Technical compilation guide for pension data in national accounts.
Date: 2012-01-17
Institutions: Eurostat
Subjects: EU statistics, data collection, pension scheme, statistics, user guide

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M e t h o d o l o g i e s  a n d 
W o r k i n g   p a p e r s

Technical Compilation Guide for Pension
Data in National Accounts 

2011 edition

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M e t h o d o l o g i e s  a n d 
W o r k i n g   p a p e r s

Technical Compilation Guide for Pension
Data in National Accounts

2011 edition

Europe Direct is a service to help you find answers  
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More information on the European Union is available on the Internet (http://europa.eu). 

Cataloguing data can be found at the end of this publication. 

Luxembourg: Publications Office of the European Union, 2011

Cite as:
Eurostat, European Central Bank (2011): Technical Compilation Guide for Pension
Data in National Accounts. Eurostat Methodologies & Working papers.  

ISBN 978-92-79-22515-4 
ISSN 1977-0375 
doi:10.2785/217 
Cat. No KS-RA-11-027-EN-N 

Theme: Economy and finance 
Collection: Methodologies & Working papers 

© European Union, 2011 
Reproduction is authorised provided the source is acknowledged. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreword

Foreword 

The  Technical  Compilation  Guide  for  Pension  Data  in  National  Accounts  is  a  handbook  for 

compilers and users of data on pension schemes in social insurance. It has been produced 

by Eurostat and the European Central Bank based on a mandate given by the Committee on 

Monetary,  Financial  and  Balance  of  Payments  Statistics  to  a  Eurostat/ECB  Task  Force  on 

the  statistical  measurement  of  the  assets  and  liabilities  of  pension  schemes  in  general 

government in 2006. 

The Compilation Guide aims at supporting the work of National Statistical Institutes, Central 

Banks  and  other  compilers  within  the  European  Union  to  derive  estimates  for  position  and 

flow  data  for  pension  entitlements.  Such  entitlements  of  households  are  reflected  by 

corresponding  obligations  of  various  pension  schemes  in  social  insurance  -  either  privately 

managed  or  managed  by  general  government.  Data  on  pension  obligations  need  to  be 

included in the supplementary table on pension schemes in social insurance. Such a table is 

described  in  chapter  17  of  the  System  of  National  Accounts,  2008  (2008  SNA)  and  also  in 

Annex A (chapter 17) of the European System of Accounts (ESA 2010). As table 29, it is also 

part of the Transmission Programme of ESA 2010, Annex B. 

Most of the government-managed pension schemes in Europe are based on the pay-as-you-

go  principle  whereby  current  contributions  finance  current  benefits.  To  examine  and 

especially  improve  the  recording  of  such  schemes,  the  various  steps  on  how  to  derive 

actuarial  estimates  are  described  in  the  Compilation  Guide.  Moreover,  the  required  data 

sources are mentioned and the results are demonstrated in various case studies and worked 

examples. 

In 

this 

regard,  we 

thank  Mr.  Bernd  Raffelhüschen  and  Mr.  Christoph  Müller, 

Forschungszentrum  Generationenverträge  of  the  University  of  Freiburg,  for  providing  a  first 

draft of the Compilation Guide and also the numerical examples. Mr. Peter Parlasca and Mr. 

Ismael Ahamdanech-Zarco, both from Eurostat, and Mr. Reimund Mink, from the ECB, have 

contributed to the preparation of this Compilation Guide. 

 Pension Compilation Guide 

1 

 
 
 
 
 
 
 
 
 
Foreword

We encourage all European Union countries to use this Compilation Guide for estimating the 

pension  obligations  of  such  schemes  for  which  no  actuarial  estimates  are  made  available 

from other data providers such as from business accountants or from supervisory agencies. 

Walter Radermacher 

Aurel Schubert 

Director General Eurostat 

Director General Statistics 

European Commission 

European Central Bank 

 Pension Compilation Guide 

2 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Contents

Foreword ...............................................................................................................................1 

List of figures........................................................................................................................5 

Abbreviations .......................................................................................................................8 

1 

2 

Introduction ...............................................................................................................11 

Estimating pension entitlements and obligations in national accounts .............15 

2.1 

2.2 

Concepts of pension entitlements and obligations ............................................15 

Projected and accumulated benefit obligations .................................................19 

3 

Pension schemes in social insurance covered by the supplementary table ......23 

3.1 

3.2 

3.3 

3.4 

3.5 

Pension benefits and non-pension benefits.......................................................23 

Social insurance, social assistance and individual insurance policies...............24 

Defined contribution, defined benefit and other pension schemes ....................28 

Core and non-core accounts .............................................................................29 

Pension manager, multi-employer pension scheme and pension administrator29 

4 

Columns and rows in the supplementary table .....................................................32 

4.1 

4.2 

Columns of the supplementary table .................................................................34 

Rows in the supplementary table.......................................................................35 

5 

Key assumptions in measuring pension entitlements ..........................................43 

5.1 

5.2 

5.3 

Discount rate......................................................................................................43 

Wage growth......................................................................................................48 

Demographic assumptions ................................................................................51 

5.3.1 

Life expectancy................................................................................................51 

5.3.2 

Fertility rate......................................................................................................52 

5.3.3  Migration..........................................................................................................52 

5.4 

Other assumptions.............................................................................................53 

5.4.1 

Inflation ............................................................................................................53 

5.4.2 

(Un)employment rates .....................................................................................54 

5.4.3 

Future prevalence of disability.........................................................................54 

6 

Data sources for compiling pension entitlements.................................................57 

6.1 

Accounting data (rows A to F) ...........................................................................57 

 Pension Compilation Guide 

3 

 
 
 
 
 
 
 
 
 
 
 Contents

6.2 

6.3 

Regulatory data (rows A through F)...................................................................60 

Other pension data (columns G and H) .............................................................61 

6.3.1  Pension data directly obtained from statistics (rows 2.1, 2.3 and 4) ...............61 

6.3.2  Pension data to be estimated by an actuarial approach (all rows except 2.1, 

2.3 and 4) ........................................................................................................62 

7 

Description of the approach to estimating pension entitlements for government-
managed pension schemes .....................................................................................69 

7.1 

7.2 

7.3 

7.4 

Overview............................................................................................................69 

Estimating individual pension entitlements ........................................................72 

Estimating individual pension entitlements for current retirees..........................74 

Estimating individual pension entitlements for current contributors ...................79 

7.4.1  A general overview ............................................................................................79 

7.4.2  Estimating the initial pension by applying homogeneous contribution careers..81 

7.4.3  Estimating the initial pension by applying heterogeneous contribution careers 89 

7.4.4  Estimating pension entitlements ......................................................................105 

7.4.5  Differentiation by type of pension ....................................................................107 

8  Worked examples ...................................................................................................112 

8.1 

8.2 

Using an actuarial approach to fill in columns G and H ...................................112 

Using business accounts and regulatory data — to complete columns A to C129 

References ........................................................................................................................132 

 Pension Compilation Guide 

4 

 
 
 
 
 
 
 
 
 
 Contents

List of figures 

Figure 1: Alternative definitions of implicit liabilities ...............................................................17 

Figure 2: Accrued-to-date liabilities and related sustainability indicators ...............................19 

Figure 3: Social insurance, social assistance and individual insurance policies ....................24 

Figure 4: Characteristics of social insurance..........................................................................25 

Figure 5: The supplementary table on pension schemes in social insurance ........................33 

Figure 6: Pension entitlements and their changes .................................................................41 

Figure 7: Interest rates of euro and German government bonds ...........................................47 

Figure 8: Age- and gender-specific earnings profile (German statutory pension scheme 2006)

.............................................................................................................................49 

Figure  9:  Ageing  Working  Group  productivity  and  wage  growth  paths  for  Germany,  Poland 

and Spain.............................................................................................................50 

Figure 10: Exemplary distribution of pension entitlements by age and gender......................70 

Figure 11: Exemplary cohort sizes by age and gender ..........................................................71 

Figure 12: Overview on the calculation of pension entitlements ............................................71 

Figure 13: Differentiation between present contributors and retirees.....................................74 

Figure 14: Aggregating annual pension benefits in present value terms ...............................75 

Figure 15: Consideration of price indexation in real and in nominal terms.............................77 

Figure 16: Consideration of wage indexation in real and in nominal terms............................78 

Figure 17: Proportion of full pension accrued-to-date (PBO approach) .................................85 

Figure 18: Proportion of full pension accrued-to-date (PBO approach) – varying contribution 

behaviour .............................................................................................................86 

Figure 19: Accrual factors considering different retirement ages ...........................................89 

Figure 20: Value of NDC accounts differentiated by age and gender ....................................93 

Figure 21: Projection of the future contribution career under the PBO approach ..................96 

Figure 22: Age- and gender-specific earnings profile (DRV 2006).........................................97 

Figure 23: Age- and gender-specific earnings profile considering general wage growth (DRV 

2006)....................................................................................................................99 

Figure 24: Estimating pension entitlements of current contributors .....................................106 

Figure 25: Projected German population .............................................................................113 

Figure  26:  Rescaled  profile  of  average  existing  retirees’  benefits  in  2006  (Social  security 

Germany, male, in Euro)....................................................................................115 

 Pension Compilation Guide 

5 

 
 
 
 
 
 
 
 
 
 Contents

Figure  27:  Phasing  out  of  average  existing  retirees’  benefits  profile  from  the  year  2006  to 

2045 (here: Social security Germany, male, in Euro) ........................................117 

Figure 28: Rescaled profile of average new retirees’ benefits for 2006 (here: Social security 

Germany, male, in Euro)....................................................................................119 

Figure  29:  Build-up  of  accumulated  future  new  retirees’  pension  benefits  profile  from  year 

2006 to 2055 (here: Social security Germany, men, EUR)................................122 

Figure 30: Amount of average future retirees’ pension benefits accrued to date Profile from 

2006 to 2055 (Social security Germany, men, EUR) .........................................123 

Figure  31:  Future  pension  expenditures  (here:  Social  security  Germany,  present  value  in 

2006, in Euro) ....................................................................................................124 

List of tables 

Table 1:   Other flows as revaluations and other changes in the volume of assets .............15 

Table 2:   Other flows as revaluations and other changes in the volume of assets .............39 

Table 3:   Required aggregated budget data (social security in Spain) ...............................62 

Table 4:   Differentiation of payments by type of pension (social security in Slovakia)......107 

Table 5:   Supplementary table for Germany .....................................................................127 

Table 6:   Columns A to C of the supplementary table for Germany .................................129 

List of boxes 

Box 1:  

Three concepts of pension obligations ................................................................16 

Box 2:  

Pension entitlements are not sustainability indicators .........................................18 

Box 3:  

Pension benefits ..................................................................................................23 

Box 4:  

The  creditor’s  and  the  debtor’s  perspective:  two  interpretations  of  the  discount 

rate.......................................................................................................................44 

Box 5:  

The appropriate choice of a discount rate for government pension obligations...46 

Box 6:  

Projecting future flows – nominal versus real terms ............................................54 

Box 7:  

Additional data sources to compile pension entitlements ....................................65 

Box 8:  

Estimating pension entitlements for current retirees............................................75 

Box 9:  

Estimating  pension  entitlements  for  current  retirees  –  considering  pension 

indexation rules....................................................................................................77 

Box 10:   Estimating pension entitlements for current contributors – the accrual factor .....85 

 Pension Compilation Guide 

6 

 
 
 
 
 
 
 
 
 
 Contents

Box 11: 

Choosing the retirement age ...............................................................................87 

Box 12: 

Consideration of heterogeneous retirement behaviour........................................88 

Box 13: 

Classification of pension schemes with regard to the benefit formula .................90 

Box 14: 

Estimation of accrued pensions in a flat-rate pension scheme............................94 

Box 15: 

Projection of future earnings................................................................................99 

Box 16: 

Estimation of accrued pensions in a final-earnings pension scheme ................101 

Box 17: 

Estimation of pension entitlements of current contributors ................................105 

Box 18: 

Differentiation of estimations for current contributors by pension type ..............108 

 Pension Compilation Guide 

7 

 
 
 
 
 
 
 
 
 
A

Abbreviations 

ABO 

ADL 

AWG 

BHPS   

COFOG 

CWL 

DB 

DC 

Accumulated benefit obligations 

Accrued-to-date liabilities 

Ageing Working group — EPC Working group on ageing populations 

and sustainability 

British Household Panel Survey 

Classification of the functions of government 

Current workers’ and pensioners’ liabilities 

Defined benefit 

Defined contribution 

Destatis 

German Federal Statistical office 

DRV 

ESA 

Deutsche Rentenversicherung (German statutory pension insurance)  

