Pension management between financialization and intergenerational solidarity: a socio-economic analysis and a comprehensive model

Pension management between financialization and intergenerational solidarity: a socio-economic... Abstract In recent decades, the management modes of pension obligations have been coevolving with political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors, as well as transnational harmonization and convergence of accounting standards between private and public sectors. In this context, our article provides a theoretical analysis of these management modes of pension obligations, based on a comprehensive review of existing practice and regulation. The latter are still inconsistent with the individual savings model that has been fostered by international institutions, including the World Bank, the International Monetary Fund and the International Public Sector Accounting Standards (IPSAS) Board. According to our frame of analysis, a variety of viable modes of pension management exists and may be acknowledged. Overcoming the received opposition between defined contribution and defined benefit systems, our approach elaborates a model of pension management with a view to clarifying and improving pension protection, that is, the assurance of continued provision of pension payments at their agreed levels under viable alternative modes of pension management. The definition of financial sustainability depends on the pension management mode that is applied. With the help of this model, we further develop policy recommendations for accounting and prudential regulations concerning pension obligations. 1. Introduction The recent transformations of the management modes of pension obligations have been driven by political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. Regulatory changes and policy reforms have been consistently developed to enable these transformations (Frericks et al., 2009). Previous literature has addressed this institutional development of pensions in its connection with political, economic and financial institutions (Dietz, 1968; McKinnon and Charlton, 2000; Naczyk, 2013; Brown, 2014). These recent trends in pension reform have been related to vested interests and lobbying by financial actors, while the current organization of the pension system has been harshly criticized for being or having become financially unsustainable. Concerning the organization of the pension system, the finance-driven mode of pension management favours an individual savings model1 1 The widespread notion of ‘defined contribution’ pension scheme makes often reference to pension fund as an ‘individual saving account’ (see Box 1 for descriptive definitions). and the establishment of funded pension-related investment funds, while the received ‘pay-as-you-go’ mode is based upon economic solidarity among members or citizens, as current contributions pay for current beneficiaries through time. 1.1 Purpose and scope of our analysis Our article aims to complement existing socio-economic analyses by developing a theoretical analysis of overarching concepts and representations of reference for pension management. We argue that positions in the ongoing debate on pension management involve featuring representations of what pensions are and how they should be organized from the economic and the financial viewpoints. These representations affect the whole process of assessment and implementation of alternative institutional solutions for the organization of the pension system, including the very notion of financial sustainability. Therefore, our approach investigates the embedding of pension management in its socio-economic context according to two distinctive dimensions: a political economic dimension concerned with the ‘horizontal’ play of socio-political forces, including the setting of accounting standards; and an ideational dimension concerned with the ‘vertical’ connection that links pension representations and financial sustainability (Biondi and Suzuki, 2007; Baker et al., 2010). Accounting models of reference provide illustrative examples for both dimensions (Biondi, 2016). Accounting standards setting certainly constitutes a relevant field for confrontation among socio-political forces interested in organizing the management of the pension system. At the same time, distinctive concepts and representations are mobilized in the accounting debate to validate or dismiss the various ways of organizing the pension system that are at issue. As a matter of fact, pension funds and obligations have been a critical matter all along the international accounting convergence process for both private and public sector entities. Recommended accounting representation has coevolved with political, financial and economic strategies aimed at promoting and favouring financial markets and institutional investors. These strategies lead to consider pension obligations as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows. Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet. At the same time, these strategies foster the immediate funding of pension obligations, through the collection of cash funds to be invested, monitored and recognized on the asset side of the balance sheet. On the contrary, the received ‘pay-as-you-go’ mode is based upon largely unfunded future pension promises that are not recognized in the sponsor’s financial statements until they become due. Our comprehensive review of existing practices and regulations shows that the latter are still inconsistent with the representation—supported by international institutions, including the World Bank, the International Monetary Fund (IMF) and the International Public Sector Accounting Standards (IPSAS) Board—that pension schemes should be based on individual savings and deferred remuneration. Notwithstanding continued pressure for adopting this representation, practices and regulations still vary according to the pension fund and across jurisdictions. 1.2 Our model of reference to analyse existing practice and regulation Our theoretical analysis develops a systemic frame of reference and analysis for pension funds and flows over time in order to disentangle some key features of existing practices and regulations. This elaboration is based on an illustrative review of regulations and practices, together with a numerical visualization which allows overcoming the received opposition between defined contribution (DC) and defined benefit (DB) pension schemes (see Box 1 for descriptive definitions). On the one hand, our model identifies the ‘one best way’ representation that is fostered by recent trends and reforms, showing its features and limits. This alleged ‘one best way’ conceives of pension as an individual savings account and deferred remuneration. On the other hand, our model situates this ‘one best way’ in a comprehensive and neutral map among other viable modes of pension management. Our model also makes it possible to better understand current practices, disentangle rival positions surrounding regulatory and policy proposals, and provide recommendations for improved accounting and prudential regulation of pension funds and obligations in public and private sector entities. Within our framework of analysis, the notion of financial sustainability is made to depend on alternative management models. The various modes of sustainability depend on and are defined by the specific ways in which each model applies to organize the fulfilment of pension obligations over time and circumstances. The Appendix provides numerical examples that illustrate these ways. In particular, according to the individual saving representation (the ‘one best way’), sustainability is conditional on financial returns on investments of accumulated pension funds (as a stock), while in an unfunded ‘pay-as-you-go’ scheme, sustainability depends on whether contributions collectively match benefits over time (as a flow). Our model posits the ‘one best way’ representation as a working hypothesis that subsumes and illustrates the ideal or avatar, which drives and is driven by the recent reforms and policies. This avatar provides justification and legitimacy for these advocated reforms and policies. According to this representation, pension is conceived as a kind of individual saving arrangement. However, reforms often aim at making individual pension saving mandatory at the collective level. Therefore, in the practical implementation of these reforms, pension comes to be understood as deferred remuneration, while its cash provision accumulation over time is targeted to include financial investment return as a key source of future individual pension coverage. Therefore, the ‘one best way’ differs from funded DC schemes, although the latter are often promoted by reforms favouring the ‘one best way’. From a political economic perspective, international institutions have been fostering the ‘one best way’ as an ideal and an ideology (IFAC, 1995; PwC, 2012); however, throughout the socio-political debate and bargaining, the current reforms that are implemented at the national level usually enforce and promote a definite contribution model for pension schemes, which is a less-extreme way of reforming pension management than the ‘one best way’ (individual savings account). Moreover, the ‘one best way’ also differs from the actuarial accounting representation that is fostered by international accounting standards setters, although the ‘one best way’ provides inspiration and legitimacy for the latter, making pension accounting representation consistent with a form of wealth accumulation based on financial return (Le Lann, 2010). In this context, our analysis shows that the ‘one best way’ representation, as implemented by actuarial accounting standards for pensions, misrepresents the financial situation and sustainability of ‘pay-as-you-go’ schemes in particular while introducing unnecessary subjectivity and volatility in accounting for pensions in general. As a result, funded schemes may turn out to be less sustainable, and unfunded ‘pay-as-you-go’ schemes can be more sustainable than what their actuarial accounting representations would suggest. According to our theoretical perspective, several dimensions should be taken into consideration to develop a comprehensive approach to the existing viable management modes for pension obligations. Adequate accounting representations for each kind of existing schemes are required to perform a comparative assessment of these alternative management modes, and to develop a consistent design for regulatory frameworks. While the literature on pensions often focuses on the switch from DB to DC schemes, our approach provides a more comprehensive frame of analysis which: includes other existing management modes for pensions besides DB and DC schemes; challenges the doxa that unfunded ‘pay-as-you-go’ schemes cannot be sustainable; and illustrates the role played by the recent accounting reform in delegitimizing this mode of management. As for DC schemes, they are often described by the media as individual savings accounts (since they include assets as well as liabilities), fostering public distrust of DB schemes that differ from savings accounts. The rest of the article is organized as follows. Section 2 situates the recent debate on the management of pension obligations in the context of recent political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. In this context, transnational harmonization and convergence of accounting standards between private and public sectors have played a neglected but important role. This section further identifies the ‘one best way’ representation that drives ongoing reforms but does not take into account the variety of existing practices. Section 3 elaborates a comprehensive model that captures the ways pension obligations stand at the crossroads between economic organization, accounting and finance. Existing definitions of financial sustainability are then disentangled and related to the corresponding modes of pension management. A summary of the main argument and results concludes. A numerical analysis features in the Appendices. 2. Pension obligations: from the ‘one best way’ of the individual savings account to a variety of inconsistent practices 2.1 Pension reforms and the financialization movement Over the past three decades, major changes in the definition and management of pension provision have occurred, concerning both the public and the private sector. ‘These changes [were] occasioned by government policy and influenced by capital markets’ (Josiah et al., 2014, p. 18). In particular, in 1994, the World Bank (1994) developed a framework for pension obligations based upon three pillars: (a) a publicly managed pension system that requires mandatory participation from all members of society but is only aimed at alleviating poverty, not providing a comfortable retirement; (b) a privately managed pension system that ideally would cover all members of society; and (c) voluntary savings by individuals. The World Bank (1994, p. 361) developed this three-pillar model, which ‘separat[es] the saving function from the redistributive function’, under the assumption that the ageing of the population makes ‘pay-as-you-go’ schemes too costly and then unsustainable. According to ApRoberts (2007), this ‘three-pillar’ approach was further endorsed by the European Commission in 1997.2 2 In fact, according to Holzmann and Hinz (2005), the World Bank has amended this approach by adding two additional pillars that better acknowledge the social assurance dimension of pension obligations. This shows that the current debate is not yet settled in favour of the individual savings account view. This approach … constitutes a normative project aimed to prompt capitalisation while limiting pay-as-you-go mechanisms as a mode of funding pension obligations. (p. 19) … . This is an ideological endeavour whose objective is to persuade that the pay-as-you-go scheme, the main mechanism of funding pension obligations in most countries, has too large a place. (p. 24) … . This choice draws upon a free-market conception that assumes [that] individuals act alone, although aiming to make individual saving compulsory. (p. 22)Debates among specialists from national, international and academic institutions have been accompanying related reform projects. McKinnon and Charlton (2000, p. 153) argue that the three-pillar approach ‘essentially prioritising financial sector issues over social welfare considerations in pensions reforms is problematic’. Moreover, ‘it is insecure in its increasingly dogmatic prioritisation of private over public sectors … [and] it is short-sighted in its implicit assumptions that historical patterns of retirement provision have failed to consider the importance of the public private interface in financial sector development in general, in pension provision in particular’. Very interestingly, Draxler (2009) states that ‘the strong promotion of funded schemes was criticized by the World Bank’s own evaluation group’ (World Bank, 2006). This World Bank policy recommendation clearly illustrates the connection between pension reforms and emerging political and financial economic strategies that aim to foster active financial markets and institutional investors. In line with this connection, a World Bank study by Holzmann (2005) argues that: Pension reforms should seek to create positive developmental outcomes through increased national saving and financial market development. (p. 6) Funded pillars ideally should be introduced gradually to enable [Latin America and Central and Eastern Europe countries] to facilitate financial market development. (p. 15)These strategies intend to facilitate and organize the collection of (supposedly individual) savings to be gathered through institutional investors towards active financial marketplaces where those institutional investors manage investment portfolios on behalf of saving individuals. Indeed, Naczyk (2016, p. 1) mentions that ‘when they are fully-funded instead of being financed on a pay-as-you-go basis, pension arrangements generate funds that are injected into the financial system’. In turn, corporate entities are expected to access those financial marketplaces to get the funding that is required for their ongoing financial needs. Financial marketplaces come then to play a key coordination role between institutional investors and corporate entities, while savings remuneration—including pension payments—becomes dependent on financial market dynamics. Wehlau and Sommer (2004) review criticisms against the strategies encouraged by the World Bank and the European Commission. Accordingly, these strategies do not improve social welfare, there is neither a theoretical ground nor empirical evidence that they will enhance the development of the financial market or economic growth while they may expose pensioners to greatly enhanced risks concerning the size and real value of their pensions. These strategies are an integral part of a more general socio-economic movement labelled ‘financialization’ in the recent literature, as evidenced by Van der Zwan (2014), Carruthers (2015) and Livne and Yonay (2016). Financialization refers to the increasing importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, at the national and international levels (Epstein, 2001). Consequently, financial practices and mindsets have acquired an increasingly pervasive role in the economy and society, across countries and jurisdictions, in recent decades. In this context, pension funds have been seen as a high-potential policy tool to collect material financial funds to be employed for financial investment and trading (Berle, 1959; Dietz, 1968; Brown, 2014; Naczyk, 2016). More precisely, ‘financial firms [were—in France and in Belgium, from the end of the 1970’s until the mid-2000s—] a key proponent of pension privatization, while employers [had] a much more ambivalent attitude’, (Naczyk, 2013, p. 1). The rest of the section summarizes US’s, UK’s and Europe’s case studies. The US and UK cases are especially illustrative of this financialization development and of the New Public Management movement (Cohn, 1997). The situation in continental Europe is more nuanced. In the USA, major pension reforms were designed in the 1970s to prompt funded pension funds to become active financial investors managing portfolios of assets held on behalf of pension beneficiaries. Before these reforms, pension funds were not allowed to freely manage their investment portfolio since prudential rules and constraints prevented them from investing in risky assets such as corporate equity shares (Montagne, 2006; Schanzenbach and Sitkoff, 2017). These reforms led pension funds to increasingly channel material flows of financial funds through financial marketplaces. At a very early stage, the privatization of social security and the implementation of ‘individual retirement accounts’ were criticized (Munnell, 1987; Moore, 1998). Concerning the US corporate environment, Thomas and Williams (2009, p. 228) argue that the standards ‘[have failed] to satisfy the condition of neutrality’ and show how the switch from DB to DC schemes has shifted the economic risk from sponsors to employees. Consequently, many independent funds started delegating financial management to leading financial institutions, which also entered this business by establishing or developing their own funds. This confirms the role of financial institutions in the pension reform, consistent with the financialization movement. Concerning the UK, the pension reforms that have been implemented over the last two decades (1990s and 2000s) have led pension funds to become active on markets for corporate equity shares and for long-term bonds, including long-term governmental bonds.3 3 Wehlau and Sommer (2004, p. 6), dealing with pension policies within the enlarged EU, and referring to Central and Eastern European Countries, ‘raise the question, whether EU authorities attempt to push for (further) privatisation of old-age security within an enlarged Union to exhaust growth potentials of financial markets’.Greenwood and Vayanos (2010) put forth that the rationale behind the two major top-down reforms—the Pension Act of 1995 and the Pension Act of 2004—was a concern with bankruptcies of entities that sponsor or provide for pensions. In order to address this concern, the Pension Act of 1995 established minimum funding requirements that coincided with accounting reforms linking the valuation of pension liabilities to market-based discount rates. The Pension Act of 2004 introduced a government-backed guarantee fund expected to act as a rescuer of last resort in case of bankruptcy, while establishing fines for underfunded pension plans. Concerning private pensions schemes accounting, UK Financial Reporting Standard 17, which became mandatory in 2005 and was the UK equivalent of the IAS 19, forced UK companies to recognize pension liabilities in their financial statements at current value (Chitty, 2002; Slater and Copeland, 2005). In continental Europe, according to Frericks et al. (2009, p. 135), two extreme directions are currently being taken, one towards privatization and the other one towards solidarity. ‘European welfare reforms transfer many services, needs, and responsibilities to the market [which corresponds to a neoliberal tendency]. However, there is also a contrasting and striking development toward solidarity, based on extensive regulatory policies [which correspond to a neo-statist tendency]. … On the one hand, pension investments are more individualized, partly transferred to capital-funded investment funds, with the emphasis on self-responsible planning; on the other hand, possibilities to invest are more highly regulated.’ In a review symposium, Liebfried and Starke (2008, p. 175) commented on Ferrera’s (2005) work, which analyses the emergence of multi-pillar pension schemes in Europe. They argued that ‘although … correction has often been implicit and remained unnoticed by citizens, liberalization in recent decades has laid bare the social objectives hitherto inherent in many state activities in the economic sphere’. In France, in particular, the situation is not straightforward. As explained by Naczyk and Palier (2010, p. 5) ‘the generosity of trade unions and their defence [gave] limited room for expansion of funded pension schemes [but] the pay-as-you go schemes [have] significantly changed over the last two decades. … As a result, the development of pension savings has been implicitly promoted, although more on a voluntary base than on a compulsory one. … The access to [voluntary] – occupational and personal – pension plans, remains mostly limited to high-skilled workers.’ 2.2 The individual saving ‘one best way’ that overarches ongoing reforms Fostered by the financialization movement, an emergent normative pattern has been driving pension reforms. It is a fundamentally normative process since existing practices are still inconsistent with its requirements and underlying views. Existing schemes still provide strong evidence of diversity in existing practices. This section and the next one will present the ‘one best way’ fostered by this normative pattern and then show evidence from a variety of management modes such as governmental pension funds in the USA, the UK and France; corporate pension funds; independent mutual and DB pension funds; and notional DC (NDC) schemes. According to the ‘one best way’ representation, pensions are understood as individual saving accounts (and deferred remuneration) held on behalf of pension beneficiaries. According to Le Lann (2010): While pension public money used to be mainly understood as an intergenerational system of solidarity, it has progressively metamorphosed into a system of individual savings [since the 1990s]. (p. 2) … Progressive introduction of a liability for ‘pay-as-you-go’ schemes should be understood as a triggering consequence of the movement toward financial capitalisation in pension statistics. (p. 3)Appendix A provides a financial representation of pension obligations according to the ‘one best way’ during the working life of employees and when they are retired; contribution payments, pension liability and return on cash-contribution-based investments are visualized through a numerical example. This emerging view mingles pensions together with other financial investment funds held by individuals for precautionary or speculative reasons. An ‘ideal’ pension fund is then supposed to be attached to each individual and to be transferable, when its beneficiary leaves the corporate entity that has promised his future pension payment and has been managing his pension account. Pension is then understood as an individual savings account that is supposed to stock ongoing inflows paid against accrued pension rights. These inflows are expected to be continuously invested over time until the final pension amount that shall be liquidated has been reached, in the form of a lump sum or life annuity, at a certain maturity date scheduled by the individual pension scheme. According to this savings account view of pension, it is somehow the individual accumulation of cash that is expected to generate the future pension, period after period. Indeed pension becomes another kind of financial placement at the individual level. From this perspective, according to Bodie et al. (1988, p. 139): [Pension] benefit levels depend on the total contribution and investment earnings of the accumulation in the account. Often the employee has some choice regarding the type of assets in which the accumulation is invested and can easily find out what its value is at any time.According to Broadbent et al. (2006, p. 48), which refer to Barr (2009): Defined Contribution plans … provide employees with much more control, choice and flexibility in terms of how they manage their retirement savings and investment, and indeed how they manage their financial assets over their lifecycle.To be sure, although the ongoing reforms drive and are driven by the ‘one best way’ as an ideal and an avatar, they do not necessarily put all its features into practice. Accordingly, when governments opt for the ‘one best way policy’, they tend to recommend funded Definite Contribution schemes as the best mode of management. In this context, the accounting representation of pension obligations is expected to enact this understanding by providing actuarial information about the current net value of the joint pension fund, as if each individual were able to claim its current value pension share at will. Accordingly, a pension fund becomes similar to a closed monetary fund whose shares split its present current value among beneficiaries, after deduction of management fees and other corporate running costs. 2.3 Pension management: a variety of existing practices Notwithstanding continued pressure to adopt this individual saving ‘one best way’ representation, financial practices and regulations are still diversified between pension funds and across jurisdictions. Different types of pension funds exist in virtually all countries and jurisdictions that do not conform to this ‘one best way’ representation. Let us briefly explore the cases of governmental pension funds; corporate pension funds; independent mutual and DB pension funds; and NDC schemes (see Box 1 for descriptive definitions).4 4 Pensions provided as social benefits (unrelated to employment) are excluded as our focus is on employee benefits. Governmental pension funds are still largely unfunded and based upon ‘pay-as-they-go’5 5 Hereafter, we replace the usual expression ‘pay-as-you-go’ with ‘pay-as-they-go’, to highlight the collective dimension of this system, where current contributors pay for other people’s pension through time. schemes. Some countries such as China, Colombia, Brazil, Belgium, France, Germany, Ireland and Luxemburg have separated unfunded schemes for civil servants pensions. (Pinheiro, 2004). In the USA, state governments’ pension schemes are only partly pre-funded (Barr, 2009; Rauh, 2010; Lav and McNichol, 2011; Ponds et al., 2011; The Pew Charitable Trust, 2015). At a national level, the World Bank report by Holzmann and Hinz (2005, p. 46)6 6 R. Holzmann, professor of economics at Universiti Malaya (Malaysia) and UNSW (Australia), was the Sector Director and Head of the Social Protection & Labor Unit at the World Bank Group between 1997 and 2009. states an accounting practice that results in substantially unfunded schemes (see also BNAC, 2009): [US] States that accumulate large reserves within their pension funds do not act as though the funds were available to finance non-pension government operations. This behaviour contrasts with the experience in national-level governments. [They] have attempted to prefund a portion of their public pension liability [but] a large proportion (60–100 percent) of the pension fund accumulation in national social insurance systems is found to be offset by larger deficits in other budgetary accounts. Smetters (2004) claims that the offset for the United States exceeds 100 percent. …In the UK, most major public pension funds remain unfunded. According to BNAC (2009), the five largest unfunded schemes, accounting for 96% of outstanding unfunded liabilities in 2009, are the National Health System, the Teachers, the Civil Service, the Police and the Armed Forces. The sixth scheme, which is funded, is the centrally guaranteed, but locally administered, Local Government Pension Scheme. In 2009, these schemes covered together about 6.4 million employees, or about 25% of the UK labour force. In France, the main schemes for public sector employees are financed on a ‘pay-as-you-go’ basis, and no liabilities are recognized in public sector financial statements (Ponds et al., 2011). The French pension scheme for central government employees, magistrates and military personnel, and local government employees (Caisse Nationale de Retraites des Agents des Collectivités Locales; CNRACL) applies a ‘pay-as-you-go’ financing method. Only, the RAFP (‘Retraite Additionelle de la Fonction Publique’), which is a complementary pension scheme for central government employees, local government employees and healthcare employees, applies a funded financing method. Moreover, some corporate pension funds, notwithstanding changes in their accounting representation through enforcement of the IAS 19, maintain close ties with corporate sponsors, including in their investment strategies and pension operations. They are, therefore, likely to remain substantially unfunded. Moreover, self-directed investing entails risks: in case of bankruptcy, self-investing strategies can be harmful as was the case in the UK for the collapse of the Robert Maxwell’s media empire, and in the USA for Enron’s collapse (Sullivan, 2004, pp. 83–84). As stated by Sullivan (2004, pp. 84–85), self-investing remains a current practice: Many US corporations make contributions to their employees 401 (k) accounts in the form of their own company shares. These companies typically have around one-third of their 401 (k) plans self-invested. This compares with about 19% for all 401(k) plans. While a high level of self-investment is contrary to the principles of prudent diversification, it is perfectly legal. Although pensions regulation impose a 10% limit on self-investment, the restriction only applies to Defined Benefit schemes. The 401 (k) plans of some of America’s largest and most venerable companies – members of the Fortune 500, with thousands of employees – have self-investment levels above 60%. For example, in 2002, Coca-Cola and General Electric had about 75% of their 401 (k) plans invested in their own shares. The equivalent figure for Procter & Gamble was just under 95%.Independent mutual and DB pension funds are not managed as closed monetary funds. They may be partly unfunded and provide collective guarantees and transfers that are inconsistent with the pension-savings account representation. Some countries have only partially funded schemes such as the USA, Singapore, Ecuador, Canada (Augusztinovics, 2002) and Finland (Oulasvirta, 2008). Moreover, some countries such as the USA, the UK and Sweden have collective guarantee mechanisms, which can be voluntary or mandatory and concern either the private sector or the public sector. As stated by ApRoberts (2007, p. 27), ‘if a voluntary membership scheme allows a capital output, it makes no pooling of risks [while] … a common fund is essential to achieve a certain equality of treatment in the group concerned’. NDC schemes, despite increased individualization, maintain a collective dimension and are partly unfunded. In countries such as Sweden, Italy, Latvia and Poland, public NDC accounts are maintained along with unfunded public pension liabilities (Holzmann et al., 2004, p. 10). According to Nisticò and Bevilacqua (2012, p. 1), Italy and Sweden moved towards NDC pension schemes by ‘[adopting] defined contribution rules while retaining a “pay‐as‐you‐go” financial architecture’. According to Cichon (1999, p. 87): … Notional Defined Contribution (NDC) system [consists in] individual social insurance pension contribution records [that] are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. [It] is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.In conclusion, a clear move has been prompted to consider pension obligations as deferred remuneration, to be managed on behalf of its ultimate beneficiary as a financial investment scheme, accounted for through an actuarial basis of accounting. However, given the current situation regarding pension obligations, there is no clear-cut, consensual view of their concept (what they are), of their management (how they are fulfilled) and of their accounting representation (how they are accounted for). Current practice and regulation still vary across funds, countries and jurisdictions. In this context, pension regulation implies a delicate balance between constructing the one best practice, and acknowledging alternative options that factually exist. Should regulations for pension obligations follow the emerging view according to which pension ought to be considered as an individual savings account? The following section aims at elaborating a theoretical model that may help disentangling some key features of the existing practice while elaborating a frame of analysis for pension funds and flows over time. This model is based upon an accounting representation of these funds and flows over time periods and across cohorts of incipient and future beneficiaries.7 7 On the theoretical connection between accounting and the theory of the firm, see Biondi (2005) and Biondi et al. (2007). 3. Towards a comprehensive frame of reference for the management of pension obligations Positions in the ongoing debate on pension management make reference to distinctive representations of what pensions are and how they should be organized from the economic and financial viewpoints. These representations affect the whole process of assessment and implementation of alternative institutional solutions for pension organization, including the very notion of financial sustainability as distinct from the notion of funding. Accounting representations constitute a paradigmatic illustration of alternative institutional solutions. Disentangling the overarching accounting concepts and methods may, therefore, highlight the ongoing process of institutional transformation of pension organization and the relevant positions and conflicts that emerge throughout this transformation (Tinker, 1985). In this context, accounting systems provide rules, incentives and representations, which actively frame and shape the underlying pension schemes that those systems make ‘accountable’ to their constituencies (Biondi and Suzuki, 2007). Accounting plays here a distinctive role as an institution that governs these schemes at a distance, through its regulatory action (Burchell et al., 1980; Hopwood, 1983; Robson, 1992; Hopwood and Miller, 1994; Knorr Cetina and Preda, 2005). The regulatory action of accounting involves a specific ideational role, in so far as it provides a quantified representation of the financial performance and position of the scheme rendered accountable in monetary terms. This representation drives the very definition of pension sustainability, that is, it defines what is acceptable and permissible within the framework of the pension scheme and for its constituencies (including its pension beneficiaries) across events and circumstances. Pension-related cash and non-cash flows enter the working of pension schemes in compliance with a set of accounting rules (this accounting frame of reference acts here as an institution, that is, a rule of accounting). From a socio-economic perspective, accounting defines and controls how these flows and funds are entered, processed and spent through the pension scheme’s working process. From an institutional perspective, accounting defines the rule of law that makes these flows and funds accountable to pension scheme constituencies (Biondi, 2010, 2016). In this context, the actuarial accounting representation of pension obligations—fostered by international accounting standards setters—constitutes one peculiar accounting frame of reference. Each and every frame modifies the working conditions of a given pension scheme and of its overall assessment, including the very definition of its financial sustainability (see the Appendices for numerical visualization). This peculiar accounting representation implements the ‘one best way’ by considering pension as deferred remuneration and imposing its evaluation in term of current value or net worth. That view is, therefore, consistent with the financialization of valuation that has marked the past few decades (Chiapello, 2014; Mennicken and Power, 2015). As a matter of fact, pension funds and obligations have been a critical matter all along the international accounting convergence process for both private and public sector entities. Their recommended accounting representation has coevolved with political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. These strategies have caused pension obligations to be considered as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows. Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet. At the same time, these strategies foster the immediate funding of pension obligations, creating cash funds to be invested, monitored and recognized on the asset side of the balance sheet. However, existing practices and regulations are still inconsistent with the actuarial accounting representation that has been fostered by the IPSAS Board.8 8 The IPSAS are the Public Sector Accounting Standards issued by the IPSAB Board, which is facilitated by the International Federation of Accountants (IFAC). The latter includes the biggest international auditing firms (Big 4) as constituencies, and maintains links with the International Accounting Standards Board (IASB) that issues the private sector accounting standards called IAS/IFRS. Notwithstanding continued pressure for adopting this actuarial accounting representation, practices and regulations are still diversified between pension funds and across jurisdictions. This section will elaborate a theoretical analysis that helps disentangling some key features of existing practices while elaborating a frame of reference and analysis for pension funds and flows over time. This elaboration is based on an illustrative review of regulations and practices, together with a numerical visualization. This modelling step situates the ‘one best way’ in terms of pension arrangements, i.e. as individual saving and deferred remuneration, as one of the various viable modes of organizing the pension system. From this perspective, financial sustainability depends on the management mode under consideration, while funding and sustainability are not necessarily linked. This modelling step allows to better understand current practices, to disentangle rival positions surrounding regulatory and policy proposals, and to provide recommendations for improved accounting and the prudential regulation of pension funds and obligations in public and private sector entities. 3.1 Accounting implications of ‘the one best way’ Political and financial economic strategies designed to develop active financial marketplaces lead a growing number of accounting representations across jurisdictions to consider pension obligations as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows (Napier, 2009). Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet9 9 Our analysis deals with pensions as employee benefits. Pensions as social benefits (unrelated to employment) are then excluded.. As summarized by Oulasvirta (2008, p. 230): [Under US GAAP, IAS/IFRS and IPSAS standards], the whole accrued and unpaid pension debt must be shown in the balance sheet and not only in the notes of the balance sheet or in the annual report narrative. If the central government has a funding arrangement for state employee pensions and there is a special separated entity (pension fund) that is responsible [for] the funding, the pension liability and debt recording belongs to this pension fund. When the pension fund belongs to the national government, the national government must also show the debt in the consolidated whole of the central government balance sheet.At the same time, these strategies foster the immediate funding of pensions, generating cash funds to be invested, monitored and recognized on the asset side of the balance sheet. Those funds are evidently expected to be invested and generate financial returns in active financial marketplaces. Referring to further literature, a Word Bank report (Holzmann and Hinz, 2005, p. 47) argues that: … Funded schemes clearly seem to promote the development of securities markets (Impavido et al., 2003), making them more liquid and deeper as well as more sophisticated and innovative (Walker and Lefort, 2002).From an accounting perspective, we can confidently summarize this alleged ‘one best way’ as follows: (a) pensions are understood as deferred remuneration (b) to be accounted through a balance sheet determination of outstanding liability (c) at its discounting-based actuarial measurement (current value). The influence of the private sector accounting rules in the representation of the type of accounting that is currently applied is fundamental here. In 2012, Hoogervorst (2012), chairman of the IASB, criticized governments (using cash-based accounting) for ‘[giving] very incomplete information about the huge, unfunded social security liabilities they have incurred’10 10 The complete quotation reads as follows: ‘Public sector accounting also demonstrates the primitive anarchy that results without the discipline and transparency that good financial reporting provides. While the IPSASB has created good standards for the public sector, based on IFRS, they are used only haphazardly. Around the world, governments give very incomplete information about the huge, unfunded social security liabilities they have incurred. Many executives in the private sector would end up in jail if they reported like Ministers of Finance, and rightly so.’ and advocated IPSASB standards that are only used ‘haphazardly’. According to Le Lann (2010), Donaghue (2003), an IMF economist, provides a clear-cut illustration of this view while recommending the treatment of employees’ pension obligations as financial liabilities in national statistics (see also Feldstein, 1997). In particular, Donaghue (2003, pp. 4–6) focuses on the ‘passage of time’ as the determinant of accruing liabilities and argues that: A present obligation has been created simply by persons being in observance of the conditions required by the government’s pension policy up to the present period—that is, the passage of time has created reasonable expectations which leaves the government with no realistic alternative to meeting (at least in the main) those expectations. … The operation of government pension schemes gives rise to present (constructive) obligations of government, where the obligating event is simply the passage of time while the pension scheme is in operation. … These criteria fit the definition of a liability [according to