Changes to National Accounts: The Impact of the Changes to the Treatment of Pensions in the National Accounts

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1 Changes to National Accounts: The Impact of the Changes to the Treatment of Pensions in the National Accounts Authors: Robbie Jones and David Matthews Date: 17 September Introduction The UK National Accounts are compiled according to international and European standards, namely the System of National Accounts (SNA) and European System of Accounts (ESA). These standards are updated periodically to reflect economic developments and changes to user needs. The Office for National Statistics (ONS) is publishing a series of articles, which collectively explain the forthcoming improvements to the UK National Accounts. These improvements reflect the recent revisions to the European System of Accounts 2010 (ESA2010), which supersedes the previous European System of Accounts 1995 (ESA95) guidance. From September 2014 onwards, the UK will be required, by European law, to compile the National Accounts on a consistent basis with the standards set out in the ESA2010 regulations. One of the major developments is the revised treatment of pensions. The purpose of this article is to explain what these changes are and how they impact on the UK National Accounts. This article has three main sections: First, information is provided to help explain the position of pensions in the structure of the National Accounts. Second, the key differences between the treatment of pensions under ESA95 and ESA2010 are explained. Third, how and why the updated treatment of pensions has impacted on some of the UK s key economic indicators: particularly, household savings and the household saving ratio, and Gross Domestic Product (GDP). Sensitivity analysis is also presented in respect of underlying assumptions, such as those surrounding the choice of discount rate and longevity. These changes will be introduced when revised figures for the UK National Accounts are published on 30 September Throughout this article, only the changing position of funded pension schemes is discussed. Unfunded schemes are not fully recorded in the core National Accounts under either ESA95 or ESA2010, and no changes to the treatment of unfunded schemes are being implemented. The article concludes by drawing attention to planned future work. 2 Pensions in the National Accounts The National Accounts seek to record the economic reality of pensions as both a form of deferred pay and savings. Broadly speaking, there are two key principles: Households own pension schemes, they are set up in order to provide them with an income in retirement. They can thus be seen as a saving instrument belonging to Households. All contributions to pension schemes are made by Households. In practice, employees will usually pay pension contributions out of their wages, while their employer (where applicable) will pay contributions directly into the pension scheme. However, the underlying reality is that the contributions by the employer are part of the Office for National Statistics Page 1

2 overall remuneration package of the employee. Households agree implicitly to forego some of their pay in the form of pension contributions. As this money belongs to households, it is in reality their money that is being paid into the pension scheme. ESA2010 seeks to reflect this economic reality more accurately than the preceding ESA95. ONS has undertaken work to implement these changes in two stages: 1. The Supplementary Table on Pensions (STP), which ONS first published in April 2012 following four years of detailed research into data sources and methods; 2. The changes in the core accounts, undertaken for incorporation into BB2014 at the end of September A series of articles detail the development of the STP (Box 1) and are available on the ONS website. Box 1: Articles published by ONS on the development of the STP Levy, S. (2012a). Pensions in the National Accounts A Fuller Picture of the UK s Funded and Unfunded Pension Obligations. ONS [website]. Available from: Levy, S. (2012b). Annex 2: Data Sources and Methods for the UK Supplementary table on Pensions ONS [website]. Available from: Levy, S. (2011a). Pensions in the National Accounts: Compiling a Complete Picture of UK Pensions Including Unfunded Pensions for Public Sector Employees. ONS [website]. Available from: Levy, S. (2011b). Compiling Estimates of State Pension Obligations for the National Accounts (A Methodology Article). ONS [website]. Available from: estimates-of-state-pension-obligations-for-the-national-accounts--methodology-article /art-pensions-in-the-national-accounts-2.html. Earlier this year, ONS published an article entitled Developments to the treatment of pensions in the National Accounts. This article provides a guide to: The new concepts and transactions in the accounts as a consequence of ESA2010; The key methodological developments; How the UK National Accounts will be impacted by these changes (at a high-level). Office for National Statistics Page 2

