## 2.22 Government Assumption of Pension Obligations ## Source details **Canonical URL:** [2.22 Government Assumption of Pension Obligations](https://www.imf.org/-/media/files/data/statistics/gfsm/global-consultations/gfsm-discussion-note-222-assumption-of-pension-obligations.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/gfsm/global-consultations/gfsm-discussion-note-222-assumption-of-pension-obligations.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/gfsm/global-consultations/gfsm-discussion-note-222-assumption-of-pension-obligations.pdf.json) --- ### Summary and Key Recommendations - Task Team Responsible: GFS Compilation Task Team (TT1). - Authors: Roderick O’Mahony, Katherine Mills, Phil Stokoe, Emmanuel Ramathuba. - Scope: treatment when government assumes pension entitlement liabilities from other units (corporate pension funds, second pillar defined contribution schemes, court decisions). - Core question: whether pension obligations assumed by government should remain as pension entitlement liabilities (current GFSM 2014 guidance) or in some scenarios be extinguished and the transferred assets treated as an other accounts payable against future benefit payments (approach in the European Union). - Recommended options: - Issue A: adopt Option A3 — extend GFSM 2014 guidance to include additional guidance on transactions after the transfer and on additional scenarios. - Issue B: adopt Option B3 — provide guidance for cash-basis reporters recommending recording these transactions below-the-line. - Character of recommendations: no conceptual changes to GFSM 2014 concepts; provide clarification and explanations where guidance is incomplete or silent. ### Introduction: types of pension arrangements and recent reform drivers - Pension scheme classifications (GFSM 2014 Appendix 2 on social protection): - First pillar: social security pension schemes organized by government or social assistance funded out of general government revenues; no household pension assets or government pension liabilities recognized in GFS other than as a memorandum item; social security contributions recorded as revenue for the social security scheme; pension payments recorded as social security benefits or social assistance benefits in expense. - Second pillar: compulsory defined contribution pension schemes (sometimes run through a Provident Fund classified as public financial corporations) and employer-provided schemes (defined contribution or defined benefit); GFSM 2014 does not specify type of financial corporation or asset/liability created by a Provident Fund; 2025 SNA paragraph 13.70 indicates defined contribution pensions give rise to pension entitlements; GFSM Update Discussion Note 2.21 recommends liabilities of Provident Funds be classified as part of currency and deposits. - Third pillar: voluntary private savings by individuals. - GFSM 2014 on employer-provided defined benefit pensions: all defined benefit pensions provided to government employees, whether funded or unfunded, should be recorded as pension entitlement assets/liabilities. ESA records no pension liability for unfunded pensions for government employees. - Drivers of pension reform: (i) population ageing; (ii) fiscal consolidation; (iii) privatization programs where governments may assume/extinguish accumulated pension obligations prior to sale; (iv) financial sector reform and regulatory changes prompting transfers to public schemes. - Illustrative examples (accounting challenges): - 1997 France Telecom: government took over pension obligations in exchange for a €5.7 billion lump sum of pension fund assets. - UK Royal Mail (privatization context): government assumed approximately £37.5 billion in pension liabilities and received pension fund nonfinancial and financial assets of approximately £28 billion. - Uruguay: legal reform in 2018 allowed opt-out from AFAP component into BPS, transferring pension rights and forfeiting individual capitalization rights held in AFAP. - Irish Waterford Wedgwood: company’s pension schemes wound up with a deficit of approximately €110 million; ECJ ruled Ireland in "serious breach" of EU law; Irish government recorded a capital transfer expense of around €249m equal to the then (expected) size of the liability, recorded as an other accounts payable liability; payments are being drawn down and, if exhausted, the Irish Government will continue to make payments as required. ### Issues identified - Two main gaps: 1. Limited guidance in GFSM 2014 and inconsistency with the European System of Accounts Manual on Government Deficit and Debt 2022 (MGDD 2022). 