1. Actuarial Measures of Defined Benefit Pension Plans for the National Accounts Marshall Reinsdorf BEA Advisory Committee Meeting May 11, 2012

2. bea.gov 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.)

3. bea.gov 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.

4. bea.gov 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).

5. bea.gov 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.

6. bea.gov 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.

7. bea.gov 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.

8. bea.gov 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.

9. bea.gov 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).

10. bea.gov Cash and SNA 2008 Measures of Households Measurement ConceptCurrent Cash MeasureAccrual Measure of SNA 2008 Compensation incomeEmployer 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

11. bea.gov Receipts & Expenditures for Private Plans 200020012002 Receipts 122.9131.3144.1 Employer contributions 73.177.081.9 Actual 32.848.699.8 Imputed 40.328.4-17.9 Employee contributions 0.80.71.1 Property income from assets 63.358.049.1 Imputed interest on claim on employer for unfunded liability -14.3-4.412.0 Expenditures 180.3188.4200.3 Benefit entitlements accrued through covered employment 66.670.576.1 Interest on benefit entitlements 106.4110.7117.3 Administrative expenses 7.37.26.9 Saving (property income – interest_rate × Assets) -57.4-57.1-56.2 Current change in assets -28.6-24.48.3 Current change in claim on employer for UAL (4+7) 26.024.0-5.9 LESS: Current change in household benefit entitlement 54.856.758.6 Household income from participation in DB plans (8-5) 179.5187.7199.2 Employer expenses (2+7) 58.872.693.9 Change in net worth of DB pension plans -164.0-273.2-214.3

12. bea.gov Effect on Estimates for Private Plans (billions or percent) 200020012002 Revision to employer saving -26.0-24.05.9 Revision to household saving 83.481.150.3 Pension plans' saving (new concept) -57.4-57.1-56.2 Revision to national saving 0.0 Revision to employer saving if employers don't benefit from plan overfunding -40.3-28.45.9 Corporate profits with IVA and CCAdj 819.2784.2872.2 Revision to employer saving as a percent of corporate profits -3.2-3.10.7 Revision to employer saving if employers don’t benefit from overfunding -4.9-3.60.7 Revision to personal saving rate1.1 0.6

13. bea.gov Receipts & Expenditures, State & local Government Plans (billions) 200720082009 Receipts 332.5332.1378.8 Employer contributions 193.7202.2201.2 Actual 75.282.584.2 Imputed 118.5119.7117.0 Employee contributions 35.538.139.9 Property income from assets 93.077.462.2 Imputed interest on claim on employer for unfunded liability 10.314.575.5 Expenditures 413.1436.1449.4 Benefit entitlements accrued through covered employment 213.9226.5230.7 Interest on benefit entitlements 183.9195.8208.3 Administrative expenses 15.313.810.5 Saving (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) 128.8134.2192.5 LESS: Current change in household benefit entitlement 223.8236.2238.7 Household income from participation in DB plans (8-5) 377.6398.0409.5 Employer expenses (2+7) 204.0216.6276.7 Change in net worth of DB pension plans -74.9-1109.9106.3

14. bea.gov Effect on Estimates for State & Local Government Plans (billions or percent) 200020012002 Revision to employer saving -128.8-134.2-192.5 Revision to household saving 209.4238.1263.1 Revision to pension plans' saving -80.6-104.0-70.6 State & local government saving (official) 12.2-72.2-78.0 State & local government saving--Revised -116.6-206.4-270.5 Revision to personal saving rate2.02.22.4 Pension plan saving as percent of DPI-0.8-0.9-0.7

15. bea.gov Receipts & Expenditures, Federal Government Plans (billions) 200720082009 Receipts 194.8200.1204.5 Employer contributions 42.646.149.8 Actual 98.1106.1115.6 Imputed -55.5-60.0-65.8 Employee contributions 4.3 4.2 Property income from assets 50.051.345.7 Imputed interest on claim on employer for unfunded liability 97.998.4104.8 Expenditures 194.8200.1204.5 Benefit entitlements accrued through covered employment 46.850.353.9 Interest on benefit entitlements 147.9149.7150.5 Administrative expenses 0.1 Saving 0.0 Current change in assets 47.752.448.6 Current change in claim on employer for UAL (4+7) 42.438.439.0 LESS: Current change in household benefit entitlement 90.190.887.6 Household income from participation in DB plans (8-5) 190.5195.8200.3 Employer expenses (2+7) 140.5144.5154.6 Change in net worth of DB pension plans -77.2-131.1-62.8

16. bea.gov Effect on Estimates for Federal Plans (billions or percent) 200720082009 Revision to employer saving -40.9-36.7-36.0 Revision to household saving 40.936.736.0 Federal government saving (official) -245.2-613.5-1217.9 State & local government saving--Revised -286.1-650.2-1253.9 Revision to personal saving rate0.40.3

17. bea.gov 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 100.1 Expenditures 833.2 Benefit entitlements accrued through covered employment 339.5 Interest on benefit entitlements 468.9 Administrative expenses 24.8 Saving -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 379.3 Household income from participation in DB plans (8-5) 792.7 Employer expenses (2+7) 423.8 Change in net worth of DB pension plans -85.6

18. bea.gov Effect on Estimates for All Plans (billions or percent) 2000200620072008 Revision to employer saving -118.7-173.0-181.5-170.9 Revision to household saving 232.6301.9322.7274.8 Pension plan saving (new concept) -113.9-128.9-141.2-104.0 Revision to personal saving rate 3.23.03.13.2 Revision to saving rate if plans in personal sector 1.61.7

19. bea.gov 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.)

20. bea.gov 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.