Measuring and Reporting Unfunded. Robert Palacios Pension Team Leader World Bank Pension Core Course Washington D.C.

Transcription

1 Measuring and Reporting Unfunded Pension Liabilities: a Global l Perspective Robert Palacios Pension Team Leader World Bank Pension Core Course Washington D.C. November 14, 2011

2 The big questions Should governments report their unfunded pension liabilities? How should they be measured and reported? 2

3 IPD does not = public debt Pension debt/wealth is not tradeable Contributing is mandatory Pension debt/wealth ea t is linked to future developments such as life expectancy not relevant for government bonds Partial defaults are both legal and common (although courts have intervened in some countries) 3

4 Reasons to report IPD Pension wealth changes may affect savings and consumption behavior Increasingly affecting credit rating (eg., Moody s for US state t bond ratings) and borrowing costs (Munnell et. al., (2011)) Often most significant government liability affecting long run fiscal sustainability Helps provide discipline to investment policy of partially funded schemes e.g., g, CCPIB 4

5 Reasons to report IPD Transparency in public debate Benefits of phased in parametric reforms to long run sustainability show up only gradually (so reformers are not credited) Conversely, changes that increase the IPD (e.g., generous early retirement) are magnified over the long run (so politicians not penalized) Current accounting biased against prefunding Shift to funding creates transition deficit but can reduces IPD (so reformers penalized, especially when targets are based on public debt/deficits) 5

6 Example: India civil servants pensions 80% 75% 70% 60% 22% 61% 51% Perc cent of GSDP 50% 40% 30% 20% 53% 20% 42% 17% 34% 10% 0% 3% 4% 5% Real discount rate contributors pensioners 6

7 Example: Eastern European reforms Average for 8 East European Countries Perce ent of GD DP Current Fiscal Deficit Before and after reversal P Perce ent of GD Unfunded Pension Liabilities Before and after reversal Source: IMF (2011) 7

8 What is the best measure: Are there lessons from the private sector? Different standards for minimum funding rules found in OECD country regulations (OECD 2011) Accrued, Projected and Indexed Benefit Obligation for Minimum i Funding Rules all observed But most common are termination liabilities which follow an accrued to date concept But critics cite limits to analogy; public DB schemes are backed by stream of future revenues not comparable to firms 8

9 What is the best measure? 9

10 What is the best measure? Disney (2001) How should we measure pension liabilities in EU countries? cites three key areas required to move forward: Standardized, di d objective and independent d generation of estimates across countries More attention to data requirements Accrual accounting for liabilities (in parallel to long term projections of key indicators) A decade later, there is wide acceptance of the need to report (especially public employee pensions (IMF 2001)), but no global standard 10

11 What is the best measure? ABO or termination liability requires fewer assumptions making it easier to compare across countries, especially in young, immature schemes Open group liability recognizes future stream of earmarked revenues and is generated in conjunction with projected flows Why not calculate and report both? 11

12 Recent developments in EU 2006 Eurostat/ECB agreed to calculate unfunded d pension liabilities/wealth lth for government sponsored schemes for the purposes of the SNA 2008 determine that a ABO/PBO definition would be applied with standardized assumptions and Eurostat demographic projections 12

13 Initial Estimates for EU 13

14 A case for standardized reporting Demand for estimates leading to confusion with different studies - apples and oranges Markets do not like unknowns transparency reduces risk Policy debate can become better informed with independent estimates, especially when looking at changes Targets or limits can be rationalized to avoid the pension shell game 14

15 A global standard Social insurance programs may also have significant fiscal implications, which should be reported by the fiscal authorities under alternative demographic and economic scenarios particularly given the effects of aging populations that now affect most industrial countries and are becoming increasingly significant in middle-income countries Accurate reporting is critical for both defined-benefit and defined-contribution pension plans. For defined-benefit plans it is important to provide an accurate assessment not only of the size of current pension obligations for the budget, but also of the accrued liabilities to date, the actuarial balance, and long-term cash flow projections. (IMF 2007) 15

16 A global standard In the case of unfunded pension liabilities, these organizations as well as IMF can coordinate to agree on common global approach Depending on the indicator(s) chosen, it would require agreement on the standard assumptions for key variables ranging from the discount rate to life tables It would also require many pension funds to upgrade their databases (as was needed in some EU countries). 16

17 Some caveats for completeness IPD estimates as described here are gross whereas net of taxes, the obligations would be smaller Have not discussed ssed government guarantees antees on private DB or DC schemes but similar arguments for measuring and reporting them could be made Fiscal impact of population ageing to include health and other factors as in EU s S1,S2a S2 separate, but important exercise 17

18 Conclusions Whether and how to report unfunded pension liabilities has been discussed for two decades While there are some initiatives in higher income countries including Europe (supplemental Eurostat accounts), the need for reporting is relevant globally The international ti organizations, regional and global, could start producing standardized estimates with important benefits in terms of fostering reform and discouraging profligate pension policies 18

19 Thank you 19