3 3 Key points of difference in the treatment of pensions between ESA95 and ESA2010 Table 1 summarises the key points of difference between the two sets of guidelines. Each of these points will then be discussed in turn. Table 1: Key differences between ESA95 and ESA2010 ESA95 ESA2010 No distinction in the accounts between Defined Benefit (DB) and Defined Contribution (DC) schemes Liabilities = assets 1 i.e. (assumption that DB schemes are fully funded) Schemes are classified as DB or DC Introduction of an actuarial valuation for DB schemes. Recording of the shortfall / surplus in funded DB schemes. Only recorded actual cash flows in the accounts Holding gains excluded from investment income New transactions, including the imputation of contributions to funded DB schemes. Implicit inclusion of holding gains in investment income. 3.1 Classification of schemes The fundamental difference between the treatment of pensions between ESA95 and ESA2010 concerns the classification of employment related schemes as being either Defined Benefit (DB) or Defined Contribution (DC). This is appropriate since the two forms have differing features. In particular, there is a fundamental difference in the entitlement households have under such schemes. Whereas DB schemes are based on a promise of a certain level of benefits usually linked to salary, for DC schemes the benefits are based on the value of the fund at retirement. Consequently, the way they are recorded in the National Accounts should reflect this fundamental difference. 3.2 Recording of pension liabilities The implication of ESA95 was that the liabilities of all pension schemes should be equal to the value of their assets. Without a mechanism in the accounts for a transaction where the pension fund could pass any surplus/deficit back to the employer, it was not possible, arithmetically, to introduce an actuarial valuation and maintain a net worth of zero for pension funds 2 (an ESA95 requirement). For DB schemes, this was clearly at variance with reality. To rectify this situation and to align with ESA2010 reporting guidelines: ONS will be introducing an actuarial valuation of funded DB schemes liabilities into the National Accounts from Blue Book 2014 onwards. This is based on the methods and sources used in the STP. 1 This is the ONS interpretation of ESA95. In reality, there was a requirement in ESA95 that the liabilities of funded DB schemes be recorded on an actuarial basis. However, as the net worth of pensions should be equal to zero, and without a means of the pension fund making a claim for additional assets on the sponsoring employer to meet any shortfall in actuarial liabilities, it was decided that liabilities should equal assets. A similar treatment was adopted by the USA (see McCulla et al, 2013). 2 Had the UK used an actuarial valuation for estimating DB liabilities under ESA95, this would not have impacted on household saving as ESA95 does not require actuarial flows to be recorded in the accounts. Office for National Statistics Page 3

4 there will also now be a series in the accounts recording the difference between the assets of funded DB schemes and their liabilities. If schemes are in deficit, this will be recorded as a liability of the employer, and if they are in surplus, it will be recorded as a liability of the pension fund. matching the liabilities, the Accounts will show the pension fund s assets as its conventional assets (equities, bonds, etc) and also this potential call on the employer. This means that the UK National Accounts will now be showing, in full, the liabilities of the corporate sector to DB pension schemes. 3.3 New transaction lines in the Accounts Under ESA95, only the actual cash flows into pensions were recorded in the National Accounts. As such, only actual values for contributions paid in, investment income generated and benefits paid out were included. By contrast, under ESA2010, liabilities will be included based on an actuarial assessment at each point in time. To ensure the accounts still balance on this basis, employers imputed contributions will now also be included in the accounts, which are calculated to ensure that the increase in entitlement due to current service is fully funded by the employer. The change in the stock of actuarial liabilities in any period is itself the combination of: the increase in liabilities each period due to there being one period less discounting of the existing pattern of future liabilities at the beginning of the period, as members move closer to retirement (the unwinding of the discount rate ); and the change in the future profile of the fund s liabilities, due to the impact of factors such as net transfers of members into or out of the scheme, scheme reforms, revaluations (changes in financial assumptions) and other changes in volume (changes in demographic assumptions). 3.4 Implicit inclusion of holding gains It is important to note that this new treatment implicitly involves a significant change in the way DB pension funds holding gains feature: Under ESA95, only actual transactions were taken into account in calculating household saving. Holding gains were thus discounted and excluded. The revised treatment takes households pensions saving as determined by the promised benefits and the pension funds as therefore owning sufficient assets to support these promised benefits. These assets, the actual contributions made, plus any holding gains made on the assets thus purchased, as well as the residual imputed employers contributions need to balance the accounts. Holding gains are thus implicitly included in saving under this new treatment. This is an important change because quantitatively the stock of holding gains is substantial. 4 Impact of the pension changes on key economic indicators Based on the above, the article now considers the consequential impact of the change to the new ESA2010 treatment on calculated household saving, as well as other key indicators such as GDP and the public sector finances. 4.1 Household saving Household saving is the part of households available resources that is not spent on the final consumption of goods and services. It is derived from subtracting final consumption expenditure from total resources, where total resources is equal to disposable income plus the change in households pension assets during the period. Office for National Statistics Page 4

