New pension fund statistics

Prepared by Jordi Gutiérrez Curos, Jürgen Herr, Rafael Quevedo, Mirna Valadzija and Me-Lie Yeh

Published as part of the ECB Economic Bulletin, Issue 7/2020.

1 Introduction and relevance of pension funds

Pension funds play an important role in the euro area economy. They provide an opportunity for households to save for retirement and, at the same time, help the efficient allocation of long-term capital. Pension-related assets are typically one of the main assets of households (representing around 20% of euro area households’ net financial wealth), particularly in countries where occupational pensions are prevalent.

The new pension fund^[1] statistics combine data on the different pension schemes in euro area countries in one harmonised set of statistics. They offer a much enhanced set of information, essential for monitoring the development of pension funds from the perspective of monetary policy, financial stability and financial structures. Pension schemes that are provided through governments (e.g. social security schemes^[2]) and pension plans offered by insurance corporations are excluded from the scope of the Regulation. The first reporting of pension fund statistics from national central banks to the ECB in line with the Regulation began with quarterly data on assets and liabilities for the third quarter of 2019 and with annual data on number of pension scheme members for 2019. The first public release of the pension funds dataset took place on 31 July 2020 on the ECB’s Statistical Data Warehouse (SDW)^[3] platform.

Pension funds have grown substantially in the euro area over the past two decades in terms of their financial assets and as a percentage of GDP. Euro area pension fund assets have almost doubled in size since 2008, with total assets currently amounting to approximately €3 trillion and almost doubling their percentage relative to euro area GDP from 13% in 2008 to 25% in 2019 (see Chart 1). By comparison, according to OECD data, the value of US private pension fund assets was equivalent to around 140% of GDP in 2018.^[4]

Since the financial crisis pension funds^[5] have represented a dynamically growing financial sector in the euro area. Chart 2 shows how fast pension funds grew as a financial sector between the 2008 financial crisis and the first quarter of 2020, when euro area pension funds had around 75 million members.

In the euro area, pension funds are highly diverse in terms of their legal and regulatory set-ups, corresponding to their different roles in social protection systems from country to country. Depending on the nature of the contributor, pension schemes are usually classified into three pillars (World Bank, 2008^[6]) (see Figure 1). First-pillar pensions are organised by the government. Second-pillar pensions are occupational pension arrangements linked to employment, most of which are associated with a specific employer, group of employers, economic sector or social partner. Third-pillar pensions are personal pension products or savings.

Euro area countries often provide first-pillar pension plans under a pay-as-you-go (PAYG^[8]) approach. Such pension benefits differ considerably in terms of their level and nature, ranging from “poverty protection” in some Member States to replacement of up to 80% of final salaries in others.^[9]

The roles, size and nature of private pensions are also highly diverse across euro area countries. It is worth noting that there are a few Member States with very low levels of first-pillar pensions, but significant private pension savings (particularly in the occupational pension sector) and high asset values relative to the Member State’s GDP.^[10] Occupational pension funds in the Netherlands make up around two-thirds of all such pensions in the euro area. Occupational pension plans are often negotiated by employers and social partners and are frequently subject to national social and labour law, which has an impact on the pension funds’ governance structures.

The euro area pension fund sector is highly concentrated in a few countries. In the euro area, the Netherlands stands out for its exceptionally large share, followed by Germany. Another characteristic of the pension fund sector in the euro area is the disparity in the number of reporting institutions, as in some countries there are large reporting populations made up of small pension funds (for instance Ireland and Cyprus^[11]) while in other countries there are just a few pension funds.

Pension funds’ assets have grown in most euro area countries since 2008. Although this growth as a percentage equivalent of a country’s GDP has varied across countries, in most the upward trend has been continuous in spite of the financial crisis (see Chart 3).

The type of assets most commonly held by euro area pension funds are investment fund shares followed by debt securities (see Chart 4). Other investments, on a smaller scale, comprise equity, financial derivatives, currency and loans.

The main liabilities for pension funds (making up more than 95% of the total for the euro area) are insurance technical reserves/pension entitlements. In the euro area, defined benefit^[12] schemes represent more than 85% of total pension entitlements. However, in most euro area countries there has been a shift in recent years from defined benefit to defined contribution contracts,^[13] although the impact on the outstanding amounts will not be seen until after a few years of accumulation (see Chart 5).

