The European System of National and Regional Accounts (ESA 10) changed the arrangements for funded defined benefit pension schemes. The new approach required that the net liabilities of these schemes for the future costs incurred from past activities were calculated using commercial accounting concepts. This box provided a summary of the effects that the new treatment would have, as well as its relevance to the Whole of Government Accounts (WGA).
This box is based on ONS data from 2014 .
In 2012, the ONS published new experimental statistics on the total gross liabilities of UK pension providers. These liabilities covered all sectors of the UK economy, including private and public sector pensions, and state pensions. And the liabilities covered all pension schemes, whether funded or unfunded, defined benefit (DB) or defined contribution (DC) schemes. Under ESA10, from 2017, all European Member States are required to submit statistics to Eurostat on most of these liabilities.a
In the National Accounts, ESA10 changes the arrangements for funded DB pension schemes, so that the net liabilities of these schemes for the future costs incurred from past activities are calculated using commercial accounting concepts. In summary, the new treatment has the main effects that:
- for private sector funded DB schemes, household saving, employers’ social contributions and the investment income payable on pension entitlements are increased, reflecting the increase in the estimated net present value of future pensions incurred to date;b and
- for public sector funded DB schemes – the Local Government pension schemes – there is also an increase in employers’ social contributions in any period, to cover any increase in the net liability of the scheme in that period, i.e. the extent to which the net increase in liabilities is not covered by the net increase in assets.
The relevance for the WGA is that:
- the Pension Protection Fund (PPF) was established to pay compensation to members of eligible DB pension schemes, when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover PPF levels of compensation;
- the PPF is not currently included within the WGA, but the 2012-13 WGA states that the Treasury propose to include it in the 2013-14 WGA. We will need to see then how the WGA balance sheet covers PPF liabilities related to private sector DB funded pension schemes, and the offsetting PPF assets; and
- the change in treatment for the Local Government pension schemes will mean that they will be treated very similarly in both the National Accounts and the WGA.
In the National Accounts, the PPF is classified to the public sector, but the ONS has not yet included the effects of its transactions in the public sector finances. When the ONS brings these effects in, we would expect them to have a neutral effect on PSNB and PSND.