5 The impact of the pension changes on household saving is considerable. Figure 1 shows that there have been increases in household saving across the period 1997 to 2012, equating to a revision of 29-55bn, and an annual average revision of 41bn a year. In some years this more than doubles the previous estimates. Figure 1: Impact of pension changes on households gross saving To consider the source of these changes, they can be broken down into five component parts, corresponding to the five flows that together add to the total. These are: Employers actual contributions; plus Employers imputed contributions; plus Households actual contributions; plus Households investment income on pension fund assets; less Household Final Consumption Expenditure on pension fund service charges. As an illustration, Table 2 breaks down the revision to gross saving for 2010: 47.4 billion in total. To put this figure in context, there are around 12 million members of DB schemes in the UK 3. So the additional saving amounts to around 4,000 per head. (There are only about 2 million members of DB schemes still making contributions, but the relevant calculations relate to what is needed to ensure the actuarial balance of the scheme as a whole, including payments which already are, or which will need to be, paid to non currently contributing members). Considering table 2 further: The changes for employers and employees actual contributions are largely the result of new data. In the case of consumer spending on pension service charges, there is also an improved methodology for making the calculation involved as well as new data. Together, these three components would have reduced gross saving by 9.5 billion; There is a much bigger upward change represented by the introduction of the new employers imputed contribution, for the reasons discussed in the previous section. This amounts to 11.3 billion; However, the biggest change comes from the calculated value of DB pension funds investment income under the new treatment. This is now imputed to be whatever is 3 Figures are taken from the Occupational Pension Scheme Survey (OPSS). Office for National Statistics Page 5

6 needed to support pension funds liabilities, rather than just the actual investment income received as under the ESA95 treatment. Again, this is for the reasons discussed in the previous section. This change is worth some 45.6 billion. Because of its quantitative importance, the following section considers this last item in more detail. Table 2: Sources of impact on households gross saving, 2010 Direction of revision Employers Actual Contributions Revision - 2.2bn Plus Employers Imputed Contributions Plus Households Actual Contributions Plus Funds Investment Income bn - 3.2bn bn Less Household Final Consumption Expenditure Total Impact on Gross Saving +4.1bn bn The counterparts to the increase in household saving are covered in the article Detailed assessment of changes to sector and financial accounts 2010 to 2012 and are explained in more detail in Developments to the treatment of pensions in the National Accounts Investment income The old investment income series (on an ESA95 basis), property income attributable to insurance policyholders, recorded the actual flow of investment income generated by pensions on their assets. It was calculated in the National Accounts as equal to dividends plus interest. No holding gains and losses were included within the series. Under the new treatment, pension funds are deemed to have just sufficient assets to meet their liabilities. These assets may include a call on the relevant employers if actual assets fall short of the liabilities. Consistently, pension funds are deemed to receive investment income on all these assets. In practice, this may be calculated as The opening pension liabilities (equal by assumption to pension funds deemed assets) multiplied by a representative risk free interest rate. Consistent with Eurostat guidance, for the UK, the chosen interest rate is the yield on 15- year Gilts for non-government managed pension schemes, or 5% for government managed schemes. Table 3, provides an example of the new calculation for investment income for private DB schemes. Table 3: Calculation of investment income for private DB schemes Pension liabilities Discount Rate 6.3% 4.4% 5.5% 4.9% 5.1% 4.4% 4.8% 4.5% 4.1% 4.7% 4.5% 3.7% 4.4% 4.0% 2.5% 2.3% Investment Income Office for National Statistics Page 6

