S & P värdering av inverkan av ofonderade pensioner i pelare I

The Impact Of Unfunded Pension Liabilities On The Credit Quality Of International Local And Regional Governments   This criteria applies to all local and regional governments rated outside of the U.S. Standard & Poor’s evaluates the credit quality of international local and regional governments (LRGs) based on the qualitative and quantitative analysis of a range of financial, economic, and institutional factors.

In certain countries, LRGs are responsible for all, or part of, the pension of their employees. In those countries, pension liabilities may affect the credit quality of LRGs to a degree that depends on the nature of the local pension schemes, the demographic profile of the LRG’s employees, and the financial coverage of future obligations.

Unfunded pension liabilities mostly affect three factors we consider when analyzing LRG credit quality:

Financial flexibility: The extent and the trend of the cash flow impact of annual pension expenditures on an LRG’s financial flexibility; Debt Burden: The impact of the debt-like obligation of actuarially-valued unfunded pension liabilities (UPLs) on an LRG’s overall stock of financial liabilities; and Management: Pension liabilities may also inform our opinion on management sophistication through the way a government is able to measure, plan for, and fund the potential costs deriving from unfunded pension liabilities.

While we consider UPLs to be debt-like in nature, they are not equivalent to debt because the obligation to make set pension payments are not completely certain, as are principal and interest payments. The magnitude of UPLs fluctuate with pension asset values (in the case of plans that are not totally pay-as-you-go) and with changes in benefits and actuarial assumptions. For these reasons, we will look first to more certain debt ratios, such as direct debt to operating revenues or tax-supported debt to total revenues in our analysis of LRG debt burdens. Our assessment of an LRG’s net financial liabilities ratio is tempered by qualitative consideration of the trajectory of asset values, actuarial assumptions, and benefit levels into the future. Furthermore unlike corporate entities, we consider that LRGs have some flexibility to influence the level of those liabilities in the future by changing certain parameters, such as the retirement age, the employees’ contribution rates or the level or indexation mechanisms of pension benefits. This flexibility might vary significantly, depending on the national legal framework.   METHODOLOGY Adequate funding for public-sector employee pensions is a rising analytical concern due to demographics and the global trend to increased and improved financial disclosure. Many rated LRGs have workforces that are steadily aging, in part as a result of declining birth rates in the post-baby boom cohorts. Compounding this trend, retirees are living longer. As public-sector employees of the baby boom generation move into retirement, pension payments to retirees will accelerate and financial pressure on pension plan contributors (LRGs and, in many cases, their employees) could increase.

The global trend to increased and improved financial disclosure is also a noteworthy root cause. In almost all jurisdictions with rated LRGs, financial regulators, accounting standards boards, and senior governments are reforming LRG financial reporting practices and improving disclosure levels. Increased disclosure of pension deficits and funding practices has raised management and taxpayer awareness of potential funding inadequacies and has translated into action in some jurisdictions.

Wide Diversity Of Pension Obligations And Pension Schemes Around The Globe. The main difficulties in comparing the UPLs of LRGs at the international level are the wide discrepancies in the level of pension responsibilities of LRGs and the significant differences in the level of information available.

In understanding the continuum of pension schemes in the developed and developing worlds, it is important to evaluate the role of the national or general pension scheme provided by the national government. In France, Italy, Spain, Belgium, Portugal, the U.K., New Zealand, Russia, Poland, Czech Republic, and most emerging countries, pensions are a responsibility of the central government, and LRGs in these countries have no pension obligations whatsoever. In a number of countries, such Australia, Austria, Canada, Germany, Mexico, Sweden, Switzerland, and to a lesser degree the U.S., pensions of LRG employees are the responsibility of those LRGs, in total or in part.

There is a considerable difference in the level of responsibility of LRG schemes. In Sweden and Switzerland, LRG schemes are complementary to the main pension schemes of the national governments–this is also the case in certain Mexican states. In other countries, such as Australia and Canada, LRGs are only effectively responsible for half of their employees’ pension schemes as independent pension boards are jointly controlled by LRG employers and employees. In Germany, LRGs are responsible for the pensions of their employees who have civil-servant status; all other employees have national or private pension arrangements. Even within some countries (especially federations), there can be significant differences in pension arrangements between LRGs, and it becomes necessary to generalize at the country level to draw distinctions between jurisdictions.