2 ECB Regulation on pension fund statistics

The legal requirements for the harmonised pension fund statistics are laid down in Regulation ECB/2018/2.^[14] The Regulation defines the statistical standards to be met by pension funds when reporting information on their assets and liabilities. Prior to the introduction of the harmonised statistics, data were collected on a best effort basis by the national central banks, which used sources other than direct collection to compute those data. The Regulation is complemented by Guideline ECB/2019/18^[15], which sets out the procedures national central banks must follow when reporting pension fund statistics to the ECB.

The ECB Regulation aims to improve the availability and quality of data reported by pension funds and to increase harmonisation and data comparability across countries. The new pension fund statistics provide a larger, more harmonised set of data, resulting in a stronger information base for monetary policy decision-making, for financial stability purposes (including from a macroprudential perspective^[16]) and for a better derivation of euro area accounts statistics. More data means more transparency on pension funds’ activities. This is vital, as pension sector reforms are taking place across the European Union and there is also a shift from defined benefit to defined contribution schemes. Another advantage of the additional data reported under the ECB Regulation is that it is opening up new avenues for research on topics such as the impact of pension funds on the economy and the financial sector. A few examples of the use of the new pension fund statistics are detailed in Section 3.

The Regulation covers autonomous pension funds, as defined by the European System of National and Regional Accounts (ESA 2010)^[17]. Pension funds are financial corporations that are mainly engaged in financial intermediation as a consequence of the pooling of the social risks and needs of their members and beneficiaries. About 76% of total pension entitlements are pension fund liabilities^[18] according to the euro area accounts (see Chart 6). Insurance corporations may also offer saving schemes, which are recorded as pensions, in particular if participation in such a scheme is part of an employment contract. The liabilities of insurance corporations make up 9% of total pension entitlements.^[19]

Only those pension funds that are institutional units separate from the units that create them are included in pension fund statistics. In some countries employers can create pensions schemes for their employees without involving a pension fund or insurance corporation. These non-autonomous schemes are not included in pension fund statistics. Where pension commitments are recognised on the balance sheet of the employers, they are covered in the euro area accounts. Non-autonomous schemes account for about 14% of total pension entitlements. Social security schemes are not included in the core definition of pensions^[20] (the first pillar in Figure 1).

Pension fund statistics are an important source for the euro area accounts, not only for data on the pension fund sub-sector, which is presented separately in the financial accounts^[21], but also for information on households’ financial investments with pension funds. The pension funds Regulation provides a stable basis for outstanding amounts and the breakdown of flows into financial transactions, revaluations and other changes in volume.^[22] This significantly improves the compilation of data on pension funds and households’ financial investments in the financial accounts.

Co-operation with the European Insurance and Occupational Pensions Authority (EIOPA) has been a key factor in minimising the reporting burden for the pension funds and ensuring consistency between supervisory and statistical data. The relevant EIOPA and ECB bodies have cooperated closely in setting up the definitions, methodological framework and transmission format for both ESCB statistics and supervisory reporting.^[23] A very high level of convergence between reporting requirements, data content, timeliness and coverage has been achieved. This gives national authorities the option of implementing a single reporting flow for pension funds in order to reduce the reporting burden and maximise consistency between data used in supervision and data used in macroeconomic statistics.^[24]

In 2017 the ECB launched a public consultation^[25]on the draft regulation on statistical reporting requirements for pension funds. Key documents – comprising the draft regulation, a summary of the related merits and costs procedure run in 2016, and frequently asked questions – were made available on the ECB’s website as background information. The public consultation was instrumental in terms of finding an appropriate balance between user needs and reporting agents’ costs, and also formed the basis for some technical fine-tuning.

In line with the pension funds reporting scheme, national central banks report to the ECB end-of-quarter stock data^[26] and quarterly reclassification and revaluation adjustments. In addition, annual data on pension scheme members, broken down into active, deferred and retired members, are also reported. Stocks refer to the value of the asset or liability at the end of the reference quarter or year. Revaluation adjustments refer to changes in stocks due to changes in prices or exchange rates. Transactions refer to the sum of all net acquisitions (minus sales) of a given type of asset during the period, and the net incurrence (inflows minus outflows) of liabilities. In addition, the split between defined benefit and defined contribution schemes can be complemented with the information reported security-by-security (s-b-s)^[27] and with the list of pension funds.^[28] Growth rates will be calculated from an index obtained by dividing transactions by the stocks at the beginning of the period to which they refer.

3 New euro area data on pension fund statistics

Euro area pension funds obtain capital from resident members. More than 99% of pension entitlements, the main liability item, are from the Member State where the pension fund is located, showing a strong domestic bias and also pointing to the low level of cross-border business carried out by pension funds (see Chart 7).

