Measuring and Reporting Unfunded Pension Liabilities World Bank Pension Core Course Mauricio i Soto Fiscal Affairs Department IMF November 14, 2011 The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management. 1
Two important questions 1. Should governments report their unfunded pension liabilities? 2. If so, how should they be measured and reported? 2
1. Should governments report unfunded pension liabilities? Yes Pensions are large: need to be accounted for Transparency: long term nature of pensions The magnitude of the imbalance is key to think about reforms 3
What does reporting mean? Likelihood of future outflow or other sacrifice of resources. Loss amount can be reasonably measured. Loss range can be reasonably measured. Loss amount or range cannot be reasonably measured. Probable. Future confirming event(s) are more likely to occur than not. Accrue the liability. Reported on Balance Sheet & Statement of Net Cost. Accrue liability of best estimate or minimum amount in loss range if there is no best estimate, and disclose nature of contingency and range of estimated liability. Disclose nature of contingency and include a statement sae e that an estimate ae cannot be made. Reasonably possible. Possibility of future confirming event(s) occurring is more than remote and less than likely. Disclose nature of contingency and estimated loss amount. Disclose nature of contingency and estimated loss range. Disclose nature of contingency and include a statement that an estimate cannot be made. Remote. Possibility of future event(s) occurring is slight. No disclosure. No disclosure. No disclosure. 4 Source: Financial Report of the United States (2010), page 107.
Whether pensions imply a contractual liability is crucial GFSM (2001): No for social security schemes and recommends reporting liabilities in a memorandum item No N direct link between contributions ti and benefits Pension reforms Yes for government retirement schemes: the receipt of contributions is an incurrence of a liability Pensions are part of compensation of employees 5
More importantly, pension liabilities are often unaffordable 400 Projected OASDI Revenues and Outlays 2011-2085 (percent of 2011 GDP) 350 336 300 250 200 150 100 50 0 Revenues Outlays Outlays-Revenues Source: 2011 Trustees Report, Page 64; and IMF staff calculations. 6
More importantly, pension liabilities are often unaffordable 400 Projected OASDI Revenues and Outlays 2011-2085 (percent of 2011 GDP) 350 336 300 290 250 200 150 100 50 46 0 Revenues Outlays Outlays-Revenues Source: 2011 Trustees Report, Page 64; and IMF staff calculations. 7
Two important questions 2. How should unfunded pension liabilities be measured and reported? Standardized di d assumptions for key variables across countries Both on termination and continuous basis 8
Measures of liability are sensitive to assumptions 400 350 300 250 200 150 100 50 Implicit Pension Debt for Brazil (in percent of GDP) 362 248 211 0 2 percent 4 percent 5 percent Source: Holzmann, Palacios and Zviniene (2004). 9
Measures of liability are sensitive to assumptions Assumed Long Term Rates of Return Around Mergers (basis points relative to mean) Source: Bergstresser, Desai, and Rauh (2006). 10
There are different ways to assess sustainability Assessing whether the PDV of the projected stream of primary balances is at least equal to the stock of explicit net debt NPV of (non-pension) primary balances is at least equal to the sum of explicit and implicit debt It is possible to assess fiscal sustainability without measuring directly the stock of implicit debt (Fiscal Monitor, S1 and S2 indicators) 11
Pension spending increases, 2010-2030 Pension Spending Increase, 2010-2030 2030 (in percent of GDP) 6 5 4 3 2 1 PPP Average=0.9 Luxembourg Belgium Finland Slovenia Cyprus Norway Netherlands Iceland New Zealand Korea Canada Germany Australia Denmark Austria United States Malta United Kingdom Ireland Slovakia Portugal Spain Greece Italy France Czech Republic Sweden In percent of GDP Japan 0-1 Source: IMF Fiscal Monitor (2011). 12
What about implicit liabilities from other programs? 120 PDV of Spending Increase, 2010-2050 2050 (in percent of 2010 GDP) 100 96 80 60 40 25 20 0 Source: IMF Fiscal Monitor (2011). Pension Health 13
Focusing only on implicit pension debt can be insufficient Impact of Past Pension Reforms on Open Group Liability 2007 2060, Eastern Europe (in percent of 2007 GDP) 160 140 137 120 100 80 60 60 40 20 0 9 Before Reform) After reform Revenue losses from diversion to second pillar Source: Soto, Clements, and Eich (2011). Net open group liability 14
Summing up National authorities should try to disclose but not recognize unfunded pension liabilities periodically It is a good idea to try to develop fairly comparable pension figures across countries but is implicit liability the key variable? Assessment of reforms should include revenue losses implied by reform 15