European System of Accounts 

ESSPROS 

European System of Social Protection Statistics 

EU-SILC 

EVS 

GAAP   

hetCC   

homCC 

IAS 

IPSAS  

NA 

NDC 

OSGL   

OSL 

OSNL   

PAYG   

PBO 

SHIW   

SKK 

European Union Statistics on Income and Living Conditions 

Einkommens-  und  Verbrauchsstichprobe  (German 

Income  and 

Expenditure Survey) 

Generally accepted accounting principles 

Heterogeneous contribution careers 

Homogeneous contribution careers 

International accounting standards  

International Public Sector Accounting Standards 

National Accounts  

Notional defined contribution 

Open-system gross liabilities 

Open-system liabilities  

Open-system net liabilities 

Pay-as-you-go 

Projected benefit obligation 

Survey on Household Income and Wealth 

Slovakian  Koruna  (Slovakian  national  currency  before  1  January 

2009) 

SNA 

System of National Accounts 

  Pension Compilation Guide 

8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreword

SOEP   

ZUS 

Sozio-oekonomisches Panel (German Socio-Economic Panel) 

Zaklad Ubezpieczen Spolecznych (Polish social insurance institution) 

 Pension Compilation Guide 

9 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreword

Introduction 

 Pension Compilation Guide 

10 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Introduction

1 

1  Introduction 

Demographic  projections  for  the  European  Union  (EU),  as  for  many  other  industrialised 

countries,  are  characterised  by  an  ageing  of  the  population.  This  will  have  a  substantial 

impact  on  general  government  spending.  A  declining  European  workforce  combined  with  a 

rapidly  expanding  number  of  retirees  will  force  up  spending  on  pensions,  health-care  and 

long-term care, while populations will start to decrease in the coming years. The dynamics of 

general government-managed pension schemes in Europe are usually based on the pay-as-

you-go  principle  whereby  current  contributions  finance  current  benefits.  To  examine  and 

improve  the  recording  of  these  schemes  in  the  System  of  National  Accounts  (SNA),  the 

Committee  on  Monetary,  Financial  and  Balance  of  Payments  Statistics  (CMFB)  agreed,  in 

2006, to establish a Eurostat/ECB Task Force on the statistical measurement of the assets 

and liabilities of pension schemes in general government. This Task Force made significant 

input to the SNA update process for pensions, notably through the design and compilation of 

a supplementary table on pension schemes in social insurance in the 2008 SNA and also in 

the European System of Accounts (ESA 2010) as adopted by the Commission. 

Pension  entitlements  were  already  partly  recorded  in  the  1993  SNA.  However,  the  1993 

SNA did not recognise pension entitlements of defined benefit (unfunded) pension schemes 

as  assets  of  households  and  as  liabilities  of  such  schemes.  The  ESA  95  treated  defined 
benefits pension schemes in the same way.1 The 2008 SNA and the ESA 2010 as the new 

statistical  standards  provide  detailed  guidelines  for  compiling  supplementary  data  on 

pension  entitlements  under  defined  benefit  schemes.  They  cover  schemes  managed  by 

non-general government units and schemes managed by the general government and also 
social security schemes.2 According to these standards, pension entitlements of households 
(and  pension  obligations  of  the  schemes)  are  recorded  in  national  accounts  (NA). 3 

However, the new international standards define a set of rules which provide compilers with 

guidance on when to include pension schemes in the core system of accounts and when to 

1 According to ESA 95, ‘provisions or similar funds constituted by employers to provide employees with pensions 
(non-autonomous  pension  funds)  are  only  included  in  the  category  insurance  technical  reserves  if  they  are 
calculated  according  to  actuarial  criteria  similar  to  those  used  by  insurance  corporations  and  autonomous 
pension funds’ (see ESA95, paragraph 5.101). 
2  For  a  description  of  the  recent  steps  taken  to  reform  the  SNA,  see  Mink  (2007),  p.  203  et  seq.  For  a  short 
explanation of  the reasons to change the SNA, see Mink  and Rother (2007), Semeraro (2007) or Dippelsman 
(2010). 
3 According to the SNA 2008, paragraph 11.107: ‘pension entitlements show the extent of financial claims both 
existing and future pensioners hold against either their employer or a fund designated by the employer to pay 
pensions earned as part of a compensation agreement between the employer and employee.’. 

 Pension Compilation Guide 

11 

 
 
 
                                                            
Introduction

1 

include the outstanding amounts of pension entitlements only in the supplementary table on 
pension schemes in social insurance4. 

The supplementary table records all positions and flows in pension obligations of all pension 

schemes in social insurance. This new table provides a complete and consistent coverage 
of  all  pension  entitlements  and  obligations  across  countries.5  It  shows  all  positions  and 

flows of pension obligations of pension schemes in an economy and (as a counterpart) the 

corresponding pension entitlements as held by households. 

In the context of the ESA 2010, it may be mandatory in the coming years for EU countries to 

record  a  full  set  of  position  and  flow  data  on  pension  obligations  of  all  pension  schemes 

including  the  schemes  managed  by  general  government  for  its  own  employers  and  social 

security pension schemes. 

In  2007,  the  Eurostat/ECB  Task  Force  on  the  statistical  measurement  of  the  assets  and 

liabilities  of  pension  schemes  in  general  government  had  started  to  model  and  estimate 

position and flow data for defined benefit schemes for general government employees and 

for  social  security  pension  schemes.  First  benchmark  estimations  of  pension  entitlements 

were  made  based  on  harmonised  assumptions  for  19  EU  countries.  In  March  2008,  this 
work was taken over by the Eurostat/ECB Contact Group on Pensions.6 

To  compile  position  and  flow  data  for  government  pension  schemes  source  data  may  be 

made  available  from  government  entities  and  also  from  supervisory  agencies.  Such  data 

are  usually  the  basis  to  carry  out  actuarial  estimates  for  defined  benefit  schemes  for 

government  employees  and  for  social  security  pension  schemes.  Actuarial  estimates  are 

broadly applied in the insurance and pension fund business. 

This  Technical  Compilation  Guide  for  Pension  Data  in  National  Accounts  (the  Technical 

Compilation  Guide)  helps  countries  compile  pension  entitlements  and  obligations  to  be 

included in the supplementary table as described above. The Technical Compilation Guide 

covers: 

4  The  supplementary  table  on  pensions  in  social  insurance  is  described  in  Chapter  17  of  the  2008  SNA  and  in 
Chapter 17 of the ESA 2010 (Annex A). It is also part of the ESA 2010 Transmission Programme (Annex B, Table 
29). 
5  The  data  reported  on  pension  entitlements  based  on  the  1993  SNA  and  the  ESA  93  show  considerable 
differences  in  the  accounts  from  country  to  country  due  to  the  institutional  variety  in  pension  schemes.  While 
pension entitlements and obligations of government-managed defined benefit schemes for general government 
employees  and  of  social  security  pension  schemes  (like  in  France,  Germany  or  Italy)  were  not  recorded  as 
positions  in  the  national  accounts,  pension  entitlements  and  obligations  in  countries  with  mainly  defined 
contribution schemes were covered as assets and liabilities in the national accounts. 
6 For an overview on the recent work of the Task Force and of the Contact Group see Task Force (2008) and 
Contact Group (2009). 

 Pension Compilation Guide 

12 

 
 
 
                                                            
Introduction

1 

• 

• 

• 
• 
• 

• 

the  main  methodological  concepts  to  be  applied  to  estimate  pension  entitlements 

and obligations (Section 2); 

the  definition  and  classification  of  pension  schemes  covered  in  the  supplementary 

table (Section 3); 

the design and use of the supplementary table (Section 4); 

the core assumptions to estimate pension entitlements and obligations (Section 5); 

the data sources for compiling and estimating pension entitlements and obligations 

(Section 6); 

the  approach  to  estimate  defined  benefit  pension  entitlements  and  obligations 

(Section 7); and 

•  examples illustrating how to fill in the supplementary table (Section 8). 

 Pension Compilation Guide 

13 

 
 
 
Introduction

1 

Estimating pension 
entitlements and obligations in 
national accounts 

 Pension Compilation Guide 

14 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Main concepts 2 

2  Estimating pension entitlements and obligations 

in national accounts 

2.1  Concepts of pension entitlements and obligations 

Pension  entitlements  of  households  can  be  recorded  either  as  financial  assets  in  the 

national  accounts  or  as  contingent  assets.  Those  treated  as  financial  assets  constitute 

financial claims that beneficiaries have vis-à-vis either their employer or a pension manager 

designated  by  the  employer  to  pay  pension  benefits  earned  as  part  of  a  compensation 

agreement  concluded  between  the  employer  and  the  employee.  Those  treated  as 

contingent  assets  usually  represent  ‘conditional  claims’  on  defined  benefit  schemes 

managed  by  general  government, 

including  social  security  pension  schemes.  As 

counterparts, they are recorded as contingent liabilities of the government. 

The aim of the supplementary table is to give an overview of pension obligations (of general 

government but also of other institutional sectors) vis-à-vis households covering all pension 

schemes  in  social  insurance.  The  figures  in  the  supplementary  table  present  the 

perspective  of  the  debtor  (the  pension  scheme)  indicating  pension  obligations  (either 

liabilities  or  contingent  liabilities)  as  well  as  that  of  the  creditor  (households)  showing 

pension  entitlements  (either  assets  or  contingent  assets).  In  the  supplementary  table,  the 

positions and flows of the pension obligations always correspond to the positions and flows 
of pension entitlements.7 

Table 1: Concepts of pension obligations 

7 When the text refers to positions or flows of pension obligations, it corresponds to positions or flows of pension 
entitlements and vice versa. 

 Pension Compilation Guide 

15 

 
 
 
 
                                                            
Main concepts 2 

Pension  obligations  or  pension  entitlements  in  national  accounts  always  refer  to  a  gross 

concept.  It  means  that  these  obligations  or  entitlements  are  not  netted  against  expected 

revenue  of  government  or  expected  social  contributions  of  households.  In  the  case  of 

defined  contribution  pension  schemes  or  social  security  pension  schemes,  no  future 

revenue  or  future  social  contributions  are  taken  into  account  to  compile  any  type  of  net 

pension  entitlements  or  pension  obligations  (see  Box  1).  Only  pension  entitlements  or 

obligations are considered. They are based on (actual and future) pension benefits. 

Box 1 

Three concepts of pension obligations 

In  recent  literature  (see  Franco,  1995,  pg.  2)  three  main  concepts  of  pension  obligations  have 
been  introduced:  the  concepts  of  (a)  accrued-to-date  liabilities  (ADL);  (b)  current  workers  and 
pensioners  liabilities;  and  (c)  open-system  liabilities.  Box  1  gives  a  detailed  description  of  these 
concepts.All  pension  obligations  of  pension  schemes  or  pension  entitlements  of  households  are 
assessed as part of extended balance sheets of pension schemes or households in the national 
accounts (showing assets and contingent assets or liabilities and contingent liabilities) at a certain 
point  in  time,  usually  at  the  year-end.  The  pension  entitlements  or  obligations  under  defined 
benefit (unfunded) social insurance pension schemes are recorded in gross terms, meaning that 
no  accrued-to-date  obligations  reflecting  future  social  contributions  to  finance  the  pension 
entitlements  are  taken  into  account;  instead  only  the  accrued-to-date  pension  entitlements  for 
current  and  future  pension  benefits  (ADL)  are  covered,  i.e.  the  pension  entitlements  accrued  by 
current workers (including deferred pension entitlements) and the remaining pension entitlements 
of existing pensioners. As for all national accounts data, the data are measured ex post, as they 
include only the current values of the entitlements that arise from already accrued pension rights. 
The  method  is  based  on  observable  past  events  and  transactions,  such  as  membership  of  the 
pension  scheme  and  contributions  paid.  However,  these  ex  post  measures  also  rely  on  some 
assumptions in the modelling process. The probability that current contributors may die or become 
disabled  before  reaching  pensionable  age  needs  to  be  estimated.  The  approach  also  covers 
future changes to the (defined) pension benefits owing to any legislation enacted prior to the year 
for  which  pension  entitlements  are  calculated.  Finally,  the  method  requires  assumptions  about 
future  developments,  notably 
future  pension 
disbursements.  As  with  all  other  assets,  the  pension  entitlements  are  entered  into  the  extended 
household  balance  sheet  at  their  value  on  the  balance  sheet  date.  Since  actuarial  values  for 
pension  entitlements  or  obligations  related  to  defined  benefit  (unfunded)  pension  schemes  in 
social  insurance  in  the  EU  countries  are  typically  not  made  available  by  the  manager  of  the 
pension scheme, compilers of national accounts have to estimate the actuarial value. 

the  development  of 

the  discount  rate 

for 

a)  Accrued-to-date  liabilities  (ADL):  These  pension  entitlements  or  obligations  contain  the 
present  value  of  pensions  to  be  paid  in  the  future  on  the  basis  of  accrued  rights.  Accrued 
pension rights are due to already paid social contributions by current workers and remaining 
pension  entitlements  of  existing  pensioners.  No  rights  accrued  after  the  current  year  —  by 
present or by future workers — are considered. The time horizon of this concept is, therefore, 
somewhat  limited.  As  shown  in  Figure  1  ADL  covers  only  integral  amounts  below  curve  B 
(also taking a discount rate into consideration). 

b)  Current  workers’  and  pensioners’  liabilities  (CWL):  For  CWL,  allowance  is  made  for  the 
pension scheme to continue until the last current contributor dies. However, new entrants are 
not included. This concept covers ADL and the present value of pension entitlements that will 
be accrued by current contributors due to their future contributions. CWL corresponds to the 
integral amounts below curve C (considering additionally a discount rate) in Figure 1. 

