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Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department Bank of Japan “Measurement for the Retirement Benefit Obligations in Japan’s Flow of Funds Accounts (Practice of recording unfunded private pension liabilities)”

Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

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Page 1: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

Workshop on Pensions

April 22-24,2013

in Canberra

Sayako Konno

Financial Statistics Group

Economic Statistics Division

Research and Statistics Department

Bank of Japan

“Measurement for the Retirement Benefit Obligations in Japan’s Flow of Funds Accounts

(Practice of recording unfunded private pension liabilities)”

Page 2: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

1. Overview of Japan’s Pension Plan

2. Coverage by JFFA (Japan’s Flow of Funds Accounts)

3. Revision in JFFA

3.1 Overview of Revision in JFFA

3.2 What is Retirement Benefit Obligations (RBO)?

3.3 Treatment of RBO in 08SNA

3.4 Unrecorded Portion of RBO in JFFA

3.5 Volume of Unrecorded Portion

3.6 Recording Method in JFFA

4. Remaining Tasks

Outline of Presentation

Page 3: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

Types of pension plans and outstanding of pension reservesTypes of pension plans and outstanding of pension reserves

1.Overview of Japan’s Pension Plan

Three tiers of pension plan:

1) Corporate Pensions (Employee’s Pension Fund, Qualified Retirement Pension Plans etc) ,other pensions (National Pension Funds etc), and personal pensions.

2) Earning-related pension (Employees’ Pension insurance, Mutual Aid Pension).

3) National Pension (Basic Pension).

Most of pension plans in Japan are defined benefit schemes.

Other pensions (17 trillion yen)

(contract- out portion)

2) Employees' pension insurance

1) Personal pension products of life insurance companies (79 trillion yen)

2) Mutual Aidpension

1) Nationalpensionfunds

(Value: end of December 2012)

3) National Pension<Pension for all Japanese>

:Defined benefit scheme

1) Otherpensions foremployees

1) DC pensionplans (Individual

type)

<Corporate pensions (104 trillion yen)>

:Defined contribution scheme

Public pensions (assets outstanding: 176 trillion yen)

1) DC pensionplans

(corporate type)

1) Corporate pensions (exceptDC pension plans <corporate

type>)

Page 4: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

2. Coverage by JFFA (Japan’s Flow of Funds Accounts)

JFFA covers:

corporate pensions (Employee’s Pension Fund, Defined Benefit Corporate Pensions Funds etc),

other pensions (National Pension Funds etc), and personal pensions (Tire 1).

JFFA does not cover: National pension funds, Employees’ Pension Insurance, and Mutual Aid Pension (Tire 2 and 3) as public pensions are considered as transfer benefits from social security funds (government) in which contribution does not link directly to benefits.

Coverage of Retirement Benefit Obligations by the JFFA

Corporate PensionsOther PensionsPersonal Pensions1) Employee's Pension Fund2) Qualified Retirement Pension Plans3) Defined Contribution Pension Plans (corporate-type)4) Defined Benefit Corporate Pensions Funds1) The National Pension Fund

Personal Pensions

Not recorded in JFFA

note1: Outstanding amounts of pension reserves (end of December 2012)

2) The Organization for Workers RetirementAllowance Mutual Aid

3) The small-scale enterprise mutual aid account ofthe Organization for Small & Medium Enterprisesand Regional Innovation, Japan.

4) The Coal Mining Pension Fund.

5) Farmers' Pension Fund (Account for Payment ofPension).6) The defined-contribution Pension (personal type).

17

Pension Type

1) National Pension Funds2) Employees' Pension Insurance3) Mutual Aid Pension

Sector in JFFA

Households

Corporate Pensions

Other Pensions

Insurance

note1

Social SecurityFund

79

Asset

Liability

Liability

Liability

104

201

Asset/Liability

(Trillion Yen)

Tier1

Tier2+ 3

Page 5: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

(Before Revision) A part of actuarially calculated retirement benefit obligations, which was

not covered by corresponding financial assets, was not recorded because of the lack of data source.

(After Revision) JFFA has revised to record the full coverage of retirement benefit

obligations. Background: (1) The data became available after the implementation of Retirement Benefits

Accounting Rule from April 2000.• The rule required to disclose in financial statements the underfunded situation of corporate

retirement benefit plans including pension plans.

