CHAPTER 10 PENSION FUNDS IN THE BALANCE OF PAYMENTS

Warning: The estimates in this publication are indicative. They are presented to give an indication of the magnitude of the impacts of proposed change to Australia's macro-economic accounts. All estimates are subject to refinement and revision in the compilation of the quarterly balance of payments to be published on 8 December 2009.

INTRODUCTION

This chapter will focus on the BPM6 treatment, data sources and models for pension funds of one economy transacting with households of other economies. New data series will be developed and backcast to June 1959 for pension fund items and will be included in the September quarter 2009 issue of Balance of Payments and International Investment Position, Australia (cat. no. 5302.0).

Pension funds are established for the purpose of providing benefits for the retirement or invalidity of specific groups of employees. Pension funds’ transactions include receiving contributions, paying benefits and investing funds.

Pension funds are often referred to as superannuation entities in the Australian context. Since the Superannuation Guarantee (Administration) Act 1992, superannuation assets and transactions have grown to be a large component of the financial sector. Pension funds are a large contributor to estimates within the National Accounts, however, under BPM5 pension funds were not included in the international accounts. BPM6 recommends the explicit measurement of resident to non-resident transactions of pension funds.


CONCEPTS

The new series records stocks (foreign assets and liabilities) and flows (contributions, benefit payments, investment income) for superannuation accounts of non-residents with Australian pension funds and superannuation accounts of residents with non-resident pension funds.


Entries in the Balance of Payments and International Investment Position

Pension funds are defined as an institutional subsector. Pension entitlements are defined as a financial instrument. These entitlements may be liabilities of pension funds or unfunded pension schemes. They are classified as other investment in the functional classification.

1 Account entries for pension fund
	Account	Transaction	Credits (exports)	Debits (imports)
	Services	Pension Fund Service Charge	Charged to Non-residents	Received from Residents
	Primary Income	Employer Contributions (CoE)	Non-resident employers on behalf of residents	Resident employees on behalf of non-residents
		Investment income	Attributed to Residents	Attributed to Non-residents
	Secondary Income	Social Contributions	Paid by Non-residents	Paid by Residents
		Social Benefits	Received by Residents	Paid to Non-residents
			Assets	Liabilties
	Financial Account	Transactions	Change in Assets (net of revaluations)	Change in Liabilities (Net of revaluations)
	International Investment Position	Closing stocks	Foreign Assets of residents	Foreign Liabilities to non-residents

In the International Investment Position (IIP), the valuation of pension entitlements will be the technical reserves available for pension entitlements. These entries will appear in the external account in the Australian System of National Accounts (cat. no. 5204.0).


Population estimates and member accounts

The in-scope population for pension estimates will be those residents and non-residents that have cross border pension positions or flows. Under this principle, residents have offshore pension fund assets (foreign assets) and non-residents are owed foreign liabilities. The method for deriving pension funds international flows will be based on the proportion of member accounts likely to be overseas.

It is likely that there are a small number of people living overseas that are contributing to Australian pension funds or receiving benefits and a larger number living in Australia receiving benefits from or contributing to overseas pension funds (see table 2). These estimates will be constructed by reconciling overseas population estimates, numbers of non-residents receiving social security payments and consulate staff. Further advice was sought from the pension funds. This remains a measurement challenge for the future as industry has advised that this is a difficult concept to measure but is most likely a small number of their member base.

2 Proportions for pension fund flows
	Type	Population	Proporton
	Contributors	Under 65 years	0.1% of contributor account transactions
	Beneficiaries	Over 65 years	0.3% of beneficiary account transactions
	Total	All working population	0.1% of member account transactions

No attempt was made to estimate the number of member accounts of overseas pension funds held by residents of Australia, rather a ratio was constructed with available data. The main source of information about residents with overseas pension accounts was benefits received.


Services

There may be explicit or implicit service charges for pension schemes. In the Australian context explicit charges are readily available from the Australian Prudential Regulatory Authority (APRA). Service charges will be composed of management and investment fees charged by pension funds. Pension fund service charge credits (exports) will be calculated as a proportion of member account transactions.