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Main concepts 2 

c)  Open-system  liabilities  (OSL):  In  addition  to  CWL,  this  liability  concept  also  includes  the 
present  value  of  pensions  of  new  workers  entering  the  respective  pension  scheme.  It  is 
assumed that the pension scheme will be continued under current rules for a relatively long 
time horizon. The present value of OSL may be compiled over an infinite time horizon. For 
practical reasons, however, a perspective, e.g. 200 years, is usually chosen. 

Figure 1 

Alternative definitions of implicit liabilities 

Source: European Commission Public Finance Report 2006. 

Applying one of the three liability concepts depends on the specific purpose of the analysis. To 
assess  the  fiscal  sustainability  of  a  defined  benefit  (unfunded)  pension  scheme  managed  by 
government for its employees, for example, it is natural to apply the widest possible time horizon. 
This means using the OSL concept to examine long-term fiscal sustainability. By contrast, policy 
issues concerning the possible termination of an existing defined benefit pension scheme should 
be  addressed  on  the  basis  of  the  ADL  or  the  CWL  concept,  depending  on  the  remaining  time 
horizon  of  the  scheme  taking  also  into  consideration  that  only  the  ADL  concept  complies  fully 
with the methodology used in national accounts. 

In line some other valuation procedures used for financial instruments like unlisted shares 

or other equity, for which market values are not or not always available, the compilation of 

ADL is based on a net present value approach.  In fact, estimating position and flow data for 

defined benefit pension schemes for government employees and for social security pension 

schemes  to  fill  in  the  corresponding  cells  of  the  supplementary  table  involves  projecting 

historical data into the future. For this purpose, actuarial estimates have to be carried out as 

described in further detail in Chapter 5 and Chapter 7. This method is commonly used in the 

insurance and pension fund sector, where actuarial figures are estimated on a frequent and 

standardised  basis.  Source  data  for  the  general  government  sector,  however,  are  often 

limited to annual cash reporting. Moreover, actuarial estimations are not widely used there 

at present. 

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Main concepts 2 

These  actuarial  calculations  require  a  number  of  careful  assumptions  to  be  made.  They 

include  assumptions  about  future  life  expectancy,  which  determine  the  payout  period  of 

future  pensions.  In  particular,  assumptions  on  future  wage  growth  and  on  an  appropriate 

discount rate play a crucial role in projecting pension entitlements or obligations accrued-to-
date.8 

It is important to stress that pension entitlements (derived as accrued-to-date and applied in 

national accounts) do not allow any conclusions to be drawn as to the fiscal sustainability of 

a  pension  scheme.  Large  pension  entitlements  do  not  necessarily  mean  unsustainable 

pension schemes, and by the same token small pension entitlements do not mean that the 

respective  pension  schemes  are  fiscally  stable  in  the  long  term  (for  a  detailed  discussion 

see Box 2). 

Pension entitlements are not sustainability indicators 

Box 2 

Measures of pension entitlements accrued-to-date are the appropriate data to be reported in the 
system  of  national  accounts.  In  this  respect,  they  are  useful  for  economic  and  policy  analyses. 
They provide an estimate of the cost of a hypothetical termination of a pension scheme without 
reneging  on  accrued  entitlements.  As  measures  of  household  wealth  (assets  and  contingent 
assets),  they  are  also  valuable  statistical  information  to  understand  positions  and  flows  in 
household wealth also in relation to saving and consumption. Furthermore, ADL help in assessing 
pension reforms of various kinds, such as establishing a new system for new contributions or new 
contributors, while maintaining the current system for already accrued entitlements. 

Pension entitlements accrued-to-date are not an appropriate indicator of fiscal sustainability. They 
can be interpreted as the amount of resources which has to be set aside today in order to finance 
all pension rights which have been earned up to a given year. Entitlements that will accrue after 
that year are not included. In contrast to other liability concepts such as OSL, therefore, the time 
horizon of ADL is somewhat limited. As illustrated in Figure 2 for the German statutory pension 
scheme,  the  ADL  represent  only  one  part  of  the  OSL.  Moreover,  the  ADL  are  compiled  gross 
without  including  the  net  present  value  of  future  social  contributions.  To  assess  fiscal 
sustainability  it  is  vital  to  compare  (future)  pension  obligations  with  the  corresponding  future 
pension-related assets. 

Figure  2  outlines  the  difference  between  ADL  and  sustainability  indicators  for  the  German 
statutory pension scheme. It shows that a considerable amount of ADL (equivalent to about 280% 
of  GDP  in  2006)  is  accumulated  in  this  scheme.  If  future  entitlements  are  also  considered  — 
applying the open system gross liability concept (OSGL) — pension obligations add up to more 
than 600 percent of GDP. However, it is only possible to draw conclusions about the sustainability 
of  a  pension  scheme  by  comparing  these  pension  obligations  with  the  respective  assets.  The 
resulting  residual  amount  of  obligations  and  assets  represents  the  open-system  net  liabilities 
(OSNL), also  known  as  the  sustainability  or  fiscal  gap.  In contrast  to  the  ADL,  it  represents  the 
stock which has to be set aside today to sustain the present pension system (in its legal status 
quo) in the long term. While the ADL only take into account a fraction of the future demographic 
development,  namely  the  change  in  the  number  of  retirees,  the  OSNL  consider  the  long-term 
development of the overall population. Figure 2 also illustrates that the ADL estimates can indeed 
be extended to measure open system gross and net liabilities, provided that a longer time horizon 

8 The assumptions of the actuarial approach are outlined in detail in Section 5. 

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is used and the corresponding assets are included.9 

Figure 2 

Accrued-to-date liabilities and related sustainability indicators 

Main concepts 2 

Source: Müller et. al. (2010), p. 117. 

2.2  Projected and accumulated benefit obligations 

When estimating the ADL, one of the following two approaches may be applied: either the 

projected  benefit  obligations  approach  (PBO)  or  the  accumulated  benefit  obligations 

approach (ABO). The main difference between these two compilation methods refers to the 

treatment  of  future  wage  increases.  In  the  case  of  the  PBO  approach,  (expected)  future 

increases in income — either through promotions or through a general increase of wages — 

are  taken  fully  into  account.  The  ABO  approach,  on  the  other  hand,  considers  only  the 

present value of benefits earned to date. Future wage increases are not taken into account. 

The choice between the two concepts may have a significant impact on the level of pension 
entitlements. Results are usually by 10 to 20% higher when applying PBO instead of ABO.10 

9 For a description of extending the ADL approach, see Müller et al. (2010). 
10 Of course, this differential depends to a large degree on the promotions during working life, i.e. it depends on 
the  progression  of  the  age-specific  wage  profile  —  shown  exemplarily  in  figure  8.  The  higher  promotions  are 

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Main concepts 2 

Therefore,  clear  guidelines  have  to  be  applied  which  of  the  two  approaches  should  be 

chosen  to  ensure  comparability  of  results  across  pension  schemes  and  also  across  EU 

countries. 

Each method has its advantages and disadvantages. The probability of a termination or of a 

freezing  of  the  respective  pension  scheme  (before  the  end  of  a  worker’s  career)  should 

determine which method to apply. If the pension scheme is likely to exist until the end of a 

worker’s career, his or her future wage growth needs to be taken into account, applying the 

PBO  method.  This  approach  is  often  recommended  for  pension  schemes  established  for 
government employees.11 The International Public Sector Accounting Standards (IPSAS25) 

also  recommend  applying  the  PBO  approach  to  measure  pension  obligations  of  defined 
benefit  plans.12  Business  accounting  standards,  in  particular  the  International  Accounting 

Standards  19  (IAS  19),  also  recommend  the  PBO  approach.  For  social  security  pension 

schemes,  the  PBO  approach  seems  the  appropriate  valuation  method,  since,  in  normal 

circumstances, an early termination of these schemes is not expected.  

Furthermore,  the  PBO  approach  is  a  more  suitable  way  of  reflecting  certain  pension 

reforms. While an extension of the contribution periods relevant for the benefit formula (e.g. 

from best 25 income years to lifetime earnings), for example, may have no effect in the case 

of  the  ABO  approach,  it  can  change  the  entitlements  when  the  PBO  approach  is  applied. 

The  PBO  approach  is also  the  most  appropriate  method  to  take  into  account  the  different 

indexation rules of pension schemes. 

In  conclusion,  most  arguments  are  in  favour  of  the  PBO  approach  rather  than  the  ABO 

approach  to  estimate  pension  obligations  of  pension  schemes  managed  by  general 

government.  This  method  has  already  been  used  in  most  countries  which  have  already 
estimated corresponding pension obligations.13 

To  maintain  consistency  across  pension  schemes  it  is  recommended  to  apply  the  PBO 

approach  for  the  estimation  of  pension  obligations  of  defined  benefit  schemes  for 

government  employees  and  of  social  security  pension  schemes.  However,  the  ABO 
may be applied if there are good reasons to do so.14 

expected,  i.e.  the  steeper  the  wage  profile  the  more  significant  is  the  difference  between  ABO  and  PBO 
outcomes. 
11 See Reinsdorf (2010), p. 190 et seq. 
12  In  fact,  the  IPSAS25  requires  an  entity  to  use  the  Projected  Unit  Credit  Method,  which  is  equivalent  to  the 
PBO approach. 
13 See Contact Group (2009), p. 10f. Only Sweden applies the ABO approach for its calculations. 
14 Some actuarial estimates provided by external institutions may apply only an ABO approach. It is feasible to 
use such figures to compile pension entitlements if no PBO estimations are available. 

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In  practice,  various  modifications  of  the  PBO  approach  are  applied,  depending  on  how 

indexation effects are taken into account. These are the PBO approach with: 

Main concepts 2 

1)  no future indexation of pensions; 

2)  price indexation; 

3)  wage indexation; 
4)  pensions indexed in accordance with indexation rules.15 

To estimate defined benefit pension obligations, the PBO approach as described under 4) 

should be applied. This would allow country-specific differences in indexation policies to be 

reflected in the estimations.  

15 For a description of indexation rules, see Chapter 7.3. 

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Main concepts 2 

Pension schemes in social 
insurance covered by the 
supplementary table 

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Distinction of pension schemes

3 

3  Pension schemes in social insurance covered by 

the supplementary table 

The supplementary table on pension schemes in social insurance as reflected in the 2008 

SNA and in the ESA 2010 covers positions and flows of pension obligations in all pension 

schemes regarded as social insurance. In order to complete this table, the various types of 

pension schemes (in the columns of the table) must be distinguished and the positions and 

flows  in  pension  obligations  (in  the  rows  of  the  table)  defined.  In  addition  the  concepts  of 

pension  benefits  and  other  social  benefits,  of  social  insurance  social  assistance  and 
individual insurance policies have to be distinguished.16 

3.1  Pension benefits and non-pension benefits 

In  the  2008  SNA  and  in  the  ESA  2010  social  insurance  benefits  (and  the  corresponding 

contributions)  are  divided  between  those  related  to  pensions  (pension  benefits) and  those 

related to all other forms of benefit.17 All other benefits are grouped together as non-pension 

benefits. 

Box 3 

Pension benefits 

Pension benefits are predominantly old-age pensions. However, survivors’ pensions — consisting of 
widows'  and  orphans’  pension  benefits  —  and  disability  and  early  retirement  pensions  also  fall 
under the term pension benefits. 

Pensions  are  generally  disbursed  in  the  form  of  a  guaranteed  annuity18  and  received  under 
predetermined legal or contractual terms. It is important to stress that, in the supplementary table, 
pension  benefits  are  recorded  in  gross  terms,  i.e.  there  are  no  deductions  made  for  taxes,  social 
contributions or any service charge associated with the respective pension scheme. 

Only  pension  benefits  (and 

the  corresponding  contributions)  are  covered  by 

the 

supplementary table. A definition of the term pension is given in Box 3Box . The distinction 

between  pension  benefits  and  non-pension  benefits  is  important  since  the  2008  SNA 

recognises  liabilities  for  pensions  whether  there  are  actually  assets  set  aside  to  meet  the 

entitlements  or  not,  but  recognises  reserves  for  non-pension  benefits  only  when  these 
actually exist.19 

16 This chapter follows closely Chapter 17 of the ESA 2010 and Chapter 17 of the 2008 SNA. 
17 See 2008 SNA, paragraph 17.98. 
18 For a definition of annuities, see 2008SNA, paragraphs 17.66-17.75. 
19 See 2008 SNA, paragraph 17.99. 