7 The revision to investment income comes from deducting the previous series from the new series, which gives a revision across the time series of 30-45bn, and an average annual revision of approximately 39bn a year. Both the old and new investment income series are calculated according to the required European standards Investment income The size of the revision to investment income is large but, in the light of the previous discussion can be explained by two main factors: Historically DB pension funds have often been heavily in deficit in the sense that their actual assets fell well short of the actuarial value of the liabilities that they were required to support. Figure 2 shows that since 1997 DB pension funds assets have consistently been below the actuarial value of their liabilities (based on a Full Buy- Out measure of liabilities 4 ). In recent years, the deficit has been substantial Since the previous treatment scored as investment income only income from the actual assets, moving to the ESA2010 treatment where assets were deemed to be equal to the actuarial value of the liabilities itself implies much larger investment returns. Furthermore, the previous treatment scored only dividend and interest receipts as investment income to the pension fund. As discussed earlier, this meant that holding gains on assets were excluded from the calculation. In reality, pension fund beneficiaries will be indifferent as to whether their future benefit entitlements are underpinned by interest and dividend payments or by increases in the values of the assets held in the pension fund. As discussed in earlier sections, the new treatment implicitly includes holding gains of this kind within DB pension funds investment income - and thus in the savings of the households who benefit from them. Both of these considerations give rise to substantial upward revisions to recorded investment income and together explain the large overall upward revision. Figure 2: Assets and liabilities of funded DB schemes 5 4 As described in Jones (2014), ONS makes use of the Pension Protection Fund s (PPF) Full Buy-Out series for estimating the liabilities of DB schemes. 5 Please note that the title of this chart changed on 18th September The word 'private' was removed. Office for National Statistics Page 7

8 4.1.3 Illustrative example of the change between ESA95 and ESA2010 It is often easiest to understand a conceptual change in the National Accounts by looking at a real-world example. This section focuses on the accounts of a sizable pension fund of a UK employer and demonstrates how the UK s estimate of gross saving are affected by the UK National Accounts moving from being on an ESA95 to ESA2010 basis 6. Table 4 highlights the figures which would be picked up from the published accounts and used in the National Accounts under ESA95. The data items highlighted in blue on the left side of table are those that are currently used in the National Accounts. The arrows then show where these data items feed into National Accounts flows, with the flows highlighted in green being those that impact on household saving. For example, the table shows that employer actual contributions are fed directly into the National Accounts and gross saving. In contrast, benefits paid are shown to flow into the accounts, but have no impact on estimates of gross saving. Table 4: Worked example on an ESA95 basis m m Figures from Accounts 2013 Fund in ESA Opening Assets 3,089.0 Opening Liabilities 3,089.0 Opening Liabilities 3,606.0 Employer Actual Contributions 54.0 Employer Actual Contributions 54.0 Employee Actual Contributions 1.0 Employee Actual Contributions 1.0 Investment Income (Interest & Dividends) 42.1 Investment Income 42.1 Benefits Paid 78.0 Benefits Paid 78.0 Net Transfers 0.0 Service Charge Holding Gains/Losses Discount Rate 4.80% Current Service Cost 55.0 Past Service Cost 4.0 Interest Cost Changes in Financial Assumptions 75.0 Changes in Demographic Assumptions 0.0 Closing Assets 3,471.0 Closing Liabilities 3,471.0 Closing Liabilities 3,825.0 Key Data used in National Accounts (ESA95) Impact on Household Saving Scheme Deficit/Surplus Impact on Gross Saving The service charge is calculated using an algorithm under ESA95. It has not been possible to replicate this algorithm for individual schemes. Therefore, for this example, the figure has been estimated by taking the proportion of assets to total assets for all pension funds, and using that proportion to estimate the previous service charge. 2 Scheme Deficit/Surplus equates to the difference between Closing Assets and Closing Liabilities. On an ESA95 basis it will always be zero. Under the ESA95 treatment, the impact on gross saving is given by the sum of employer and employee actual contributions plus investment income (defined as dividend plus interest receipts) less the cost of the service charge. By contrast, Table 5 shows which figures from the pension fund will be used in the National Accounts under ESA2010. Similarly to Table 4, the figures highlighted in blue are those which are picked up by the accounts, with the arrows showing where they feed into the Accounts. 6 These figures are taken directly from the pension funds accounts and the employers accounts. The actuarial figures are not on the same basis as those used in the National Accounts. This is simply an illustrative example; the figures actually recorded in the National Accounts will differ. Office for National Statistics Page 8

