Social Insurance Accounting for a Notional Defined Contribution Scheme Combining Retirement and Long-Term Care Benefits

Abstract

This paper develops a social insurance accounting model for a notional defined contribution (NDC) scheme combining retirement and long-term care (LTC) contingencies. The procedure relies on standard double-entry bookkeeping and enables us to compile a "Swedish" type actuarial balance sheet (ABS) following a framework equivalent to an open group approach. This methodology is suitable for reporting the system's solvency status and can show periodical changes in the system's financial position by means of an income statement. The information underpinning the actuarial valuation is based on events and transactions that are verifiable at the valuation date, without considering expected future trends. The paper also contains an illustrative example to make it easier for policymakers to understand the main advantages and difficulties of our proposal. The policy conclusions stress the need to properly report social insurance benefits to enhance transparency and sustainability and to improve decision-making because it is in the public interest to do so.

Does the Pension System’s Income Statement Really Matter? A Proposal for An NDC Scheme with Disability and Minimum Pension Benefits

“…It is not only potentially misleading but may encourage "accounting arbitrage", where countries are incentivised to structure systems in certain ways to reduce the value placed on pension liabilities. In short, it can be said that ADLs capture (in an unsuitable way) only one side of a pension scheme's balance sheet which is considered from a Social Security Administration's point of view, the most valuable instrument for reporting the system's financial status (Vidal-Meliá et al, 2018).…”

“…Depending on the criteria chosen to quantify the NCRs of the contributors (Vidal-Meliá et al, 2018), there could be two aditional items presented on the balance sheet, liabilitiy to contributors for retirement, Con_(R)_NCR, and disability, Con_(D)_NCR, due to NCRs.…”

“…Since the system provides MPBs, its solvency and transparency needs to be preserved by including an asset counterpart to underwrite the liabilities caused by NCRs. To do this, and depending on the approach adopted (Pérez-Salamero et al, 2017;Vidal-Meliá et al, 2018) two additional entries can appear: a special type of public contribution asset: PCA_(D) and PCA_(R), or a buffer fund: BF_(D) and BF_(R), financed from general government revenues. It is important to note that disability benefits, survivor benefits and guaranteed minimum pensions are excluded from Swedish accounting because they are not part of the NDC system but are financed separately, basically using general tax revenue (TSPS, 2018).…”

“…The paper builds on previous work carried out dealing with the so-called "Swedish" open group (SOG) approach, and with pension schemes combining permanent disability and retirement within an NDC framework. The starting points are the papers by Ventura-Marco and Vidal-Meliá (2014), Pérez-Salamero et al (2017), TSPS (2018) and Vidal-Meliá et al (2018). Ventura-Marco and Vidal-Meliá (2014) inspired by the Swedish model, developed as a theoretical basis for compiling a Swedish ABS for a DB PAYG scheme with retirement and disability benefits.…”

“…TSPS (2018) is the most recent annual report of the Swedish pension system and presents its financial status and income statement along with a description of the accounting principles used for valuing the system's assets and liabilities. Finally, the paper by Vidal-Meliá et al (2018) develop a social insurance accounting model for an NDC scheme combining retirement and long-term care (LTC) contingencies.…”