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Distinction of pension schemes

3 

3.2  Social  insurance,  social  assistance  and  individual 
insurance policies 

Pensions  can  be  provided  to  beneficiaries  in  the  form  of  (i)  social  insurance  pension 

schemes;  (ii)  social  assistance;  and  (iii)  individual  insurance  policies  related  to  pensions 

(see Figure 3). 

Social insurance, social assistance and individual insurance policies 

Figure 3 

Considered in the supplementary table 

Social  insurance  is  the  predominant  form  of  pension  scheme  in  EU  countries,  covering 

social security pension schemes (classified as belonging to the general government sector) 

which,  in  many  cases,  are  organized  for  major  parts  of  the  population,  and  employment-

related  pension  schemes  established  by  employers,  including  government,  for  their  own 

employees.  The  distinction  between  social  security  schemes  and  employment-related 

schemes  varies  considerably  from  country  to  country,  with  the  consequence  that  the 

coverage  and,  therefore,  the  national  perception  of  what  the  term  “social  security”  means 

also vary considerably, especially between European and non-European countries. 

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Distinction of pension schemes

3 

Figure 4 

Characteristics of social insurance 

Characteristics 

Social insurance 

The beneficiary is obliged or encouraged to take out insurance against 
contingencies (old age, unemployment, illness, long-term care) by intervention of 
a third party. 

Social security 

Employment-related social insurance 

Form of 
organisation 

Organised by general government 
via social security schemes 

Organised by employers on behalf of their 
employees and their dependants or by 
others on behalf of a specified group 

Type of social 
insurance 

Social security 
pension schemes 

Other social 
security 

Employment-related 
pension schemes 

Other employment-
related social 
insurance 

Sector 

Social security funds  

Sector or sub-sector of employer, or 
pension funds 

In  contrast  to  social  insurance  benefits,  social  assistance  benefits  are  payable  without 

qualifying contributions having been made to a social insurance scheme. Usually all resident 

households  are  entitled  to  apply  for  social  assistance  but  the  conditions  under  which  it  is 

granted are often restrictive. Generally, benefits are means-tested, including an assessment 

of  available 

income  and  property.  Only 

those  households 

falling  below  a  given 

income/property threshold may be granted this type of social assistance. 

Sometimes it may not be feasible (or not sufficiently important) to separate elements of social 

assistance  within  pension  schemes  organised  as  social  insurance.  In  these  exceptional 

cases, social assistance benefits are included in the supplementary table. 

Individual insurance policies related to pensions are policies that beneficiaries take out in 

their  own  names  without  being  members  of  a  scheme  organized  collectively  for  groups  of 

employees,  as  in  the  case  of  social  insurance.  They  are  based  on  contracts  which  are 

(generally) made with individuals and which are not organised collectively. These individual 

insurance  policies  are  not  employment  related  and  therefore  are  not  recorded  in  the 

supplementary table. 

Employment-related  social  insurance  pension  schemes  may  be  managed  by  general 

government  or  by  non-government  entities,  and  they  may  be  funded  or  unfunded.  Funded 

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Distinction of pension schemes

3 

schemes finance pension benefits by drawing down segregated and earmarked assets. Their 

design requires them to hold assets equal to their liabilities. These schemes can be exactly 

funded,  under-funded  or  over-funded,  depending  on  the  size  of  the  accumulated  assets  in 

relation  to  the  pension  entitlements.  Unfunded  schemes  finance  current  pension  payments 

with the ongoing contributions paid by future pensioners and/or other ongoing revenue, such 

as taxes or transfers; unfunded schemes may nevertheless hold assets (for liquidity reasons, 

for example, or as buffer funds). 

The  supplementary  table  covers  social  insurance-type  pension  schemes  but  not 

schemes based on social assistance-type benefits and private savings benefits. To draw a 

clear line between these different types of schemes, the following definitions are essential: 

(i) 

Social insurance refers to a contractual insurance scheme where the beneficiaries 

are obliged or encouraged to insure against certain contingencies by the intervention 

of a third party. According to 2008 SNA a social insurance scheme must fulfil the 

following two conditions: 

a)  The  benefits  received  are  conditional  on  participation  in  the  scheme  and 

constitute social benefits as this term is used in the 2008 SNA. 

b)  At least one of the three following conditions is met: 

•  Participation in the scheme is obligatory either by law or under the terms and 

conditions of employment of an employee, or group of employees. 

• 

It  is  a  collective  scheme  operated  for  the  benefit  of  a  designated  group  of 

workers, whether employed or non-employed, participation being restricted to 

members of that group. 

•  An  employer  makes  a  contribution  (actual  or  imputed)  to  the  scheme  on 

behalf of an employee, regardless of whether the employee contributes. 

Social  insurance  pensions  are  broken  down  into  benefits  provided  by  general  

government  —  so-called  social  security  pensions  —  and  pensions  provided  by 

employers,  namely  employment-related  pensions  (other 

than  social  security 

pensions).  This  distinction  is  applied  in  the  supplementary  table  for  government-

managed pension schemes. 

(cid:190)  Social  security  pension  schemes  are  contractual  insurance  schemes  where  the 

beneficiaries,  as  participants  of  a  social  insurance  scheme,  are  obliged  or 

encouraged  by  government  to  insure  against  old  age,  unemployment  and  so  forth. 

Social security pensions are provided to beneficiaries by general government. 

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Distinction of pension schemes

3 

Contributions towards a social security pension scheme are often compulsory for a 

large  part  of  the  population.  Furthermore,  social  security  pension  schemes  are 

generally  defined  benefit  schemes  which  means  that  they  are  unfunded  and  are 

financed on a pay-as-you-go basis. 

The narrowest form of a social security pension is very basic. The level may be fixed 

independently of the size of contributions. Such flat-rate pension schemes are found 

in  Ireland  and  the  Netherlands.  Most  countries  in  Europe  have  earnings-related 

social  security  pension  schemes,  e.g.  Germany  and  France.  In  these  systems,  the 

level of future pensions depends on the earnings history of contributors. 

No pension entitlements for social security pension schemes are recognised in the 

core  system  of  national  accounts.  They  are  only  displayed  in  the  supplementary 

table described in Section 4. 

(cid:190)  Employment-related  pension  schemes,  other  than  the  most  basic  form  of  social 

security  pension  schemes,  are  seen  as  part  of  the  compensation  package  for 

employees. Negotiations between employees and employers may focus on pension 

entitlements as much as on current conditions of service and pay scales. 

The  relative  importance  of  social  security  pension  schemes  relative  to  other  social 

insurance  schemes  varies  quite  considerably  across  Europe.  In  some  countries, 

such as Malta and France, almost all pension obligations accruing to employees of 

corporations and other legal entities may be rerouted through social security pension 

schemes. Other countries, such as the Netherlands and the United Kingdom, restrict 

their  social  security  pension  schemes  mainly  to  the  provision  of  basic  pensions 

based  on  the  dominant  employment-related  pension  schemes.  Social  insurance 

contributions  —  paid  by  employees  or  by  employers  vis  their  employees  —  entitle 

designated  beneficiaries  to  receive  social  benefits  (covered  by  the  respective 

scheme). 

Most  positions  in  pension  obligations  of  employment-related  pension  schemes  are 

recorded  in  the  core  system  of  national  accounts  and  in  the  supplementary  table. 

For  government  employee  pension  schemes,  however,  the  classification  is  not  so 

straightforward.  Based  on  a  convention,  positions  in  pension  obligations  of 

defined  benefit  pension  schemes  for  government  employees  in  EU  countries 

are  to  be  recorded  in  the  supplementary  table  only.  See  Section  3.4  for  a 

detailed description of the division between core and non-core accounts. 

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Distinction of pension schemes

3 

3.3  Defined  contribution,  defined  benefit  and  other 

pension schemes 

The supplementary table distinguishes between two types of pension schemes:  

•  defined contribution schemes (columns A and D); and 
•  defined benefit schemes (columns B, E, F and G). 

In  a  defined  contribution  (DC)  scheme,  the  level  of  eventual  pension  benefits  is 

exclusively determined by contributions over the employee’s working life and the return on 

funds invested. Defined contribution schemes are always organised in the form of a pension 
fund.20 

The risk that an adequate retirement income may not be forthcoming is borne solely by the 

employees.  An  underfunded  defined  contribution  scheme  is  impossible  by  definition. 

Measuring pension obligations of defined contribution schemes is relatively straightforward; 

their development is determined by the development of the assets attributed to the fund. 

Defined benefit (DB) schemes, on the contrary, are pension schemes in which the pension 

benefits are determined by the use of a formula, either independently or in combination with 

a guaranteed minimum amount payable. Generally, the factors considered to estimate the 

defined benefits are the years of service, the salary over a defined period of time, the age at 

retirement and the indexation rule. 

Unlike  in  a  defined  contribution  scheme,  the  manager21  of  the  pension  scheme  bears  the 

risk of providing an adequate pension in defined benefit schemes. Defined benefit schemes 

can be, but are not necessarily, based on a pension fund. Social security pension schemes 

are usually designed as defined benefit schemes which are unfunded and arranged as pay-

as-you-go  arrangements.  Therefore,  pension  entitlements  need  to  be  estimated  using 

actuarial methods, which are described in detail in Section 5 to Section 8. 

Other  non-defined  contribution  schemes  are  recorded  together  with  defined  benefit 

schemes in the supplementary table; they are often described as hybrid schemes in that they 

combine the characteristics of defined contribution schemes and defined benefit schemes. In 

these schemes, the risk of providing an adequate retirement income is shared between the 

pension  manager  and  the  beneficiary  of  the  scheme.  The  most  important  forms  of  such 

hybrid  schemes  are  notional  defined  contribution  (NDC)  schemes,  which  are  similar  to 

20 A pension fund can be defined as a pool of assets that is used to pay pension benefits. It can be contrasted 
with the term ‘pension scheme’ which represents a bundle of rules for paying out pensions. 
21 For a definition of the term manager see below. 

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Distinction of pension schemes

3 

defined contribution schemes but, usually, include a guaranteed minimum amount payable. 

In  notional  defined  contribution  schemes,  contributions  (from  both,  employees  and 

employers)  are  credited  to,  and  accumulated  on,  individual  accounts.  These  individual 

accounts  are  notional  in  the  sense  that  the  contributions  to  the  schemes  are  used  to  pay 

pension benefits to current pensioners. 

3.4  Core and non-core accounts 

The  supplementary  table  on  pensions  in  social  insurance  distinguishes  between  pension 

schemes whose positions are recorded in the core system of national accounts (and in the 

supplementary  table)  and  those  recorded  only  in  the  supplementary  table.  There  is 

essentially one type of pension scheme, namely social security pension schemes, recorded 

only  in  the  supplementary  table.  For  EU  countries  however,  by  convention,  all  defined 

benefit  schemes  for  general  government  employees  are  also  recorded  only  in  the 

supplementary  table.  Positions  and  flows  of  these  two  types  of  pension  schemes  are 

recorded in columns G and H of the supplementary table. 

3.5  Pension  manager,  multi-employer  pension  scheme 
and pension administrator 

The supplementary table classifies pension schemes according to the sector classification 
of  the  manager22  of  the  pension  scheme.  A  pension  manager  is  mandated  by  the 

employer  to  manage  the  pension  scheme.  He  is  responsible  for  setting  the  terms  of  an 

employment-related  pension  scheme  and  bears  the  ultimate  responsibility  for  pension 

entitlements.  The  pension  manager  also  has  a  significant  degree  of  responsibility  for  the 

long-term  policy  of  investment  in  assets,  including  the  selection  of  an  investment  strategy 

and the structure of administrative providers.  

A single unit may often contract with several employers to manage their pension schemes. 

This unit is called a multi-employer pension scheme. As a pension manager, it bears the 

responsibility for any shortfall in the funds to meet the entitlements in return for the right to 

keep  any  excess  funds.  By  pooling  the  risks  of  various  employers,  the  multi-employer 

pension  scheme  expects  to  balance  under-  and  over-funding  and  run  a  surplus  in  the 

schemes taken as a whole. This resembles the way in which an insurance corporation pools 

risk for many clients. 

22 Please note that the term ‘manager’ is used synonymously for the word ‘sponsor’ which has been frequently 
used in recent years. 