9 Table 5: Worked example on an ESA2010 basis m m Figures from Accounts 2013 Fund in ESA Opening Assets 3,089.0 Opening Liabilities 3,606.0 Opening Liabilities 3,606.0 Employer Actual Contributions 54.0 Employer Actual Contributions 54.0 Current Service Cost 55.0 Employer Imputed Contributions Employee Actual Contributions 1.0 Employee Actual Contributions 1.0 Investment Income (Interest & Dividends) 42.1 Interest Cost Investment Income Benefits Paid 78.0 Benefits Paid 78.0 Service Charge Holding Gains/Losses Discount Rate 4.80% Net Transfers 0.0 Net Transfers 0.0 Past Service Cost 4.0 Scheme Reforms 4.0 Changes in Financial Assumptions 75.0 Revaluations 75.0 Changes in Demographic Assumptions 0.0 Other Changes in Volume 0.0 Closing Assets 3,471.0 Closing Liabilities 3,825.0 Closing Liabilities 3,825.0 Key Data used in National Accounts (ESA2010) Impact on Household Saving Scheme Deficit/Surplus Difference between ESA95 and ESA Impact on Gross Saving The employer imputed contributions are broadly equal to the current service cost less the employers actual contributions less the employees actual contributions plus the service charge plus any experience effects (the difference between assumptions made originally by the pension scheme to what is actually paid out). 2 The Service Charge is calculated as 1% of the Opening Assets. 3 Scheme Deficit/Surplus equates to the difference between Closing Assets and Closing Liabilities. Under the ESA2010 treatment: The impact on gross saving still includes employers and employees actual contributions, and the service charge is still netted off. However, the impact also includes the imputed contribution made by employers, as discussed in previous sections, recognising their ultimate obligation to make good underfunding of the scheme. Investment income is also still included but this is now defined as the return the pension fund needs to support its liabilities, and is based on the interest cost of the fund liabilities, rather than just actual dividends and interest received. This is much larger, for the reasons discussed in the previous sections (see section 4.1.1). 4.2 Impact on the household saving ratio The household saving ratio is given by dividing households gross saving by their total resources, i.e. disposable income plus the change in their pensions assets in that period. Most of the impact comes from the large upward movements to the numerator implied by the new treatment, and as described above. However, there is also an offsetting impact insofar as the denominator is also increased. But this effect is much smaller. Overall, as would be expected, the effect is of major upward revisions to the calculated household saving ratio in all years since 1997 (Figure 3). The profile of changes, year to year, however, is much less significantly impacted. Office for National Statistics Page 9

10 Figure 3: Revisions to the household saving ratio caused by the pension changes Figure 4 highlights the position of the UK household saving ratio, on an ESA95 and ESA2010 basis, compared with France and Germany. In addition, it also shows the position of the US on an SNA93 basis and an SNA2008 basis. Figure 4: International comparison of the household saving ratio 1 Estimates for the US are on a net rather than gross basis due to data availability. The graph demonstrates that the revised treatment of pensions in the UK National Accounts results in the UK household saving ratio being closer to that in other European countries. 7 This reflects the significant size of private sector DB schemes in the UK. Interestingly, there has not been such a significant increase in the US saving ratio as they have moved onto an 7 It is important to note that the figures for France and Germany are on an ESA95 basis rather than ESA2010 as figures are not currently available. Office for National Statistics Page 10

11 SNA2008 basis. However, the US has made clear that it has chosen not to fully adopt the recommendations as set out in SNA2008 8, an option not available to European countries Household saving ratio sensitivity analysis With the introduction of actuarial figures into the calculation of the household saving ratio, the ratio is now sensitive to the various assumptions used to calculate the actuarial liabilities. Two of the key assumptions made to calculate liabilities are the discount rate and the demographic assumptions used to project mortality and life expectancy. ONS has carried out sensitivity analysis in these two areas to aid understanding of how the new data impact on the household saving ratio Discount rate sensitivity One of the key elements of an actuarial valuation of DB liabilities is the choice of a discount rate. ESA2010 recommends that member states should use a risk-free discount rate when discounting liabilities for non-government managed schemes, and advises that the yield on long-term (10 years maturity or more), AAA-rated government or corporate bonds are the most appropriate for this 9. For government managed schemes, Eurostat advises that a 5% nominal discount rate should be used across all EU member states in order to provide consistency and comparability. The UK has decided to use the yield on 15-year Gilts as the discount rate for discounting non-government managed DB pension liabilities as this is widely seen as a risk-free discount rate, and is of appropriate maturity. This is an important decision to take as the discount rate has a significant impact on the liabilities series. In addition, the choice of the discount rate feeds into the investment income, which in turn feeds into household gross saving and the household saving ratio. ONS has therefore undertaken sensitivity analysis in order to understand how sensitive the household saving ratio is to the use of different discount rates. The discount rates used are: 15-Year Gilt Yields (the original discount rate) 15-Year Corporate Bond Yields Fixed 5% Discount Rate Fixed 2.5% Discount Rate 15-Year Gilt Yields +/-100bp 10 Figure 5 shows the results. As would be expected, the precise discount rate used does make some difference to the calculated household saving ratio. But, in all cases, the result of a substantial upwards shift, as compared with the series under the previous treatment, is clearly apparent. 8 This is outlined in two papers by the US Bureau of Economic Analysis (BEA), see McCulla et al (2013) and BEA (2014). 9 See ESA2010, A basis point (bp) represents a 0.01 percentage point movement in an indicator. Office for National Statistics Page 11