IPSAS 1]. (p. 6) (emphasis added) Therefore, pension liabilities should be recognized on the balance sheets of government, and the corresponding transactions (transfers to households) should be included in the measurement of the government’s operating result in the periods during which the pension obligations accrue. (p. 7) In accounting terms, all government non-exchange pension schemes give rise to liabilities (in economic terms, insurance technical reserves), and expense and financing transactions. The liabilities are the net present value of obligations accrued to the current date. (p. 11)Donaghue (2003, p. 4) argues that ‘by relieving an individual of the present need to make provision for future risk, the government is actually providing a current benefit (similar to insurance cover)’ and should, therefore, consider pensions obligations as financial liabilities. The author underpins its arguments by quoting the US governmental accounting standard SFFAS No. 17 (Donague, 2003, p. 5): This same point is made in the USA Federal Accounting Standards and Advisory Board SFFAS No. 17 Accounting for Social Insurance which notes that some argue that ‘it is inherently misleading to fail to quantify the size of the promise that is being made and on which people are told they can rely’ (emphasis in original)Donaghue’s arguments are then in line with the concept of pension as being an entitled savings account (p. 6): The corresponding entitlements of individual citizens begin to accumulate when they reach the age of economic independence, and increase until they reach pensionable age (providing they are in observance of the conditions applying to the scheme), after which they begin to decline as benefits are paid out.In fact, Donaghue (2003) himself concedes that the recognition of pension obligations as a liability is not self-evident and goes beyond current practice and regulation. This further implies that he has been asserting a normative view that is not based upon a heuristic or comparative analysis of pension management modes. The recognition of obligations (and corresponding economic flows) arising from government pension schemes recommended in this paper goes beyond that set out in GFSM [Government Finance Statistics Manual, issued by the IMF] 2001. (p. 2) It is important to note that the treatment proposed in this paper will present a very different view of the economic stocks and flows relating to government pension schemes from ‘pay-as-you-go’ or similar treatments. (p. 7) It has been argued by some fiscal economists including at the International Monetary Fund (IMF) that the social pension arrangements do not adequately satisfy the constructive obligation criterion, due to the “relatively soft nature of the commitment”. Some fiscal analysts would therefore prefer that there be disclosure of the possible scope of government liabilities, rather than full recognition of the liability in the financial statements. (p. 12)Oulasvirta (2008, p. 229) summarizes this ‘one best way’ to treat accounting for pension obligations as follows: US GAAP, IAS/IFRS and IPSAS standards all have as a starting point that post-employment benefits should be recognized and recorded following the principle of pension benefits earned during the work. Based on this principle, pensions should be recorded on the following grounds. • The paid salary and the unpaid part of the salary which is the pension benefit earned during the accounting period should be recorded on accrual basis • as an expense incurred in the income statement (the profit and loss statement) • and the earned but still unpaid part of the benefits at the book closure date as a liability (debt) in the balance sheet. • The paying of the pension benefit to the recipients are only instalments of the debt (pension liability) recorded on a cash basis (no impact on income statement). This accounting representation is consistent with the ‘one best way’ view of pension obligations as individual saving, deferred remuneration and a financial placement on behalf of its beneficiaries. However, this view neglects and somewhat collides with the existing practice and regulations concerning pension management. The next section will develop a theoretical analysis that situates the ‘one best way’ among alternative viable modes of pension organization. 3.2 A theoretical analysis based upon the review of existing practice and regulation As a matter of fact, the individual saving ‘one best way’ for the accounting and management of pension obligations is not consistent with all the existing practices that still characterize pension management and reporting across countries and jurisdictions. The received distinction between DC and DB pension schemes is, therefore, insufficient to summarize and understand the organization of pension management. Our theoretical analysis aims to go beyond this received distinction in order to understand the ‘one best way’ as one among various viable modes of pension management. Pension management generally occurs through organized entities acting on behalf of sponsors and beneficiaries. This entity dimension is not consistently included in the view of pension obligations as individual savings account and deferred remuneration. A savings account can exist independently of managerial delegation to a specialized financial entity, while an entity-held pension account does not necessarily feature all the characteristics—regarding appropriability, transferability, remuneration and so forth—that functionally define an individual savings account. For instance, an entity-held pension account may not be appropriable or transferable at will, while it may not be fully funded at all times.11 11 Bohn (2011) argues on the ambiguous meaning of full funding, stating that there are several conceptually different ways to its interpretation. Separately incorporated or not, a financial entity specialized in pension management (generally labelled ‘pension fund’) is purposively designed to fulfil pension obligations over time. This fulfilment constitutes its constitutive mission. Performing this mission involves two complementary working processes that have to be accounted for: One process concerns the series of cash (cash-receivable, and cash-promised) flows that pass through the entity from current contributing members (including future expected beneficiaries and committed sponsors) to incipient and future beneficiaries. This process involves cash and non-cash financial funds and flows that have to be accounted for. It points to the financial dimension of the process. The cash process of the entity economy is consistent with a cash basis of accounting. The second process concerns the economic recovery of the outward flow of payments that are due over time to incumbent beneficiaries. This process involves the recognition and measurement of pension payments and matching contributions, and of the dedicated assets and outstanding liabilities that are generated by the continuous management of pension entity through time and hazard. It points to the economic process of the entity economy and is consistent with an accrual basis of accounting.Both processes go on through the working activity of the ongoing entity that is organized to fulfil pension obligations over time on behalf of sponsors and beneficiaries. Accounting provides its own representation of both processes and their mutual interaction, along with an accountability device concerning their performance and situation over time. From this perspective, an individual savings account approach to pension involves quite a narrow view of both processes. Accordingly, each individual is expected to collect his own series of cash settlements, which, through financial placement, are the only way to get future pension payments through a continuous financial accumulation that is dependent on cumulated cash funds and proceeds. To expand on this view, it may be useful to disentangle its implicit understanding of pension management through a dualistic approach that identifies couples of contrasting terms. This dualistic approach draws upon a review of the existing practice, as follows: Individualistic vs. collective: This discriminating concept distinguishes between individualistic and collective approaches to pension obligations. This concept specifically refers to the economic process. According to individualistic approaches, each individual is expected to pay for himself. Social solidarity through mutualistic transfers is, therefore, excluded, in principle, whereas financial sustainability is based upon the individual ability to pay and accumulate (as a stock). According to collective approaches, all of the members ensure the coverage of pension payments over time. Individualistic appropriation is, therefore, excluded, in principle, whereas financial sustainability depends on the continuous collective ability to balance contributions and benefits over time (as a flow). Funded vs. unfunded: This discriminating concept distinguishes between funded and unfunded pension obligations. This concept specifically refers to the financial process. Under funded schemes, the pension accounts are expected to contain cash and cash receivables that are intended to be invested with a view to recovering future pension payments, making financial sustainability dependent on investment returns. Under unfunded schemes, the pension accounts are not expected to contain cash, making financial sustainability dependent on collective assurance through time. It identifies outstanding pension rights and obligations that do not necessarily match some underlying financial investment process. Stock vs. flow basis of accounting: This discriminating concept distinguishes between the two most general families of accounting models (Biondi, 2012). This concept especially refers to the accounting representation.12 12 This stock/flow dyad of alternative accounting bases differs from the usual distinction between cash and accruals bases of accounting. While the latter distinction points to recording techniques of cash and non-cash movements, the former refers to the accounting model of reference for accounting representation. A flow basis of accounting can then exist under an accrual basis of accounting, as it is the case with the dynamic accounting view provided by historical cost accounting. The stock basis method of accounting adopts a balance sheet accounting approach that gives priority to recognition and measurement of assets and liabilities as they stand at one point in time, in order to represent and account for overarching managerial processes. The current (fair) value accounting measurement is generally consistent with the stock accounting basis that is applied to examine the financial sustainability of the pension scheme. The flow basis of accounting adopts an income statement accounting approach that gives priority to revenues, costs, contributions and expenditures. A historical cost (historical nominal amount) accounting determination is generally consistent with the flow basis of accounting that is applied to examine the financial sustainability of the pension scheme. This stock vs. flow dyad makes it possible to better characterize the ‘pay-as-they-go’ pension systems that still exist and are widespread in some national contexts, including France. Deferred remuneration vs. social protection: This discriminating concept distinguishes between two alternative understandings of pension rights and obligations and provides an overarching definition for various modes of pension management. On the one hand, pension is understood as deferred remuneration that is due to the individual along with the current remuneration. In its pure form, this implies that both the accrued pension payment and its cash liquidation are performed in the accruing period when the current remuneration is paid. On the other hand, pension is understood as a social protection that is granted to each other by all the members of the constituencies (pension fund members, citizenship) and delegated to a pension-purpose entity (mutual, governmental). In its pure form, this implies that continuous pension payments are ensured by that entity (including on behalf of collective or sovereign powers) and do not belong to the beneficiaries before they are due and liquidated.Table 1 summarizes these couples of contrasting terms. Table 1 Couples of contrasting terms Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Table 1 Couples of contrasting terms Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  According to this frame of analysis (Table 1), the view of pension as deferred remuneration that has been recently put forward corresponds to an individualistic approach which involves a funded financial management and a stock basis method of accounting. On the other side, we have the pure unfunded ‘pay-as-they-go’ scheme that has been generally adopted by public sector pension funds. This collective approach fosters an unfunded financial management, it prefers a flow basis method of accounting and it understands pensions as a social protection that is ensured by the pension-purpose entity on behalf of the whole of the union (pension fund members, citizenry). To be sure, pensions in the form of individual savings accounts have an ambivalent meaning regarding the flow and stock bases of accounting. On the one hand, if we focus on the progressive accumulation over time, we can see that an individual savings account is made up of continuously cumulated flows of savings. This dynamic dimension is consistent with a flow basis of accounting. On the other hand, if we focus on its continued reinvestment over time, this account comes to be a form of financial investment whose return is a key source for the coverage of future pension obligations. An actuarial accounting representation points to this second aspect, which is consistent with stock basis of accounting. Therefore, the ‘one best way’ mingles the individual savings account (flow basis) and deferred remuneration (stock basis). Our classification in Table 2 focuses on its progressive accumulation through flows of savings, neglecting its financial investment dimension (the deferred remuneration), which would be consistent with a stock basis. Table 2 A theoretically informed classification of existing modes of pension management   Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes    Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes  *Classification under flow basis focuses on its progressive accumulation through flows of saving, neglecting its financial investment dimension (the deferred remuneration), which is consistent with a stock basis. Table 2 A theoretically informed classification of existing modes of pension management   Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes    Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes  *Classification under flow basis focuses on its progressive accumulation through flows of saving, neglecting its financial investment dimension (the deferred remuneration), which is consistent with a stock basis. Our frame of reference goes beyond the alleged ‘one best way’ that defines pension as an individual savings account and deferred remuneration. Overarching managerial processes exist and are sustainable (depending on conditions and circumstances) under various models which correspond to, and can be referred to each couple of discriminating concepts. For instance, Table 2 shows a classification of existing practices according to two discriminating concepts: individual vs. collective and stock vs. flow basis. Accordingly (Table 2), under individualistic regimes, DC schemes apply a stock basis method of accounting and management. Each individual is, therefore, expected to hold a share of the pension joint stock. Individual savings (deferred remuneration) accounts are by definition personal, and they are generated by a progressive accumulation of savings flows and related reinvestment proceeds. Under collective regimes, DB schemes promise continued pension payments on behalf of the whole of a given constituency (including beneficiaries and sponsors). ‘Pay-as-they-go’ schemes make the same promise, but fulfil it through continuous matching between contributions and pension payments over time. In this context, a stock basis of accounting points to the notion and function of money as a reserve and measure of value (Le Lann, 2010), while a flow basis of accounting points to the notion and function of money as a symbol, a means of payment and unit of account (Biondi, 2010). In the first case, dedicated asset portfolio refers to the very existence and accumulation of identifiable assets that are expected to pay for future pensions. In the latter case, pension commitments stand as acknowledgement of stated promises of future payments by the entity responsible for the fulfilment of these promises through time. From this perspective, the ‘one best way’ that understands pension as an individual savings account appears to be inconsistent with the generally accepted meaning for pension arrangements. Historically, this meaning has been related to protection granted to the old or the sick (Blackburn, 2003). In its pure form, the pension as savings account view holds each individual—independently from all the others—responsible for their own financial sustainability over their entire retirement period, making it dependent on the hazardous results of the current financial investment process. However, according to the Merriam-Webster Dictionary, pension means ‘an amount of money that a company or the government pays to a person who is old or sick and no longer works’, while its meaning as ‘wage’ is considered as archaic. According to the Oxford English Dictionary, pension means ‘a regular payment made by the state to people of or above the official retirement age and to some widows and disabled people’.13 13 To be sure, Oxford Dictionary also adds the following definition: ‘A regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.’ Late Middle English (in the sense ‘payment, tax, regular sum paid to retain allegiance’) derives from Old French, as well as from Latin pensio(n-) that means ‘payment’, from pendere ‘to pay’. The current meaning of the verb dates back to the mid-19th century. 3.3 Distinctive notions of financial sustainability depending on pension management models According to our frame of analysis, the very definition of financial sustainability depends on alternative management models. The current modes of sustainability depend on the specific ways in which each model organizes the fulfilment of pension obligations over time and circumstances. The Appendix provides numerical examples that illustrate these ways. In particular, in the individual savings account (the ‘one best way’), sustainability is based upon financial returns over investments of accumulated pension funds (as a stock). In an unfunded ‘pay-as-they-go’ scheme, sustainability is based upon the continuous collective matching of contributions and benefits through time (as cash flows). An actuarial representation applies the time value of money to these flows. Future flows are then discounted back to the present time according to some compound discount rate of reference (as actuarial stocks). In this context, notwithstanding the criticism that has been levelled at them, unfunded ‘pay-as-they-go’ schemes can be sustainable as long as current and future contributions from constituencies (including sponsors and future beneficiaries) go on matching current payments that become due to incumbent beneficiaries over time. Appendix B gives a numerical illustration of this sustainability. Accordingly, pension obligations are divided between pension flows that have already been paid to beneficiaries (the ongoing flow of pension payments that constitutes outflows to current beneficiaries), and pension flows that may become payable in the future (constituting the remaining notional gross commitment for pension obligations). The latter is not yet an outstanding liability for the pension scheme. It will become a liability when pension payments become due and an actual outflow is booked for these payments. By that time, if the pension scheme has recourse to an external source of debt to pay for them, its outstanding debt will grow to sustain the incurred operational deficit between pension payments and contributions. Symmetrically, an actuarial representation of pension obligations can hide significant issues and hazards related with pension protection over time. Appendix C gives a numerical illustration that highlights these limitations. For instance, the outstanding cash balance remains hidden although it exposes the pension scheme to significant costs and risks. The expected actuarial balance is based upon assumptions about remote future events and conditions. An eventual bankruptcy occurring at some point during this extended period would undermine the capacity of the pension scheme to cover pension obligations, although the expected actuarial balance was in a situation of equilibrium. It is interesting to observe here the distinctive impact of interest rates on pension schemes. Coeteris paribus, a reduction in interest rates may favour unfunded ‘pay-as-you-go’ schemes, since they may incur lower interest charges to fund pension payments that have become due. On the contrary, the same reduction undermines funded DC schemes that depend on financial investment accumulation and return to fulfil future pension obligations when they become due. In this context, financial sustainability depends on distinctive conditions for funded DC schemes and for ‘pay-as-they-go’ schemes. Concerning the former, financial return from outstanding financial investment portfolios is a key factor to cover pension obligations through time. Concerning the latter, the demographic and economic evolutions of membership are critical. To be sure, it does not relate only to demography, but also to the financial and economic capacity to maintain intergenerational solidarity among members through time. From an economic perspective, Barr (2002, p. 8) deconstructs the myth that funding solves adverse