STATISTICS EXPLANATIONS REGARDING ACCRUED PENSION ACCUMMULATED RIGHTS AT THE END OF A PERIOD WITHIN SOCIAL SECURITY

1.Introduction

Economic Policy Committee (EPC) established by Commission Decision 74/122 / CCE (2) performing certain activities related to the sustainability of pensions and reforms on pensions.

The work of experts in statistics, on the one hand, and the experts in the field of aging operating under the CPE, on the other hand, should be closely coordinated at national and at European level, regarding macroeconomic assumptions and other actuarial parameters to ensure consistency and comparability of results from one country to another and to ensure effective communication of data and information on pensions to users and stakeholders.

It should also be clear that the accumulated pension rights by a specific date in the social security systems is not in itself an indicator of the sustainability of public finances (alin.21 Regulation 549/2013).

European System of National and Regional Accounts 2010 (ESA 2010) was recently updated to keep pace with new social and economic.

The new European System of Accounts (ESA 2010) allows for better analysis and international comparability of pension schemes within and between countries by introducing a supplementary table on pension schemes. Recommendations on developing this table were provided in a guide. This guide is a reference for all Member States of the European Union to develop supplementary pension table.

Supplementary table on accumulated pension rights provided in Transmission Program of the European System of Accounts (ESA 2010) and is important in the context of an aging society, the necessary detailed information is needed on pensions.

The main purpose of the national accounts data on pensions is to:

a)provide an overview of the pension entitlements of households in a single data set. Pension entitlements comprise a portion of the assets of households and are relevant to an analysis of consumption and saving behavior by.

b)provide comparability of data on pension entitlements of households across countries by covering all pension insurance systems.

2. Pension systems of national accounts

A defined contribution scheme(para 17.54 ESA 2010) is a pension scheme where the benefits are defined exclusively in terms of the level of the fund built up from the contributions made over the employee’s working life and the increases in value that result from the investment of such funds by the manager of the pension scheme.

A defined benefit scheme (para 17.56 ESA 2010) is a pension scheme where the benefits payable to the employee on retirement are determined by the use of a formula, either alone or in combination with a guaranteed minimum amount payable.

At the end of an accounting period, the level of the pension entitlements due to past and present employees can be calculated by estimating the present value of the amounts due to be paid in retirement using actuarial calculations based on a set of assumptions reflecting the expectation of long-term developments in demography.

Pension entitlements arising from social security schemes are not included in the core national accounts.

Pension entitlements arising from social security schemes are included in the supplementary table for accrued-to-date pension entitlements in social insurance to allow comparison of country data.

The recording of the flows for social security pension schemes refers to contributions made by the employer and by the employees and to social security benefits.

Comparison between defined benefit systems and defined contribution systems

The fundamental difference in accounting for a defined benefit pension scheme as compared to a defined contribution pension scheme is that, for the defined benefit pension scheme, the benefit to the employee in the current period is determined

in terms of the undertakings made by the employer about the level of pension, whereas for the defined contribution pension scheme the benefit to the employee in the current period is determined by the contributions made to the scheme, and the investment income and holding gains and losses earned on those and previous contributions. Thus while there is in principle complete information available on the benefits for the participant in the defined contribution pension scheme, the benefits for the participants in a defined benefit pension scheme are estimated actuarially.

Actuarial iphotesis-the data from national account are measured ex post, as they include only the current values of the entitlements that arise from the accrued pension rights at the balance sheet date. The method is based on observable past events and transactions, such as membership of the pension scheme and paid contributions. However, such ex post measures also rely on a number of assumptions in the modelling process. Estimates are made for the probability of current contributors dying or becoming disabled before reaching the pensionable age. The measures also reflect future changes of the payment stream due to any legislation enacted prior to the year for which pension entitlements are being calculated. Finally, the method requires some important assumptions on future developments, notably regarding the discount rate for future pension disbursements.

Discount rate-the discount rate applied to estimates of future pension benefits in the case of accrued-to-date entitlements is one of the single most important assumptions to be made in the modelling of pension schemes, since its accumulated impact over many decades can be very large. The discount rate from a chosen approach may change over time, which would lead to revaluations in the accounts

The same discount rate has to be used for all pension schemes where government is the pension manager (including social security pension schemes) at whatever level of government since the desired result should approximate risk-free yields.

Wage growth

Defined benefit pension schemes often apply a formula to the member’s salary — whether it be the final salary, an average of a period of years, or lifetime earnings — to determine the level of pension. The final pensions paid are affected by the average

growth of members’ salaries, notably through promotions and career progression.

It is, therefore, appropriate to consider what assumptions are made for the future development of wages. The assumed long-term development of wages should correspond with the observed discount rate. Both variables are, in the long-term, interdependent.

Demographic assumptions

Future pension payments are subject to demographic effects, in terms of the age/ gender balance of members and their longevity.