12 Figure 5: Sensitivity of household saving ratio (HHSR) to the discount rate Longevity sensitivity analysis ONS receives data from the Pension Protection Fund (PPF) as to the impact on liabilities of changes in longevity assumptions. For 2011, ONS was advised by the PPF that changes in longevity assumptions resulted in a 3.5% increase in liabilities at the end of Conducting in depth sensitivity analysis on how changes in longevity assumptions impact on the saving ratio would require extensive actuarial work to determine the impact of changes on the liabilities series. However, as an indicator, it is possible to make a broadly realistic assumption of the percentage impact on liabilities of changes in longevity assumptions, and feed that into our calculation of household saving. Similarly to the discount rate, this feeds into household saving through investment income. For this purpose, the sensitivity analysis looked at the effect of a stylised -10% and a +10% impact on liabilities as a result of changes to longevity assumptions. Figure 6 shows the current saving ratio, the new saving ratio under ESA2010, and the impact on the new saving ratio if there was a 10% reduction in liabilities due to changes in longevity assumptions, and the impact if there was a 10% increase in liabilities. The result is very little deviation from the new saving ratio figure. Office for National Statistics Page 12

13 Figure 6: Sensitivity of household saving ratio to longevity assumptions 4.3 Impact on Gross Domestic Product (GDP) There are three measures of GDP, each of which balances to provide a single figure for the UK economy. These are the production measure, the income measure and the expenditure measure. Pensions impacts on all three measures of GDP Production measure of GDP There are two elements to the impact of pensions on the production measure of GDP. First, there is a revision to the output of pension funds as a consequence of moving to ESA2010. The output is now equal to the service charge, and is calculated as equal to 1% of the value of the fund 11. This replaces the algorithm for calculating output under ESA95. The second impact on the production measure of GDP is due to changes in the output of the Local Government and Non-Profit Institutions Serving Households (NPISH) sectors, as nonmarket producers. The output of non-market producers is calculated as the sum of costs (being intermediate consumption, compensation of employees, consumption of fixed capital, and taxes less subsidies). Therefore, as the sponsors of DB pension schemes, both sectors record an employers imputed contribution which, as part of compensation of employees, feeds into their output calculation Income measure of GDP Similarly to the production measure of GDP, there are two elements to the impact of pensions on the income measure. First, the increase in the output of pension funds leads to an increase in their operating surplus by an equal amount. The second element is that the imputed contributions now recorded for local government and NPISH increase their respective compensation of employees. For all other sectors of the economy paying imputed contributions, they do not impact on GDP as it results in an equal and opposite impact on their operating surplus and, therefore, no net impact on GDP. However, for non-market producing sectors such as local government and NPISH, as the imputed contributions feed into output and subsequently Gross Value Added (GVA), this acts to cancel out any impact 11 For the local government pension scheme (LGPS) and crown guarantee schemes, the service charge is calculated based on administrative data for charges and fees from scheme accounts. Office for National Statistics Page 13

14 on their operating surplus, resulting in an impact on GDP equal to the imputed contributions paid by those sectors Expenditure measure of GDP Finally, on the expenditure measure of GDP, there are again two elements of the impact from pensions. First, pension funds output is solely consumed by households as the beneficiaries of pensions. Therefore, household final consumption expenditure increases by a value equal to output, which leads to an increase in GDP. For the local government and NPISH sectors, as non-market producers, they are the consumers of their own output. Therefore, any increase in output leads to an increase in their respective final consumption expenditures, and again results in an increase in GDP Impact on GDP The result of the changes described is to revise GDP by between - 1.3bn and 9.4bn across the time period , with an average annual revision of 4.0bn a year. As Figure 7 highlights, the impact is more pronounced in recent years, in particular from 2005 onwards. Figure 7: Estimated impacts on GDP in current prices 4.4 Impact on Public Sector Finances The impact of the pension changes on the public sector finances is as a result of the recording of employers imputed contributions as payable by the local government sector. This is because the National Accounts have classified the local government sector as the pension manager 12 of the local government pension scheme (LGPS) 13. As a result, local government is liable for any imputed contributions and for any deficit in the LGPS. The payment of the employers imputed contributions by local government ultimately impacts on their net borrowing. The impact on local government net borrowing ranges from a 0.6bn to 2.5bn increase in net borrowing. The increase in local government net borrowing results in an equal increase in general government net borrowing The pension manager is usually taken to be the sponsoring employer of the pension scheme, as they are ultimately responsible for the liabilities of any funded DB scheme. 13 For more detail, please see Jones (2014). 14 For more detail, please see ONS (2014) and Gittins (2014). Office for National Statistics Page 14