(2) Treatment in SNA•93SNA: The liability of DB pension plan is equal to the present value of the promised benefits.•08SNA: Employment-related pension entitlements should be recognized as liabilities towards

households, irrespectively of whether the necessary assets exist or not.

3.1 Overview of Revision in JFFA

Page 6: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

3.2 What is Retirement Benefit Obligations (RBO)?

Image of Retirement Benefit Obligations (RBO) “Retirement benefit

obligations” is defined as expected total benefits at retirement earned to date and discounted to the present value.

“Retirement Benefit Obligations” is calculated by three steps;

A) Expected Benefit Payments in full values.

B) Expected Benefit Payments which have accrued at the end of current term.

C) Discounted at present value (Retirement benefit obligations).

(C)RetirementBenefit

Obligations

(A)ExpectedBenefit

Payments(38 years)

(B) Full Valueof Expected

BenefitPayments(28 years)

Expected BenefitPayments

accrued in thefuture

Discounted at Present Value

Retirement(at age of 60)

fiscal year-end of statement of financial

position

the End of Current Term(at age of 50)

Entering Company(at age of 22)

28 years

38 years

Page 7: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

3.3 Treatment of RBO in 08SNA

(1) Retirement benefit obligations should be recognized as liability of “corporate pensions” sector, and asset of “households” sector.

(2) Introduction of Actuarial calculation The level of the employer’s contribution should be determined actuarially.

(3) Clarify relationship between pension fund and employer Any excess of the liabilities over the available assets should represent a claim

of the pension fund on the employer.

(4) Presentation of supplementary table The table shows the liabilities and associated flows of all private and

government pension schemes, whether funded or unfunded and including social security.

Page 8: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

3.4 Unrecorded Portion of RBO in JFFA

Retirement Benefit Obligations Unrecorded Portion of RBO : Retirement Benefit Obligations +

Prepaid Pension Costs – Pension Assets

= Unrecognized Liabilities +

Accrued Pension Costs

“Unrecognized liabilities”

includes “Transition Obligations”, “Actuarial Gains/Losses”, and “Past Service Liability (PSL)” which are not recognized in the B/S.

“Accrued Pension Costs”

should be recorded on the B/S as liability for retirement benefits. If it becomes asset, it will be “Prepaid Pension Costs.”

Pension Assets

UnrecognizedLiabilities

AccruedPension Costs

RetirementBenefit

Obligations

PrepaidPension Costs

UnrecordedPortion of

RBO in JFFA

Page 9: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

Non-financial CorporationsNon-financial Corporations BanksBanks

3.5 Volume of Unrecorded Portion

Unrecorded Portion of RBO : 25 trillion yen

Unrecognized liabilities : 10 trillion yen

Accrued pension costs : 15 trillion yen

Unrecorded Portion of RBO : 1.8 trillion yen

Unrecognized liabilities : 0.6 trillion yen

Accrued pension costs : 1.2 trillion yen

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Trillion Yen)

(FY)

Banks

Unrecognized Liabilities

Accrued Pension Cost

Figures are the sum of individual companies. (Source) Consolidated financial statements of listed companies.

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Trillion Yen)

(FY)

Listed Companies (except banks) on a stock exchange

Unrecognized Liabilities

Accrued Pension Cost

Page 10: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

3.6 Recording Method in JFFA

JFFA records a part of actuarially calculated retirement benefit obligations which corresponds to unrecognized liabilities and accrued pension costs as below.

The unrecorded portion has been retroactively revised in three sectors from 2002 2Q.

Pension reserves Pension reserves

27 trillion yen 27 trillion yen

Accountsreceivable/payable

Accountsreceivable/payable

27 trillion yen 27 trillion yen

(Volume: end of December 2012)

Private nonfinancial corporations Corporate pensions Households

Asset Liability Asset Liability Asset Liability

Page 11: Workshop on Pensions April 22-24,2013 in Canberra Sayako Konno Financial Statistics Group Economic Statistics Division Research and Statistics Department

The remaining tasks on unrecorded portion of RBO are;

1. Refine stock data:include companies other than banks and private nonfinancial corporations. include unlisted companies.

2. Estimate transaction data:make a distinction between transaction and reconciliation. Currently, the stock difference of unrecorded portion of RBO from the previous term is recorded in the reconciliation table only.

- Thank you for your attention -

4. Remaining Tasks