demographics, claiming that ‘demographic change is not a strong argument for a shift towards funding’, and that ‘the difference between “pay-as-you-go” and funding is second order’. Our numerical analysis further implies that funded schemes do not guarantee better provision and security of pensions. The shortcomings of funded schemes have been brought to light in the aftermath of financial crises. For instance: in the UK, in 1992, the Maxwell scandal (Augusztinovics, 2002, p. 26); and in 2000, the insurance company Equitable Life, and in 2007, the pension fund of Allied Steel and Wire. In the USA, an illustrative example is offered in 2002 by the Enron bankruptcy and related scandal. In France, the additional pension fund for civil servants named CREF (‘caisse complémentaire de retraite de la fonction publique’), which was partly funded, incurred financial distress and was transferred in 2002 to the COmplément REtraite Mutualiste (COREM) under the supervision of the state14 14 Thousands of contributors seek compensation in court for their damages, and were partially satisfied (Pouzin, 2014). Other plaintiffs remained unsatisfied (Prache, 2008), while the new fund COREM reduced previously committed levels of pensions as a consequence of the financial distress of 2002. (Pouzin, 2014). According to Augusztinovics (2002, p. 26), the funding requirement can also lead to high administrative costs and low compliance rates as evidenced by the case of the Chilean pension fund administrators. Moreover, if circularity in government funding occurs, pensions funding systems have virtually no comparative advantage relative to a ‘pays-as you-go’ system (Ponds et al., 2011), especially if the pension fund’s portfolio is composed of national public debt—as Sauviat (2014) says it is in the case of Chile. Ultimately, the objective—and, therefore, the future allocation—of funds can be reshuffled as it has been the case for the New Zealand Superannuation Fund. Indeed, in New Zealand, ‘the early policy rationale for accumulating financial assets may have led … voters to expect future benefits from the funds set aside for publicly-funded old age pensions. But this seems to be contradicted by the subsequent overlapping rationale that these same assets provide a buffer against economic shocks’ (Newberry, 2013, p. 12). Since unfunded ‘pay-as-they-go’ pension schemes can be sustainable (Appendix B), while partially funded, financial-return-based pension plans can be unsustainable (Appendix C), we can conclude that funding and sustainability are not necessarily linked. This argument is also supported by Augusztinovics (2002, p. 26): Contrary to the new pension orthodoxy’s major arguments, there is ample conceptual evidence in the literature to demonstrate that the method of finance and the type of management are no panacea … .From our perspective, the overarching accounting and management purpose concerns the protection of pension promises through enhanced reporting and disclosure. Accountability, in terms of pension management, involves being accountable for the main purpose of that management, i.e. the timely and continued provision of pension payments as they become due at their previously promised levels. The pension as savings account model (Appendix A) ensures this protection through a financial accumulation process, which exposes funded pension liability to financing cost and risk, as well as investment cost and risk, including misappropriation and misallocation by controlling parties. Palmer (2002, p. 172) argues that ‘countries in the OECD have been reluctant to make [the] transition [from pay-as-they-go schemes to individual financial account systems] … due not only to the high initial cost for the transition generation, but also to the financial risk involved’. From this perspective, its actuarial mode of accounting representation entails the risk of undermining control and accountability, in so far as the discounting/unwinding measurement method does not track the actual cash flows and funds that are involved in overarching managerial processes. Moreover, this actuarial representation introduces subjectivity and volatility in valuation, making continuous valuation dependent on assumptions over critical variables concerning the financial accumulation process, including discount rates of reference, and forecasts over very long periods of time (Biondi et al., 2011; Biondi 2011; Biondi 2014). According to Klumpes (2001), in Australia, the adoption of accrual-based accounting principles reduced the level of generational accountability concerning the under-funding of its major pension fund, the State Authorities Superannuation Scheme. The unfunded ‘pay-as-they-go’ model ensures pension protection through collective responsibility for incumbent beneficiaries. This responsibility is delegated to the managed entity on behalf of entity constituencies involved in pension provision. This has historically led to a lack of accounting reporting and disclosure by both public sector and private sector sponsors. Little information (if any) was provided through their accounting reporting, while no quantitative determination was included in their balance sheet concerning outstanding positions. However, Appendix B shows how the temporal structure of flows and funds can be represented without having recourse to current (discounted) values that are inconsistent with this model. To conclude, our theoretical approach develops a more comprehensive and neutral perspective on management modes for pension obligations, including a viable accounting representation of related funds and flows over time. Accordingly, regulatory authorities and policymakers are not so much requested to endorse one particular mode of pension management, than to rule accounting and prudential options that make them consistently represented and accountable for pension obligations over time. In particular, Appendix B shows how an actuarial mode of accounting would provide information that is inconsistent with governance and managerial needs for pension obligations under ‘pay-as-they-go’ schemes, whereas Appendix C shows how this very method undermines disclosure on cash management by managing entities. 4. Conclusive remarks The distinction between DB and DC schemes appears to be simplistic, preventing current and future beneficiaries from understanding the actual organization of their pension management schemes. This distinction has fostered mistrust and confusion in the public debate (for instance in Poland and the USA) concerning political decisions about pension regulation. The lack of consistent accounting representation for each and every scheme has added to this mistrust and confusion. In this context, our approach goes beyond this received distinction. Our theoretical model highlights the specificities of the various pension systems, such as self-investing strategies employed by public sector pension entities in the USA and Poland, as well as by private sector pension entities such as Coca-Cola. Moreover, our map provides better positioning for schemes that do not fit into DB or DC definitions, such as notional pension funds or ‘pay-as-they-go’ pension systems. Recent reforms in pension management have been driven by an alleged ‘one best way’ according to which pension should be understood as a form of individual financial placement. This transformation appears to be embedded in an overall tendency towards a neoliberal Europe that ‘redefines social rights, and therefore transforms social identity and citizenship’ (Frericks et al., 2009, p. 1). However, this ‘one best way’ view is currently incompatible with existing alternative modes of economic organization for pension management, including the unfunded ‘pay-as-they-go’ schemes that still characterize public sector pension funds in some European Member States such as France and Finland (Oulasvirta, 2014). Nevertheless this view, which may be considered to be fundamentally normative, it is widely acknowledged that funding and sustainability are not necessarily linked. Accounting representation constitutes an illustrative case of the kind of ongoing transformation of pension management that is driven by this view. Current reforms are shifting pensions from an unfunded collective obligation based on social solidarity across generations and among citizenry, towards a funded individual saving obligation based on financial investment opportunities on active financial markets. The individual savings model constitutes the extreme outcome of this socio-economic movement. This trend has been reshaping the very meaning and organization of pension. At present, however, alternative representations and organizations coexist and somewhat collide. Regulation (including accounting standard-setting) has, therefore, become the critical arena where this confrontation occurs. Regulatory bodies and policymakers face choices that relate financial sustainability to the overarching role of pension management in economy and society. Eurostat excludes pensions from Maastricht debt but requires Member States to disclose comparable information concerning pensions. Indeed, in 2013, a supplementary compulsory table was included in chapter 17 on ‘social insurance including pensions’ in the ESA 2010 (Eurostat, 2013). This table provides detailed and reliable estimates of stock and flow data on pensions that are included in core accounts and on pensions which are not included in them. The supplementary table ‘covers stock and flow data not fully recorded in the core national accounts for specific pension schemes such as government-unfunded defined benefit schemes with government as the pension manager, and social security pension schemes’ (Eurostat, 2013, p. 379). Concerning OECD statistics, the pension accounting issue remains unaddressed, leading to comparability problems due to different definitions and treatments. Since 2017, a supplementary table concerning pensions shall display additional information on pension obligations. All along this article, the overall purpose of pension management has been assumed to be the protection of pension promises over time. From this perspective, pension regulation should find a reasonable balance between fostering an alleged one best way to fulfil pension obligations, and acknowledging viable alternative modes of economic organization. Several viable alternative modes exist in the current practice, from the individualistic savings account schemes at one extreme of the pension world, to unfunded ‘pay-as-they-go’ schemes under collective responsibility at the opposite extreme. Within this framework, pension regulation could develop and enforce a set of clear and consistent options, which would make it possible for the various existing modes of management to fulfil their specific prudential and accounting needs for accountability and responsibility over time. Acknowledgements Yuri Biondi is tenured senior research fellow of the National Center for Scientific Research of France (Cnrs), and research director at the Financial Regulation Research Lab (Labex ReFi), Paris, France. The authors wish to thank Mme Danièle Lajoumard and Mr. John Stanford for their valuable help through discussion and documentation provision. 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World Bank ( 2006) Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance , Washington, DC, Independent Evaluation Group, World Bank. Appendix A. The ‘one best way’ of accounting and management for pension obligations Our main text shows how criticisms of ‘pay-as-they-go’ pension mechanisms are based upon an alleged ‘one best way’ to define and manage pension funds, treating them as closed monetary funds. Appendix A provides a numerical example of this treatment and its accounting representation. It shows how pension contributions are accumulated over their working life by the employees (20 units each year) and reinvested through time so that they produce interest on the cumulated cash amounts. Because of accumulation over time, this interest yield—labelled cash investment return in Table A1—passes from 1 to 4 units during the work period (periods 1–5). When employees retire, their cash account is spent to pay their pension over the retirement period (periods 6 and 7). Table A1 provides a numerical illustration. A working life is supposed to span 5 periods; the retirement period is supposed to span 2 periods. For the sake of simplicity, interest yields are set at 5% over all the investment periods (with no investment return volatility or investment loss). B. Sustainability of unfunded ‘pay-as-they-go’ pension schemes: a numerical example Appendix B provides a numerical example to show how ‘pay-as-they-go’ mechanisms can be sustainable over time without having recourse to an actuarial representation and control of their current economic and financial process. Moreover, it shows how this overarching process is misinterpreted by the actuarial representation. This misrepresentation may cause its operations and its accountability to look very opaque to stakeholders and regulatory bodies. For illustration purposes (Table B1), we assume one cohort of incipient fund members (which pay contributions) along with one cohort of current fund beneficiaries (which receive pension payments). Since the ‘pay-as-you-go’ scheme is collective, its functional process is expected here to balance current payments (outflows) against current contributions (inflows), period through period. More sophisticated mechanisms may be designed while maintaining a flow basis method of accounting and control. Period balance of these two flows shows the over/under-paid amount of the period. This represents the operational surplus or deficit of the period. The cumulated deficit from the past is then a liability for the pension scheme, since it corresponds to past and present pension payments that have become due and have been liquidated. From this perspective, a statement of funds may represent, on the asset side, the remaining contributions to be collected, by cumulating outstanding future commitments to be received at their nominal amount; on the liability side, it may represent the remaining notional gross commitment for pensions to be paid at their nominal amount. Period balance between these two funds shows residual balance that is accrued at that period. This outstanding balance over the future is not a liability for the pension scheme, since it does not correspond yet to actual pension payments that became due and were liquidated. Total balance is provided by adding cumulated balance from the past to cumulated balance from the future. It shows the outstanding balance of the ongoing pension operations across time. It represents the expected surplus or deficit from its ongoing operations through time. Table B1 further provides an actuarial representation of this working process. Accordingly, the series of remaining future pension obligations is discounted back to the current period at the discount rate of reference, determining the actuarial liability. Its progressive reduction through time (technically speaking, the unwinding of the discount) is accounted as an actuarial profit of the period. For sake of convenience, the actuarial asset is made equal to the actuarial liability by assumption. Since this pension mechanism is based upon flow compensation over time, an actuarial representation is bound to misinterpret its functioning and does not provide meaningful and useful figures to represent and control it. In particular, it provides an evaluation of initial accrued liability (434) that undermines the actual notional gross commitment (520) over the future, while it unwinds a progressively decreasing profit (from 109 to 60 over various years) that misrepresents the ongoing series of inflows (100) and outflows (100 and 80 over various years). C. Actuarial representation of financial and economic processes of pension payments Appendix C disentangles implicit assumptions made by an actuarial representation. We take the same numerical example as in Appendix B concerning the flow of pension payments. However, ongoing pension contributions are replaced by a lump sum payment at the end of the cohort period. This working hypothesis shows the impact of discounting involved in an actuarial representation. Its sustainability is fundamentally based upon the compensation of stock values that include implicit compound return rates over time. Table C1 develops a numerical illustration. Again, for sake of convenience, the actuarial asset is made equal to the actuarial liability by assumption. Table C1 shows a pension scheme that is balanced under its actuarial representation over time, generating actuarial profit from the progressive reduction of pension liability through discount unwinding. However, this balance is obtained by recovering negative cash outflows all along the cohort duration (up to a cumulated deficit from the past of − 440) with a lump sum inflow (581 units at year 5) that compensates both the cash outflows and the negative returns that have been paid to maintain the negative cash imbalance over time. This involves a final payment (581) that is materially bigger than the total payment (520), which is required under the ‘pay-as-they-go’ scheme in Table B1. This numerical example illustrates several hazards that are not fully disclosed by an actuarial representation. In particular: outstanding cash balance remains hidden although exposing the pension-providing entity to significant costs and risks; an implicit return is included in the actuarial representation of dedicated asset portfolio (this return is expected to compensate negative return over outstanding liability). In the event of a bankruptcy occurring before the final period, the capacity of the fund to cover pension obligations would be undermined, notwithstanding the expected situation of equilibrium of the actuarial balance that is based upon assumptions about remote future events and conditions. An implicit cost of funding is included in the estimated liability, although it is based upon future amounts that are not yet due and liquidated. In sum, an actuarial representation makes the pension provision sustainability dependent on the structure of financial returns related to positive and negative stocks that are computed in a way that neglects time, process and hazard. Biondi (2011) provides further theoretical analysis of discounting in capital budgeting. Box C1 Glossary Defined Benefit - DB schemes. Pension schemes where the benefits accrued are linked to earnings and the employment career (the future pension benefit is pre-defined and promised to the member). It is normally the scheme sponsor who bears the investment risk and often also the longevity risk: if assumptions about rates of return or life expectancy are not met, the sponsor must increase its contributions to pay the promised pension. These tend to be occupational schemes. Defined Contribution - DC schemes. Pension schemes where the level of contributions, and not the final benefit, is pre-defined: no final pension promise is made. DC schemes can be public, occupational or personal: contributions can be made by the individual, the employer and/or the state, depending on scheme rules. The pension level will depend on the performance of the chosen investment strategy and the level of contributions. The individual member, therefore, bears the investment risk and often makes decisions about how to mitigate this risk. Funded scheme. A pension scheme whose benefit promises are backed by a fund of assets set aside and invested for the purpose of meeting the scheme’s liability for benefit payments as they arise. Funded schemes can be either collective or individual. Hybrid pension scheme. In a hybrid scheme, elements of both defined contribution and defined benefits are present or, more generally, the risk is shared by the scheme’s operator and beneficiaries. Pay-As-You-Go schemes. Pension schemes where current contributions finance current pension expenditure. Source: European Commission (2010). Notional Defined Contribution - NDC pension schemes. They combine the individual accounts of a privately managed defined contribution scheme with pay-as-you-go financing. Source: World Bank report (Holzmann et al., 2004, p. 10). Table A1 A numerical illustration of the ‘one best way’ (pension savings account) Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Notes: Data rounded to the nearest unit. Reinvestment return rate is fixed at yearly 5%. View Large Table A1 A numerical illustration of the ‘one best way’ (pension savings account) Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Notes: Data rounded to the nearest unit. Reinvestment return rate is fixed at yearly 5%. View Large Table B1 A numerical illustration of sustainability of unfunded ‘pay-as-they-go’ pension schemes Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Note: Data rounded to the nearest unit. View Large Table B1 A numerical illustration of sustainability of unfunded ‘pay-as-they-go’ pension schemes Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Note: Data rounded to the nearest unit. View Large Table C1 Numerical illustration of an actuarial representation of pension obligations Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Note: Data rounded to the nearest unit. View Large Table C1 Numerical illustration of an actuarial representation of pension obligations Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Note: Data rounded to the nearest unit. View Large © The Author 2017. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: journals.permissions@oup.com http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Socio-Economic Review Oxford University Press

Pension management between financialization and intergenerational solidarity: a socio-economic analysis and a comprehensive model

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Oxford University Press
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© The Author 2017. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: journals.permissions@oup.com
ISSN
1475-1461
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1475-147X
D.O.I.
