Definition: Transfer of employers' pension obligations to government
For various reasons, government, as owner of the public corporations, may intend to "clean"
their balance sheets, for instance with a view to privatising these corporations whereas investors would be reluctant because of these obligations.
As a result of the transfer of the obligations to government, the employer’s pension scheme
is suppressed and the pension obligations are transferred to the government into the general social security scheme. The new scheme is unfunded (referred to as “Pay As You Go system”). In the case of a previously funded scheme, the transfer involves a change in the organisation of the pension scheme.
Note that various arrangements might be observed in the context of this transfer of pension obligations. Government could take responsibility for the payment of all the future pensions to existing employees of the corporation. It could also charge itself for only part of the future pension. Or government could pay additional amounts to pensioners in order to guarantee them a level of pensions on the basis of a current arrangement more advantageous than the new scheme they join.
The common point is that, as counterpart to the future commitments taken by government, government receives a “lump sum” that is assumed to cover the future burden of the pensions that will be paid by government.
This amount paid to government is generally an actuarial estimate of the present value of the future related government disbursements.
The assumptions underlying the method of calculation for the amount paid to government may be questionable as long-term projections of a number of variables, and their interaction, may lead to a range of estimates. However the differences generated by various assumptions are expected to remain sufficiently small to ensure that the transaction has a net present value close to zero and therefore acceptable by both parties.
Eurostat, "Lump sum payments to government in the context of the transfer of pension obligations"; (2004 edition), Office for Official Publications of the European Communities, 2004, Luxembourg