2. No guidance in GFSM 2014 for countries compiling GFS on a cash basis about how to record pension assumptions. - Current GFSM 2014 treatment (paragraphs A2.60–A2.63): - When government receives assets in exchange for assuming pension obligations, a capital transfer (revenue or expense) is recorded if assets received differ from liability assumed. - GFSM 2014 directs that when government assumes pension entitlement liabilities these should be maintained as pension entitlement liabilities of the government even if administered as part of a social security fund. - Post-transfer consequences under GFSM 2014 integrated framework: - Above-the-line: Property expense for investment income disbursements (reflecting unwinding of the discount on the liability). - Below-the-line: Actual pension benefit payments recorded as reductions in the liability stock in the financial accounts (not as social benefit expense above-the-line). - ESA/MGDD 2022 approach (contrast): - When employees of an assumed scheme are moved to an unfunded scheme, pension entitlement assets and liabilities disappear (ESA does not record unfunded pension liabilities as pension entitlements). - MGDD 2022 directs recording the transfer of a lump sum from the pension fund as a prepayment of future transfers to the government (other accounts payable liability). The other accounts payable liability is reduced according to a planned or estimated schedule of repayments with revenue recorded as a current transfer (not a social contribution) at the same time as assumed pension payments, which are recorded as social benefit expense. - Additional gaps: - GFSM 2014 and 2025 SNA do not adequately address cases where governments absorb second pillar defined contribution scheme assets/liabilities into the first pillar; MGDD 2022 part 1.3.4 provides limited guidance assuming liabilities transferred equal assets received. - Court-compelled assumptions of pension obligations have no existing GFSM 2014 guidance. ### Options to address Issue A (government assumption of pension obligations) - Overview: five alternative options presented; none change the guidance on recording a capital transfer when assets and liabilities transferred differ in value. - Option A1: Maintain current GFSM 2014 guidance. - Preserve paragraphs A2.60–A2.63; pension entitlement liabilities remain on government balance sheet; pension payments recorded below-the-line as reductions of the liability. - Pros: maintains internal consistency of GFSM 2014 integrated framework; no need to revise historical series. - Cons: perpetuates divergence from ESA/MGDD 2022; risks inconsistencies for dual-reporting countries; no guidance on second pillar transfers or court-ordered transfers. - Option A2: Extend existing guidance on transactions after the transfer. - Clarify post-transfer recording: Property expense for investment income disbursements recorded as an expense for government; actual pension payments recorded below-the-line as repayments of the pension entitlement liability. - Option A3: Extend existing guidance to discuss post-transfer transactions and additional scenarios. - Revise GFSM 2014 to include guidance on recording transactions after the transfer and on absorption of obligations from defined contribution schemes and court-ordered assumptions. - Example scenarios: - Irish Waterford Wedgwood: pension entitlement liability assumed by government appears on the government balance sheet, matched by a capital transfer to household beneficiaries. - Uruguay: assumption of defined contribution assets and obligations sees pension entitlements and assets transferred to the government balance sheet, with resulting below-the-line payments to reduce the entitlement. - Limitations: - a. Adds complexity to GFSM 2014 Appendix 2 and may reduce accessibility for compilers with limited statistical capacity; correct post-transfer treatment requires adequate source data to estimate and record post-transfer stocks and flows. - b. Remains different from ESA/MGDD 2022 guidance on absorption of obligations into unfunded schemes, requiring reconciliation for EU member countries. - c. Recording pension entitlement liabilities for defined contribution scheme transfers absorbed into a first-pillar pay-as-you-go arrangement affects sectors beyond government: household assets effectively disappear from the household perspective, yet Option A3 would require a liability on the government balance sheet matched by a household asset. - Option A4: Revise guidance to align GFSM with ESA/MGDD 2022 for unfunded schemes. - Pension entitlement asset/liability disappears when incorporated into an unfunded scheme; lump sum received by government treated as an advance payment (account payable) wound down over time by recording revenue as a current transfer (GFS code 1441) matching future pension payments; future pension payments recorded as social assistance benefits. - Pros: closes gap with EU member country guidance; may be operationally easier for compilers lacking actuarial capacity. - Cons: introduces a significant conceptual change to GFSM; may understate government pension liabilities and household assets; could inflate stock of accounts payables in large assumptions; does not provide guidance on second pillar transfers or court-ordered transfers; reduces alignment with SNA/BPM recognition principles. - Option A5: Align with ESA/MGDD 2022 for