The accounting profession uses two actuarial methods to measure the impact of wage increases , namely :

The accrued benefit obligation (ABO) records only the benefits actually accrued to date.

The projected benefit obligation (PBO) is a more prudent measure of what the eventual level of entitlement is likely to be. For an individual, the PBO makes assumptions about how many future promotions the person is likely to receive and calculates his final salary accordingly.

3. Supplementary table on pension rights accumulated at the end of a period

The table contains three concepts namely pension rights :

A)Accrued-to-date liabilities (ADL)

These rights and obligations include the present value of retirement pensions to be paid in the future based on accrued rights. Pension rights accrued due to social contributions already paid by current workers and the remaining pension entitlements of existing pensioners. Are not considered accumulated rights acquired after curent year.

B)Current workers and pensioners liabilities (CWL)

For CWL, the pension system should continue until the last contributor dies. However, new entries of participants are not permitted. This concept refers to the ADL and the present value of the pension rights that will be accummulated by today's taxpayers because their future contributions

C)Closed Group Valuation (CGV)

ADL estimate does not allow the provision of services of future benefits to be accumulated by current members or new entrants to the public sector. ADL estimate is also known as "closed group evaluation".

Since actuarial values ​​for pension rights or obligations related to defined benefit (unfunded schemes) on social security in EU countries are not normally made available by the administrator of the pension scheme, national accounts statisticians must estimate the actuarial value

The table is in the form of a matrix line - column comprising 10 rows and 11 columns (A-K).

Rows represent transactions , more or less consistent with transactions of the National System of Accounts.

Table 1: The rows of the suplimentary table onaccumulated pension rights

Code ESA / Row no / Changes in pension entitlements due to transactions
XAF63LS / 1 / Pension entitlements (incl contingent pension entitlements)
XD61p / 2 / Increase in pension entitlements due to social contributions
XD6111 / 2.1 / Employer actual social contributions
XD6121 / 2.2 / Employer imputed social contributions
XD6131 / 2.3 / Household actual social contributions
XD6141 / 2.4 / Household social contribution supplements
XD61SC / 2.5 / Less: Pension scheme service charges
XD619 / 3 / Other (actuarial) change of pension entitlements in social security pension schemes
XD62p / 4 / Reduction in pension entitlements due to payment of pension benefits
XD8 / 5 / Changes in pension entitlements due to social contributions and pension benefits
XD81 / 6 / Transfers of pension entitlements between schemes
XD82 / 7 / Change in entitlements due to negotiated changes in scheme structure
Changes to pension entitlements due to other economic flows
XK7 / 8 / Changes in entitlements due to revaluations
XK5 / 9 / Changes in entitlements due to other changes in volume
XAF63LE / 10 / Pension entitlements (incl. contingent pension entitlements

Row 1shows the opening stock of pension entitlements, which is equivalent to the closing stock of the previous accounting period.

Changes in pension entitlements due to transactions

Row 2 Employer and employee actual social contributions are recorded in rows 2.1 and 2.3, as in the core national accounts.

Row 2.4 Household social contribution supplements shows the property income earned or imputed in the schemes, which is routed via the households sector or the rest of the world sector. It should be noted that for all defined benefit schemes including social security, whether funded or unfunded, this property income is equivalent to the unwinding of the discount rate.

In other words, the value is equal to the discount rate times the pension entitlements at the beginning of the accounting period.

Row 2.5 are pension scheme service tariffs provided by the pension

Row 3 is registering other (actuarial) change of pension entitlements in social security pension schemes. This item is calculated on actuarial basis.

Row 4Reduction in pension entitlements due to payment of pension benefits represent pension benefits that are paid during the accounting period

Row 5presents the changes in pension entitlements due to contributions and benefits.

It’s calculated as: Row 2 + Row 3 -Row 4

Row 6Transfers of pension entitlements between schemes

When one unit takes over the responsibility for pension entitlements from another unit, two transactions are recorded in row 6. First, there is a transfer of pension entitlements from the original pension scheme to the new pension scheme. Second, there may be a transfer in cash or other financial assets to compensate the new pension scheme. It is possible that the value of the transfer of financial assets is not exactly equal to the value of the pension entitlements transferred. In that case a third entry is needed in transactions of capital transfers to correctly reflect the changes in net worth of the two units concerned.

Row 7 shows the impact of reforms of pension scheme structures on entitlements relating to past service.

Changes to pension entitlements due to other economic flows

Rows 8 and 9account for the other flows as revaluations and other changes in volume associated with pension schemes in social insurance

Revaluations are due to changes of key model assumptions in the actuarial calculations. These assumptions are the discount rate, the wage rate and the inflation rate.

Other changes in actuarial estimates are more likely to be recorded as other changes in volume of assets. The effects of price changes due to the investment of the entitlements are recorded as revaluations appearing in the revaluation account.