10.1093/ser/mwx015
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Abstract

Abstract In recent decades, the management modes of pension obligations have been coevolving with political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors, as well as transnational harmonization and convergence of accounting standards between private and public sectors. In this context, our article provides a theoretical analysis of these management modes of pension obligations, based on a comprehensive review of existing practice and regulation. The latter are still inconsistent with the individual savings model that has been fostered by international institutions, including the World Bank, the International Monetary Fund and the International Public Sector Accounting Standards (IPSAS) Board. According to our frame of analysis, a variety of viable modes of pension management exists and may be acknowledged. Overcoming the received opposition between defined contribution and defined benefit systems, our approach elaborates a model of pension management with a view to clarifying and improving pension protection, that is, the assurance of continued provision of pension payments at their agreed levels under viable alternative modes of pension management. The definition of financial sustainability depends on the pension management mode that is applied. With the help of this model, we further develop policy recommendations for accounting and prudential regulations concerning pension obligations. 1. Introduction The recent transformations of the management modes of pension obligations have been driven by political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. Regulatory changes and policy reforms have been consistently developed to enable these transformations (Frericks et al., 2009). Previous literature has addressed this institutional development of pensions in its connection with political, economic and financial institutions (Dietz, 1968; McKinnon and Charlton, 2000; Naczyk, 2013; Brown, 2014). These recent trends in pension reform have been related to vested interests and lobbying by financial actors, while the current organization of the pension system has been harshly criticized for being or having become financially unsustainable. Concerning the organization of the pension system, the finance-driven mode of pension management favours an individual savings model1 1 The widespread notion of ‘defined contribution’ pension scheme makes often reference to pension fund as an ‘individual saving account’ (see Box 1 for descriptive definitions). and the establishment of funded pension-related investment funds, while the received ‘pay-as-you-go’ mode is based upon economic solidarity among members or citizens, as current contributions pay for current beneficiaries through time. 1.1 Purpose and scope of our analysis Our article aims to complement existing socio-economic analyses by developing a theoretical analysis of overarching concepts and representations of reference for pension management. We argue that positions in the ongoing debate on pension management involve featuring representations of what pensions are and how they should be organized from the economic and the financial viewpoints. These representations affect the whole process of assessment and implementation of alternative institutional solutions for the organization of the pension system, including the very notion of financial sustainability. Therefore, our approach investigates the embedding of pension management in its socio-economic context according to two distinctive dimensions: a political economic dimension concerned with the ‘horizontal’ play of socio-political forces, including the setting of accounting standards; and an ideational dimension concerned with the ‘vertical’ connection that links pension representations and financial sustainability (Biondi and Suzuki, 2007; Baker et al., 2010). Accounting models of reference provide illustrative examples for both dimensions (Biondi, 2016). Accounting standards setting certainly constitutes a relevant field for confrontation among socio-political forces interested in organizing the management of the pension system. At the same time, distinctive concepts and representations are mobilized in the accounting debate to validate or dismiss the various ways of organizing the pension system that are at issue. As a matter of fact, pension funds and obligations have been a critical matter all along the international accounting convergence process for both private and public sector entities. Recommended accounting representation has coevolved with political, financial and economic strategies aimed at promoting and favouring financial markets and institutional investors. These strategies lead to consider pension obligations as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows. Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet. At the same time, these strategies foster the immediate funding of pension obligations, through the collection of cash funds to be invested, monitored and recognized on the asset side of the balance sheet. On the contrary, the received ‘pay-as-you-go’ mode is based upon largely unfunded future pension promises that are not recognized in the sponsor’s financial statements until they become due. Our comprehensive review of existing practices and regulations shows that the latter are still inconsistent with the representation—supported by international institutions, including the World Bank, the International Monetary Fund (IMF) and the International Public Sector Accounting Standards (IPSAS) Board—that pension schemes should be based on individual savings and deferred remuneration. Notwithstanding continued pressure for adopting this representation, practices and regulations still vary according to the pension fund and across jurisdictions. 1.2 Our model of reference to analyse existing practice and regulation Our theoretical analysis develops a systemic frame of reference and analysis for pension funds and flows over time in order to disentangle some key features of existing practices and regulations. This elaboration is based on an illustrative review of regulations and practices, together with a numerical visualization which allows overcoming the received opposition between defined contribution (DC) and defined benefit (DB) pension schemes (see Box 1 for descriptive definitions). On the one hand, our model identifies the ‘one best way’ representation that is fostered by recent trends and reforms, showing its features and limits. This alleged ‘one best way’ conceives of pension as an individual savings account and deferred remuneration. On the other hand, our model situates this ‘one best way’ in a comprehensive and neutral map among other viable modes of pension management. Our model also makes it possible to better understand current practices, disentangle rival positions surrounding regulatory and policy proposals, and provide recommendations for improved accounting and prudential regulation of pension funds and obligations in public and private sector entities. Within our framework of analysis, the notion of financial sustainability is made to depend on alternative management models. The various modes of sustainability depend on and are defined by the specific ways in which each model applies to organize the fulfilment of pension obligations over time and circumstances. The Appendix provides numerical examples that illustrate these ways. In particular, according to the individual saving representation (the ‘one best way’), sustainability is conditional on financial returns on investments of accumulated pension funds (as a stock), while in an unfunded ‘pay-as-you-go’ scheme, sustainability depends on whether contributions collectively match benefits over time (as a flow). Our model posits the ‘one best way’ representation as a working hypothesis that subsumes and illustrates the ideal or avatar, which drives and is driven by the recent reforms and policies. This avatar provides justification and legitimacy for these advocated reforms and policies. According to this representation, pension is conceived as a kind of individual saving arrangement. However, reforms often aim at making individual pension saving mandatory at the collective level. Therefore, in the practical implementation of these reforms, pension comes to be understood as deferred remuneration, while its cash provision accumulation over time is targeted to include financial investment return as a key source of future individual pension coverage. Therefore, the ‘one best way’ differs from funded DC schemes, although the latter are often promoted by reforms favouring the ‘one best way’. From a political economic perspective, international institutions have been fostering the ‘one best way’ as an ideal and an ideology (IFAC, 1995; PwC, 2012); however, throughout the socio-political debate and bargaining, the current reforms that are implemented at the national level usually enforce and promote a definite contribution model for pension schemes, which is a less-extreme way of reforming pension management than the ‘one best way’ (individual savings account). Moreover, the ‘one best way’ also differs from the actuarial accounting representation that is fostered by international accounting standards setters, although the ‘one best way’ provides inspiration and legitimacy for the latter, making pension accounting representation consistent with a form of wealth accumulation based on financial return (Le Lann, 2010). In this context, our analysis shows that the ‘one best way’ representation, as implemented by actuarial accounting standards for pensions, misrepresents the financial situation and sustainability of ‘pay-as-you-go’ schemes in particular while introducing unnecessary subjectivity and volatility in accounting for pensions in general. As a result, funded schemes may turn out to be less sustainable, and unfunded ‘pay-as-you-go’ schemes can be more sustainable than what their actuarial accounting representations would suggest. According to our theoretical perspective, several dimensions should be taken into consideration to develop a comprehensive approach to the existing viable management modes for pension obligations. Adequate accounting representations for each kind of existing schemes are required to perform a comparative assessment of these alternative management modes, and to develop a consistent design for regulatory frameworks. While the literature on pensions often focuses on the switch from DB to DC schemes, our approach provides a more comprehensive frame of analysis which: includes other existing management modes for pensions besides DB and DC schemes; challenges the doxa that unfunded ‘pay-as-you-go’ schemes cannot be sustainable; and illustrates the role played by the recent accounting reform in delegitimizing this mode of management. As for DC schemes, they are often described by the media as individual savings accounts (since they include assets as well as liabilities), fostering public distrust of DB schemes that differ from savings accounts. The rest of the article is organized as follows. Section 2 situates the recent debate on the management of pension obligations in the context of recent political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. In this context, transnational harmonization and convergence of accounting standards between private and public sectors have played a neglected but important role. This section further identifies the ‘one best way’ representation that drives ongoing reforms but does not take into account the variety of existing practices. Section 3 elaborates a comprehensive model that captures the ways pension obligations stand at the crossroads between economic organization, accounting and finance. Existing definitions of financial sustainability are then disentangled and related to the corresponding modes of pension management. A summary of the main argument and results concludes. A numerical analysis features in the Appendices. 2. Pension obligations: from the ‘one best way’ of the individual savings account to a variety of inconsistent practices 2.1 Pension reforms and the financialization movement Over the past three decades, major changes in the definition and management of pension provision have occurred, concerning both the public and the private sector. ‘These changes [were] occasioned by government policy and influenced by capital markets’ (Josiah et al., 2014, p. 18). In particular, in 1994, the World Bank (1994) developed a framework for pension obligations based upon three pillars: (a) a publicly managed pension system that requires mandatory participation from all members of society but is only aimed at alleviating poverty, not providing a comfortable retirement; (b) a privately managed pension system that ideally would cover all members of society; and (c) voluntary savings by individuals. The World Bank (1994, p. 361) developed this three-pillar model, which ‘separat[es] the saving function from the redistributive function’, under the assumption that the ageing of the population makes ‘pay-as-you-go’ schemes too costly and then unsustainable. According to ApRoberts (2007), this ‘three-pillar’ approach was further endorsed by the European Commission in 1997.2 2 In fact, according to Holzmann and Hinz (2005), the World Bank has amended this approach by adding two additional pillars that better acknowledge the social assurance dimension of pension obligations. This shows that the current debate is not yet settled in favour of the individual savings account view. This approach … constitutes a normative project aimed to prompt capitalisation while limiting pay-as-you-go mechanisms as a mode of funding pension obligations. (p. 19) … . This is an ideological endeavour whose objective is to persuade that the pay-as-you-go scheme, the main mechanism of funding pension obligations in most countries, has too large a place. (p. 24) … . This choice draws upon a free-market conception that assumes [that] individuals act alone, although aiming to make individual saving compulsory. (p. 22)Debates among specialists from national, international and academic institutions have been accompanying related reform projects. McKinnon and Charlton (2000, p. 153) argue that the three-pillar approach ‘essentially prioritising financial sector issues over social welfare considerations in pensions reforms is problematic’. Moreover, ‘it is insecure in its increasingly dogmatic prioritisation of private over public sectors … [and] it is short-sighted in its implicit assumptions that historical patterns of retirement provision have failed to consider the importance of the public private interface in financial sector development in general, in pension provision in particular’. Very interestingly, Draxler (2009) states that ‘the strong promotion of funded schemes was criticized by the World Bank’s own evaluation group’ (World Bank, 2006). This World Bank policy recommendation clearly illustrates the connection between pension reforms and emerging political and financial economic strategies that aim to foster active financial markets and institutional investors. In line with this connection, a World Bank study by Holzmann (2005) argues that: Pension reforms should seek to create positive developmental outcomes through increased national saving and financial market development. (p. 6) Funded pillars ideally should be introduced gradually to enable [Latin America and Central and Eastern Europe countries] to facilitate financial market development. (p. 15)These strategies intend to facilitate and organize the collection of (supposedly individual) savings to be gathered through institutional investors towards active financial marketplaces where those institutional investors manage investment portfolios on behalf of saving individuals. Indeed, Naczyk (2016, p. 1) mentions that ‘when they are fully-funded instead of being financed on a pay-as-you-go basis, pension arrangements generate funds that are injected into the financial system’. In turn, corporate entities are expected to access those financial marketplaces to get the funding that is required for their ongoing financial needs. Financial marketplaces come then to play a key coordination role between institutional investors and corporate entities, while savings remuneration—including pension payments—becomes dependent on financial market dynamics. Wehlau and Sommer (2004) review criticisms against the strategies encouraged by the World Bank and the European Commission. Accordingly, these strategies do not improve social welfare, there is neither a theoretical ground nor empirical evidence that they will enhance the development of the financial market or economic growth while they may expose pensioners to greatly enhanced risks concerning the size and real value of their pensions. These strategies are an integral part of a more general socio-economic movement labelled ‘financialization’ in the recent literature, as evidenced by Van der Zwan (2014), Carruthers (2015) and Livne and Yonay (2016). Financialization refers to the increasing importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, at the national and international levels (Epstein, 2001). Consequently, financial practices and mindsets have acquired an increasingly pervasive role in the economy and society, across countries and jurisdictions, in recent decades. In this context, pension funds have been seen as a high-potential policy tool to collect material financial funds to be employed for financial investment and trading (Berle, 1959; Dietz, 1968; Brown, 2014; Naczyk, 2016). More precisely, ‘financial firms [were—in France and in Belgium, from the end of the 1970’s until the mid-2000s—] a key proponent of pension privatization, while employers [had] a much more ambivalent attitude’, (Naczyk, 2013, p. 1). The rest of the section summarizes US’s, UK’s and Europe’s case studies. The US and UK cases are especially illustrative of this financialization development and of the New Public Management movement (Cohn, 1997). The situation in continental Europe is more nuanced. In the USA, major pension reforms were designed in the 1970s to prompt funded pension funds to become active financial investors managing portfolios of assets held on behalf of pension beneficiaries. Before these reforms, pension funds were not allowed to freely manage their investment portfolio since prudential rules and constraints prevented them from investing in risky assets such as corporate equity shares (Montagne, 2006; Schanzenbach and Sitkoff, 2017). These reforms led pension funds to increasingly channel material flows of financial funds through financial marketplaces. At a very early stage, the privatization of social security and the implementation of ‘individual retirement accounts’ were criticized (Munnell, 1987; Moore, 1998). Concerning the US corporate environment, Thomas and Williams (2009, p. 228) argue that the standards ‘[have failed] to satisfy the condition of neutrality’ and show how the switch from DB to DC schemes has shifted the economic risk from sponsors to employees. Consequently, many independent funds started delegating financial management to leading financial institutions, which also entered this business by establishing or developing their own funds. This confirms the role of financial institutions in the pension reform, consistent with the financialization movement. Concerning the UK, the pension reforms that have been implemented over the last two decades (1990s and 2000s) have led pension funds to become active on markets for corporate equity shares and for long-term bonds, including long-term governmental bonds.3 3 Wehlau and Sommer (2004, p. 6), dealing with pension policies within the enlarged EU, and referring to Central and Eastern European Countries, ‘raise the question, whether EU authorities attempt to push for (further) privatisation of old-age security within an enlarged Union to exhaust growth potentials of financial markets’.Greenwood and Vayanos (2010) put forth that the rationale behind the two major top-down reforms—the Pension Act of 1995 and the Pension Act of 2004—was a concern with bankruptcies of entities that sponsor or provide for pensions. In order to address this concern, the Pension Act of 1995 established minimum funding requirements that coincided with accounting reforms linking the valuation of pension liabilities to market-based discount rates. The Pension Act of 2004 introduced a government-backed guarantee fund expected to act as a rescuer of last resort in case of bankruptcy, while establishing fines for underfunded pension plans. Concerning private pensions schemes accounting, UK Financial Reporting Standard 17, which became mandatory in 2005 and was the UK equivalent of the IAS 19, forced UK companies to recognize pension liabilities in their financial statements at current value (Chitty, 2002; Slater and Copeland, 2005). In continental Europe, according to Frericks et al. (2009, p. 135), two extreme directions are currently being taken, one towards privatization and the other one towards solidarity. ‘European welfare reforms transfer many services, needs, and responsibilities to the market [which corresponds to a neoliberal tendency]. However, there is also a contrasting and striking development toward solidarity, based on extensive regulatory policies [which correspond to a neo-statist tendency]. … On the one hand, pension investments are more individualized, partly transferred to capital-funded investment funds, with the emphasis on self-responsible planning; on the other hand, possibilities to invest are more highly regulated.’ In a review symposium, Liebfried and Starke (2008, p. 175) commented on Ferrera’s (2005) work, which analyses the emergence of multi-pillar pension schemes in Europe. They argued that ‘although … correction has often been implicit and remained unnoticed by citizens, liberalization in recent decades has laid bare the social objectives hitherto inherent in many state activities in the economic sphere’. In France, in particular, the situation is not straightforward. As explained by Naczyk and Palier (2010, p. 5) ‘the generosity of trade unions and their defence [gave] limited room for expansion of funded pension schemes [but] the pay-as-you go schemes [have] significantly changed over the last two decades. … As a result, the development of pension savings has been implicitly promoted, although more on a voluntary base than on a compulsory one. … The access to [voluntary] – occupational and personal – pension plans, remains mostly limited to high-skilled workers.’ 