Pension funds invest in a geographically broader area. Euro area pension funds’ assets are more widely geographically distributed than their liabilities, with only about 55% of assets invested domestically. Investment fund shares are invested mainly in domestic investment funds, while debt securities, for example, tend to be invested in issuers in other euro area countries (i.e. outside the country the pension fund is located in). In the case of equity, the largest holdings are from issuers resident outside the euro area (see Chart 8).

The breakdown of types of investment fund now available is key to the analysis of the interconnectedness of the pension funds sector. In the previous pension fund data collection, only the absolute amount of all investment fund shares – the largest type of asset held – was reported. Therefore, data on the real exposure of pension funds to stock and debt market movements were not available. Under the Regulation, when pension funds report investment fund shares they must specify which type of fund they are investing in (namely equity, bond, mixed, hedge, real estate or other) (see Chart 9). The new reporting shows that the largest type of investment fund shares held by euro area pension funds is equity, followed by bond funds and mixed funds (which combine the previous two types).

The exposure of euro area pension funds to stock and debt markets can be analysed in more detail with the new breakdowns. For instance, the effect of the Covid-19 crisis on pension funds in the first quarter of 2020 can now be analysed in detail: the pandemic affected the asset side of pension funds’ balance sheets mainly through their exposure on stock markets, measured not only by the equity they directly hold but also through their equity (and mixed) investment fund shares (see Chart 10). Holdings of equity fund shares fell by 15%, while those of bond funds were stable throughout the quarter, with revaluation losses mostly compensated by positive transactions. Without this new breakdown, all data on fund types would be merged, providing a less clear picture.

In debt markets, pension funds invest mostly long term and in government bonds. Of the debt securities held, 96% have original maturities of over one year. Both domestically and in other euro area countries, pension funds hold more general government debt than monetary and financial institution debt and non-financial corporation debt combined (see Chart 11).

Investments in currency and deposits are also more long-term oriented. At the end of 2019, 60% of the holdings of cash and deposits of euro area pension funds had maturities of over two years (see Chart 12). Although the share of short-term deposits has grown over time, cash and deposits have slightly declined in importance on pension fund balance sheets in a general move towards longer-term investments.

Net worth is the balancing item in the statistical balance sheet^[29], and its evolution can be better understood with the new data on revaluation adjustments. In a defined benefit pension scheme, the level of pension benefits promised to participating employees is defined by a formula agreed in advance. Since assets are valued at market prices, their value might be higher or lower than the promised entitlements, leading to a positive or negative worth of the pension fund, respectively. When net worth turns negative, a pension fund can be said to be underfunded.^[30] Another advantage of the new collection of data is the availability of revaluations and reclassifications, which can help explain why net worth grows or falls. The net worth of euro area pension funds fell from €124 billion in the fourth quarter of 2019 to €-122 billion in the first quarter of 2020. This drop can mostly be explained by the newly reported negative revaluations in the first quarter of 2020 (see Chart 13), mirroring exceptional market developments in this quarter due to the pandemic.

4 Conclusions

Pension funds play a dual role, helping individuals save for old age and allocating long-term capital efficiently across firms, sectors and global markets. Pension funds are among the largest and fastest-growing investors in global capital markets. Their investments are diverse in terms of financial instruments, sectors and geographical location. Their role in the funding of euro area governments and non-financial corporations through investments in debt securities and equity is also increasing. The effects of the financial crisis and the pandemic, the low interest rate environment and Europe’s ageing population have all highlighted the need for better quality, more granular and comparable data on this sector. Previously, gaps in the data available and the lack of comparability across countries made it difficult to gain a comprehensive understanding of the role of the sector in the monetary policy transmission mechanism, of cash flows and of the risks associated with pension obligations, as well as the risks associated with pension funds’ investment behaviour and their interconnectedness with the rest of the financial system and the real economy. This is why it is crucial to have good, harmonised statistics on euro area pension funds.

The new euro area statistics on pension funds improve upon the previous dataset in several respects. The new dataset features (i) harmonised concepts that comply with international statistical standards and ensure the dataset is consistent with supervisory data; (ii) full coverage of institutions; (iii) detailed breakdowns of assets and liabilities, including by maturity, counterpart sector and geographical area; (iv) data on transactions and adjustments (e.g. revaluations and reclassifications); and (v) more timely releases of data. In addition, they are a vital building block for the compilation of data on pension funds and households’ financial investments in the financial accounts.