 Pension Compilation Guide 

29 

 
 
 
                                                            
Distinction of pension schemes

3 

When general government takes responsibility for providing benefits to large sections of the 

society,  the  social  security  function  fills  the  role  of  a  multi-employer  scheme.  Like  the 

insurance  corporation,  the  government  then  takes  on  the  responsibility  for  any  shortfall  in 

funds to meet the pension obligations, and may be entitled to retain any surplus generated. 

As social security pension schemes are financed on a pay-as-you-go basis there is usually 

no surplus or deficit; if there is a shortfall of the scheme, government may have the power to 

adjust  pension  obligations  not  only  in  relation  to  future  employment  but  also  to  past 

employment. 

Besides  the  pension  manager,  the  employer  may  also  appoint  a  pension  administrator 

responsible  for  the  day-to-day  administration  of  the  pension  scheme.  The  pension 

administrator, however, does not take any responsibility for a shortfall of the scheme or the 

benefit  of  any  surplus.  The  same  unit  may  in  practice  carry  out  both  functions  of  pension 

manager and pension administrator. 

 Pension Compilation Guide 

30 

 
 
 
Distinction of pension schemes

3 

Columns and rows in the 
supplementary table 

 Pension Compilation Guide 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rows and columns 4 

4  Columns and rows in the supplementary table 

The  supplementary  table  on  pensions  in  social  insurance  (see  overleaf)  provides  a 

complete  and  comparable  overview  of  pension  obligations  from  the  debtor  (pension 

scheme) perspective and also (as a counterpart) of pension entitlements from the creditor 

(household)  perspective.  In  Europe,  entitlements  of  defined  benefit  pension  schemes 

represent  a  significant  share  of  overall  pension entitlements.  Thus  far  figures  on  positions 

for specific government-managed pension schemes have not been compiled and included 

in  the  system  of  national  accounts.  The  supplementary  table  (see  Figure  5)  bridges  this 

information  gap  by  showing  all  positions  and  flows  of  all  pension  schemes  in  social 

insurance 

including  government-managed  defined  benefit  schemes 

for  government 

employees  and  social  security  pension  schemes.  This  chapter  describes  in  detail  the 

columns  (Section  4.1)  and  rows  (Section  4.2)  in  the  table.  The  outline  follows  closely 

Chapter 17 of the ESA 2010. 

 Pension Compilation Guide 

32 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rows and columns 4 

Figure 5 
The supplementary table on pension schemes in social insurance 

Recording 
Pension manager 

Core national accounts 
Non-general government 

General government 

Not in the core 
national accounts 

Total 
pension 
scheme
s 

Counter-
parts:  
Pension 
entitle-
ments of 
non-
resident 
house-
holds4) 

Defined 
benefit 
schemes 
and 
other1) 
non-
defined 
contri-
bution 
schemes 
B 

Total 
C 

Defined 
con-
tribution 
schemes 
A 

Defined 
contri-
bution 
schemes 
D 

E 
Opening balance sheet 

Defined benefit schemes for general 
government employees2) 

Classi-
fied in 
finan-cial 
corpora-
tions 

Classi-
fied in 
general 
govt 3) 

Classi-
fied in 
general 
govern-
ment  

Social 
security 
pension 
schemes 

F 

G 

H 

I 

J 

Changes in pension entitlements due to transactions 

Changes in pension entitlements due to other flows 

Closing balance sheet 

Related indicators 

Rela-
tions 

Row 
No. 

Column number 

1 

Pension entitlements 

Σ  2.1 
to 2.5 

2  +  3 
– 4 

Increase in pension entitlements 
due to social contributions  
Employer actual social 
contributions 
Employer imputed social 
contributions 
Household actual social 
contributions 
Household social contribution 
supplements5) 
Less: Pension scheme service 
charges 

Other (actuarial) change of 
pension entitlements in social 
security pension schemes 
Reduction in pension 
entitlements due to payment of 
pension benefits 
Changes in pension entitlements 
due to social contributions and 
pension benefits 
Transfers of pension 
entitlements between schemes 
Change in entitlements due to 
negotiated changes in scheme 
structure 

Changes in entitlements due to 
revaluations6) 
Changes in entitlements due to 
other changes in volume 6) 

2 

2.1 

2.2 

2.3 

2.4 

2.5 

3 

4 

5 

6 

7 

8 

9 

1+ Σ 5 
to 9 

10 

Pension entitlements 

11 

Output 

1) Such other non-defined contribution schemes, often described as hybrid schemes, have both a defined benefit and a defined contribution element. 2) Schemes organised by general 
government  for  its  current  and  former  employees.  3)  These  are  non-autonomous  defined  benefit  schemes  whose  pension  entitlements  are  recorded  in  the  core  national  accounts.  4) 
Counterpart  data  for  non-resident  households  will  only  be  shown  separately  when  pension  relationships  with  the  rest  of  the  world  are  significant.  5)  These  supplements  represent  the 
return on members' claims on pension schemes, both through investment income on defined contribution schemes' assets and for defined benefit schemes through the unwinding of the 
discount rate applied. 6) A more detailed split of these positions has to be provided for columns G and H based on the model calculations carried out for these schemes. The cells shown 
as █ are not applicable; the cells in ▒ will contain different data from the core national accounts. 

 Pension Compilation Guide 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1  Columns of the supplementary table 

Rows and columns 4 

Pension  schemes  are  recorded  in  different  categories  as  shown  in  the  columns  of  the 

supplementary table. The table distinguishes pension schemes by four criteria: 

•  by  type  of  recording:  positions  and  flows  of  pension  schemes  recorded  in  the  core 

accounts (pension schemes in columns A to F), and positions of pension schemes 

recorded only in the supplementary table (pension schemes in columns G and H); 

•  by type of pension manager: non-general government (columns A to C), and general 

government pension schemes (columns D to H); 

•  by institutional sector: pension schemes classified in non-government sectors 

(columns A to E), and pension schemes including social security pension schemes 

classified in the general government sector (columns F, G and H); 

•  by type of pension scheme: defined contribution schemes23 (columns A and D), and 

defined benefit schemes including other non-defined contribution  schemes 

(columns B and E to G). 

For further explanations of the terms used above, see Chapter 3. 

Column  I  sums  up  all  pension  entitlements  acquired  or  held  by  resident  households. 

Generally, the beneficiaries of pension schemes are predominantly resident households. In 

some  countries,  however,  the  number  of  non-resident  households  receiving  pension 

benefits  may  be  considerable.  In  this  case,  Column  J  should  be  filled  in  and  added 

indicating the positions and flows of pension entitlements of non-resident households. 

23 In defined contribution schemes, assets should always be equal to equal to liabilities. The figures in Columns 
A and D are therefore always based on actual data and not on necessarily on actuarial estimations. 

 Pension Compilation Guide 

34 

 
 
 
 
                                                            
Rows and columns 4 

4.2  Rows in the supplementary table 

The rows in the supplementary table contain a full reconciliation between the opening stock 

of  pension  obligations  (entitlements)  at  the  beginning  of  a  period  and  the  closing  stock  at 

the end of a period. Within this framework, all transactions and other economic flows which 

lead  to  changes  in  the  opening  and  the  closing  stock  within  a  given  period  are  taken  into 

account. 

i.  Pension obligations (entitlements) — rows 1 and 10 

Row  1  illustrates  the  opening  stock  of  pension  obligations  (entitlements),  which  is 

identical with the closing stock of the previous year. The corresponding closing stock of 

pension obligations (entitlements) at the end of the relevant period is given in row 10. 

ii.  Social contributions — rows 2.1 to 2.4 

Employer  and  employee  actual  social  contributions  are  recorded  in  rows  2.1  and  2.3. 

Note  that  all  actual  social  contributions  are  recorded  in  the  core  accounts.  For  some 

pension  schemes  (notably 

for  social  security  pension  schemes),  actual  social 

contributions related to pensions need to be separated from social contributions related 

to other social risks (such as unemployment). 

In Columns H and G, the actual social contributions made by both employers (row 2.1) 

and  employees  (row  2.3)  appear  in  the  core  accounts,  while  all  other  entries  in  these 

columns (G and H) are shown only in the supplementary table (except row 4); they are 

shaded grey in the table and are explained below. 

For  defined  benefit  pension  schemes,  employer-imputed  social  contributions  are 

generally  measured  as  the  balancing  item.  Any  changes  in  pension  entitlements  over 

the year not included in the other rows of the table are captured by row 2.2. 

Row  2.2  also  covers  any  ‘experience  effects’  where  the  observed  outcome  of  pension 

modelling assumptions (real wage growth rate, discount rate, etc.) differs from the levels 

assumed. It should be noted that, for social security pension schemes, such ‘experience 

effects’ are not recorded in row 2.2 but in row 3. By definition, there are no entries in this 

row  for  defined  contribution  schemes.  Row  2.2  is  therefore  shaded  black  for  these 

schemes. 

 Pension Compilation Guide 

35 

 
 
 
Rows and columns 4 

The  imputed  social  contributions  by  employers  to  government  schemes  (column  G) 

require special consideration. In the non-core accounts, imputed contributions are to be 

estimated  on  the  basis  of  actuarial  calculations.  Only  in  cases  where  the  actuarial 

calculations  are  not  sufficiently  reliable  may  two  other  approaches  be  applied  to 

estimate government employers’ imputed pension contributions: 

i. 

on the basis of a reasonable percentage of wages and salaries paid to 

current employees; or 

ii. 

as the difference between current benefits payable and actual contributions 

payable (by both employees and government as employer). 

Items  for  household  social  contribution  supplements  and  the  other  changes  in 

entitlements are shown in the same way as for non-government pension schemes. 

Row 2.4 relates to the property income earned, or imputed, on the schemes; it is routed 

via  the  household  (or  the  rest  of  the  world)  sector.  For  all  defined  benefit  pension 

schemes  including  social  security  schemes,  property  income  is  equivalent  to  the 

unwinding of the discount rate, meaning that its value is equal to the discount rate times 

the  pension  entitlements  at  the  beginning  of  the  accounting  period.  An  illustrative 

example  is  given  in  Section  8.1.  For  defined  contribution  pension  schemes,  row  2.4 

denotes interest earned on assets, i.e. the investment income during a period. Any loss 

in defined contribution funds is recorded in row 9. 

iii. 

Other (actuarial) changes of pension entitlements in social security pension 
schemes — row 3 

Given  that  the  supplementary  table  provides  a  complete  overview  of  the  changes  in 

pension  entitlements  over  the  accounting  period,  a  specific  row  is  needed  to  show 

cases where actual social contributions to the social security pension scheme are not 

actuarially  based.  Such  cases  reflect  an  imputed  contribution  (which  is  not  the 

responsibility  of  any  employer).  Row  3  shows  these  imputed  transactions  of  social 

security  pension  schemes  (as  other  (actuarial)  increases  to  pension  entitlements  in 

social security pension schemes). 

The  entries  in  this  row  can  be  positive  or  negative.  Negative  cases  arise  in  a  social 

security  pension  scheme  when  the  discount  rate  is  higher  than  the  scheme’s  internal 
rate  of  return24,  e.g.,  where  contributions  have  been  increased  above  the  actuarially 

24 The internal rate of return of a pension scheme is the discount rate that equalises the actual contributions paid 
and the discounted value of pension entitlements accrued through those contributions. 

 Pension Compilation Guide 

36 

 
 
 
                                                            
Rows and columns 4 

required  level  to  finance  a  short-run  cash  shortfall.  By  contrast,  positive  values  can 

occur when the discount rate is lower than the scheme’s internal rate of return. 

Row 3 does not show cash transfers from tax revenues, which are recorded in the core 

accounts  as  current  transfers  between  government  units,  unless  they  affect  pension 

entitlements. In some EU countries, however, governments make transfers to pension 

schemes that do increase pension entitlements (for example where transfers are made 

for specific social groups which are unable to contribute directly), which would indicate 

that the amounts should be implicitly included in this row calculated by difference. 

‘Experience  effects’  found  in  social  security  pension  schemes  in  which  the  observed 

outcome of pension modelling assumptions (real wage growth rate, discount rate, etc.) 

differs from the levels assumed in the previous estimation are also recorded in Row 3. 

For other types of pension schemes, these experience effects are recorded in Row 2.2 

(employer-imputed social contributions). 

iv. 

Pension benefits — Row 4 

Row  4  comprises  the  pension  benefits  that  are  paid  during  the  period  of  time.  The 

payment of pension benefits has the effect of ‘settling’ some of the pension entitlements 

included in the opening stock in Row 1. 

v. 

Change to pension entitlements — Row 5 

Row 5 shows the changes to pension entitlements due to contributions and benefits. It 

is equal to Row 2 + Row 3 – Row 4. This balancing item measured in the non-financial 

account is conceptually equivalent to that measured in the financial account. 

vi. 

Transferring pension entitlements — Row 6  

With increasing work mobility, the portability of pension entitlements from one employer 

to  another  has  significantly  increased  in  recent  years.  A  change  of  jobs  does  not 

usually  lead  to  a  change  in  pension  entitlements  for  the  household  concerned. 