unfunded schemes and include guidance on additional scenarios. - Combines A4 alignment with extended guidance for court-ordered assumptions and second pillar transfers. - Pros and cons similar to Option A4. ### Draft recommendation for Issue A - Task team recommends Option A3. - Rationale: preserves the existing GFSM conceptual approach while strengthening guidance where the manual is incomplete or silent; clarifies recording of transactions after the assumption and extends guidance to absorption of defined contribution schemes into government schemes and court-ordered assumptions. ### Recording of pension assumptions on a cash basis (Issue B) - Background: - GFSM 2014 focuses on accrual recording; no explicit guidance for cash-basis recording. - On a cash basis the only observable transactions are the transfer of the lump sum of assets to government and subsequent pension payments. - Recording the lump sum above-the-line could create a large cash surplus at transfer and higher deficits in future periods; recording as borrowing/repayment could avoid misleading headline impacts. - Options for cash-basis recording: - Option B1: Maintain current GFSM 2014 guidance. - No new guidance; likely heterogeneous recording across cash-basis reporters and potential incentives to time large transactions to affect headline fiscal measures. - Option B2: Revise guidance to record on a cash basis with operations above-the-line. - Cash receipt of assets recorded as an other capital transfer (GFS code 1442) in other revenues; subsequent pension payments recorded as social assistance benefits. - Drawback: distorts cash surplus/deficit in current and future periods; replicates misleading impact accrual recording seeks to avoid. - Option B3: Revise guidance to record on a cash basis with operations below-the-line. - Receipt of assets recorded below-the-line, matched by incurrence of a liability (pension entitlements or other accounts payable); subsequent pension payments recorded as reductions in that liability. - Advantage: no impact on cash surplus/deficit from the operation. - Data requirement: compilers need appropriate data to track future pension payments, which may be difficult if incorporated into a broader pension scheme. - Comparison: - Option B2 produces larger impacts on government cash surplus/deficit. - Option B3 minimizes headline distortions but requires significant data. ### Draft recommendation for Issue B - Task team recommends Option B3. - Rationale: avoids potentially misleading impacts on the cash surplus/deficit, particularly where pension reforms transfer assets from funded schemes to government; acknowledges trade-off of more demanding data requirements for compilers. ### Questions for global consultation - Issue A: Government Assumption of Pension Obligations of Other Institutional Units 1. Which option do you prefer (Option A1; Option A2; Option A3; Option A4; Option A5)? Please explain the reason for the option selected and provide any other additional comments, including any alternative options you would like to propose. 2. Are you aware of other scenarios involving government assumption of pension obligations (other than absorption of defined contribution schemes into first pillar state pension scheme and assumptions arising from court orders) where additional guidance would be beneficial? - Issue B: Recording of Pension Assumptions on a Cash Basis 3. Which option do you prefer (Option B1; Option B2; Option B3)? Please explain the reason for the option selected and provide any other additional comments, including any alternative options you would like to propose. *GFSM Update Discussion Note 2.22, GFS Compilation Task Team (TT1), authors Roderick O’Mahony, Katherine Mills, Phil Stokoe, Emmanuel Ramathuba* ### 2.22 Government Assumption of Pension Obligations ### 2.22 Government Assumption of Pension Obligations ### Summary and Key Recommendations - Task Team Responsible: GFS Compilation Task Team (TT1) - Authors of Discussion Note: Roderick O’Mahony, Katherine Mills, Phil Stokoe, Emmanuel Ramathuba - Scope: Discussion of different types of pension schemes and accounting when government assumes pension entitlement liabilities from other units (corporate pension funds, second pillar defined contribution schemes, court decisions). - Core question: Whether pension obligations assumed by government should remain as pension entitlement liabilities (current GFSM 2014 guidance) or in some scenarios be extinguished and the transferred assets treated as an other accounts payable against future benefit payments (approach used in the European Union). - Recommended options: - Issue A (Government assumption of pension obligations of other institutional units): extend GFSM 2014 guidance to include additional guidance on transactions after the transfer and guidance on additional scenarios (Option A3). - Issue B (Recording of pension assumption on a cash basis): provide additional guidance for cash-basis reporters and recommend recording