2.2 The individual saving ‘one best way’ that overarches ongoing reforms Fostered by the financialization movement, an emergent normative pattern has been driving pension reforms. It is a fundamentally normative process since existing practices are still inconsistent with its requirements and underlying views. Existing schemes still provide strong evidence of diversity in existing practices. This section and the next one will present the ‘one best way’ fostered by this normative pattern and then show evidence from a variety of management modes such as governmental pension funds in the USA, the UK and France; corporate pension funds; independent mutual and DB pension funds; and notional DC (NDC) schemes. According to the ‘one best way’ representation, pensions are understood as individual saving accounts (and deferred remuneration) held on behalf of pension beneficiaries. According to Le Lann (2010): While pension public money used to be mainly understood as an intergenerational system of solidarity, it has progressively metamorphosed into a system of individual savings [since the 1990s]. (p. 2) … Progressive introduction of a liability for ‘pay-as-you-go’ schemes should be understood as a triggering consequence of the movement toward financial capitalisation in pension statistics. (p. 3)Appendix A provides a financial representation of pension obligations according to the ‘one best way’ during the working life of employees and when they are retired; contribution payments, pension liability and return on cash-contribution-based investments are visualized through a numerical example. This emerging view mingles pensions together with other financial investment funds held by individuals for precautionary or speculative reasons. An ‘ideal’ pension fund is then supposed to be attached to each individual and to be transferable, when its beneficiary leaves the corporate entity that has promised his future pension payment and has been managing his pension account. Pension is then understood as an individual savings account that is supposed to stock ongoing inflows paid against accrued pension rights. These inflows are expected to be continuously invested over time until the final pension amount that shall be liquidated has been reached, in the form of a lump sum or life annuity, at a certain maturity date scheduled by the individual pension scheme. According to this savings account view of pension, it is somehow the individual accumulation of cash that is expected to generate the future pension, period after period. Indeed pension becomes another kind of financial placement at the individual level. From this perspective, according to Bodie et al. (1988, p. 139): [Pension] benefit levels depend on the total contribution and investment earnings of the accumulation in the account. Often the employee has some choice regarding the type of assets in which the accumulation is invested and can easily find out what its value is at any time.According to Broadbent et al. (2006, p. 48), which refer to Barr (2009): Defined Contribution plans … provide employees with much more control, choice and flexibility in terms of how they manage their retirement savings and investment, and indeed how they manage their financial assets over their lifecycle.To be sure, although the ongoing reforms drive and are driven by the ‘one best way’ as an ideal and an avatar, they do not necessarily put all its features into practice. Accordingly, when governments opt for the ‘one best way policy’, they tend to recommend funded Definite Contribution schemes as the best mode of management. In this context, the accounting representation of pension obligations is expected to enact this understanding by providing actuarial information about the current net value of the joint pension fund, as if each individual were able to claim its current value pension share at will. Accordingly, a pension fund becomes similar to a closed monetary fund whose shares split its present current value among beneficiaries, after deduction of management fees and other corporate running costs. 2.3 Pension management: a variety of existing practices Notwithstanding continued pressure to adopt this individual saving ‘one best way’ representation, financial practices and regulations are still diversified between pension funds and across jurisdictions. Different types of pension funds exist in virtually all countries and jurisdictions that do not conform to this ‘one best way’ representation. Let us briefly explore the cases of governmental pension funds; corporate pension funds; independent mutual and DB pension funds; and NDC schemes (see Box 1 for descriptive definitions).4 4 Pensions provided as social benefits (unrelated to employment) are excluded as our focus is on employee benefits. Governmental pension funds are still largely unfunded and based upon ‘pay-as-they-go’5 5 Hereafter, we replace the usual expression ‘pay-as-you-go’ with ‘pay-as-they-go’, to highlight the collective dimension of this system, where current contributors pay for other people’s pension through time. schemes. Some countries such as China, Colombia, Brazil, Belgium, France, Germany, Ireland and Luxemburg have separated unfunded schemes for civil servants pensions. (Pinheiro, 2004). In the USA, state governments’ pension schemes are only partly pre-funded (Barr, 2009; Rauh, 2010; Lav and McNichol, 2011; Ponds et al., 2011; The Pew Charitable Trust, 2015). At a national level, the World Bank report by Holzmann and Hinz (2005, p. 46)6 6 R. Holzmann, professor of economics at Universiti Malaya (Malaysia) and UNSW (Australia), was the Sector Director and Head of the Social Protection & Labor Unit at the World Bank Group between 1997 and 2009. states an accounting practice that results in substantially unfunded schemes (see also BNAC, 2009): [US] States that accumulate large reserves within their pension funds do not act as though the funds were available to finance non-pension government operations. This behaviour contrasts with the experience in national-level governments. [They] have attempted to prefund a portion of their public pension liability [but] a large proportion (60–100 percent) of the pension fund accumulation in national social insurance systems is found to be offset by larger deficits in other budgetary accounts. Smetters (2004) claims that the offset for the United States exceeds 100 percent. …In the UK, most major public pension funds remain unfunded. According to BNAC (2009), the five largest unfunded schemes, accounting for 96% of outstanding unfunded liabilities in 2009, are the National Health System, the Teachers, the Civil Service, the Police and the Armed Forces. The sixth scheme, which is funded, is the centrally guaranteed, but locally administered, Local Government Pension Scheme. In 2009, these schemes covered together about 6.4 million employees, or about 25% of the UK labour force. In France, the main schemes for public sector employees are financed on a ‘pay-as-you-go’ basis, and no liabilities are recognized in public sector financial statements (Ponds et al., 2011). The French pension scheme for central government employees, magistrates and military personnel, and local government employees (Caisse Nationale de Retraites des Agents des Collectivités Locales; CNRACL) applies a ‘pay-as-you-go’ financing method. Only, the RAFP (‘Retraite Additionelle de la Fonction Publique’), which is a complementary pension scheme for central government employees, local government employees and healthcare employees, applies a funded financing method. Moreover, some corporate pension funds, notwithstanding changes in their accounting representation through enforcement of the IAS 19, maintain close ties with corporate sponsors, including in their investment strategies and pension operations. They are, therefore, likely to remain substantially unfunded. Moreover, self-directed investing entails risks: in case of bankruptcy, self-investing strategies can be harmful as was the case in the UK for the collapse of the Robert Maxwell’s media empire, and in the USA for Enron’s collapse (Sullivan, 2004, pp. 83–84). As stated by Sullivan (2004, pp. 84–85), self-investing remains a current practice: Many US corporations make contributions to their employees 401 (k) accounts in the form of their own company shares. These companies typically have around one-third of their 401 (k) plans self-invested. This compares with about 19% for all 401(k) plans. While a high level of self-investment is contrary to the principles of prudent diversification, it is perfectly legal. Although pensions regulation impose a 10% limit on self-investment, the restriction only applies to Defined Benefit schemes. The 401 (k) plans of some of America’s largest and most venerable companies – members of the Fortune 500, with thousands of employees – have self-investment levels above 60%. For example, in 2002, Coca-Cola and General Electric had about 75% of their 401 (k) plans invested in their own shares. The equivalent figure for Procter & Gamble was just under 95%.Independent mutual and DB pension funds are not managed as closed monetary funds. They may be partly unfunded and provide collective guarantees and transfers that are inconsistent with the pension-savings account representation. Some countries have only partially funded schemes such as the USA, Singapore, Ecuador, Canada (Augusztinovics, 2002) and Finland (Oulasvirta, 2008). Moreover, some countries such as the USA, the UK and Sweden have collective guarantee mechanisms, which can be voluntary or mandatory and concern either the private sector or the public sector. As stated by ApRoberts (2007, p. 27), ‘if a voluntary membership scheme allows a capital output, it makes no pooling of risks [while] … a common fund is essential to achieve a certain equality of treatment in the group concerned’. NDC schemes, despite increased individualization, maintain a collective dimension and are partly unfunded. In countries such as Sweden, Italy, Latvia and Poland, public NDC accounts are maintained along with unfunded public pension liabilities (Holzmann et al., 2004, p. 10). According to Nisticò and Bevilacqua (2012, p. 1), Italy and Sweden moved towards NDC pension schemes by ‘[adopting] defined contribution rules while retaining a “pay‐as‐you‐go” financial architecture’. According to Cichon (1999, p. 87): … Notional Defined Contribution (NDC) system [consists in] individual social insurance pension contribution records [that] are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. [It] is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.In conclusion, a clear move has been prompted to consider pension obligations as deferred remuneration, to be managed on behalf of its ultimate beneficiary as a financial investment scheme, accounted for through an actuarial basis of accounting. However, given the current situation regarding pension obligations, there is no clear-cut, consensual view of their concept (what they are), of their management (how they are fulfilled) and of their accounting representation (how they are accounted for). Current practice and regulation still vary across funds, countries and jurisdictions. In this context, pension regulation implies a delicate balance between constructing the one best practice, and acknowledging alternative options that factually exist. Should regulations for pension obligations follow the emerging view according to which pension ought to be considered as an individual savings account? The following section aims at elaborating a theoretical model that may help disentangling some key features of the existing practice while elaborating a frame of analysis for pension funds and flows over time. This model is based upon an accounting representation of these funds and flows over time periods and across cohorts of incipient and future beneficiaries.7 7 On the theoretical connection between accounting and the theory of the firm, see Biondi (2005) and Biondi et al. (2007). 3. Towards a comprehensive frame of reference for the management of pension obligations Positions in the ongoing debate on pension management make reference to distinctive representations of what pensions are and how they should be organized from the economic and financial viewpoints. These representations affect the whole process of assessment and implementation of alternative institutional solutions for pension organization, including the very notion of financial sustainability as distinct from the notion of funding. Accounting representations constitute a paradigmatic illustration of alternative institutional solutions. Disentangling the overarching accounting concepts and methods may, therefore, highlight the ongoing process of institutional transformation of pension organization and the relevant positions and conflicts that emerge throughout this transformation (Tinker, 1985). In this context, accounting systems provide rules, incentives and representations, which actively frame and shape the underlying pension schemes that those systems make ‘accountable’ to their constituencies (Biondi and Suzuki, 2007). Accounting plays here a distinctive role as an institution that governs these schemes at a distance, through its regulatory action (Burchell et al., 1980; Hopwood, 1983; Robson, 1992; Hopwood and Miller, 1994; Knorr Cetina and Preda, 2005). The regulatory action of accounting involves a specific ideational role, in so far as it provides a quantified representation of the financial performance and position of the scheme rendered accountable in monetary terms. This representation drives the very definition of pension sustainability, that is, it defines what is acceptable and permissible within the framework of the pension scheme and for its constituencies (including its pension beneficiaries) across events and circumstances. Pension-related cash and non-cash flows enter the working of pension schemes in compliance with a set of accounting rules (this accounting frame of reference acts here as an institution, that is, a rule of accounting). From a socio-economic perspective, accounting defines and controls how these flows and funds are entered, processed and spent through the pension scheme’s working process. From an institutional perspective, accounting defines the rule of law that makes these flows and funds accountable to pension scheme constituencies (Biondi, 2010, 2016). In this context, the actuarial accounting representation of pension obligations—fostered by international accounting standards setters—constitutes one peculiar accounting frame of reference. Each and every frame modifies the working conditions of a given pension scheme and of its overall assessment, including the very definition of its financial sustainability (see the Appendices for numerical visualization). This peculiar accounting representation implements the ‘one best way’ by considering pension as deferred remuneration and imposing its evaluation in term of current value or net worth. That view is, therefore, consistent with the financialization of valuation that has marked the past few decades (Chiapello, 2014; Mennicken and Power, 2015). As a matter of fact, pension funds and obligations have been a critical matter all along the international accounting convergence process for both private and public sector entities. Their recommended accounting representation has coevolved with political and financial economic strategies aimed at promoting and favouring active financial markets and institutional investors. These strategies have caused pension obligations to be considered as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows. Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet. At the same time, these strategies foster the immediate funding of pension obligations, creating cash funds to be invested, monitored and recognized on the asset side of the balance sheet. However, existing practices and regulations are still inconsistent with the actuarial accounting representation that has been fostered by the IPSAS Board.8 8 The IPSAS are the Public Sector Accounting Standards issued by the IPSAB Board, which is facilitated by the International Federation of Accountants (IFAC). The latter includes the biggest international auditing firms (Big 4) as constituencies, and maintains links with the International Accounting Standards Board (IASB) that issues the private sector accounting standards called IAS/IFRS. Notwithstanding continued pressure for adopting this actuarial accounting representation, practices and regulations are still diversified between pension funds and across jurisdictions. This section will elaborate a theoretical analysis that helps disentangling some key features of existing practices while elaborating a frame of reference and analysis for pension funds and flows over time. This elaboration is based on an illustrative review of regulations and practices, together with a numerical visualization. This modelling step situates the ‘one best way’ in terms of pension arrangements, i.e. as individual saving and deferred remuneration, as one of the various viable modes of organizing the pension system. From this perspective, financial sustainability depends on the management mode under consideration, while funding and sustainability are not necessarily linked. This modelling step allows to better understand current practices, to disentangle rival positions surrounding regulatory and policy proposals, and to provide recommendations for improved accounting and the prudential regulation of pension funds and obligations in public and private sector entities. 3.1 Accounting implications of ‘the one best way’ Political and financial economic strategies designed to develop active financial marketplaces lead a growing number of accounting representations across jurisdictions to consider pension obligations as deferred remuneration, to be attached today to individual pay and expensed through actuarial measurement of future cash outflows (Napier, 2009). Outstanding liability (related to accrued future obligations) is then expected to be included on the liability side of the balance sheet9 9 Our analysis deals with pensions as employee benefits. Pensions as social benefits (unrelated to employment) are then excluded.. As summarized by Oulasvirta (2008, p. 230): [Under US GAAP, IAS/IFRS and IPSAS standards], the whole accrued and unpaid pension debt must be shown in the balance sheet and not only in the notes of the balance sheet or in the annual report narrative. If the central government has a funding arrangement for state employee pensions and there is a special separated entity (pension fund) that is responsible [for] the funding, the pension liability and debt recording belongs to this pension fund. When the pension fund belongs to the national government, the national government must also show the debt in the consolidated whole of the central government balance sheet.At the same time, these strategies foster the immediate funding of pensions, generating cash funds to be invested, monitored and recognized on the asset side of the balance sheet. Those funds are evidently expected to be invested and generate financial returns in active financial marketplaces. Referring to further literature, a Word Bank report (Holzmann and Hinz, 2005, p. 47) argues that: … Funded schemes clearly seem to promote the development of securities markets (Impavido et al., 2003), making them more liquid and deeper as well as more sophisticated and innovative (Walker and Lefort, 2002).From an accounting perspective, we can confidently summarize this alleged ‘one best way’ as follows: (a) pensions are understood as deferred remuneration (b) to be accounted through a balance sheet determination of outstanding liability (c) at its discounting-based actuarial measurement (current value). The influence of the private sector accounting rules in the representation of the type of accounting that is currently applied is fundamental here. In 2012, Hoogervorst (2012), chairman of the IASB, criticized governments (using cash-based accounting) for ‘[giving] very incomplete information about the huge, unfunded social security liabilities they have incurred’10 10 The complete quotation reads as follows: ‘Public sector accounting also demonstrates the primitive anarchy that results without the discipline and transparency that good financial reporting provides. While the IPSASB has created good standards for the public sector, based on IFRS, they are used only haphazardly. Around the world, governments give very incomplete information about the huge, unfunded social security liabilities they have incurred. Many executives in the private sector would end up in jail if they reported like Ministers of Finance, and rightly so.’ and advocated IPSASB standards that are only used ‘haphazardly’. According to Le Lann (2010), Donaghue (2003), an IMF economist, provides a clear-cut illustration of this view while recommending the treatment of employees’ pension obligations as financial liabilities in national statistics (see also Feldstein, 1997). In particular, Donaghue (2003, pp. 4–6) focuses on the ‘passage of time’ as the determinant of accruing liabilities and argues that: A present obligation has been created simply by persons being in observance of the conditions required by the government’s pension policy up to the present period—that is, the passage of time has created reasonable expectations which leaves the government with no realistic alternative to meeting (at least in the main) those expectations. … The operation of government pension schemes gives rise to present (constructive) obligations of government, where the obligating event is simply the passage of time while the pension scheme is in operation. … These criteria fit the definition of a liability [according to IPSAS 1]. (p. 6) (emphasis added) Therefore, pension liabilities should be recognized on the balance sheets of government, and the corresponding transactions (transfers to households) should be included in the measurement of the government’s operating result in the periods during which the pension obligations accrue. (p. 7) In accounting terms, all government non-exchange pension schemes give rise to liabilities (in economic terms, insurance technical reserves), and expense and financing transactions. The liabilities are the net present value of obligations accrued to the current date. (p. 11)Donaghue (2003, p. 4) argues that ‘by relieving an individual of the present need to make provision for future risk, the government is actually providing a current benefit (similar to insurance cover)’ and should, therefore, consider pensions obligations as financial liabilities. The author underpins its arguments by quoting the US governmental accounting standard SFFAS No. 17 (Donague, 2003, p. 5): This same point is made in the USA Federal Accounting Standards and Advisory Board SFFAS No. 17 Accounting for Social Insurance which notes that some argue that ‘it is inherently misleading to fail to quantify the size of the promise that is being made and on which people are told they can rely’ (emphasis in original)Donaghue’s arguments are then in line with the concept of pension as being an entitled savings account (p. 6): The corresponding entitlements of individual citizens begin to accumulate when they reach the age of economic independence, and increase until they reach pensionable age (providing they are in observance of the conditions applying to the scheme), after which they begin to decline as benefits are paid out.In fact, Donaghue (2003) himself concedes that the recognition of pension obligations as a liability is not self-evident and goes beyond current practice and regulation. This further implies that he has been asserting a normative view that is not based upon a heuristic or comparative analysis of pension management modes. The recognition of obligations (and corresponding economic flows) arising from government pension schemes recommended in this paper goes beyond that set out in GFSM [Government Finance Statistics Manual, issued by the IMF] 2001. (p. 2) It is important to note that the treatment proposed in this paper will present a very different view of the economic stocks and flows relating to government pension schemes from ‘pay-as-you-go’ or similar treatments. (p. 7) It has been argued by some fiscal economists including at the International Monetary Fund (IMF) that the social pension arrangements do not adequately satisfy the constructive obligation criterion, due to the “relatively soft nature of the commitment”. Some fiscal analysts would therefore prefer that there be disclosure of the possible scope of government liabilities, rather than full recognition of the liability in the financial statements. (p. 12)Oulasvirta (2008, p. 229) summarizes this ‘one best way’ to treat accounting for pension obligations as follows: US GAAP, IAS/IFRS and IPSAS standards all have as a starting point that post-employment benefits should be recognized and recorded following the principle of pension benefits earned during the work. Based on this principle, pensions should be recorded on the following grounds. • The paid salary and the unpaid part of the salary which is the pension benefit earned during the accounting period should be recorded on accrual basis • as an expense incurred in the income statement (the profit and loss statement) • and the earned but still unpaid part of the benefits at the book closure date as a liability (debt) in the balance sheet. • The paying of the pension benefit to the recipients are only instalments of the debt (pension liability) recorded on a cash basis (no impact on income statement). This accounting representation is consistent with the ‘one best way’ view of pension obligations as individual saving, deferred remuneration and a financial placement on behalf of its beneficiaries. However, this view neglects and somewhat collides with the existing practice and regulations concerning pension management. The next section will develop a theoretical analysis that situates the ‘one best way’ among alternative viable modes of pension organization. 