Canadian Pension Satellite Account

Presentation to the OECD Working Party on Financial Statistics and Working Party on National Accounts

Patrick O’Hagan October 3rd, 2007

Pensions in the SNA … SNA was developed in a period when an aging

population was not an issue The impact of this phenomenon now evident on post-

war economies, and economic issues surrounding pensions coming to the forefront

Coincidentally, treatment of pensions garnered significant attention in the revisions to SNA93

In Canada the SNA, while developed was not set up to address some of these emerging issues related to pensions … therefore a Pension Satellite Account (PSA) was conceived to better articulate pension stocks and flows and to fill in gaps in data

PSA is largely analytical in nature Last year Canada agreed to present an overview of the

PSA at the 2007 WPFS-WPNA meeting

CSNA sector-based

Institutional sector-based accounts architecture to the CSNA are designed to articulate economic behaviour. The sector accounts include: the income and outlay account; the capital account, the financial account and the balance sheet account (including the other changes in assets).

Incomes and current and expenditures in the sector accounts consolidate to GDP income arising from production and GDP final expenditure on production

GDP – Income arising from production

GDP – Final expenditure on production

Real GDP – by expenditure component- PE- I- X,MPersons Corporations Governments Non-residents

Current account transactions

- Incomes, outlays

Capital account transactions

- Capital investment, saving

Financial account transactions

- Financial asset flows

- Liability flows

Other changes in assets account

Revaluations and other volume changes

Balance sheet account

Non-financial assets

Financial assets

Financial Liabilities

Net worth

SatelliteAccounts:

Non-profit

Tourism

Pensions

CSNA Core Sector Accounts and Satellite Accounts in Income and Expenditure Accounts Division

Diverse treatment of pensions in the CSNA sector accounts

Income and outlay, saving Financial transactions Accumulated saving (wealth) Benefit payments / withdrawals Gains and losses on pension assets Actuarial evaluations

Pension flows … not fully articulated in CSNA

Dimensions to the PSAThe PSA adopts the stock-flow structure to the

sequence of sector accountsSupplementary detail to sectors … in particular

to the household sectorPSA covers the entire universe of the

retirement regime in Canada in considerable detail

The three tiers are: (i) government-sponsored social security, (ii) employer-sponsored pension plans (including both private and public, as well as funded and unfunded) and (iii) voluntary individual retirement saving plans

Structure of the PSA Opening

wealth position

Inflows: Contributions, investment- income

Outlays: Withdrawals, other flows

Other changes: Gains/losses, etc

Closing wealth position

Social security

Employer-sponsored plans

Individual savings plans

Social security plansCanada/Quebec Pension Plan

Funded (invested) assets are recorded in Government sector, and affect net debt of government

No liability of government is recognized to households for this social program

Household pension transfer income Old Age Security

No assets -- PAYG social program system … benefit payments (expense) out of government general revenue

Household pension transfer income

Individual retirement saving plans –

Accumulation and payout products Registered retirement saving plans (RRSP) introduced

in 1957. Contributions to RRSP are tax-sheltered with a limit and are on a voluntary basis. Withdrawals are allowed but subject to income tax at the time of withdrawal

The amount will be converted to payout vehicle such as registered retirement income fund (RRIF) or an annuity when the owner turns age 69

Typically part of insurance companies and banks or investment funds liabilities to households. A self-directed RRSP (sometimes referred to as a self-administered plan) allows many more investment options than a regular RRSP … measurement issues

Composition of individual retirement saving plans

$ billion

-

200

400

600

800

1990 1992 1994 1996 1998 2000 2002 2004

Self-directed RRSPInvestment fundRRIFLIC+ seg fDeposits

Employer-sponsored contributory plans detail

Defined benefit, defined contribution, hybridOthers (e.g., profit-sharing)Funded, unfunded …public, privateSurplus, deficitBy institutional investor

۰by asset type

Assets, income … valuation issues

Trusteed Pension Funds: Bulk of Employer-sponsored pension plans

$ billion, TPP by f inancial instrument

0

200

400

600

800

1000

1993 1995 1997 1999 2001 2003 2005

real estate

Stocks;

fixed income

Two features of the Canadian SNA treatment of ESPP

All ESPP pension plans have a similar treatment with respect to their impact on personal saving and wealth. Specifically, an government unfunded plan (no invested assets) ― by virtue of the fact that it is recognized as a liability (by government) ― is treated as a household sector asset, with corresponding saving flows

Second, Canada has a treatment for that does not require the D8 adjustment described in SNA93 to bring personal saving and personal disposable income into line. Essentially the pension funds are consolidated in the household sector