these transactions below-the-line (Option B3). - Character of recommendations: No conceptual changes to GFSM 2014 concepts; provide clarification and explanations where guidance is incomplete or silent. ### Introduction: Types of Pension Arrangements and Recent Reform Drivers - Pension scheme classifications and treatment (GFSM 2014 Appendix 2 on social protection): - First pillar: social security pension schemes organized by government or social assistance funded out of general government revenues. Under these schemes, no household pension assets or government pension liabilities are recognized in GFS other than as a memorandum item; social security contributions recorded as revenue for the social security scheme; pension payments recorded as social security benefits or social assistance benefits in expense. - Second pillar: compulsory defined contribution pension schemes (sometimes run through a Provident Fund classified as public financial corporations) and employer-provided schemes (defined contribution or defined benefit). GFSM 2014 does not specify type of financial corporation or asset/liability created by a Provident Fund; 2025 SNA paragraph 13.70 indicates defined contribution pensions give rise to pension entitlements; GFSM Update Discussion Note 2.21 recommends liabilities of Provident Funds be classified as part of currency and deposits. - Third pillar: voluntary private savings by individuals. - GFSM 2014 guidance on employer-provided defined benefit pensions: all defined benefit pensions provided to government employees, whether funded or unfunded, should be recorded as pension entitlement assets/liabilities. ESA records no pension liability for unfunded pensions for government employees. - Drivers of pension reform: (i) population ageing; (ii) fiscal consolidation; (iii) privatization programs where governments may assume/extinguish accumulated pension obligations prior to sale; (iv) financial sector reform and regulatory changes prompting transfers to public schemes. - Examples illustrating accounting challenges: - 1997 France Telecom: government took over pension obligations in exchange for a €5.7 billion lump sum of pension fund assets. - UK Royal Mail (privatization context): government assumed approximately £37.5 billion in pension liabilities and received pension fund nonfinancial and financial assets of approximately £28 billion. - Uruguay: mixed pension system with opt-out from AFAP component into BPS under a 2018 law, transferring pension rights and forfeiting individual capitalization rights held in AFAP. - Irish Waterford Wedgwood case: company’s pension schemes wound up with a deficit of approximately €110 million; ECJ ruled Ireland in "serious breach" of EU law; Irish government recorded a capital transfer expense of around €249m equal to the then (expected) size of the liability, recorded as an other accounts payable liability rather than as a pension entitlement liability; payments are being drawn down and, if exhausted, the Irish Government will continue to make payments as required. ### Issues Identified - Two main issues: 1. Limited guidance in GFSM 2014 and inconsistency with European System of Accounts Manual on Government Deficit and Debt 2022 (MGDD 2022). 2. No guidance in GFSM 2014 for countries compiling GFS on a cash basis about how to record pension assumptions. - Current GFSM 2014 treatment (paragraphs A2.60–A2.63): - When government receives assets in exchange for assuming pension obligations, a capital transfer (revenue or expense) is recorded if assets received differ from liability assumed. - GFSM 2014 directs that when government assumes pension entitlement liabilities these should be maintained as pension entitlement liabilities of the government even if administered as part of a social security fund. - Post-transfer consequences under GFSM 2014 integrated framework: - Above-the-line: Property expense for investment income disbursements (reflecting unwinding of the discount on the liability). - Below-the-line: Actual pension benefit payments recorded as reductions in the liability stock in the financial accounts (not as social benefit expense above-the-line). - ESA/MGDD 2022 approach differs: - When employees of an assumed scheme are moved to an unfunded scheme, pension entitlement assets and liabilities disappear (ESA does not record unfunded pension liabilities as pension entitlements). - MGDD 2022 directs recording the transfer of a lump sum from the pension fund as a prepayment of future transfers to the government (other accounts payable liability). The other accounts payable liability is reduced according to a planned or estimated schedule of repayments with revenue recorded as a current transfer (not a social contribution) at the same time as assumed pension payments, which are recorded as social benefit expense. - Gaps: - Cases where governments absorb second pillar defined contribution scheme assets/liabilities into the first pillar are not addressed in GFSM 2014 or 2025 SNA; MGDD 