3.2 A theoretical analysis based upon the review of existing practice and regulation As a matter of fact, the individual saving ‘one best way’ for the accounting and management of pension obligations is not consistent with all the existing practices that still characterize pension management and reporting across countries and jurisdictions. The received distinction between DC and DB pension schemes is, therefore, insufficient to summarize and understand the organization of pension management. Our theoretical analysis aims to go beyond this received distinction in order to understand the ‘one best way’ as one among various viable modes of pension management. Pension management generally occurs through organized entities acting on behalf of sponsors and beneficiaries. This entity dimension is not consistently included in the view of pension obligations as individual savings account and deferred remuneration. A savings account can exist independently of managerial delegation to a specialized financial entity, while an entity-held pension account does not necessarily feature all the characteristics—regarding appropriability, transferability, remuneration and so forth—that functionally define an individual savings account. For instance, an entity-held pension account may not be appropriable or transferable at will, while it may not be fully funded at all times.11 11 Bohn (2011) argues on the ambiguous meaning of full funding, stating that there are several conceptually different ways to its interpretation. Separately incorporated or not, a financial entity specialized in pension management (generally labelled ‘pension fund’) is purposively designed to fulfil pension obligations over time. This fulfilment constitutes its constitutive mission. Performing this mission involves two complementary working processes that have to be accounted for: One process concerns the series of cash (cash-receivable, and cash-promised) flows that pass through the entity from current contributing members (including future expected beneficiaries and committed sponsors) to incipient and future beneficiaries. This process involves cash and non-cash financial funds and flows that have to be accounted for. It points to the financial dimension of the process. The cash process of the entity economy is consistent with a cash basis of accounting. The second process concerns the economic recovery of the outward flow of payments that are due over time to incumbent beneficiaries. This process involves the recognition and measurement of pension payments and matching contributions, and of the dedicated assets and outstanding liabilities that are generated by the continuous management of pension entity through time and hazard. It points to the economic process of the entity economy and is consistent with an accrual basis of accounting.Both processes go on through the working activity of the ongoing entity that is organized to fulfil pension obligations over time on behalf of sponsors and beneficiaries. Accounting provides its own representation of both processes and their mutual interaction, along with an accountability device concerning their performance and situation over time. From this perspective, an individual savings account approach to pension involves quite a narrow view of both processes. Accordingly, each individual is expected to collect his own series of cash settlements, which, through financial placement, are the only way to get future pension payments through a continuous financial accumulation that is dependent on cumulated cash funds and proceeds. To expand on this view, it may be useful to disentangle its implicit understanding of pension management through a dualistic approach that identifies couples of contrasting terms. This dualistic approach draws upon a review of the existing practice, as follows: Individualistic vs. collective: This discriminating concept distinguishes between individualistic and collective approaches to pension obligations. This concept specifically refers to the economic process. According to individualistic approaches, each individual is expected to pay for himself. Social solidarity through mutualistic transfers is, therefore, excluded, in principle, whereas financial sustainability is based upon the individual ability to pay and accumulate (as a stock). According to collective approaches, all of the members ensure the coverage of pension payments over time. Individualistic appropriation is, therefore, excluded, in principle, whereas financial sustainability depends on the continuous collective ability to balance contributions and benefits over time (as a flow). Funded vs. unfunded: This discriminating concept distinguishes between funded and unfunded pension obligations. This concept specifically refers to the financial process. Under funded schemes, the pension accounts are expected to contain cash and cash receivables that are intended to be invested with a view to recovering future pension payments, making financial sustainability dependent on investment returns. Under unfunded schemes, the pension accounts are not expected to contain cash, making financial sustainability dependent on collective assurance through time. It identifies outstanding pension rights and obligations that do not necessarily match some underlying financial investment process. Stock vs. flow basis of accounting: This discriminating concept distinguishes between the two most general families of accounting models (Biondi, 2012). This concept especially refers to the accounting representation.12 12 This stock/flow dyad of alternative accounting bases differs from the usual distinction between cash and accruals bases of accounting. While the latter distinction points to recording techniques of cash and non-cash movements, the former refers to the accounting model of reference for accounting representation. A flow basis of accounting can then exist under an accrual basis of accounting, as it is the case with the dynamic accounting view provided by historical cost accounting. The stock basis method of accounting adopts a balance sheet accounting approach that gives priority to recognition and measurement of assets and liabilities as they stand at one point in time, in order to represent and account for overarching managerial processes. The current (fair) value accounting measurement is generally consistent with the stock accounting basis that is applied to examine the financial sustainability of the pension scheme. The flow basis of accounting adopts an income statement accounting approach that gives priority to revenues, costs, contributions and expenditures. A historical cost (historical nominal amount) accounting determination is generally consistent with the flow basis of accounting that is applied to examine the financial sustainability of the pension scheme. This stock vs. flow dyad makes it possible to better characterize the ‘pay-as-they-go’ pension systems that still exist and are widespread in some national contexts, including France. Deferred remuneration vs. social protection: This discriminating concept distinguishes between two alternative understandings of pension rights and obligations and provides an overarching definition for various modes of pension management. On the one hand, pension is understood as deferred remuneration that is due to the individual along with the current remuneration. In its pure form, this implies that both the accrued pension payment and its cash liquidation are performed in the accruing period when the current remuneration is paid. On the other hand, pension is understood as a social protection that is granted to each other by all the members of the constituencies (pension fund members, citizenship) and delegated to a pension-purpose entity (mutual, governmental). In its pure form, this implies that continuous pension payments are ensured by that entity (including on behalf of collective or sovereign powers) and do not belong to the beneficiaries before they are due and liquidated.Table 1 summarizes these couples of contrasting terms. Table 1 Couples of contrasting terms Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Table 1 Couples of contrasting terms Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  Dimension of reference  Discriminating concept  Economic process  Individualistic vs. collective  (contributions and expenses)  Financial process  Funded vs. unfunded  (cash inflows and outflows)  Accounting representation(accounting model)  Stock basis vs. flow basis of accounting  Overarching definition(view, understanding)  Deferred remuneration vs. social protection  According to this frame of analysis (Table 1), the view of pension as deferred remuneration that has been recently put forward corresponds to an individualistic approach which involves a funded financial management and a stock basis method of accounting. On the other side, we have the pure unfunded ‘pay-as-they-go’ scheme that has been generally adopted by public sector pension funds. This collective approach fosters an unfunded financial management, it prefers a flow basis method of accounting and it understands pensions as a social protection that is ensured by the pension-purpose entity on behalf of the whole of the union (pension fund members, citizenry). To be sure, pensions in the form of individual savings accounts have an ambivalent meaning regarding the flow and stock bases of accounting. On the one hand, if we focus on the progressive accumulation over time, we can see that an individual savings account is made up of continuously cumulated flows of savings. This dynamic dimension is consistent with a flow basis of accounting. On the other hand, if we focus on its continued reinvestment over time, this account comes to be a form of financial investment whose return is a key source for the coverage of future pension obligations. An actuarial accounting representation points to this second aspect, which is consistent with stock basis of accounting. Therefore, the ‘one best way’ mingles the individual savings account (flow basis) and deferred remuneration (stock basis). Our classification in Table 2 focuses on its progressive accumulation through flows of savings, neglecting its financial investment dimension (the deferred remuneration), which would be consistent with a stock basis. Table 2 A theoretically informed classification of existing modes of pension management   Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes    Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes  *Classification under flow basis focuses on its progressive accumulation through flows of saving, neglecting its financial investment dimension (the deferred remuneration), which is consistent with a stock basis. Table 2 A theoretically informed classification of existing modes of pension management   Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes    Stock basis  Flow basis  Individualistic  DC schemes  Individual saving accounts (*)  Collective  DB schemes  Pay-as-they-go schemes  *Classification under flow basis focuses on its progressive accumulation through flows of saving, neglecting its financial investment dimension (the deferred remuneration), which is consistent with a stock basis. Our frame of reference goes beyond the alleged ‘one best way’ that defines pension as an individual savings account and deferred remuneration. Overarching managerial processes exist and are sustainable (depending on conditions and circumstances) under various models which correspond to, and can be referred to each couple of discriminating concepts. For instance, Table 2 shows a classification of existing practices according to two discriminating concepts: individual vs. collective and stock vs. flow basis. Accordingly (Table 2), under individualistic regimes, DC schemes apply a stock basis method of accounting and management. Each individual is, therefore, expected to hold a share of the pension joint stock. Individual savings (deferred remuneration) accounts are by definition personal, and they are generated by a progressive accumulation of savings flows and related reinvestment proceeds. Under collective regimes, DB schemes promise continued pension payments on behalf of the whole of a given constituency (including beneficiaries and sponsors). ‘Pay-as-they-go’ schemes make the same promise, but fulfil it through continuous matching between contributions and pension payments over time. In this context, a stock basis of accounting points to the notion and function of money as a reserve and measure of value (Le Lann, 2010), while a flow basis of accounting points to the notion and function of money as a symbol, a means of payment and unit of account (Biondi, 2010). In the first case, dedicated asset portfolio refers to the very existence and accumulation of identifiable assets that are expected to pay for future pensions. In the latter case, pension commitments stand as acknowledgement of stated promises of future payments by the entity responsible for the fulfilment of these promises through time. From this perspective, the ‘one best way’ that understands pension as an individual savings account appears to be inconsistent with the generally accepted meaning for pension arrangements. Historically, this meaning has been related to protection granted to the old or the sick (Blackburn, 2003). In its pure form, the pension as savings account view holds each individual—independently from all the others—responsible for their own financial sustainability over their entire retirement period, making it dependent on the hazardous results of the current financial investment process. However, according to the Merriam-Webster Dictionary, pension means ‘an amount of money that a company or the government pays to a person who is old or sick and no longer works’, while its meaning as ‘wage’ is considered as archaic. According to the Oxford English Dictionary, pension means ‘a regular payment made by the state to people of or above the official retirement age and to some widows and disabled people’.13 13 To be sure, Oxford Dictionary also adds the following definition: ‘A regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.’ Late Middle English (in the sense ‘payment, tax, regular sum paid to retain allegiance’) derives from Old French, as well as from Latin pensio(n-) that means ‘payment’, from pendere ‘to pay’. The current meaning of the verb dates back to the mid-19th century. 3.3 Distinctive notions of financial sustainability depending on pension management models According to our frame of analysis, the very definition of financial sustainability depends on alternative management models. The current modes of sustainability depend on the specific ways in which each model organizes the fulfilment of pension obligations over time and circumstances. The Appendix provides numerical examples that illustrate these ways. In particular, in the individual savings account (the ‘one best way’), sustainability is based upon financial returns over investments of accumulated pension funds (as a stock). In an unfunded ‘pay-as-they-go’ scheme, sustainability is based upon the continuous collective matching of contributions and benefits through time (as cash flows). An actuarial representation applies the time value of money to these flows. Future flows are then discounted back to the present time according to some compound discount rate of reference (as actuarial stocks). In this context, notwithstanding the criticism that has been levelled at them, unfunded ‘pay-as-they-go’ schemes can be sustainable as long as current and future contributions from constituencies (including sponsors and future beneficiaries) go on matching current payments that become due to incumbent beneficiaries over time. Appendix B gives a numerical illustration of this sustainability. Accordingly, pension obligations are divided between pension flows that have already been paid to beneficiaries (the ongoing flow of pension payments that constitutes outflows to current beneficiaries), and pension flows that may become payable in the future (constituting the remaining notional gross commitment for pension obligations). The latter is not yet an outstanding liability for the pension scheme. It will become a liability when pension payments become due and an actual outflow is booked for these payments. By that time, if the pension scheme has recourse to an external source of debt to pay for them, its outstanding debt will grow to sustain the incurred operational deficit between pension payments and contributions. Symmetrically, an actuarial representation of pension obligations can hide significant issues and hazards related with pension protection over time. Appendix C gives a numerical illustration that highlights these limitations. For instance, the outstanding cash balance remains hidden although it exposes the pension scheme to significant costs and risks. The expected actuarial balance is based upon assumptions about remote future events and conditions. An eventual bankruptcy occurring at some point during this extended period would undermine the capacity of the pension scheme to cover pension obligations, although the expected actuarial balance was in a situation of equilibrium. It is interesting to observe here the distinctive impact of interest rates on pension schemes. Coeteris paribus, a reduction in interest rates may favour unfunded ‘pay-as-you-go’ schemes, since they may incur lower interest charges to fund pension payments that have become due. On the contrary, the same reduction undermines funded DC schemes that depend on financial investment accumulation and return to fulfil future pension obligations when they become due. In this context, financial sustainability depends on distinctive conditions for funded DC schemes and for ‘pay-as-they-go’ schemes. Concerning the former, financial return from outstanding financial investment portfolios is a key factor to cover pension obligations through time. Concerning the latter, the demographic and economic evolutions of membership are critical. To be sure, it does not relate only to demography, but also to the financial and economic capacity to maintain intergenerational solidarity among members through time. From an economic perspective, Barr (2002, p. 8) deconstructs the myth that funding solves adverse demographics, claiming that ‘demographic change is not a strong argument for a shift towards funding’, and that ‘the difference between “pay-as-you-go” and funding is second order’. Our numerical analysis further implies that funded schemes do not guarantee better provision and security of pensions. The shortcomings of funded schemes have been brought to light in the aftermath of financial crises. For instance: in the UK, in 1992, the Maxwell scandal (Augusztinovics, 2002, p. 26); and in 2000, the insurance company Equitable Life, and in 2007, the pension fund of Allied Steel and Wire. In the USA, an illustrative example is offered in 2002 by the Enron bankruptcy and related scandal. In France, the additional pension fund for civil servants named CREF (‘caisse complémentaire de retraite de la fonction publique’), which was partly funded, incurred financial distress and was transferred in 2002 to the COmplément REtraite Mutualiste (COREM) under the supervision of the state14 14 Thousands of contributors seek compensation in court for their damages, and were partially satisfied (Pouzin, 2014). Other plaintiffs remained unsatisfied (Prache, 2008), while the new fund COREM reduced previously committed levels of pensions as a consequence of the financial distress of 2002. (Pouzin, 2014). According to Augusztinovics (2002, p. 26), the funding requirement can also lead to high administrative costs and low compliance rates as evidenced by the case of the Chilean pension fund administrators. Moreover, if circularity in government funding occurs, pensions funding systems have virtually no comparative advantage relative to a ‘pays-as you-go’ system (Ponds et al., 2011), especially if the pension fund’s