-3.1

0.7

-4.9

-3.6

0.7

1.1

1.1

0.6

Revision to employer saving as a percent of corporate profits
Revision to employer saving if employers don’t benefit from
overfunding

Revision to personal saving rate

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Receipts & Expenditures, State & local
Government Plans (billions)

Receipts
Employer contributions
Actual
Imputed
Employee contributions
Property income from assets
Imputed interest on claim on employer for unfunded liability
Expenditures

Benefit entitlements accrued through covered employment
Interest on benefit entitlements
Administrative expenses
Saving (property income – interest_rate × Assets)
Current change in assets
Current change in claim on employer for UAL (4+7)
LESS: Current change in household benefit entitlement
Household income from participation in DB plans (8-5)
Employer expenses (2+7)
Change in net worth of DB pension plans
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2007
332.5
193.7
75.2
118.5
35.5
93.0
10.3
413.1
213.9
183.9
15.3
-80.6
14.4
128.8
223.8

2008

332.1
202.2
82.5
119.7
38.1
77.4
14.5
436.1
226.5
195.8
13.8
-104.0
-2.0
134.2
236.2

2009
378.8
201.2
84.2
117.0
39.9
62.2
75.5
449.4
230.7
208.3
10.5
-70.6
-24.5

192.5
238.7

377.6
398.0 409.5
204.0
216.6 276.7
-74.9 -1109.9 106.3


Effect on Estimates for State & Local
Government Plans (billions or percent)
2000

2001

2002

Revision to employer saving
Revision to household saving
Revision to pension plans' saving

-128.8 -134.2 -192.5
209.4 238.1 263.1
-80.6 -104.0 -70.6

State & local government saving (official)
State & local government saving--Revised

12.2

-72.2 -78.0
-116.6 -206.4 -270.5

Revision to personal saving rate
Pension plan saving as percent of DPI

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2.0
-0.8

2.2
-0.9

2.4
-0.7


Receipts & Expenditures, Federal
Government Plans (billions)

Receipts
Employer contributions
Actual
Imputed
Employee contributions
Property income from assets
Imputed interest on claim on employer for unfunded liability
Expenditures
Benefit entitlements accrued through covered employment

Interest on benefit entitlements
Administrative expenses
Saving
Current change in assets
Current change in claim on employer for UAL (4+7)
LESS: Current change in household benefit entitlement
Household income from participation in DB plans (8-5)
Employer expenses (2+7)
Change in net worth of DB pension plans
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2007

2008

2009

194.8 200.1
42.6
46.1
98.1 106.1
-55.5 -60.0
4.3
4.3
50.0
51.3
97.9
98.4
194.8 200.1
46.8

50.3
147.9 149.7
0.1
0.1
0.0
0.0
47.7
52.4
42.4
38.4
90.1
90.8
190.5 195.8
140.5 144.5
-77.2 -131.1

204.5
49.8
115.6
-65.8
4.2
45.7
104.8
204.5
53.9
150.5
0.1
0.0
48.6
39.0

87.6
200.3
154.6
-62.8


Effect on Estimates for Federal Plans
(billions or percent)

Revision to employer saving
Revision to household saving

2007
-40.9
40.9

2008
-36.7
36.7

Federal government saving (official)
State & local government saving--Revised

-245.2
-286.1

-613.5 -1217.9
-650.2 -1253.9

Revision to personal saving rate

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0.4

0.3

2009
-36.0
36.0

0.3


Receipts & Expenditures, All Plans, 2007
Receipts
Employer contributions
Actual
Imputed
Employee contributions
Property income from assets
Imputed interest on claim on employer for unfunded liability

Expenditures
Benefit entitlements accrued through covered employment
Interest on benefit entitlements
Administrative expenses

323.7
240.8

82.9
40.6
227.6
100.1

833.2
339.5
468.9
24.8

-141.2

Saving
Current change in assets
Current change in claim on employer for UAL (4+7)
LESS: Current change in household benefit entitlement
Household income from participation in DB plans (8-5)
Employer expenses (2+7)

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Change

692.0

in net worth of DB pension plans

55.1
183.0
379.3
792.7

423.8

-85.6


Effect on Estimates for All Plans
(billions or percent)

Revision to employer saving
Revision to household saving
Pension plan saving (new concept)

Revision to personal saving rate
Revision to saving rate if plans in personal sector

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2000
-118.7
232.6
-113.9

3.2
1.6

2006 2007 2008
-173.0 -181.5 -170.9
301.9 322.7 274.8
-128.9 -141.2 -104.0

3.0
1.7

3.1
1.7

3.2
1.7


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.)

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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.

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