Some generalizations can be drawn across the eight countries. Most pension schemes surveyed were of the defined benefit (DB) type, where employees bear no investment risk, although defined contribution (DC) schemes, where employers do not bear investment risk, were not uncommon. Generally, the conversion from DB to DC has risen as a direct consequence of the higher cost of pension arrangements and the uncertainty about the long-term adequacy of current funding practices. In most jurisdictions, the projected benefit obligation (PBO; an estimate of the present value of an employee’s pension that assumes that the employee will continue to work and that his or her pension contributions would increase as their salary increases) or the accumulated benefit obligation method (ABO; which assumes that the employee ceases to work for company at the time the actuarial estimate is made) are the basis for actuarial evaluations. Typically, those reporting pension obligations will report on a PBO or ABO basis only; however, some information is made available on an ABO basis. Rarely is information made available on both.

Funding levels and practices vary across jurisdictions, from completely unfunded pay-as-you-go DC and DB schemes (Germany in the DB case) to totally prefunded DB schemes (Canada). In no jurisdiction are all DB plans of all rated LRGs totally prefunded. Furthermore, flexibility in benefit levels is quite limited, owing to the political risk of conflict with often powerful collective bargaining agents, such as unions or employee associations.

Available Information Is Of Uneven Quality Although the quality of pension information disclosed by LRGs varies considerably from jurisdiction to jurisdiction, the overall level of disclosure and the quality of the information disclosed has improved in recent years. Disclosure levels vary from limited public disclosure, as is largely the case in Germany and Mexico, to full, detailed public disclosure, as is the case in Canada, Switzerland, and the U.S. Full disclosure typically entails an entry for UPLs on the LRG’s balance sheet accompanied by detailed information in the notes to the financial statements, including information on contributions and benefits, breakdowns of surplus and deficits, current expenses, all main actuarial assumptions, data on plan members, and financial information on pension funds themselves. Information quality largely depends on the use of independent actuaries for periodic evaluations and contribution rate-setting and the general willingness of LRGs to disclose detailed information.

In our analysis of pensions, the reporting of independent actuarial evaluations is usually a positive factor, as the use of independent actuaries tends to be correlated with information quality and, to a lesser degree, the willingness to tackle the issue of pension funding. Actuarial assumptions, such as investment return, discount and compensation growth rates, and mortality tables, are examined for consistency by comparing across LRGs within the same jurisdiction, unless those factors are defined in the national legal framework.

In countries where the actuarial valuation of unfunded pension obligations is still not available consistently (namely Germany and Mexico), Standard & Poor’s makes its own assumptions to estimate a very rough measure of an LRG’s UPL and include that estimate in its net financial liabilities ratio, until the issuer can provide a more accurate estimate. A footnote in our analyses signals that the net financial liabilities ratio is based on a Standard & Poor’s estimate, and we will continue to comment on it in the full analysis for each credit. To make this calculation, we use the LRG’s projected cash flow payments on pension obligations for the next 35 years; and calculate the actuarial value of future obligations using generally, as an assumption, the average yield during the current year of central government bonds with a 10-year maturity.

However, Standard & Poor’s is not an independent actuary and does not pretend to provide an exact measure of an LRG’s UPLs. We make this very rough calculation to reflect the existence and a reasonable estimate of an LRG’s pension liabilities in the absence of any other issuer-provided information. This estimate is important to us when comparing an LRG with more sophisticated international peers that include this liability in their balance sheet. We believe that this situation is only transitory, as these countries are also gradually moving toward more sophisticated accounting standards and should be able to provide consistent information on pensions in the next few years.

Impact Of Unfunded Pension Liabilities On Financial Flexibility With respect to financial flexibility, Standard & Poor’s examines the current level and expected trend of annual pension expenditures of both defined-benefit (PBO-based preferably) and defined-contribution schemes relative to existing expenditures and revenues. Of concern are situations where annual pension expenditures constitute a large portion of operating expenditures, or where we expect them to become so, because those costs tend to be typically inflexible due to the high political cost of change. This could affect an LRG’s financial performance particularly if payment growth exceeds revenue growth. The past and projected growth rates of pension spending are generally compared with past and projected growth of operating revenues and expenditures. Another relevant indicator is the point at which a partially funded pension plan will exhaust its investments and become pay-as-you-go.

Frequently, LRGs are plan sponsors and can increase the age of retirement, the duration of the contribution period, and the rate of contribution, to alter the rate of indexation of the benefits, and to change calculation modalities for new hires. Although the long-term benefit from these measures can be fairly robust, there are sometimes offsetting results. An increase in the contribution rate, for example, has a direct negative effect on operating expenditures of the LRG as an employer, but is positive for the LRG as a guarantor and frequently, it does not weigh only on the employer but also on the employee (often 50-50 or 66-33%).

