EUROPE - A new Eurostat ruling on treatment of pension obligations could help reduce budget deficits of EU countries.
The Statistical Office of the European Communities today decided that payments received by a government when taking over a company’s pension commitments could be to used to reduce government deficit.
This ruling is in the case of transfer to government of pensions obligations under funded pension schemes operated by state-run companies.
David Collinson, a partner at Waston Wyatt explained: “This decision impacts countries like Germany and France or those countries which have a large public sector where there is scope of privatising.
“It gives some governments the scope to try and use pension commitments to reduce their apparent budget deficits. It effectively allows governments to get money upfront without having to recognise the deficit that they are taking on through pension commitments.”
A previous ruling on October 21, 2003 had covered unfunded pension schemes.
“Eurostat has decided that the payments received by a government from a corporation in the context of a transfer of obligations under funded schemes that the corporation operates for its own employees should be recorded as government revenue and should therefore have a positive impact on government surplus or deficit (EDPB9).
“As a consequence, the payments connected to the transfer to government of pension obligations have the same impact on government deficit in the cases of both funded and unfunded schemes organised by a corporation,” a Eurostat statement said.
In both cases, funded and unfunded, the cash received by government is an unrequited transaction, classified as a capital transfer (codified D99 in ESA95) and the pension obligations taken over by government are not recorded in the form of an ESA95.
Eurostat said that according to the accrual principle, the capital transfer should be recorded at the time the pension obligations are effectively transferred and not at the time of the payments.
“In the future, the improvement in government surplus or deficit due to this capital transfer will be offset by the payment of benefits that government has to pay and that will be recorded as government expenditure and thus will have a negative impact on government surplus or deficit in the coming years. Therefore, the Eurostat decision ensures that, in all cases, the transfer of pension obligations is neutral (or very close to neutrality) over time,” Eurostat said.
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