2022 part 1.3.4 provides limited guidance assuming liabilities transferred equal assets received. - Court-compelled assumptions of pension obligations have no existing GFSM 2014 guidance. ### Options to Address Issue A (Government Assumption of Pension Obligations) - Overview: - Five alternative options presented to strengthen/revise guidance on recording transfer of pension obligations to government. - None adjust existing guidance on recording a capital transfer when assets and liabilities transferred differ in value. - Option A1: Maintain the current GFSM 2014 Guidance. - Preserve existing paragraphs A2.60–A2.63. - Maintains internal consistency of GFSM 2014 integrated framework: pension entitlement liabilities remain on government balance sheet; pension payments recorded below-the-line as reductions of the liability. - Does not require revision of historical series. - Drawbacks: perpetuates divergence from ESA/MGDD 2022; risks inconsistencies for dual-reporting countries; provides no guidance on second pillar transfers or court-ordered transfers. - Option A2: Extend the existing guidance on transactions after the transfer. - Broaden GFSM 2014 guidance to clarify post-transfer recording: - Once pension entitlements have been transferred to government and recorded on the government balance sheet, compilers should record Property expense for investment income disbursements as an expense for government. - Actual pension payments should be recorded below-the-line as repayments of the pension entitlement liability. *GFSM Update Discussion Note 2.22, GFS Compilation Task Team (TT1), authors Roderick O’Mahony, Katherine Mills, Phil Stokoe, Emmanuel Ramathuba* ### 34. This directly closes the most critical gap within the existing GFSM 2014 framework by explicitly ### GFSM Discussion Note 222 — Assumption of Pension Obligations ### Options for recording assumptions of pension obligations (Issue A) - Option A3: Extend existing guidance to discuss recording of transactions after the transfer and additional scenarios. - GFSM 2014 would be revised to include guidance on transactions after the transfer and on recording scenarios where governments absorb obligations and assets from defined contribution schemes, and court-ordered assumption of pension entitlement obligations. - Example scenarios: - Irish Waterford Wedgewood case: pension entitlement liability assumed by the government appears on the government balance sheet, matched by a capital transfer to the household beneficiaries. - Uruguay case: assumption of defined contribution assets and obligations sees pension entitlements and assets transferred to the government balance sheet, with resulting below-the-line payments to ultimately reduce the entitlement. - Limitations: - a. Adds complexity to GFSM 2014 Appendix 2 and may reduce accessibility for compilers in countries with limited statistical capacity; correctly applying the post-transfer treatment requires adequate source data to estimate and record post-transfer stocks and flows. - b. Remains different from ESA/MGDD 2022 guidance on absorption of obligations into unfunded schemes, meaning EU member countries with assumed pension liabilities may need to reconcile GFSM and ESA-based outputs. - c. Recording pension entitlement liabilities for defined contribution scheme transfers absorbed into a first-pillar pay-as-you-go arrangement has implications beyond the government sector (Uruguay example): once an individual's AFAP entitlement is transferred to the BPS pay-as-you-go system, that entitlement effectively disappears from the households' perspective; Option A3 would still require a liability on the government balance sheet, which needs to be matched in the household balance sheet with a corresponding asset. - Option A4: Revise guidance to align GFSM with ESA/MGDD 2022 guidance for unfunded schemes. - Under this approach, pension entitlement asset/liability disappears for pension entitlements incorporated into an unfunded scheme; lump sum received by the government treated as an advance payment of future payments toward subsequent pension benefits. - The advance payment would be recorded as an account payable and wound down over time by recording revenue in the form of a current transfer not elsewhere classified (GFS code 1441), with amounts matching the schedule of future pension payments at the time of the transfer. - Future pension payments would be recorded as social assistance benefits. - No additional guidance on transfer of second pillar schemes or court-ordered transfers. - Pros: - Closes the gap between EU member country guidance and the rest of the world. - May be operationally easier for compilers lacking actuarial capacity to estimate discount rate and liability profile at transfer date. - Cons: - Introduces a significant conceptual change to the GFSM. - Arguably understates government pension liabilities and household assets (which may not be fully addressed in the supplementary table on pensions). - Could inflate the