Although the flexibility to reform pension schemes might exist, there are practical limits to the extent of relief they can provide. The political power of collective bargaining agents, social issues, and legal limits on the ability to reform can constrain LRGs in their efforts to obtain relief from future pension obligations. Accordingly, pension reform flexibility might produce only modest fiscal relief.

Impact On Debt Measurement Standard & Poor’s views actuarially-valued unfunded liabilities of defined-benefit schemes as debt-like in nature. By accepting a portion of compensation on a deferred basis, employees essentially become creditors of the sponsoring government. As with conventional debt, these liabilities pose risks to the sponsoring governments from the call on future cash flow they represent. For this reason, we include the actuarial value of unfunded pension liabilities in our measurement of an LRG net financial liabilities, to reflect its nature as a long term debt-like obligation. We prefer to add the unfunded liability as calculated using the ABO method but in countries where ABO-based data is not available we will use PBO data.

The net financial liabilities as a percent of total revenues ratio is one debt measure we use to assess and compare the debt burden of international LRGs. It is the broadest measure because it includes an LRG’s direct own-purpose debt, the debt of its tax-supported companies, guarantees, and its unfunded pension liabilities. The main goal of this broad debt measurement is to present an overall picture of an LRG’s long-term financial obligations, regardless of the specific accounting rules and practices pertaining to each jurisdiction; and which vary significantly across countries, particularly with regard to the consolidation of pension and public enterprises obligations.

However, unless for the other debt measures such as direct debt or tax-supported debt, our assessment of an LRG’s net financial liabilities ratio is tempered by qualitative consideration of the trajectory of asset values, actuarial assumptions, future benefit levels, and the government’s policy to manage the impact of UPLs on the LRG’s long-term funding needs.

DC schemes are generally not an analytical concern and do not affect our debt measures, as employees bear the investment risk and receive only the value of contributions invested.

Impact Of Pension Liabilities On Our Opinion Of Management The impact of pension liabilities on an LRG’s credit quality is largely determined by the size and timing of the obligations–but also by management’s capacity and willingness to implement meaningful policies and build budget contingencies to address the increased cost of pensions.

LRGs with aging payrolls or a significant number of employees with vested pension benefits, combined with a lack or insufficiency of pension-fund assets and the absence of a plan to address these mounting obligations, are likely to see a deterioration of their credit quality. Conversely, LRGs that implement pension reform and strengthen their pension system’s governance structure and funding status, could minimize the impact pension liabilities have on creditworthiness.

When pension costs start to threaten an LRG’s short-to-medium-term ability to service its financial obligations, ratings start to change. In particular, we could start revising ratings when it becomes clear that governments will not be able to fund their long-term benefits without fundamental structural changes to their current fiscal positions. The evolution of government policies with respect to pension benefits takes on greater importance then, as pension reforms can buffer potential fundamental changes to fiscal structure. Pension scheme reforms, such as increased retirement age, reductions in benefit indexation, introduction of DC schemes for new employees, benefit reductions, or increased contribution rates, could reduce the magnitude of fiscal changes required to fully service all financial obligations. However, there can be additional limits to the scope of some reforms in the case where a particular pension plan has a retirement age or a contribution rate that is high in the national context. In this instance, the LRG’s fiscal measures could provide the only meaningful relief.

The willingness of an LRG to reform its pension scheme or implement the necessary fiscal measures to maintain its financial profile is also important. In addition to potential pension reform, some LRGs may decide to institute fiscal measures such as raising taxes, stricter budgetary control, program review or any one of a number of initiatives governments undertake in order to improve or maintain their budgetary performance. We consider the willingness of an LRG to institute such potentially unpopular fiscal measures to ensure that it will be able to meet its pension obligations to be a credit positive.

Other Postemployment Benefits We do not include other unfunded postemployment benefits (OPEB) liabilities (such as vested sick leave and unused vacation time) in our calculation of net financial liabilities because they affect a very limited number of countries. We are still developing the analytical treatment of OPEBs, as information about OPEBs is not yet consistent enough across affected jurisdictions. We will continue to analyze OPEB liabilities will continue as a contingent liability pending the finalization of OPEB criteria.

 

 

Overview Of Local And Regional Governments’ Pension Systems

 

Canada

U.S.

Mexico

Australia

 

 

 

 

 

 

LRGs’ pension responsibility

Responsible for at least 50% of employees’ pension (balance is employee’s responsibility).

Fully responsible for their employees. Some states are responsible for pensions of local government employees.

Most states fully responsible for employee pensions, some partially. Some state pension systems incorporated in the federal one. Not an issue for most of the municipalities because high turnover. Some participate in state pension systems.

States responsible for employees’ pensions (in addition to employees’ own contributions).

 

 

 

 

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