When the demographic assumptions used in the actuarial calculations are changed, they are recorded as other changes in the volume of assets.

Row 10 End stock of pension entitlements at the end of the accounting period;

Table 2: Columns of the table of accrued pension rights accumulated

The columns of the table refer to the three groupings of pension schemes, as follows:

1. by type of recording into pension schemes completely recorded in the core national accounts (columnsA to F) and those whose entitlements are only recorded in the supplementary table (columns G and H);

2. by type of pension manager into non-general government (columns A to C) and general government pension schemes (columns D to H); pension schemes including social security classified in general government are shown in columns D, F, G and H; and

3. by type of pension scheme into defined contribution schemes (columns A and D) and defined benefit schemes (columns B and E to G).

For the most part, the beneficiaries of pension schemes are resident households. In some countries, the number of non-resident households receiving pension benefits may be significant. In this case, column K is added to show the total for non-resident households.

Pension schemes are classified further according to the pension manager, as government and non-government pension managers.

The pension manager is responsible also for determining the terms of another employment-related pension scheme and bears the ultimate responsibility for pension entitlements.

The pension manager also retains a significant degree of responsibility over the long-term policy of investment in assets, including the selection of investment options and the structure of administrative providers.

Although the same unit may frequently carry out both the functions of a pension manager and of a pension administrator, in some cases they are the responsibilities of different units.

When government takes responsibility for providing benefits to large sections of the community, the social security function fills the role of a multi-employer scheme. Like the insurance corporation, the government then takes on the responsibility for any shortfall in funds to meet the pension liabilities or may be entitled to retain any surplus generated.

It is often the case, though, that social security is funded on a pay-as-you-go basis so there is no question of a surplus arising and, if there is a shortfall in resources, government may have powers to change the entitlements not just relating to future employment but also for the past(para 17.77 ESA 2010).

Columns B, D, E, F, G shall not be filled in Romania.

4. Pensions systems in Romania

In the period, 2005-2008 Romania implemented the strategy of reforming and updating pension system.

After the pension reform of 2008, Romania was established a new pension system with several pillars, including:

a)Pillar I: mandatory public PAYG system ;

b)Pillar II: Is the name given to the mandatory private pension system, defined contribution;

c)Pillar III: is the name given pension system, run by private companies, a system based on individual accounts and voluntary membership

Romanian pension system is governed by Law 263/2010 on the unitary public pension and entered into force on January 1, 2011.

Table -Accrued-to-date pension entitlements in social insurance is prepared for the reference year of 2015 and be completed for columns A, H, I, J and the rows 1 to 6 and 10.

The data in column A rows 2-6 are recorded in the national accounts.

In Romania there are two types of schemes namely:

1. The defined contribution classified outside government (shown in column A)

2. Social security pension system classified in the general government sector (shown in column H)

4.1. Private pension funds

As recommended by ESA 2010, defined contribution schemes are schemes in which the future benefits depends on the value of investments accumulated in the system. Accumulated investment value depends on the level of contributions, investment income earned and capital gains and losses. It is considered that private pension funds (Pillar II) is a defined contribution scheme.

Regarding social contributions pension funds law provides:

Para 30

(1) The persons no older than 35 years, who are insured in accordance with art.5 paragraph 1 from Law 19/2000 regarding the public pension system and other social insurance rights, and who are contributing to the public pension system, must participate in a private pension fund

(2) The persons, other than the ones mentioned under paragraph 1, no older than 45 years, who are already insured and who contribute to the public pension system, have the option to participate to a private pensionfund.

Para 35

(1) Following the adhesion or the random distribution, the participants must contribute to a private pension fund and cannot redraw from the private pension funds system during the entire period that they make payments to the public pension system, until they are eligible for the payment of a private pension.

(2) Are exempted from the provisions of paragraph 1, the periods when payments are not made to the public pension system.

(3) If a participants stops making contributions to a private pension fund, he/she will remain a participant, with full rights, at the fund.

Par 39

(1) If a participant wishes to adhere to another private pension fund, he/she is obliged to notify in writing the administrator of the fund he/she want to transfer from, in 30 days time before the effective adhesion to the new private pension fund, and to send to it a copy of the new adhesion act.

(2) One stops being a participant to the old private pension fund on the day of the transfer of the account value, the role of participant to the new fund starts on the same day.

Para 42

(1) Contribution to the pension fund is part of the individual social security contribution due to the public pension system.

(2) The contributions to the private pension funds, is recorded distinctively, is deducted from the gross salary of the insured, in a similar manner with the contributions paid under the provisions of Law 19/2000, modified and amended to day.

(3) The contribution to the private pension fund is established and paid in the same conditions as the social insurance contributions.

Para 47

(1) Every participant has an individual account.