15 Currently, although crown guarantee schemes are treated as being managed by government in the STP, the National Accounts currently classify those schemes as nongovernment managed. This is because the granting of a crown guarantee to any particular pension scheme does not necessarily result in general government being required to meet any liabilities at that stage. For example, the crown guarantee enjoyed by the BT pension scheme does not result in government being liable for the deficit in that scheme, rather the liability remains with BT unless it becomes insolvent. National Accounts plans to review the classification of the pension manager of such schemes, and any changes will be communicated accordingly. 5 Future Work ONS has undertaken extensive preparation prior to implementing these changes to the STP and to the National Accounts and will be seeking to make continued improvements over the next few years. Future key developments include: Developments to the calculation of revaluations, other changes in volume and pension scheme reforms in order to improve the quality of those estimates. This work will allow ONS to review the methodology used to calculate employers imputed contributions. The current assumption of 1% of assets as the value of the service charge is supported by research from the Department of Work and Pensions (Wood et al, 2012; Croll et al, 2010). However, it will be kept under review given potential policy developments and changes to the pension industry. Further developments will take place to pension estimates in the National Accounts as part of the work to bring the core Accounts and the STP onto a fully consistent basis. 6 Contacts Robbie Jones National Accounts Methods and Developments +44 (0) Jacqui Jones Business Indicators and Balance of Payments +44 (0) References BEA (2014). Changes in the Measurement of Pensions in the US National Income and Product Accounts. Group of Experts on the National Accounts Challenges and Approaches to the Implementation of 2008 SNA. Conference of European Statisticians, Geneva, pp Croll, A., Vargeson, E and Lewis, A. (2010). Charging Levels and Structures in Money- Purchase Pension Schemes. Department for Work and Pensions Research Report No London: Department for Work and Pensions. Chamberlin, G. & Dey-Chowdhury, S. (2008). Methods Explained: Household Saving Ratio. Economic & Labour Market Review, 2(3), pp Office for National Statistics Page 15

16 Davies, C., Fender, V. & Williams, B. (2010). Recent Developments in the Household Saving Ratio. Economic & Labour Market Review, 4(5), pp Gittins, P. (2014). Transition to ESA2010: Update to Impact on Public Sector Finances. ONS [website]. Available from: Jones, R. (2014). Developments to the Treatment of Pensions in the National Accounts. ONS [website]. Available from: Levy, S. (2012a). Pensions in the National Accounts A Fuller Picture of the UK s Funded and Unfunded Pension Obligations. ONS [website]. Available from: Levy, S. (2012b). Annex 2: Data Sources and Methods for the UK Supplementary table on Pensions ONS [website]. Available from: Levy, S. (2011a). Pensions in the National Accounts: Compiling a Complete Picture of UK Pensions Including Unfunded Pensions for Public Sector Employees. ONS [website]. Available from: Levy, S. (2011b). Compiling Estimates of State Pension Obligations for the National Accounts (A Methodology Article). ONS [website]. Available from: estimates-of-state-pension-obligations-for-the-national-accounts--methodology-article /art-pensions-in-the-national-accounts-2.html. McCulla, S.H., Holdren, A.E., & Smith, S. (2013). Improved Estimates of the National Income and Product Accounts: Results of the 2013 Comprehensive Revision. US BEA [website]. Available from: ONS (2014). Developments to Public Sector Finance Statistics June 2014 Update. ONS [website]. Available from: Wood, A., Wintersgill, D and Baker, N. (2012). Pension Landscape and Charging: Quantitative and Qualitative Research with Employers and Pension Providers. Department for Work and Pensions Research Report No.804. London: Department for Work and Pensions. Copyright Crown copyright 2014 You may use or re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or This document is also available on our website at Office for National Statistics Page 16

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