Definition: Defined-benefit funded schemes

National accounts

A first category of funded schemes is “defined-benefit funded schemes” where, although there is an
accumulation of assets as mentioned above, the unit responsible for management of the scheme bears the financial risk, taking the commitment to pay a promised level of benefits irrespective of the value of the accumulated assets. The sponsor can of course
use some financial techniques in order to reduce this risk.
In the case of such schemes, the liability of the fund (AF.612) must be valued at the "present value of the promised benefits" (§ 7.59) on the basis of some hypotheses. In addition, the sponsor has the power to “adjust the rules” if necessary, similarly to the
case of an unfunded scheme.
As a result, such schemes may show a positive (”over-funded”) or negative (“underfunded”) net worth if the market value of the assets is higher (or lower) than the
present value mentioned above. Such scheme may be under-funded as a result of a fall in the market value from the assets . Generally, the unit responsible for the scheme (the sponsor) should have to inject money under certain conditions in order to better
match the assets and obligations, but it may also take the form of government support, recorded according to ESA95 as a capital transfer. It means that even if the value of the assets is lower than 50% of the future obligations (which, obviously, could not be considered as a “predominant part”) a scheme could be treated as funded if it is obvious that the sponsor shows the intention to “re-balance” the scheme.
A government unit may theoretically manage such defined benefit funded schemes.
Provided that other criteria, as mentioned in ESA95 4.88a (large coverage of population, compulsory participation, control of contributions and benefits) are
fulfilled, these schemes must be classified as “social security schemes”.
It means that in the current ESA95, the liability vis-à-vis households for defined benefit funded schemes is not recorded as such in government balance sheet. This
may be seen as an inconsistency in the system (compared to a “private” definedbenefit pension fund) but, from an economic point of view, this situation is very similar to a social security fund as the main point is the government commitment to pay pensions according to rules where the market value of the accumulated assets has no influence.
Source:
Eurostat, "Classification of funded pension schemes and impact on government finance", 2004 edition, Office for Official Publications of the European Communities, 2004, Luxembourg
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