Institutional dimensions to pension saving and wealth feed into PSA

Trusteed pension plans Insurance companiesGovernment consolidated revenue

arrangementsDeposit accepting institutionsMutual fundsOtherSocial schemes

Institutional investors assets drive net

assets pension growth

DepositsFixed income securitiesEquities Investment fund unitsReal estateOf which: Foreign

Investments, income, capital gains in PSA

Key sources of data for the PSASurveys of institutional investors (insurance,

pension funds, banks)Enterprise surveys for employersGovernment public accounts and other

government administrative dataTax dataHousehold survey dataSome degree of modeling and derived dataFOCUS ON ANALYSIS

Analytical issues

Understanding personal saving and wealth accumulation

Structure of the pension systemEconomic forecastsProjections to tax revenueImpact on capital marketsSustainabilityDimensions of risk

Downward trend in personal saving supported by pension saving

Personal Savings Rate

0

5

10

15

20

25

1980

/03

1981

/12

1983

/09

1985

/06

1987

/03

1988

/12

1990

/09

1992

/06

1994

/03

1995

/12

1997

/09

1999

/06

2001

/03

2002

/12

2004

/09

Evolution of pension saving and wealth Despite the downward trend in personal saving since

1990, household wealth has continued to accumulate at good pace … essentially substituting capital gains (price appreciation of assets) for saving out of current income

Pension saving is an increasing share of a downward trending personal saving; pension wealth has been a significant contributor to the growth in household net worth

Pension assets account for close to half of the size of the total financial assets and close to one-third of the net worth

Impact of increasing pension payments/withdrawals

Downward trend in personal saving supported by pension saving

$million

-80

-60

-40

-20

-

20

40

60

80

1990 1992 1994 1996 1998 2000 2002 2004

saving non-pension saving

Capital gains result in a different interpretation of personal saving

Modified Personal Saving Rate(Including Capital Gains)

-15-5

515

2535

4555

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

%

Forecasting the economy, with less spending out of current incomePersonal expenditure accounts for about 60%

of GDPAs population ages, increasing sources of funds

from other than income ― dis-saving in financial account

Propensity to spend quite high out of retirement dis-saving

Need to systematically articulate this detail drawn from the PSA for users

Projecting tax revenue for fiscal purposes

There is already a gap between reported SNA income and income taxes paid, largely because realized capital gains are excluded from SNA income

Increasingly taxes will be generated out of ESPP pension benefit payments and individual retirement plan withdrawals

Need to systematically articulate this detail drawn from the PSA for users

Impact on capital marketsAssets in ESPP, social security and individual

saving plans are very significant As assets in these funds grew sharply beginning

in about 1987-90s, they have had a substantial influence on capital markets – both growth and fluctuations

As these funds are drawn down by retirees over the years to come, the impact on these markets is unclear

PSA provides the detail required to make assessments of this impact

SustainabilityThe question of will there be enough (and what

is the distribution by age and income class) to finance the wave of retiring baby-boomers

If not, implications for standard of living… for government fiscal balances

Coverage by individual and ESPPPSA by soon adding a link to household survey

micro data will provide the detail required to support projections and assessments to study sustainability

Shifting composition of pension assets

% of total pension assets

0%

20%

40%

60%

80%

100%

1990 1992 1994 1996 1998 2000 2002 2004

RRSPRPPC/QPP

Pension system risks

To employers, in particular corporations with DB ESPP, as asset values fluctuate

To individuals as employers move towards DC ESPP, as known benefit streams provide income security

To individuals in relation to returns on individual retirement saving plans

PSA provides the detail required to undertake analysis of potential risks to pension assets

Risk: Gains and losses on largest segment of funded ESPP

Contributions and net captial gains/losses

-10

-5

0

5

10

15

1993/03 1994/06 1995/09 1996/12 1998/03 1999/06 2000/09 2001/12 2003/03 2004/06 2005/09

Employee contributions Employer contributions Net capital gains/losses

Billions

Individual risk …shift from defined benefit to defined contribution ESPP

0

20

40

60

80

100

120

1980 1990 2004 1980 1990 2004

Participants Plans

DB DC%

Future PSA work Initial estimates released in paper in 2008Shift database frequency to quarterlyDevelopment of standard supplementary SNA

tables on pension incomes, saving and wealth, payments/withdrawals, taxes paid and estimates of personal expenditure from retirees for current analysis

Expand detail on actuarial deficits/surplusesLink up with household micro data to expand the

analytical capability