However,  there  are  transactions  between  the  two  pension  funds  as  one  assumes  the 

liability  of  the  other.  First,  there  is  a  transfer  of  pension  entitlements  from  the  original 

manager  to  the  new  manager.  Second,  there  may  be  a  transfer  in  cash  or  other 

financial assets to compensate the new manager. The value of the transfer of financial 

assets may not be exactly equal to the value of the pension entitlements transferred. In 

that  case,  a  third  entry  is  needed  (in  the  core  accounts)  in  transactions  (capital 

transfers) to correctly reflect the changes in net worth of the two units concerned. 

 Pension Compilation Guide 

37 

 
 
 
Rows and columns 4 

If a government assumes responsibility for pension obligations for the employees of a 

non-government  unit  through  an  explicit  transaction,  a  pension  liability  should  be 

recorded  in the  balance  sheet of  the  government.  If  the  government  does  not  receive 

matching  assets  in  return,  the  difference  between  the  increase  in  the  government’s 

liability  and  the  assets  received  is  shown  as  a  capital  transfer  to  the  non-government 

employer. 

vii. 

Pension reforms — Row 7 

Due to demographic and economic developments, employers may reform the pension 

schemes they manage. Such reforms often take the form of parametric changes, e.g. a 

change  of  the  retirement  age,  the  indexation  rules  or  the  benefit  formula.  In  some 

cases, systemic reforms can be observed, e.g. a shift from a defined benefit scheme to 

a defined contribution scheme. It is important to underline that not all reforms lead to a 

change of pension entitlements in the supplementary table. 

First, only enacted pension reforms are recorded in the national accounts. They affect 

the  estimates  of  pension  entitlements  in  the  year  in  which  the  reform  is  enacted  and 

subsequently. An announcement by an employer of an intention to undertake a pension 

reform  is  not  a  sufficient  basis  for  introducing  the  effects  of  the  reform  into  national 

accounts data. 

Some reforms, although formally enacted, may not have an impact on current pension 

entitlements. This is the case when the employer chooses to leave the rights of existing 

members  untouched,  confining  the  reformed  arrangements  to  new  entrants  to  the 

pension  scheme.  The  impact  of  such  reforms  would  be  seen  in  future  measures  of 

pension  entitlements,  in  line  with  the  accrued-to-date  liabilities  concept  described  in 

Section 2. 

In  many  cases,  reform  measures  affect  not  only  future  entrants  into  the  pension 

scheme  but  also  existing  members.  An  example  would  be  a  general  change  to  the 

pension  indexation  rules  that  has  an  impact  on  present  pensioners  as  well  as  on 

present and future contributors. Such reforms change the stock of pension entitlements 

during  the  period  in  which  they  are  enacted.  They  must  be  accounted  for  as  a 

transaction  in  the  supplementary  table.  The  impact  of  a  reform  may  be  very  high  if  it 

affects  current  and  future  pension  benefits  —  i.e.  present  pensioners  and  present 

contributors — since this affects the entire stock of existing entitlements. 

 Pension Compilation Guide 

38 

 
 
 
 
Rows and columns 4 

Pension reforms are treated differently in national accounts, depending on whether they 

have been negotiated or whether they are imposed without negotiation. 

Negotiated reforms are recorded as transactions in the following manner: 

(i) If the entitlements of a pension scheme are included in the core accounts, and the 

employer/manager  agrees  to  change  the  terms  of  pension  entitlements  via 

negotiation  with  the  employees  concerned,  this  change  should  be  recorded  as  a 

transaction in the supplementary table under row 7; 

(ii)  If  the  entitlements  of  a  pension  scheme  are  not  recorded  in  the  core  accounts, 

and the employer/manager agrees to a change in the terms of pension entitlements 

via negotiation with the employees concerned, this change should be recorded as a 

transaction in Row 7 in the supplementary table;  

(iii)  Changes  agreed  in  parliament  to  pension  entitlements  under  social  security 

schemes are recorded as if the changes had been negotiated. 

Changes to pension entitlements that are imposed without negotiation are recorded as 

other changes in the volume of assets (row 9). 

viii. 

Other flows — rows 8 and 9 

Rows  8  and  9  show  other  flows  as  revaluations  and  other  changes  in  volume 

associated  with  pension  schemes  in  social  insurance.  Table  2  breaks  down  the  other 

flows into revaluations and other changes in volume. 

Other flows as revaluations and other changes in the volume of assets 

Table 2 

 Pension Compilation Guide 

39 

 
 
 
 
Rows and columns 4 

Revaluations  are  due  to  changes  to  the  key  model  assumptions  in  the  actuarial 

calculations  and  are  covered  in  row  8.  These  assumptions  are  the  discount  rate,  the 
wage rate and, if used in the model, the inflation rate.25 Other changes in prices such 
as write-downs are also covered in row 8.26 Experience effects are not to be included 

here in principle, though in some circumstances it may not be possible to single them 

out. 

When the demographic assumptions used in the actuarial calculations are changed, they 

are  recorded  as  other  changes  to  the  volume  of  assets  (row  9).Any  other  changes  to 

assumptions  which  are  not  revaluations  are  covered  in  row  9.  This  includes 

presumptions on future retirement behaviour. If these retirement patterns are altered in 

the model, the resulting changes to the outcomes are recorded in row 9. However, such 
changes are only covered in row 9 if they are not derived from a legislative reform.27 

Besides changes to the underlying assumptions, the general framework of the actuarial 

model applied may also change from one year to the next to improve the accuracy of the 

results. Row 9 records these changes to the estimation approach which are not due to 

altered assumptions but result from a change in the model framework. 

Row  9  also  covers  a  number  of  other  changes  in  the  volume  of  assets.  This  includes 

changes  to  pension  entitlements  that  are  imposed  without  negotiation  and  defined 

contribution pension schemes that hold losses of pension funds. 

ix. 

Financial services — row 11 

Financial  services  provided  by  all  pension  schemes  are  recorded  as  being  paid  by 

scheme  members  (thus  the  costs  of  pension  schemes  will  never  be  recorded  as 

intermediate consumption of the employer operating the scheme). Accordingly, Figure 6 

shows  financial  services  separately  from  social  contributions.  Presenting  financial 

services  in  this  way  means  that  the  figures  shown  as  social  contributions  received  by 

employees from their employers are exactly the same as the share of contributions paid 

by the employees to the pension fund. It is not necessary to show which element of social 

contributions  covers  the  service  fee.  It  is  the  household  contribution  supplement  for  a 

defined contribution scheme and either the employer or the household contribution for a 

defined benefit scheme. 

25 For a further discussion on the use of the inflation rate, see Section 5.4.1. 
26 Note that, while write-downs are covered in row 8, write-offs are recorded in row 9. 
27 All changes due to enacted reforms are covered in row 7. 

 Pension Compilation Guide 

40 

 
 
 
                                                            
Rows and columns 4 

Output covers financial services. They are the costs of running the pension scheme for a 

given  period.  The  output  data  provide  additional  information  to  be  included  in  the 

supplementary table.  

Figure 6 

Pension entitlements and their changes 

 Pension Compilation Guide 

41 

 
 
 
 
Rows and columns 4 

Key assumptions in measuring 
pension entitlements 

 Pension Compilation Guide 

42 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key assumptions 5 

5  Key assumptions in measuring pension 

entitlements 

Pension  entitlements  are  recorded  as  positions  in  national  accounts  representing  future 

payments  of  pension  benefits.  Moreover,  the  changes  in  positions  between  two  points  in 

time are also registered; these changes cover transactions, revaluations and other changes 

in  the  volume  of  assets  as  described  in  Section  4.  Positions  in  pension  entitlements  are 

derived by applying actuarial estimation methods which are based on the net present value 

concept. Such actuarial estimation methods are used for all pension schemes. For pension 

schemes  managed  by  non-government  units,  position  data  on  pension  entitlements  are 

usually available based on business accounting or supervisory data sources  (see Section 

6). 

For  defined  benefit  schemes  for  general  government  employees  and  for  social  security 

pension  schemes,  such  data  are  not  available  and  need  to  be  compiled  based  on  data 

taken  from  government  finance  and  population  statistics.  For  such  estimations  various 

assumptions have to be made. 

First  of  all,  a  suitable  discount  rate  has  to  be  chosen  since  pension  entitlements  are 

calculated  in  present  value  terms  —  i.e.  they  reflect  the  discounted  sum  of  present  and 

future  flows  compared  to  a  certain  base  year.  Another  key  assumption  concerns  future 

wage growth. Often, the development of future pension levels is highly dependent on wage 

assumptions,  e.g.  via  pension  indexation.  Further,  demographic  assumptions  —  mainly 

concerning  life  expectancy  —  play  a  significant  role  in  estimating  pension  entitlements. 

Following the appropriate choice of these three key assumptions, the estimation of pension 

entitlements  is  described  for  such  government-managed  pension  schemes.  In  addition, 

some other assumptions such as assumed inflation rates are discussed. 

5.1  Discount rate 

a) 

The concept of the discount rate 

The  choice  of  the  discount  rate  is  one  of  the  most  crucial  assumptions  for  estimating 
pension entitlements, since its accumulated impact over many decades is quite high.28 

28 See e.g. ECB (2010), p. 95. 

 Pension Compilation Guide 

43 

 
 
 
                                                            
Key assumptions 5 

Pension entitlements as positions are compiled based on the net present value method, i.e. 

they reflect the value of a future payment stream for a given base year. When calculating 

pension entitlements, the crucial question is: what are future payments of pension benefits 

worth today?  

One  tool  for  valuing  a  future  stream  of  payments  is  the  discount  factor  (

).  The 

is 

compiled based on the following Equation 1: 

The discount rate   as part of the denominator determines the level of the 

. To calculate 

the present value in year   of a future pension benefit in year   this future payment needs to 

be multiplied by the 

. 

Generally, there are two approaches of interpreting this factor. From the point of view of the 

creditor  who  earns  the  pension  entitlements,  the  discount  factor  reflects  the  time  value  of 

money. It is the value of a future payment in terms of a present payment. Present payments 

are  seen  as  worth  more  than  future  payments  due  to  opportunity  costs  and  possible  risks 

associated  with  future  payment  streams.  It  means  that  the  discount  factor  is  generally 

smaller than one. 

From the debtor’s point of view the discount rate is used to calculate the pension reserves 

to be set aside today to finance future pension obligations. For a more detailed description 

of these two perspectives, see Box 4. 

Box 4 
The creditor’s and the debtor’s perspective: two interpretations of the discount rate 

For pension entitlements (obligations), the discount rate can be interpreted from two perspectives, 
from the perspective of the creditor and from the perspective of the debtor. 

From  the  perspective  of  the  creditor,  a  future  payment  is  influenced  by  the  opportunity  costs  of 
‘waiting’. If a future pension benefit were available today, it could e.g. be saved and therefore could 
yield a return in the coming period. In such cases, the opportunity costs are reflected by the interest 
rate on the possible investment. Additionally, the  discount rate of the creditor may be affected by 
the  uncertainty  of  future  payments.  For  example,  there  is  the  risk  that  the  pension  scheme  may 
default. From the individual perspective of the creditor, therefore, the discount rate may be higher 
than  the  risk-free  interest  rate.  Obviously,  the  discount  rate  from  this  viewpoint  is  difficult  to 
measure  and  might  vary  considerably  across  individuals  and  time  depending  on  individual 
preferences. However, for the estimation of pension entitlements in national accounts, such aspects 
of risk and preferences need to be taken into account. 

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44 

 
 
 
 
Key assumptions 5 

The  discount  rate  can  also  be  interpreted  from  the  debtor’s  perspective,  representing  a  tool  to 
measure the present capital costs of financing future payments. Due to gains through interest rates, 
the  amount  of  money  to  be  set  aside  today  to  finance  a  future  payment  can  be  smaller  than  the 
actual payment in the future. On the basis of these interest rates (discount rates), therefore, present 
pension  reserves  can  be  estimated  to  finance  future  pension  payments.  In  the  case  of  defined 
benefit  schemes,  notional  reserves  may  be  quantified.  In  practice,  most  accounting  standards 
require  debtors  to  calculate  using  relatively  risk-free  interest  rates  such  as  corporate  bonds  or 
central government bonds. 

b) 

The choice of the discount rate 

The  choice  of  the  discount  rate  in  business  accounting  standards  differs.  International 

accounting standards (IAS) aim for a discount rate that reflects market yields on the balance 

sheet of ‘high-quality corporate bonds’. In this context, ‘high quality’ is generally defined by 

business accountants as bonds with a high rating. Where the markets for corporate bonds 

are thin, it is possible to use yields on central government bonds. 

