Actuarial Measures of Defined Benefit Pension Plans for

the National AccountsMarshall Reinsdorf

BEA Advisory Committee MeetingMay 11, 2012

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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.)

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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. 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).

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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 assetsInterest 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 2001 2002Receipts 122.9 131.3 144.1 Employer contributions 73.1 77.0 81.9 Actual 32.8 48.6 99.8 Imputed 40.3 28.4 -17.9 Employee contributions 0.8 0.7 1.1 Property income from assets 63.3 58.0 49.1 Imputed interest on claim on employer for unfunded liability -14.3 -4.4 12.0Expenditures 180.3 188.4 200.3 Benefit entitlements accrued through covered employment 66.6 70.5 76.1 Interest on benefit entitlements 106.4 110.7 117.3 Administrative expenses 7.3 7.2 6.9Saving (property income – interest_rate × Assets) -57.4 -57.1 -56.2 Current change in assets -28.6 -24.4 8.3 Current change in claim on employer for UAL (4+7) 26.0 24.0 -5.9 LESS: Current change in household benefit entitlement 54.8 56.7 58.6Household income from participation in DB plans (8-5) 179.5 187.7 199.2Employer expenses (2+7) 58.8 72.6 93.9Change in net worth of DB pension plans -164.0 -273.2 -214.3

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Effect on Estimates for Private Plans (billions or percent)

2000 2001 2002Revision to employer saving -26.0 -24.0 5.9Revision to household saving 83.4 81.1 50.3Pension plans' saving (new concept) -57.4 -57.1 -56.2Revision to national saving 0.0 0.0 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

Revision to employer saving as a percent of corporate profits -3.2 -3.1 0.7Revision to employer saving if employers don’t benefit from overfunding -4.9 -3.6 0.7

Revision to personal saving rate 1.1 1.1 0.6

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

2007 2008 2009Receipts 332.5 332.1 378.8 Employer contributions 193.7 202.2 201.2 Actual 75.2 82.5 84.2 Imputed 118.5 119.7 117.0 Employee contributions 35.5 38.1 39.9 Property income from assets 93.0 77.4 62.2 Imputed interest on claim on employer for unfunded liability 10.3 14.5 75.5Expenditures 413.1 436.1 449.4 Benefit entitlements accrued through covered employment 213.9 226.5 230.7 Interest on benefit entitlements 183.9 195.8 208.3 Administrative expenses 15.3 13.8 10.5Saving (property income – interest_rate × Assets) -80.6 -104.0 -70.6 Current change in assets 14.4 -2.0 -24.5 Current change in claim on employer for UAL (4+7) 128.8 134.2 192.5 LESS: Current change in household benefit entitlement 223.8 236.2 238.7Household income from participation in DB plans (8-5) 377.6 398.0 409.5Employer expenses (2+7) 204.0 216.6 276.7Change in net worth of DB pension plans -74.9 -1109.9 106.3

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

percent)2000 2001 2002

Revision to employer saving -128.8 -134.2 -192.5Revision to household saving 209.4 238.1 263.1Revision to pension plans' saving -80.6 -104.0 -70.6

State & local government saving (official) 12.2 -72.2 -78.0State & local government saving--Revised -116.6 -206.4 -270.5

Revision to personal saving rate 2.0 2.2 2.4Pension plan saving as percent of DPI -0.8 -0.9 -0.7

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Receipts & Expenditures, Federal Government Plans (billions)

2007 2008 2009Receipts 194.8 200.1 204.5 Employer contributions 42.6 46.1 49.8 Actual 98.1 106.1 115.6 Imputed -55.5 -60.0 -65.8 Employee contributions 4.3 4.3 4.2 Property income from assets 50.0 51.3 45.7 Imputed interest on claim on employer for unfunded liability 97.9 98.4 104.8Expenditures 194.8 200.1 204.5 Benefit entitlements accrued through covered employment 46.8 50.3 53.9 Interest on benefit entitlements 147.9 149.7 150.5 Administrative expenses 0.1 0.1 0.1Saving 0.0 0.0 0.0 Current change in assets 47.7 52.4 48.6 Current change in claim on employer for UAL (4+7) 42.4 38.4 39.0 LESS: Current change in household benefit entitlement 90.1 90.8 87.6Household income from participation in DB plans (8-5) 190.5 195.8 200.3Employer expenses (2+7) 140.5 144.5 154.6Change in net worth of DB pension plans -77.2 -131.1 -62.8

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Effect on Estimates for Federal Plans (billions or percent)

2007 2008 2009Revision to employer saving -40.9 -36.7 -36.0Revision to household saving 40.9 36.7 36.0

Federal government saving (official) -245.2 -613.5 -1217.9State & local government saving--Revised -286.1 -650.2 -1253.9

Revision to personal saving rate 0.4 0.3 0.3

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Receipts & Expenditures, All Plans, 2007

Receipts 692.0 Employer contributions 323.7 Actual 240.8 Imputed 82.9 Employee contributions 40.6 Property income from assets 227.6 Imputed interest on claim on employer for unfunded liability 100.1Expenditures 833.2 Benefit entitlements accrued through covered employment 339.5 Interest on benefit entitlements 468.9 Administrative expenses 24.8Saving -141.2 Current change in assets 55.1 Current change in claim on employer for UAL (4+7) 183.0 LESS: Current change in household benefit entitlement 379.3Household income from participation in DB plans (8-5) 792.7Employer expenses (2+7) 423.8Change in net worth of DB pension plans -85.6

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Effect on Estimates for All Plans (billions or percent)

2000 2006 2007 2008Revision to employer saving -118.7 -173.0 -181.5 -170.9Revision to household saving 232.6 301.9 322.7 274.8Pension plan saving (new concept) -113.9 -128.9 -141.2 -104.0

Revision to personal saving rate 3.2 3.0 3.1 3.2Revision to saving rate if plans in personal sector 1.6 1.7 1.7 1.7

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Questions for the CommitteeShould 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.