stock of accounts payables in large assumptions, hampering analysis. - Does not provide guidance on transfer of second pillar schemes and court-ordered transfers of pension obligations. - Reduces alignment with the SNA/BPM approach, under which assumed pension entitlement liabilities would generally continue to be recognized on the government balance sheet where conditions for recognition are met. - Option A5: Align with ESA/MGDD 2022 for unfunded schemes and include guidance on additional scenarios. - Aligns treatment for common types of pension assumptions with ESA/MGDD 2022 as in Option A4, and extends guidance to court-ordered assumptions and assumption of obligations from second pillar defined contribution schemes. - Has similar pros and cons to Option A4. ### Draft recommendation for Issue A - The task team recommends adopting Option A3. - Rationale: preserves the existing GFSM conceptual approach to government assumptions of pension obligations while strengthening guidance where the current manual is incomplete or silent. - Clarifies recording of transactions after the assumption and extends guidance to cover additional scenarios, including absorption of defined contribution schemes into government schemes and court-ordered assumptions. ### Recording of pension assumptions on a cash basis (Issue B) Background and issues - GFSM 2014 currently focuses on accrual recording of transfers of pension liabilities; no explicit guidance on what to record when GFS are recorded on a cash basis. - On a cash basis the only transactions are the transfer of the lump sum of assets to the government and subsequent pension payments. - This could create: - A large cash surplus at the time of the transfer if recorded above-the-line, followed by higher deficits in future periods as pensions are paid. - Alternative: record the lump sum as borrowing and future pension payments as repayment to avoid misleading above-the-line impacts. Options for cash-basis recording - Option B1: Maintain current GFSM 2014 guidance. - No new guidance for cash-basis recording; likely leads to heterogeneous recording across countries that report GFS on a cash basis and may incentivize timing of large transactions to affect headline fiscal measures. - Option B2: Revise guidance to include advice on recording on a cash basis with operations recorded above-the-line. - Cash receipt of assets recorded as an other capital transfer (GFS code 1442) in other revenues. - Subsequent pension payments recorded as social assistance benefits. - Drawback: distorts cash surplus/deficit in current and future periods; replicates the potentially misleading impact that accrual recording seeks to avoid. - Option B3: Revise guidance to include advice on recording on a cash basis with operations recorded below-the-line. - Receipt of assets recorded below-the-line, matched by incurrence of a liability (pension entitlements or other accounts payable). - Subsequent pension payments recorded as reductions in that liability. - Advantage: no impact on cash surplus/deficit from the operation. - Data requirement: appropriate data needed to track future pension payments, which may be difficult if incorporated into a broader pension scheme. Comparison - Options B2 and B3 both address the lack of guidance for cash-basis GFS. - Option B2: larger impact on government cash surplus/deficit. - Option B3: significant data requirements for GFS compilers. ### Draft recommendation for Issue B - The task team recommends adopting Option B3. - Rationale: avoids potentially misleading impacts on the cash surplus/deficit; important where pension reforms transfer assets from funded schemes to government because recording the cash receipt above-the-line could artificially improve the headline balance without reflecting associated future pension obligations. - Acknowledged trade-off: more demanding data requirements for GFS compilers to track subsequent pension payments. ### Questions for global consultation - Issue A: Government Assumption of Pension Obligations of Other Institutional Units 1. Which option do you prefer (Option A1; Option A2; Option A3; Option A4; Option A5)? Please explain the reason for the option selected and provide any other additional comments, including any alternative options you would like to propose. 2. Are you aware of other scenarios involving government assumption of pension obligations (other than absorption of defined contribution schemes into first pillar state pension scheme and assumptions arising from court orders) where additional guidance would be beneficial? - Issue B: Recording of Pension Assumptions on a Cash Basis 3. Which option do you prefer (Option B1; Option B2; Option B3)? Please explain the reason for the option selected and provide any other additional comments, including any alternative options you would like to propose. --- _Source: https://www.imf.org/-/media/files/data/statistics/gfsm/global-consultations/gfsm-discussion-note-222-assumption-of-pension-obligations.pdf_