portfolio is composed of national public debt—as Sauviat (2014) says it is in the case of Chile. Ultimately, the objective—and, therefore, the future allocation—of funds can be reshuffled as it has been the case for the New Zealand Superannuation Fund. Indeed, in New Zealand, ‘the early policy rationale for accumulating financial assets may have led … voters to expect future benefits from the funds set aside for publicly-funded old age pensions. But this seems to be contradicted by the subsequent overlapping rationale that these same assets provide a buffer against economic shocks’ (Newberry, 2013, p. 12). Since unfunded ‘pay-as-they-go’ pension schemes can be sustainable (Appendix B), while partially funded, financial-return-based pension plans can be unsustainable (Appendix C), we can conclude that funding and sustainability are not necessarily linked. This argument is also supported by Augusztinovics (2002, p. 26): Contrary to the new pension orthodoxy’s major arguments, there is ample conceptual evidence in the literature to demonstrate that the method of finance and the type of management are no panacea … .From our perspective, the overarching accounting and management purpose concerns the protection of pension promises through enhanced reporting and disclosure. Accountability, in terms of pension management, involves being accountable for the main purpose of that management, i.e. the timely and continued provision of pension payments as they become due at their previously promised levels. The pension as savings account model (Appendix A) ensures this protection through a financial accumulation process, which exposes funded pension liability to financing cost and risk, as well as investment cost and risk, including misappropriation and misallocation by controlling parties. Palmer (2002, p. 172) argues that ‘countries in the OECD have been reluctant to make [the] transition [from pay-as-they-go schemes to individual financial account systems] … due not only to the high initial cost for the transition generation, but also to the financial risk involved’. From this perspective, its actuarial mode of accounting representation entails the risk of undermining control and accountability, in so far as the discounting/unwinding measurement method does not track the actual cash flows and funds that are involved in overarching managerial processes. Moreover, this actuarial representation introduces subjectivity and volatility in valuation, making continuous valuation dependent on assumptions over critical variables concerning the financial accumulation process, including discount rates of reference, and forecasts over very long periods of time (Biondi et al., 2011; Biondi 2011; Biondi 2014). According to Klumpes (2001), in Australia, the adoption of accrual-based accounting principles reduced the level of generational accountability concerning the under-funding of its major pension fund, the State Authorities Superannuation Scheme. The unfunded ‘pay-as-they-go’ model ensures pension protection through collective responsibility for incumbent beneficiaries. This responsibility is delegated to the managed entity on behalf of entity constituencies involved in pension provision. This has historically led to a lack of accounting reporting and disclosure by both public sector and private sector sponsors. Little information (if any) was provided through their accounting reporting, while no quantitative determination was included in their balance sheet concerning outstanding positions. However, Appendix B shows how the temporal structure of flows and funds can be represented without having recourse to current (discounted) values that are inconsistent with this model. To conclude, our theoretical approach develops a more comprehensive and neutral perspective on management modes for pension obligations, including a viable accounting representation of related funds and flows over time. Accordingly, regulatory authorities and policymakers are not so much requested to endorse one particular mode of pension management, than to rule accounting and prudential options that make them consistently represented and accountable for pension obligations over time. In particular, Appendix B shows how an actuarial mode of accounting would provide information that is inconsistent with governance and managerial needs for pension obligations under ‘pay-as-they-go’ schemes, whereas Appendix C shows how this very method undermines disclosure on cash management by managing entities. 4. Conclusive remarks The distinction between DB and DC schemes appears to be simplistic, preventing current and future beneficiaries from understanding the actual organization of their pension management schemes. This distinction has fostered mistrust and confusion in the public debate (for instance in Poland and the USA) concerning political decisions about pension regulation. The lack of consistent accounting representation for each and every scheme has added to this mistrust and confusion. In this context, our approach goes beyond this received distinction. Our theoretical model highlights the specificities of the various pension systems, such as self-investing strategies employed by public sector pension entities in the USA and Poland, as well as by private sector pension entities such as Coca-Cola. Moreover, our map provides better positioning for schemes that do not fit into DB or DC definitions, such as notional pension funds or ‘pay-as-they-go’ pension systems. Recent reforms in pension management have been driven by an alleged ‘one best way’ according to which pension should be understood as a form of individual financial placement. This transformation appears to be embedded in an overall tendency towards a neoliberal Europe that ‘redefines social rights, and therefore transforms social identity and citizenship’ (Frericks et al., 2009, p. 1). However, this ‘one best way’ view is currently incompatible with existing alternative modes of economic organization for pension management, including the unfunded ‘pay-as-they-go’ schemes that still characterize public sector pension funds in some European Member States such as France and Finland (Oulasvirta, 2014). Nevertheless this view, which may be considered to be fundamentally normative, it is widely acknowledged that funding and sustainability are not necessarily linked. Accounting representation constitutes an illustrative case of the kind of ongoing transformation of pension management that is driven by this view. Current reforms are shifting pensions from an unfunded collective obligation based on social solidarity across generations and among citizenry, towards a funded individual saving obligation based on financial investment opportunities on active financial markets. The individual savings model constitutes the extreme outcome of this socio-economic movement. This trend has been reshaping the very meaning and organization of pension. At present, however, alternative representations and organizations coexist and somewhat collide. Regulation (including accounting standard-setting) has, therefore, become the critical arena where this confrontation occurs. Regulatory bodies and policymakers face choices that relate financial sustainability to the overarching role of pension management in economy and society. Eurostat excludes pensions from Maastricht debt but requires Member States to disclose comparable information concerning pensions. Indeed, in 2013, a supplementary compulsory table was included in chapter 17 on ‘social insurance including pensions’ in the ESA 2010 (Eurostat, 2013). This table provides detailed and reliable estimates of stock and flow data on pensions that are included in core accounts and on pensions which are not included in them. The supplementary table ‘covers stock and flow data not fully recorded in the core national accounts for specific pension schemes such as government-unfunded defined benefit schemes with government as the pension manager, and social security pension schemes’ (Eurostat, 2013, p. 379). Concerning OECD statistics, the pension accounting issue remains unaddressed, leading to comparability problems due to different definitions and treatments. Since 2017, a supplementary table concerning pensions shall display additional information on pension obligations. All along this article, the overall purpose of pension management has been assumed to be the protection of pension promises over time. From this perspective, pension regulation should find a reasonable balance between fostering an alleged one best way to fulfil pension obligations, and acknowledging viable alternative modes of economic organization. Several viable alternative modes exist in the current practice, from the individualistic savings account schemes at one extreme of the pension world, to unfunded ‘pay-as-they-go’ schemes under collective responsibility at the opposite extreme. Within this framework, pension regulation could develop and enforce a set of clear and consistent options, which would make it possible for the various existing modes of management to fulfil their specific prudential and accounting needs for accountability and responsibility over time. Acknowledgements Yuri Biondi is tenured senior research fellow of the National Center for Scientific Research of France (Cnrs), and research director at the Financial Regulation Research Lab (Labex ReFi), Paris, France. The authors wish to thank Mme Danièle Lajoumard and Mr. John Stanford for their valuable help through discussion and documentation provision. 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World Bank ( 2006) Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance , Washington, DC, Independent Evaluation Group, World Bank. Appendix A. The ‘one best way’ of accounting and management for pension obligations Our main text shows how criticisms of ‘pay-as-they-go’ pension mechanisms are based upon an alleged ‘one best way’ to define and manage pension funds, treating them as closed monetary funds. Appendix A provides a numerical example of this treatment and its accounting representation. It shows how pension contributions are accumulated over their working life by the employees (20 units each year) and reinvested through time so that they produce interest on the cumulated cash amounts. Because of accumulation over time, this interest yield—labelled cash investment return in Table A1—passes from 1 to 4 units during the work period (periods 1–5). When employees retire, their cash account is spent to pay their pension over the retirement period (periods 6 and 7). Table A1 provides a numerical illustration. A working life is supposed to span 5 periods; the retirement period is supposed to span 2 periods. For the sake of simplicity, interest yields are set at 5% over all the investment periods (with no investment return volatility or investment loss). B. Sustainability of unfunded ‘pay-as-they-go’ pension schemes: a numerical example Appendix B provides a numerical example to show how ‘pay-as-they-go’ mechanisms can be sustainable over time without having recourse to an actuarial representation and control of their current economic and financial process. Moreover, it shows how this overarching process is misinterpreted by the actuarial representation. This misrepresentation may cause its operations and its accountability to look very opaque to stakeholders and regulatory bodies. For illustration purposes (Table B1), we assume one cohort of incipient fund members (which pay contributions) along with one cohort of current fund beneficiaries (which receive pension payments). Since the ‘pay-as-you-go’ scheme is collective, its functional process is expected here to balance current payments (outflows) against current contributions (inflows), period through period. More sophisticated mechanisms may be designed while maintaining a flow basis method of accounting and control. Period balance of these two flows shows the over/under-paid amount of the period. This represents the operational surplus or deficit of the period. The cumulated deficit from the past is then a liability for the pension scheme, since it corresponds to past and present pension payments that have become due and have been liquidated. From this perspective, a statement of funds may represent, on the asset side, the remaining contributions to be collected, by cumulating outstanding future commitments to be received at their nominal amount; on the liability side, it may represent the remaining notional gross commitment for pensions to be paid at their nominal amount. Period balance between these two funds shows residual balance that is accrued at that period. This outstanding balance over the future is not a liability for the pension scheme, since it does not correspond yet to actual pension payments that became due and were liquidated. Total balance is provided by adding cumulated balance from the past to cumulated balance from the future. It shows the outstanding balance of the ongoing pension operations across time. It represents the expected surplus or deficit from its ongoing operations through time. Table B1 further provides an actuarial representation of this working process. Accordingly, the series of remaining future pension obligations is discounted back to the current period at the discount rate of reference, determining the actuarial liability. Its progressive reduction through time (technically speaking, the unwinding of the discount) is accounted as an actuarial profit of the period. For sake of convenience, the actuarial asset is made equal to the actuarial liability by assumption. Since this pension mechanism is based upon flow compensation over time, an actuarial representation is bound to misinterpret its functioning and does not provide meaningful and useful figures to represent and control it. In particular, it provides an evaluation of initial accrued liability (434) that undermines the actual notional gross commitment (520) over the future, while it unwinds a progressively decreasing profit (from 109 to 60 over various years) that misrepresents the ongoing series of inflows (100) and outflows (100 and 80 over various years). C. Actuarial representation of financial and economic processes of pension payments Appendix C disentangles implicit assumptions made by an actuarial representation. We take the same numerical example as in Appendix B concerning the flow of pension payments. However, ongoing pension contributions are replaced by a lump sum payment at the end of the cohort period. This working hypothesis shows the impact of discounting involved in an actuarial representation. Its sustainability is fundamentally based upon the compensation of stock values that include implicit compound return rates over time. Table C1 develops a numerical illustration. Again, for sake of convenience, the actuarial asset is made equal to the actuarial liability by assumption. Table C1 shows a pension scheme that is balanced under its actuarial representation over time, generating actuarial profit from the progressive reduction of pension liability through discount unwinding. However, this balance is obtained by recovering negative cash outflows all along the cohort duration (up to a cumulated deficit from the past of − 440) with a lump sum inflow (581 units at year 5) that compensates both the cash outflows and the negative returns that have been paid to maintain the negative cash imbalance over time. This involves a final payment (581) that is materially bigger than the total payment (520), which is required under the ‘pay-as-they-go’ scheme in Table B1. This numerical example illustrates several hazards that are not fully disclosed by an actuarial representation. In particular: outstanding cash balance remains hidden although exposing the pension-providing entity to significant costs and risks; an implicit return is included in the actuarial representation of dedicated asset portfolio (this return is expected to compensate negative return over outstanding liability). In the event of a bankruptcy occurring before the final period, the capacity of the fund to cover pension obligations would be undermined, notwithstanding the expected situation of equilibrium of the actuarial balance that is based upon assumptions about remote future events and conditions. An implicit cost of funding is included in the estimated liability, although it is based upon future amounts that are not yet due and liquidated. In sum, an actuarial representation makes the pension provision sustainability dependent on the structure of financial returns related to positive and negative stocks that are computed in a way that neglects time, process and hazard. Biondi (2011) provides further theoretical analysis of discounting in capital budgeting. Box C1 Glossary Defined Benefit - DB schemes. Pension schemes where the benefits accrued are linked to earnings and the employment career (the future pension benefit is pre-defined and promised to the member). It is normally the scheme sponsor who bears the investment risk and often also the longevity risk: if assumptions about rates of return or life expectancy are not met, the sponsor must increase its contributions to pay the promised pension. These tend to be occupational schemes. Defined Contribution - DC schemes. Pension schemes where the level of contributions, and not the final benefit, is pre-defined: no final pension promise is made. DC schemes can be public, occupational or personal: contributions can be made by the individual, the employer and/or the state, depending on scheme rules. The pension level will depend on the performance of the chosen investment strategy and the level of contributions. The individual member, therefore, bears the investment risk and often makes decisions about how to mitigate this risk. Funded scheme. A pension scheme whose benefit promises are backed by a fund of assets set aside and invested for the purpose of meeting the scheme’s liability for benefit payments as they arise. Funded schemes can be either collective or individual. Hybrid pension scheme. In a hybrid scheme, elements of both defined contribution and defined benefits are present or, more generally, the risk is shared by the scheme’s operator and beneficiaries. Pay-As-You-Go schemes. Pension schemes where current contributions finance current pension expenditure. Source: European Commission (2010). Notional Defined Contribution - NDC pension schemes. They combine the individual accounts of a privately managed defined contribution scheme with pay-as-you-go financing. Source: World Bank report (Holzmann et al., 2004, p. 10). Table A1 A numerical illustration of the ‘one best way’ (pension savings account) Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Notes: Data rounded to the nearest unit. Reinvestment return rate is fixed at yearly 5%. View Large Table A1 A numerical illustration of the ‘one best way’ (pension savings account) Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Hypothesis and parameters implications   Cohort duration (periods number):   7  6  5  4  3  2  1  –  Flow representation  Periods  Cumulated/ Initial  1  2  3  4  5  6  7      During work life  After retirement  Statement of flows                   Pension payment  120  0  0  0  0  0  60  60  Net wage  400  80  80  80  80  80  0  0  Pension cash contribution  100  20  20  20  20  20  0  0  Gross wage  500  100  100  100  100  100      Cash investment return  11  0  1  2  3  4  0  0  Statement of funds                  Cumulated cash contributions (+)    20  40  61  83  106  111  51  Cumulated cash investment returns (+)    0  1  2  3  4  0  0  Pension payment (outflow) (−)    0  0  0  0  0  −60  −60  Accrued pension fund (Cash) (=)    20  41  63  86  111  51  −9  Notes: Data rounded to the nearest unit. Reinvestment return rate is fixed at yearly 5%. View Large Table B1 A numerical illustration of sustainability of unfunded ‘pay-as-they-go’ pension schemes Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Note: Data rounded to the nearest unit. View Large Table B1 A numerical illustration of sustainability of unfunded ‘pay-as-they-go’ pension schemes Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  Cumulated/Initial  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  500  100  100  100  100  100  =  Operational balance (pension management)    −20  −20  −20  20  20    Statement of Funds              A  Cumulated balance from the past  −20  −20  −40  −60  −40  −20    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  500  400  300  200  100  0  B  Outstanding balance over the future  −20  0  20  40  20  0  C = A + B  Total balance    −20  −20  −20  −20  −20  Actuarial representation    Actuarial liability  434  325  221  122  60  –    Discounting unwinding (+profit/−loss)    109  104  99  63  60    Cumulated actuarial balance    109  213  311  374  434                    For disclosure: discounted yearly payments to beneficiaries    109  104  99  63  60  Note: Data rounded to the nearest unit. View Large Table C1 Numerical illustration of an actuarial representation of pension obligations Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Note: Data rounded to the nearest unit. View Large Table C1 Numerical illustration of an actuarial representation of pension obligations Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Hypothesis and parameters implications    Discount rate for future payments: 0,05    0,91  0,86  0,82  0,78  0,75    Cohort duration (periods number): 5    4  3  2  1  –  Flow representation    Periods  CUM/INIT  1  2  3  4  5    Statement of Flows              −  Pension payments (outflows to current beneficiaries)  520  120  120  120  80  80  +  Pension contributions (inflows from incipient members)  581  0  0  0  0  581  =  Operational balance (pension management)    −120  −120  −120  −80  501    Statement of Funds              A  Cumulated balance from the past  61  −120  −240  −360  −440  61    Remaining notional gross commitment  520  400  280  160  80  0    Remaining contributions to be collected  581  581  581  581  581  0  B  Outstanding balance over the future  61  181  301  421  501  0  C = A + B  Total balance    61  61  61  61  61  Actuarial representation    Actuarial asset  434  325  221  122  60  60    Actuarial liability  434  325  221  122  60  0    Discounting unwinding (+profit /−loss)    109  104  99  63  60    Cumulated actuarial balance  0  109  213  311  374  434    For disclosure                Discounted yearly payments to beneficiaries    109  104  99  63  60    Discounted yearly contribution from beneficiaries    –  –  –  –  434  Note: Data rounded to the nearest unit. View Large © The Author 2017. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: journals.permissions@oup.com

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Socio-Economic ReviewOxford University Press

Published: Apr 24, 2017

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