1. Treatment of General Government Pension Schemes (Superannuation) in ABS Government Finance Statistics and the Australian System of National Accounts OECD/ABS Pension Entitlement Workshop. April 22-24, 2013

2. Overview Background Entities associated with general government superannuation schemes in Australia Collection of general government superannuation estimates –Government Finance Statistics (GFS) –Australian Prudential Regulation Authority (APRA) Treatment of general government superannuation in the Australian System of National Accounts –Defined contribution schemes –Defined Benefit schemes Unfunded defined benefit schemes Defined benefit schemes with an autonomous pension fund - employers responsible for liabilities

3. Background Superannuation = pension schemes in social insurance Recognition of unfunded pension liabilities – implementation of SNA 93 No major changes - ASNA estimates for general government superannuation schemes –implementation of 2008 SNA Progress report in 2010 for Australia of SNA 2008 17.10 - ABS could not populate substantial number of cells

4. Entities Associated with General Government Superannuation Schemes in Australia Defined contribution, defined benefits and hybrid schemes Entities are usually associated with the operation of a general government superannuation scheme in Australia: –general government employer unit(s); –superannuation scheme administrative unit; –a board of trustees or equivalent for the scheme; and –a superannuation fund under the management of the board of trustees.

5. Collection of General Government Superannuation Estimates – Government Finance Statistics (GFS) Adoption of accrual accounting by the Commonwealth and State Governments in Australia in 1998-99 - more consistent data relating to defined benefit superannuation schemes becoming available for use in compiling GFS and the ASNA. The Australian Accounting Standards Board (AASB) adopted Australian Equivalents of International Financial Reporting Standards for accounting periods from 1 January 2005. The new standard relating to the accounting treatment of superannuation schemes for employers is AASB 119, Employee Benefits.

6. Collection of General Government Superannuation Estimates – GFS (cont) In 2006-07, the ABS conducted a Public Sector Superannuation Review - review was to examine reporting practices by government jurisdictions and to produce a set of guidelines to ensure that superannuation stocks and flows were being reported in a uniform manner by all jurisdictions and consistent with GFS concepts. Since early 2012, ABS Public Finance Section has been reviewing ABS Government Finance Statistics (GFS) in parallel to the International Monetary Fund (IMF) review of their Government Finance Statistics Manual (GFSM).

7. Collection of General Government Superannuation Estimates – APRA and ABS Survey of Financial Information (SFI) Income and expenditure estimates and transactions and balance sheet positions for net equity in reserves of pension funds for general government defined contribution and defined benefit (with autonomous fund) schemes - APRA Quarterly Superannuation Statement of Financial Position and APRA Quarterly Superannuation Statement of Financial Performance collections and the quarterly and annual APRA superannuation statistical bulletins. The ABS SFI: Investment Managers -provides balance sheet information about superannuation funds placed with investment managers. Other - such as market capitalisation sector/subsector share issuance Australian Securities Exchange data. APRA - do not currently collect balance sheet or income and expenditure data separately by scheme (defined contribution, defined benefit and hybrids).

8. Collection of General Government Superannuation Estimates – APRA (cont) In September 2012, APRA embarked on a significant review of its superannuation collections - release of a discussion paper - "Reporting Standards for Superannuation Consultation". In November 2012 the ABS submitted a formal response to the review. The ABS saw the review as an opportunity to consolidate and strengthen the APRA superannuation collections to better meet statistical standards and international reporting requirements. At the end of March 2013, the ABS provided a set of forms and instruction to APRA, which included data items to assist the ABS to compile 2008 SNA Table 17.10.

