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    Guide to the Canadian Pension Satellite Account

    2 Objective and scope

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    2.1 Pensions in the national accounts framework
    2.2 The scope of the Pension Satellite Account

    The Canadian System of National Accounts (CSNA) is a fully integrated set of accounts for each of the main sectors in the economy, which includes various transactions and positions related to pensions.1 While pension activity and wealth is included in the core CSNA, they do not constitute primary variables nor are they a main use of the national accounts.2 As a result, pensions are not fully articulated in the current system.

    This gave rise to the need for a satellite account to clearly articulate the pension assets and flows, in light of substantial growth in pension saving and assets and in the face of an ageing population. The Pension Satellite Account (PSA) can shed light on changes in personal saving and consumption, as well as the impact of market fluctuations on net worth.

    The structure and intricacies of the Canadian pension system necessitate the PSA. Issues such as the recognition and ownership of pension assets and corresponding liabilities, as well as the nature of pension flows, are critical to the definition and understanding of these indicators of households' financial position and behaviour.

    2.1 Pensions in the national accounts framework

    In Canada, there is a three-tier system of social programs and saving schemes designed to provide funds for retirement: social security, employer-based pension plans, and individual registered saving plans (RSP) which are tax sheltered to encourage Canadians to accumulate retirement assets.

    The CSNA pension treatment reflects to a large extent the most fundamental differences between these three pension tiers.

    Social security

    In Canada, there are two social security programs providing retirement income to the elderly: (1) The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP); and (2) the Old Age Security/Guaranteed Income Supplement (OAS/GIS).

    In the CSNA framework, the CPP and QPP pension assets are owned by the government sector and are articulated, therefore, in the government sector balance sheet accounts. As a result, there is no liability of government recognized in the personal sector assets for these social programs.

    Employee contributions to CPP and QPP are reflected in wages and salaries and employer contributions in supplementary labour income of households. However, in the CSNA, both employee and employer contributions are treated as current transfers remitted to the government from the personal sector, therefore they are not included in the personal saving estimation. Investment income on CPP and QPP assets is part of government revenue, and the plans contribute to overall government saving and surplus/deficit. Benefit payments, i.e., withdrawals, are treated as part of current transfers from the government sector to the personal sector.

    For the OAS/GIS pension scheme, benefit payments are treated as current transfers from the government to the personal sector. There are no other explicit entries in the CSNA – no contributions made into the plan, no reserves set aside and no accumulated assets.

    Employer-based pension plans

    In the case of autonomous employer-based pension plans, the CSNA assigns the pension assets to the personal sector, with the corresponding liability on the corporate sector balance sheet accounts where the invested assets' detail is articulated.

    Tax-deductible employee contributions to employer-based pension plans are implicit, being included in wages and salaries. Employer contributions are treated as a labour cost and included in supplementary labour income of households. The autonomous pension plans are treated in the CSNA as collective investment schemes that are consolidated in the current account items of the personal sector. Consequently, contributions to autonomous employer-based plans remain in the personal sector and the investment income earned on the pension assets is counted in household income, and both are reflected in personal saving. Withdrawals, while taxable, are not treated as income but rather as financial flows that are mirrored in personal saving and represent a drawing down of assets or dis-saving.

    The CSNA treatment of government unfunded employer-based pension plans is consistent with that of the funded employer-based pension plans. The unfunded pension liabilities are classified as liabilities of the government sector and as assets of the personal sector in the national balance sheet accounts.3

    Individual registered saving plans

    The individual RSP pension assets are owned by the personal sector. As such, the personal sector balance sheet accountestimates include accumulated net inflows (contributions and investment income less withdrawals) as well as capital gains and losses on these investments.

    In the CSNA, contributions to individual plans are made out of current gross income, most of them arising from wages and salaries. Contributions are not explicitly recorded in the system as part of current outlays, so that they are implicitly included in estimates of personal saving. Investment income on these plans' assets earned in the current period also contributes to personal saving. Withdrawals that are used as a source of funds for personal consumption expenditure in a given period are reflected in that period's expenditure, and thus serve to reduce personal saving (i.e., represent dis-saving).

    2.2 The scope of the Pension Satellite Account

    Generally, sources of funds in retirement can include:

    1. Social security, which includes government transfers, the OAS/GIS, as well as the CPP and the QPP.
    2. Pension income from employer-based pension plans including both defined benefit and defined contribution plans. Pension plans of public servants including government consolidated revenue arrangements are included in this category.
    3. Individual registered saving plans such as registered retirement saving plans and locked-in retirement accounts as well as assets held in payout vehicles such as registered retirement income funds, life income funds or annuities.
    4. Investment income earned on non-registered assets other than those in the retirement schemes, including interest, rent, and dividends.
    5. Liquidation of unregistered financial assets or non-financial assets.
    6. Labour income, income from employment (wages and salaries).

    The PSA covers the three tiers of the Canadian pension system: social security, employer-based pension plans, and voluntary individual RSPs. Given that its focus is strictly on pensions, the PSA does not identify all the possible sources of funds that could be used for retirement, such as homeowner equity, intra-family transfers of assets or income, or personal savings held outside pension saving vehicles.

    The PSA does not take into account the use that is being made of these pension vehicles or the timing of withdrawals of funds earmarked for retirement. Any drawing down of accumulated pension assets prior to retirement are included as pension withdrawals.

    Notes:

    1. In the CSNA framework, the participants in economic activities are grouped into four main institutional sectors: the personal sector (i.e., persons and unincorporated business), the corporate sector, the government sector and the non-resident sector.
    2. The CSNA is broken down into two architectures: the production accounts and the sector accounts. The latter open with two main measures: gross domestic product (GDP) income arising from production and GDP final expenditure on production. The quarterly Income and Expenditure AccountsGDP estimates lead into the sector accounts. These aggregates and their components are broken down into sectoral income and outlay accounts and capital accounts. Added to these are quarterly financial transactions by sector (Financial Flow Accounts) to complete the flow accounts. Each period is framed by an opening and closing balance sheet (National Balance Sheet Accounts).
    3. The treatment of government unfunded pension liabilities (UPL) in the national accounts framework has been subject to much debate over the years. Strictly speaking, this type of government pension liabilities is defined as 'unfunded' as there are no invested assets. In the past, the Canadian national accounts' treatment was to exclude UPL. More specifically, UPL was excluded from the CSNA government balance sheet and household sector assets, which was  consistent with the view that for each liability there must be an asset. In 2000, the CSNA treatment was revised to include a full accounting for UPL. This decision was  based on several important considerations: the recognition of these liabilities in official government public  accounts, the need to eliminate the asymmetry between the treatment of funded and unfunded schemes and its effects on the national accounts' components as well as the need to more accurately state government gross and net debt in the CSNA.  Notably, this revision preceded the recognition of UPL in System of National Accounts 2008.
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