Debits (imports) will be calculated from a ratio based on exports.


Primary income

There will be two elements to primary income. Employer contributions will be rerouted through compensation of employees as they are attributed to the employee. Employer contributions are directly available through APRA. International flows will be calculated based on a proportion of relevant member account transactions.

The second transaction will be investment income attributable to current beneficiaries and contributors. These transactions will be considered to be supplementary contributions of the beneficiaries and contributors. These transactions will be calculated by a proportion of total member accounts transactions.


Secondary income

There will be two transactions that occur for secondary income credits and debits.

Social contributions will be recorded in the international accounts when a resident makes contributions to a pension scheme in another economy for his or her employment in that economy, or when an employer makes actual or imputed contributions on behalf of the employee. Social contributions to pension schemes will be determined as follows:

Employers’ contributions;

+ Employers’ imputed contributions;

+ Employees’ actual contributions;

+ Contribution supplements corresponding to investment income payable by pension schemes on pension entitlements;

- Service charges payable to pension schemes.

Social benefits in the secondary income account will be the amounts payable to the beneficiaries, and include pensions. These will exclude lump sum payments.


Financial account

Financial account transactions will be the changes in technical reserves due to transactions and consist of amounts of the estimated obligations to beneficiaries and holders that were accrued during the period. Pension entitlements will include those under both funded and unfunded schemes, but not potential benefits under social security schemes such as war veterans pension. The increase in pension entitlements shown in the financial account theoretically matches the entry in the use of income accounts for the adjustment for change in pension entitlements plus any change in pension entitlements, as well as any capital transfers that may occur.


International investment position

In the IIP the value of pension entitlements will be due to direct liabilities for domestic pension funds and assets based on the ratios derived from the domestic economy. Obligations of unfunded pension schemes will be also recognized as liabilities and are embedded within the estimates. It should be noted that potential payments by social security schemes will not be recognized as financial assets or liabilities in the IIP. Payments will be treated as current transfers in the secondary income account as they are made.

Foreign liabilities are calculated as a proportion of net equity in reserves for pension funds from the Australian System of National Accounts. Foreign assets will be calculated based on ratios from the domestic economy.


IMPACT ON THE BALANCE OF PAYMENTS

The revisions from the introduction of pension funds into BPM6 will increase the level of the current account deficit by 1.3% (about $940 million) in 2007-08. Australian asset position with the rest of the world will increase by 1.1% (about $12,200 million) and foreign liabilities will increase by less than 0.1% (about $1,000 million). Service charges for pension funds will decrease net services by 48.3% (about $590 million) and net secondary income flows will decrease by 54.7% (about $190 million).

3 Australian foreign liability and benefits flows
	1994-95	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01	2001-02	2002-03	2003-04	2004-05	2005-06	2006-07	2007-08
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Pension funds service charge	8	10	11	13	15	17	14	15	17	17	21	29	37	55
Investment income	4	4	4	4	8	8	8	4	8	8	8	12	16	16
Social Benefits paid	28	32	39	47	53	66	20	21	21	33	37	37	46	49
Social contributions	36	40	47	55	68	82	52	44	53	61	62	101	162	53
Foreign liabilities	187	219	267	312	357	440	470	489	514	611	696	852	1 119	1 076

4 Australian foreign asset and benefits flows
	1994-95	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01	2001-02	2002-03	2003-04	2004-05	2005-06	2006-07	2007-08
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Pension funds service charge	71	92	97	142	156	148	109	123	165	187	272	445	499	653
Investment income	37	38	36	45	86	73	63	32	77	88	104	187	220	193
Social Benefits recieved	204	232	248	356	392	384	360	360	384	396	408	436	444	452
Social contributions	327	372	416	604	714	720	407	362	514	673	805	1 386	1 319	643
Foreign assets	1 590	1 919	2 200	3 186	3 482	3 548	3 701	4 089	5 105	6 829	9 146	12 664	14 491	12 276