9. Treatment of General Government Superannuation in the Australian System of National Accounts (ASNA): Defined Contribution (DC) Schemes A defined contribution (DC) superannuation scheme is one where the benefits payable to the employee on retirement are determined by the funds that have accumulated from employer and employee contributions over the working life of the employee, together with income and capital gains/losses arising from the investment of the accumulated funds. Table 1 illustrates the ASNA transactions and balance sheet positions related to defined contribution general government employer superannuation schemes. ASNA compilation, data sources from GFS and APRA, and Compilation Issues and Implication for 2008 SNA Table 17.10 are presented. For Australia, general government employer DC would be classified in Column D of 2008 SNA Table 17.10

10. Treatment of General Government Superannuation in the ASNA: Compilation Issues DC Schemes For Australia, we cannot compile Column D of 2008 SNA Table 17.10: - Employer Contributions payable: GFS data - some jurisdiction report funded superannuation expenses with unfunded expenses. Plus funded superannuation expense cannot be split between defined contribution (DC) and defined benefit (DB) schemes. -Imputed Interest (investment income attributable superannuation policy holders) and Net equity in reserves of pension funds in the household balance sheet: APRA data - the general government employer DC property income and balance sheet component are not separately compiled. Calculated for all superannuation schemes, both public and private sector (DC & DB schemes with autonomous funds).

11. Treatment of General Government Superannuation in the ASNA: Defined Benefit (DB) Schemes A defined benefit superannuation scheme is one where the benefits payable to the employee on retirement are determined by a formula, usually based on a combination of final salary (or final average salary), age at retirement and the number of years of membership in the scheme. There are a number of factors that can affect an employer's defined benefit superannuation liability. These include: (i) Current service cost (current service increase) (ii) Interest cost (past service increase) (iii) Benefit payments on retirement or exit (iv) Changes to the discount rate, other actuarial assumptions and/or the rules governing entitlements under the scheme.

12. Treatment of General Government Superannuation in the ASNA: DB Schemes (cont) The Projected Unit Credit Method (equivalent to the projected benefit obligation (PBO) - the AASB 119 Employee Benefits for calculating the present value of defined benefit obligations. Jurisdiction use the 10 year Commonwealth Government bond rate and or the government bond rate with the longest available maturity as the discount rate for present value calculations. Schemes – with autonomous superannuation fund, the fund has a liability to the household sector equal to the discounted value of the defined benefit obligations. For unfunded or where a non-autonomous fund has been established to fund superannuation liabilities, the general government employer has a liability directly to the household sector. The increase in superannuation liability - employment services provided in the current period – PBO.

13. Treatment of General Government Superannuation in the ASNA: DB Schemes (cont) Interest cost: average of the present value of the defined benefit obligation during the year multiplied by the discount rate at the start of the year (takes account of both increases and decreases in the outstanding liability during the year). Schemes with autonomous funds (employer liable) ABS believes that nominal interest on unfunded superannuation equals interest cost less investment income earned by the fund and recorded as a imputed property income flow from the general government employer to the fund (if fund earnings exceed interest cost, imputed property income flow from the fund to the employer). AASB 119 recommends that the net interest on the net defined benefit liability should be calculated as the net defined benefit liability multiplied by the discount rate. Currently, the above imputations cannot be calculated.

14. Treatment of General Government Superannuation in the ASNA: DB Schemes (cont) In practice in the ASNA, interest cost (ASNA item "imputed interest receivable by households") where an autonomous superannuation fund exists is equal to actual property income earned by the fund plus nominal interest on unfunded superannuation from general government. This calculation is therefore not equal to 2008 SNA definition for the past service increase, which is equal to the outstanding pension liabilities of the fund to households multiplied by the discount rate. Changes to the present value of defined benefit obligations at the end of the period due to: -changes to assumptions on the discount or inflation rate are classified as revaluation changes. -Other actuarial changes are recorded as other changes in the volume of assets- includes changes to demographic assumptions and scheme conditions

15. Treatment of General Government Superannuation in the ASNA: General Government Employer Unfunded DB Schemes Table 2 illustrates the ASNA items that capture the transactions and balance sheet positions related to general government employer unfunded defined benefit (DB) superannuation schemes. ASNA compilation, GFS data sources and compilation issues and implications for 2008 SNA Table 17.10 are presented. For Australia, general government employer unfunded DB superannuation schemes are classified in Column F (DB scheme managed by government itself) of 2008 SNA Table 17.10. For Australia, items 2.1 (employer actual social contributions) and 2.3 (household actual social contributions) are not applicable.

