## D.11 Removing Debt Between Affiliated Insurance Corporations and Pension Funds from Direct Investment ## Source details **Canonical URL:** [D.11 Removing Debt Between Affiliated Insurance Corporations and Pension Funds from Direct Investment](https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf.json) --- ### Background and issue - The Balance of Payments and International Investment Position Manual, sixth edition (BPM6) and the OECD’s Benchmark Definition of Foreign Direct Investment, fourth edition (BD4) exclude debt positions between selected affiliated financial corporations because such debts are taken to represent “normal banking-type business” and are not considered strongly connected to the direct investment (DI) relationship. - The selected financial corporations currently excluded from DI debt treatment include: - deposit-taking corporations (both central banks and deposit-taking corporations other than the central bank); - investment funds; and - other financial intermediaries except insurance corporations and pension funds (ICPFs). - ICPFs are not classified as financial intermediaries whose sole purpose is financial intermediation; BPM6 paragraphs 4.88 and 4.89 define insurance corporations and pension funds and indicate their principal functions are beyond pure intermediation. - BD4 and BPM6 treat all inter-company debt flows between related financial intermediaries as excluded from DI, including debt securities classified as portfolio investment and other inter-company flows classified as other investment; the BD4 abandoned the concept of permanent debt for this exclusion on grounds of practicality and statistical significance. ### Key considerations and criteria - DI relationships are characterized by stable and long-lasting economic links, transfer of technology and know-how, and impacts on economic performance. Debt that is “normal banking-type business” (short-term liquidity financing) may mislead DI interpretation and is excluded. - Whether ICPF debt qualifies as “normal banking-type business” is central to deciding exclusion from DI: - The permanence of debt positions could be a criterion; some ICPF items (loans, technical reserves, provisions) may be long-lived (e.g., life insurance and technical reserves can be “permanent” or illiquid). - Practical compilation issues arise because current DI standards do not require a non-resident sectoral breakdown; identifying the institutional sector of counterpart affiliates would be necessary to reclassify such debts out of DI. - BPM6 Table 6.1 links financial assets classification and functional categories; DI involving “Insurance, pension, and standard guarantee schemes” (AF6) can principally take the form of Claims of pension funds on pension managers (AF64) and Provisions for calls under standardized guarantees (AF66). DI in the form of Nonlife insurance technical reserves (AF61) and Life insurance and annuity entitlements (AF62) are possible but relatively uncommon. DI between affiliated ICPFs can also take the form of Debt securities (AF3), Loans (AF4) and Other accounts receivable/payable (AF8). DI in the form of Currency and deposits (AF2) can be excluded. ### Evidence on evolution of ICPF debt positions - National examples reported: - In France, DI outstanding amounts between affiliated insurance companies have remained low, below 2 EUR billions. In addition, there are no pension funds in France. - In Canada, inter-company debt outstanding amounts between affiliated insurance companies have remained stable and at low levels, representing less than 10 percent of total foreign DI positions. - Overall inter-company debt amounts of pension funds have been insignificant or null in recent years in reported cases. - No DITT member reported significant changes in debt positions between affiliated ICPFs since the last Benchmark Definition that would justify a change in concept and methodology. ### Practical feasibility issues - Changing methodology to exclude some ICPF debt from DI would require: - Identification of the counterpart institutional sector for non-residents in DI statistics, which is not currently required and may be difficult to obtain from reporters. - Possible identification of specific debt instrument types in reported data, which may be challenging if debt types are not separately recorded. - Leaving debt between affiliated ICPFs in DI is straightforward under current compilation practices. - One DITT member noted unresolved classification issues when an affiliate exhibits features of both financial intermediary and financial auxiliary (e.g., dealer and broker activities), with no guidance on sub-sector assignment; the guidance note considers this beyond its scope. ### Consultations and conclusions - Twelve members of the Direct Investment Task Team (DITT) provided views; they unanimously supported maintaining the current methodology (i.e., keeping debt between affiliated insurance corporations and pension funds in DI). The co-authors of the guidance note shared this view. - Outcomes of the written consultation with the Committee: all Committee members unanimously supported maintaining the status quo, citing no evidence of significant developments requiring change. ### Recommendations - Maintain current manuals unchanged: keep debt of insurance corporations and pension funds related to their activity as insurance and pension funds included in direct investment. - Suggested textual clarification for the 2008 SNA: modify paragraph 26.87 to clarify which financial institutions are concerned by the statement “Direct investment includes debt between the parties as well as equity except in the case of debt positions between related financial institutions.” --- _Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf_