## 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/ditt/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bpm6/ditt/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bpm6/ditt/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf.json) --- ### Background and issue - Under the Balance of Payments and International Investment Position Manual, sixth edition (BPM6), direct investment (DI) excludes debt positions between selected types of affiliated financial corporations because such debt is treated as “normal banking-type business” and therefore not strongly connected to the DI relationship. - The selected financial corporations whose intercompany debt is excluded from DI are: - 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). - The OECD’s Benchmark Definition of Foreign Direct Investment, fourth edition (BD4) similarly excludes inter-company debt between certain related financial intermediaries (following the 2008 SNA definition of financial intermediary). - BPM6 paragraph 6.28 states that “Debt between selected affiliated financial corporations is not classified as direct investment because it is not considered to be so strongly connected to the direct investment relationship.” - ICPFs are currently excluded from the category of financial intermediaries whose intercompany debt is removed from DI because their principal functions go beyond financial intermediation (BPM6 paragraphs 4.88–4.89; consistent with 2008 SNA paragraphs 4.115 and 4.116). ### Conceptual considerations - Rationale for exclusion of financial intermediaries’ intercompany debt: - Such debt is considered “normal banking-type business,” often used to meet liquidity constraints and may be short-term. - Inclusion of such debt could produce misleading DI results because its nature differs from debt linked to ownership/control relationships that characterize DI. - BD4 and BPM6 originally allowed exclusion only for non-permanent debt but later extended the exclusion to all inter-company debt between selected financial intermediaries for practicality and statistical significance. - The question for ICPFs: Do debt positions between ICPFs and affiliated entities conceptually meet criteria to be excluded from DI, similar to “normal banking-type business”? ### Empirical observations and evolution of ICPF debt activity - Reported country-level evidence presented in the guidance note: - France: DI outstanding amounts between affiliated insurance companies have remained low, below 2 EUR billions; there are no pension funds in France. - 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. - The guidance note observes that ICPFs’ debt activities have not evolved enough in nature since the last manual update to justify a change in treatment. ### Measurement and practical feasibility issues - Current statistics: - Under current standards, the breakdown by institutional sector for non-residents is not required in DI statistics. - Practical challenges if methodology were changed: - Identifying the counterpart institutional sector for respondents would likely be required, which may be difficult in practice and could necessitate additional reporting from ICPFs. - If change were limited to certain debt instrument types, identifying those instruments in available data may be difficult. - Leaving debt between affiliated ICPFs in DI requires no change and is straightforward. - Possible criterion for reclassification: - Permanence of debt positions could be used to assess whether ICPF-related debts should be excluded from DI; historically, only non-permanent debt was excluded but the BD4 abandoned the permanent debt concept for practicality. - Life or non-life insurance technical reserves may be very “permanent” given their illiquid nature. - Data needs for further assessment: - Characteristics, amounts, and volatility of debts between insurance corporations and affiliated insurance corporations or pension funds and between pension funds and affiliated insurance corporations or pension funds, by debt type. ### Classification links and instrument types - Table 6.1 in BPM6 links financial asset classification and functional categories. Among “Insurance, pension, and standard guarantee schemes” (AF6), DI can take the form of: - Claims of pension funds on pension managers (AF64); - Provisions for calls under standardized guarantees (AF66); - Nonlife insurance technical reserves (AF61) and Life insurance and annuity entitlements (AF62) — possible but relatively uncommon; - Debt securities (AF3), loans (AF4), and other accounts receivable/payable (AF8) between affiliated ICPFs can represent DI; - Currency and deposits (AF2) between affiliated ICPFs can be excluded. ### Outcomes of DITT discussions and consensus - Twelve members of the Direct Investment Task Team (DITT) shared views on the guidance note and unanimously support the recommendation that methodology remain unchanged: debt between affiliated insurance corporations and pension funds should remain included in DI. - Co-authors of the guidance note also share this view. - No DITT member reported any significant change in debt positions between affiliated ICPFs since the last benchmark definition that would justify a conceptual or methodological change. - One DITT member flagged an unresolved identification issue: assigning the institutional (sub)sector for affiliates that exhibit both financial intermediary and financial auxiliary features (e.g., dealer and broker activities). The guidance note’s authors consider this issue outside the scope of the note. ### Recommendation - The DITT recommends keeping the manuals unchanged: retain the current treatment that debt between affiliated insurance corporations and pension funds remains in DI because there is no evidence that such debt related to ICPFs would distort DI analysis in the way cross-border interbank loans would if included in DI. ### Questions for discussion (posed by the guidance note) 1. Do you agree with the DITT recommendation of keeping the current treatment of debt positions between affiliated ICPFs unchanged? 2. If a review is needed: a. Which criteria should be used to decide whether debt positions between ICPFs are included in DI? Should a return to a “permanent debt” criterion be useful? Can volatility be used as a criterion? b. Would you favor a reclassification of all or part of debts between affiliated insurance corporations and pension funds? And if so, in which cases? --- _Source: https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d11-removing-debt-between-affiliated-insurance-corporations-and-pension-funds-from-direct-investment.pdf_