16. Treatment of General Government Superannuation in the ASNA: Compilation Issues General Government Employer Unfunded DB Schemes (cont) For Australia, we cannot compile Column F of 2008 SNA Table 17.10: - Imputed Employer Contributions : GFS data -some jurisdiction report funded superannuation expenses with unfunded expenses. Plus The unfunded superannuation expense cannot be split between unfunded DB schemes and partly funded DB schemes (DB schemes with autonomous fund). -Imputed interest: - Nominal interest on unfunded superannuation no split available between DB with autonomous fund and unfunded schemes. -In the ASNA, current methodology implies all nominal interest on unfunded superannuation is associated with unfunded schemes. In reality, this assumption is not correct as some jurisdictions DB schemes do in fact have autonomous funds.

17. T reatment of General Government Superannuation in the ASNA: General Government Employer DB Scheme with an Autonomous Pension Fund (employer responsible for liabilities of scheme) Table 3 illustrates the ASNA transactions and balance sheet positions related to general government employer defined benefit superannuation schemes, with an autonomous fund. ASNA compilation, data sources from GFS and APRA, and compilation issues and Implication for 2008 SNA Table 17.10 are presented. For Australia, general government employer DB superannuation schemes, with an autonomous fund. would be classified in Column E (DB scheme managed by financial corporation sector) of 2008 SNA Table 17.10.

18. Treatment of General Government Superannuation in the ASNA: Compilation Issues General Government Employer DB Scheme with an Autonomous Pension Fund For Australia, we cannot compile Column E of 2008 SNA Table 17.10: -Employer Contributions payable: See compilation issues listed for Table 1. - Imputed Employer Contributions: See compilation Issues for Table 2 - Imputed Interest (investment income attributable superannuation policy holders See compilation issues listed for Table 1 and 2 The estimate for imputed interest in ASNA is not what is defined in the 2008 SNA past service increase. ASNA item calculated as "nominal interest" on unfunded component of the DB scheme (autonomous fund) plus property income of fund earnings. - Net equity in reserves of pension funds in the household balance sheet: See compilation issues listed for Table 1 plus GFS provision for unfunded superannuation, no split available between DB with autonomous fund & unfunded schemes.

19. Treatment of General Government Superannuation in the ASNA: Solutions to Compilation Issues For GFS data, July 2013 consultation process with jurisdiction Focus on obtaining splits such as : - Funded and unfunded superannuation expenses. Funded superannuation expense split between defined contribution (DC) and defined benefit (DB) schemes. Nominal interest on unfunded superannuation split between unfunded schemes and partly funded schemes (autonomous fund) It is unlikely that jurisdictions will change assumption in their models compliant with AASB 119 to meet ASNA requirements such as: -the calculation of "net interest on the net defined benefit liability (asset)" which is calculated as the unfunded liability times the discount rate. -use of "expected" property income rather than actual property income when calculating the imputed interest flow from the pension fund to employees. The difference between expected property income and actual property income is treated in AASB 119 as an actuarial gain or loss.

20. Treatment of General Government Superannuation in the ASNA: Solutions to Compilation Issues ABS detail submission to APRA – March 2013 included: -Each superannuation fund to report sub fund data, that is DC and DB in two separate statements in the APRA quarterly/annual financial position collection. -Each superannuation fund to report sub fund data - DC and DB in two separate statements in the APRA quarterly/annual financial performance collection- example administrative costs (includes, labour and investment costs). -For hybrid schemes, separate into (1) DC and DB component and report in respective DC and DB return or; (2) report hybrid schemes as DB schemes if components cannot be separated. ABS will refine the APRA March 2013 submission to see whether it may be possible to obtain for DB superannuation schemes the actuarial estimate for imputed interest payable (past service increase) as defined 2008 SNA and DB superannuation schemes actuarial estimate for total outstanding liabilities to employees

21. Questions?