For  government-managed  pension  schemes,  it  is  generally  agreed  that  central 

government debt securities provide a suitable basis for the discount rate.29 Furthermore, the 

choice of the discount rate should be based on the following criteria: 

1)  In order to obtain a suitable proxy for a risk-free interest rate, it is advisable to base it 

not on central government debt securities of one single country but on a basket of 

e.g. European central government debt securities. 

2)  The  maturity  of  these  debt  securities  should  be  similar  to  that  of  pension 

entitlements, i.e. at least 10 years, but preferably longer. 

3)  In order to guarantee comparability across countries, the same discount rate should 

be  applied  to  all  EU  countries  and  all  government-managed  pension  schemes 

(including social security pension schemes) at whatever level of government. 

4)  A  stable  discount  rate  should  be  applied  to  avoid  the  noise  resulting  from  frequent 

changes. 

In  line  with the  above  criteria,  it  is recommended  to  set  the  discount  rate  at  three  per 

cent in real terms and five per cent in nominal terms. This will considerably improve the 

comparability of results across EU countries and will be in line with the assumptions made 

by the Ageing Working Group. 

29 E.g. IPSAS recommends (long-term) government bonds as a basis for the discount rate. 

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45 

 
 
 
 
                                                            
The  appropriate  choice  of  discount  rate  for  pension  obligations  under  unfunded  public 

pension schemes is discussed in more detail in Box 5. 

Key assumptions 5 

The appropriate choice of a discount rate for government pension obligations 

Box 5 

In  order  to  produce  comparable  estimates  for  pension  entitlements  (obligations)  in  national 
accounts  across  pension schemes,  countries  and  time,  the  following criteria should  be met  with 
regard to the discount rate: 

1) 
To obtain a suitable proxy for a risk-free interest rate it is advisable to base it not on the 
central  government  debt  securities  of  one  single  country  but  on  a  basket  of  e.g.  European 
government long-term debt securities. 

The  first  argument  for  such  a  portfolio  of  bonds  is  based  upon  risk  considerations.  Government 
bonds are usually not absolutely risk-free and generally include the risk of default by the country 
concerned in the shape of a risk premium. This risk premium can vary across countries and over 
time. 
Another  argument  in  favour  of  a  basket  of  European  bonds  is  the  issue  of  interdependence,  or 
more  specifically  the  interdependence  between  a  country's  pension  entitlements  and  its 
government  bonds.  The  following  example  illustrates  this  issue.  Imagine  a  country  increases 
future pension levels via new pension legislation. Such a reform may lead to a higher default risk 
for the country and thus to increased interest rates on government bonds. Despite the increase in 
pension  levels,  therefore,  the  pension  entitlements  recorded  in  national  accounts  may  actually 
decrease due to a higher discount rate. To avoid such a possible interdependence between the 
pension policy and the discount rate, it is advisable to choose a basket of European government 
bonds as a basis for the discount rate — which is (almost) unaffected by national pension policies. 

2) 
10 years but preferably longer. 

The maturity of these bonds should be similar to that of pension entitlements, i.e. at least 

When  calculating  the  accrued-to-date  liabilities  (ADL)  of  government-managed  defined  benefit 
pension  schemes  and  of  social  security  pension  schemes,  one  projects  future  pension  benefits 
accrued to date into the future. These benefits will arise after a period of some several decades. 
The  government  bonds  used  should  cover  (at  least)  a  similar  period  of  time.  Therefore,  only 
government  bonds  with  a  maturity  of  at  least  10  years  should  be  considered  as  a  basis  for  the 
discount  rate.  Preferably,  duration  of  30  years  should  be  chosen,  which  reflects  the  average 
length of pension entitlement payments.  

3) 
To guarantee comparability across Europe, the same discount rate should be applied to 
all EU countries and all government-managed defined benefit pension schemes (including social 
security pension schemes) at whatever level of government. 

In  theory,  there  is  only  one  risk-free  interest  rate.  This  interest  rate  should  be  equal  for  all 
countries and all levels of general government. Therefore, only one value should be approximated 
for  the  corresponding  discount  rate  and  used  for  estimations  across  Europe.  Furthermore, 
differing  discount  rates  across  European  countries  would  make  it  difficult  to  compare  cross-
country pension entitlements since outcomes can differ widely. A discount rate lower by just 2 to 3 
per cent (in real terms) may increase outcomes by about 20 per cent. Therefore, using a single 
discount rate also ensures the comparability of results across countries. 

4) 
changes. 

A  stable  discount  rate  should  be  applied  to  avoid  the  noise  resulting  from  frequent 

Frequent changes in the discount rate can make it difficult to explain to the public and compare 
time series of pension entitlements since outcomes can differ widely. As stated above, variation in 
the  discount  rate  may  change  outcomes  considerably.  Excessive  changes  to  the  discount  rate 

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Key assumptions 5 

should therefore be avoided. 

Why to choose a discount rate of three per cent per annum? 

Figure  shows  the  average  yield  on  government  bonds  (with  10-year  duration)  in  euro  countries 
compared  to  German  central  government  bonds  yields.  The  chosen  discount  rate  of  three  per 
cent p.a. (in real terms) is close to the average interest rate over this time period. 

A discount rate of three percent p.a. corresponds closely to the interest rates applied by European 
institutions  and  some  national  regulations.  The  Ageing  Working  Group  agreed  with  Member 
States  a  constant  real  discount  rate  of  three  percent  p.a.  for  its  long-term  projections.  For 
estimating pension entitlements in the business sector, the reformed German Commercial Code 
also  prescribes  a  long-term  interest  rate  of  about  five  percent  p.a.30  in  nominal  terms  — 
corresponding  to  three  percent  p.a.  in  real  terms.  Of  course,  there  remains  some  uncertainty 
about  the  future  development  of  the  real  interest  rate.31  Therefore,  the  choice  of  discount  rate 
should be reviewed regularly. 

Figure 7 

Interest rates of euro and German government bonds 

% p.a., 1999-2009 

Source: ECB and Eurostat. 

30  The  discount  factors  to  apply  to  pension  liabilities  under  the  German  GAAP  are  published  monthly  by  the 
Deutsche Bundesbank and based on the average yields over the period of the last 7 years. In accordance with 
the  yield  curve  interest  rates  are  published  for  different  maturities.  For  pension  liabilities  with  a  duration  of  30 
years the interest rate in June 2010 was set at a level of 5.28 %. 

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47 

 
 
 
                                                            
 
Key assumptions 5 

5.2  Wage growth 

To  estimate  the  pension  entitlements  of  defined  contribution  schemes,  no  assumptions 

regarding wage growth are required. In such systems, pension entitlements depend solely 

on the financial assets accumulated through contributions.  

In  contrast,  in  defined  benefit  schemes  the  level  of  pension  entitlements  depends  also 
significantly  on  future  wage  growth.32  These  schemes  usually  apply  a  formula  to  the 

member’s  salary  (final  salary,  an  average  over  a  period  of  years,  or  lifetime  earnings)  to 

determine  the  level  of  the  initial  pension.  When  using  the  PBO  approach  —  described  in 

Section 2.2 — the future wage development is taken into account. Therefore, assumptions 

have to be made regarding future wage growth, through promotion/career progression but 
also due to general economic growth.33 

a)  The choice of wage growth 

Assumptions as to the future development of wages have a significant impact on the level of 

pension entitlements when the PBO method is used. Therefore, guidelines for determining 

this essential parameter for actuarial estimations are given below.  

Generally, two factors lead to future wage growth:  

1)  Promotions and the career progression; and 

2)  The general wage growth in the economy 

The  career  path  of  individuals  is  usually  relatively  age-specific.  Most  countries  show  a 

hump-shaped  wage  development  over  the  employment  cycle  —  as  illustrated  in  Figure  8. 

Younger  cohorts  (here  aged  around  20-30  years)  generally  earn  less  than  their  older 

counterparts  in  the  workforce.  With  an  increasing  age,  average  earnings  rise  and  reach 

their  maximum  usually  around  the  age  of  50.  In  many  countries,  the  average  earnings 

profile — shown in Figure 8 — decreases at ages close to retirement (here: 55-60 years). 

To approximate future career paths, it is useful to take the earnings profile for the base year 

as the basis (for an example see Figure 8). It is assumed that the present age- and gender-

31 Some authors (see. e.g. Börsch-Supan et  al. (2004) or Canton  et al. (2003)) assume  that due to an ageing 
population  and  resulting  changes  in  investment  and  saving  behaviour  real  interest  rates  might  drop  in  the 
coming  two  decades.  However,  it  is  not  clear  to  which  extent  this  is  already  anticipated  in  the  current  interest 
rates of long-term government bonds.    
32 In NDC systems, generally,  future pension  levels  are  determined  by the  wage growth or more precisely the 
wage bill growth in the economy. 
33 When applying the ABO method no assumptions  have to  be made about the future development of  wages. 
With this approach the members’ pensions are determined solely on the basis of their current salary in the base 
year. 

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48 

 
 
 
 
                                                                                                                                                                                          
Key assumptions 5 

specific  salary  structure  will  remain  constant  over  time.  In  the  example  given,  a  male 

individual aged 25 in the base year 2006 can thus expect to earn 75 per cent more at the 

age of 40 (in 2021) due simply to career progression. 

Career  progression  might  differ  between  members  of  government-managed  pension 

schemes for its employees and members of social security pension schemes. This is mainly 

due  to  differences  in  promotions  in  the  private  sector  compared  to  the  public  sector. 

Therefore,  earnings  profiles  should  distinguish  between  private  and  public  employees,  if 

possible. 

Age- and gender-specific earnings profile (German statutory pension scheme 2006) 

Figure 8 

Source:  Forschungszentrum  Generationenverträge,  University  of  Freiburg,  based  on  data  provided  by  the 
German statutory pension scheme. 

General wage growth in the economy will also affect future pension levels, and therefore 

PBO  pension  entitlements.  Since 

the  development  of 

future  wages 

is  uncertain, 

assumptions  have  to  be  made  here  as  well.  Generally,  it  is  assumed  that,  over  the  long 

term, wages follow labour productivity growth per capita in the economy.  

An  overview  of  EU  countries  shows  that  this  growth  rate  is  relatively  heterogeneous  (see 

Figure  9).  Specifically,  countries  with  lower  GDP  per  capita  rates  have  seen  higher 

productivity growth rates in recent years. According to the projections of the Ageing Working 

Group (AWG), this trend will continue in the coming decades. In particular, central eastern 

EU  countries  are  expected  to  experience  higher  growth  paths,  catching  up  to  the 

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49 

 
 
 
 
 
Key assumptions 5 

productivity levels of the ‘old’ EU Member States (see e.g. the example of Poland in Figure 

9). 

In  order  to  reflect  heterogeneous  growth  paths  across  the  EU,  the  wage  growth 

assumptions  of  the  AWG  —  reflecting  productivity  growth  per  capita  —  should  if 

possible be used for the estimation of pension entitlements. This provides a basis for 

harmonised  growth  assumptions  and  at  the  same  time  allows  for  heterogeneous  growth 

paths across EU Member States. 

Figure 9 

Ageing Working Group productivity and wage growth paths 
for Germany, Poland and Spain 

Source: Ageing Working Group. 

In  most  government-managed  pension  schemes  of  the  EU  countries,  wage  growth  also 

plays  a  crucial  role  in  the  indexation  of  pension benefits.  In the  Netherlands,  for  example, 

pension benefits are adjusted twice a year in line with the average wage growth. To ensure 

consistency, the AWG assumptions for future wage and productivity growth should be used 

to estimate the future indexation of pensions. 

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50 

 
 
 
 
 
 
Changes in the wage growth assumptions 

The assumptions for wage growth should be reviewed and updated on a regular basis. The 

latest  productivity  projections  of  the  AWG  should  always  be  applied.  These  forecasts  are 

Key assumptions 5 

revised  generally  every  three  years,  and  the  last  update  has  been  made  available  in 
September  2011.34  The  AWG  assumptions  can  be  obtained 

the  national 

from 

representatives in the AWG. If there are changes in the assumptions for future real wages, 

this will be recorded as other flows (revaluations). 

5.3  Demographic assumptions 

5.3.1  Life expectancy 

The level of pension entitlements is also dependent on future demographic developments. 

Assumed future life expectancy plays a significant role. It determines the expected number 

of years the pension annuity is to be paid out. As a consequence, pension entitlements may 

vary if different life expectancies are applied. Life expectancies are calculated on the basis 

of  mortality  tables  already  established  for  the  modelling  of  pension  and  life  insurance 

schemes.  

Choice of life expectancy 

In  the  case  of  social  security  pension  schemes  covering  a  large  part  of  the  population, 

demographic  data  provided  by  Eurostat  should  generally  be  used.  This  ensures  a 

comparable  data  set  across  EU  countries.  Eurostat  provides  age-  and  gender-specific 

mortality tables for all EU countries. Only if specific data on the mortality of social security 

members  are  available  such  data  should  be  used.  Since  mortality  rates  differ  widely 

between men and women, a gender-specific differentiation of mortality data is necessary. 

An  increase  in  life  expectancy  has  been  observed  over  recent  decades.  This  trend  is 

generally expected to continue in the coming years. Assumptions provided by Eurostat 

regarding future life expectancy should thus be applied as well. In doing so:  

•  Eurostat’s most recent population projections must always be used. The most recent 

update of EUROPOP has been made available in spring 2011. 

•  There are several possible population change scenarios. In the case of EUROPOP, 

the convergence scenario must always be assumed.  

34 To contact the national representatives in the AWG see ‘The 2012 Ageing Report: Underlying Assumptions 
and Projections Methodologies’ (2011), p. 4-6 on the following link: 
http://ec.europa.eu/economy_finance/publications/european economy/2011/pdf/ee-2011-4_en.pdf. 

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51 

 
 
 
                                                            
•  Furthermore,  assumptions  regarding 

future 

life  expectancy  must  again  be 

Key assumptions 5 

differentiated by gender.  

Eurostat’s mortality data are available at: 

http://epp.eurostat.ec.europa.eu/portal/page/portal/population/data/database  

If  the  mortality  of  pension  scheme  members  is  assumed  to  differ  widely  from  the  general 

population mortality, scheme-specific mortality data should be used if available. This might 

be  the  case  for  e.g.  civil  servants,  who  are  generally  assumed  to  have  a  higher  life 

expectancy than the population average. In contrast, the beneficiaries of disability pensions 

might have significantly higher mortality rates than average members of the population. 

5.3.2  Fertility rate 

The  modelling  of  some  pension  schemes  may  involve  the  use  of  other  demographic 

assumptions such as future fertility rates. This may play a role in estimating entitlements for 

an orphan’s pension. The right to these benefits is accrued today by present contributors to 

the pension scheme. When they die at some point in the future, however, their dependent 

children — whether born or unborn at present — will generally receive an orphan’s pension. 

A  higher  future  fertility  rate  will  therefore  lead  to  a  higher  number  of  children  receiving  an 

orphan’s  pension.  However,  this  should  play  only  a  minor  role  since  orphans’  pensions 

account only for a small part of overall pension entitlements. 

In  addition,  the  future  fertility  rate  may  play  a  role  in  certain  benefit  formulas  under 

European pension schemes, as e.g. in the German general pension scheme. Here, future 

pensions are linked — via a so-called sustainability factor — to demographic developments, 

which are partly determined by future fertility rates. 

Choice of future fertility rate 

Here too, Eurostat provides a suitable harmonised basis for choosing future fertility levels. 

They are available at: 

http://epp.eurostat.ec.europa.eu/portal/page/portal/population/data/database 

5.3.3  Migration 

Migration is another factor that might be relevant for the estimation of pension entitlements. 

In some countries, individual pension levels may differ if contributors migrate. Sometimes, 

as e.g. in the case of the United Kingdom, different pension rules apply to pensioners who 

choose to emigrate. Also, migration may play a role in the pension benefit formula — e.g. if 

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52 

 
 
 
Key assumptions 5 

a sustainability factor is applied as in notional defined contribution schemes. Here, national 

modellers have to make assumptions about how migration will develop in future. 

Choice of future migration rates 

Eurostat  also  provides  a  suitable  basis 

for  choosing 

future  migration 

levels 

at:http://epp.eurostat.ec.europa.eu/portal/page/portal/population/data/database 

5.4  Other assumptions 

5.4.1  Inflation 

For  calculating  pension  entitlements,  it  has  to  be  decided  whether  future  flows  are  to  be 

projected in nominal or in real terms. If nominal values are chosen, both the discount rate 

and  the  wage  growth  rate  should  include  future  inflation  expectations.  If  the  projection  is 

based on real values, inflation expectations are not considered. The latter approach has the 

advantage  of  avoiding  further  assumptions  regarding  future  price  levels.  Generally,  for 

calculating present values both approaches (nominal and real values) should lead to similar 

results  (see  Box  ).  Therefore,  both  approaches  can  be  used  for  the  estimation  of  pension 

entitlements.  However,  it  is  essential  to  check  which  is  being  taken  as  the  basis  for  the 

assumptions. Discount rates are usually quoted in real terms, but not always. Wage growth 

is sometimes presented in nominal terms. Hence, it is important to verify whether inflation is 
considered in the financial assumptions or not.35 

Choice of future inflation 

For  the  future,  an  inflation  rate  of  two  per  cent  should  be  applied.  This  is  in  line  with  the 

ECB’s inflation rate target of just under two per cent over the medium term. 

35 For some examples how to apply inflation for the estimation of pension entitlements see also section 7.3,  
Box . 

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53 

 
 
 
 
                                                            
Projecting future flows — nominal terms versus real terms 

Box 6 

Key assumptions 5 

To estimate the present value
growth-discount factor (

) is applied: 

) in year t of a pension benefit

paid out in t+1, the following 

The  discount  rate  is  denoted  by 
indexation, is denoted by 
: 
with the 

  and  the  growth  in  the  pension  benefit,  e.g.  due  to  pension 
. The present value is then calculated by multiplying the pension level 

If  a  nominal  approach  is  adopted,  expected  inflation  (
and for the discount rate, leading to the following growth-discount factor:  

)  is  considered  for  future  wage  growth 

= 

Since  expected  inflation  (
cancelled out. 
the results calculated in nominal terms are rather close to the outcomes estimated in real terms.  

,  it  is  almost 
 therefore have a similar value, with the consequence that 

)  is  in  both  the  nominator  and  the  denominator  it  (

 and 

5.4.2  (Un)employment rates 

In  some  countries  such  as  Poland  and  Germany  the  level  of  future  pensions  is  directly 

linked  to  (un)employment  rates  in  the  economy.  In  Poland,  for  example,  entitlements  are 

(annually)  recalculated 

in  accordance  with  recent  employment  growth.  Therefore, 

employment assumptions may be required for the estimation of pension entitlements.  

The choice of future (un-)employment rates 

For  the  choice  of  future  (un-)employment  rates,  the  AWG  provides  a  basis  comparable 

across  EU  countries.  Therefore,  these  assumptions  should  be  used  if  required  for  the 

estimation of pension entitlements. 

5.4.3  Future prevalence of disability 

The  supplementary  table  covers  all  types  of  pensions,  including  disability  and  invalidity 

pensions. In order to estimate entitlements to disability and invalidity pensions, assumptions 

thus  need  to  be  made  regarding  the  probability  of  becoming  disabled  in  the  future.  This 

probability  is  reflected  in  the  so-called  prevalence  rate,  which  is  defined  in  this  context  as 

the total number of disabled persons divided by the total population.  

Pension  entitlements  take  into  account  the  probability  of  receiving  a  pension  in  future. 

Therefore, they are generally higher — other things being equal — the higher the assumed 

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54 

 
 
 
 
 
 
 
Key assumptions 5 

future  prevalence  rates  for  disability.  Accordingly,  the  crucial  question  is  whether  the 

present health status will remain constant in the future.  

The choice of future prevalence rates for disability 

In recent decades, a rise in disability due to mental illness has been observed. Whether this 

trend  will  continue  in  the  coming  years  is  uncertain,  and  is  not  clearly  evident  from 

academic studies. Moreover, some countries have seen disability pension claims rise as a 

behavioural feedback loop in response to legal changes, e.g. an increase in legal retirement 

ages.  Also,  future  behavioural  responses  of  this  kind  are  difficult  to  forecast.  Due  to  this 

uncertainty,  constant  prevalence  rates  should  be  used  for  the  estimation  of  pension 

entitlements. 

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55 

 
 
 
Key assumptions 5 

Data sources for compiling 
pension entitlements 

 Pension Compilation Guide 

56 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Data sources

6 

6  Data sources for compiling pension entitlements 

Different data sources can be utilised to fill in the supplementary table on pension schemes. 

For  the  figures  in  columns  A  to  F,  accounting  data  (see  Section  6.1)  and  regulatory  data 

(see Section 6.2) generally provide a suitable basis. The information for columns G and H 
can  be  partly  obtained  from  annual  government  finance  data.36  Some  rows  in  columns  G 

and H, however, have to be estimated on the basis of an actuarial model (see Section 6.3). 

The  various  data  sources  that  can  be  used  to  complete  the  supplementary  table  are 

outlined in the following sections.  

6.1  Accounting data (rows A to F) 

The  accounting  statements  of  both  private  businesses  and  (for  some  countries)  public 

bodies are guided by accounting principles for pension schemes. These principles may be 

based on one of the following international or national accounting standards:  

a)  International Accounting Standard (IAS) for private businesses 

b)  National accounting standards for private businesses 

c)  International  Public  Sector  Accounting  Standard  (IPSAS)  for  the  employer  pension 

schemes of public bodies 

These standards are explained below to facilitate the interpretation and use of pension data 
from sources that apply these accounting standards37.  

a. 

International Accounting Standard (IAS) 

The  accounting  treatment  of  pension  schemes  in  private  businesses  is  set  out  in 

International Accounting Standard 19 (IAS19 – ‘Employee Benefits’). This standard is 

mandatory  for  the  consolidated  accounts  of  listed  companies  in  Europe,  with  some 

countries extending its application (obligatory or voluntary) to individual accounts and 

unlisted companies. 

IAS19  does  not  distinguish  between  funded  and  unfunded  pension  schemes.  It  is 

based  on  the  principle  that  all  schemes  should  be  recorded  in  company  accounts. 

However,  IAS19  does  distinguish  between  defined  contribution  (DC)  and  defined 

benefit (DB) schemes, and differentiates between the accounting treatment applied: (i) 

Defined contribution schemes entail a cost to the employer in the current period, but 

the only balance sheet obligations recorded are for employer contributions not paid by 

36 The figures of column F may also be estimated by an actuarial model depending on the accounting practices. 
37 In all cases, data from any source have to be adjusted according to National Accounts valuation and principles. 

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Data sources

6 

year-end;  (ii)  Defined  benefit    schemes  entail  costs  to  the  employer  in  the  current 

period  along  with  balance  sheet  obligations  representing  the  discounted  value  of 

future pension payments. 

For  defined  benefit  schemes,  the  balance  sheet  obligations  for  pension  schemes 

under ISA19 are calculated using an actuarial model with the following characteristics: 

•  A discount rate equivalent to the market yield (on the balance sheet date) on high- 

quality  corporate  bonds  (by  convention  with  an  AA  ranking  or  better)  should  be 

used. 

•  The  ‘Projected  Unit  Credit  Method’  should  be  used;  this  method  is  equivalent  to 

the Projected Benefit Obligation (PBO) approach described in Section 2. 

•  Valuations  should  be  carried  out  regularly  and  assumptions  should  be  mutually 

consistent. 

Accounts  should  therefore  record  the  following  on  the  income  (profit  and  loss) 

statement  for  a  company  pension  scheme:  (i)  current  service  cost  (the  actuarial 

estimate of benefits earned by employee service in the period); (ii) interest cost (the 

increase in the present value of the obligation as a result of moving one period closer 
to  settlement);  (iii)  expected  return  on  the  pension  scheme’s  assets38;  (iv)  actuarial 
gains  and  losses39,  to  the  extent  recognised;  (v)  past  service  cost,  to  the  extent 

recognised;  (vi)  the  effect  of  any  plan  curtailments  or  settlements  (e.g.  pension 

reforms). 

During  the  process  of  designing  IAS19,  there  was  a  widespread  fear  that  fully 

recognising  actuarial  gains  and  losses  on  the  income  statement  would  lead  to 

excessive  volatility.  Therefore,  a  smoothing  process  was  introduced,  whereby 

actuarial gains and losses would be reflected only if they exceeded higher and lower 

bands  (known  as  the  ‘corridor’).  However,  it  should  be  noted  that  IAS19  is  currently 

under  review  by  the  International  Accounting  Standards  Board  (IASB).  According  to 
the  latest  draft  proposal  published  in  April  2010,40  the  ‘corridor’  approach  is  to  be 

abolished. In other words, it is planned to include all estimated changes in the cost of 

providing defined benefits and all changes in the value of plan assets. Furthermore, a 

38 This is the source of some controversy because the basis for calculating the expected return on assets is left 
to the discretion of the company. 
39 Representing the experience effect of outcomes compared to assumptions, and also changes in assumptions 
between one modelling exercise and the next. 
40 On the current revision of the IAS19 see http://www.iasplus.com/standard/ias19.htm#0908ed . 

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6 

new presentation approach that clearly distinguishes between different types of gains 
and losses arising from defined benefit plans is envisaged.41 

b.

National accounting standards for private businesses

As  regards  companies  that  do  not  apply  IAS,  accounting  practices  differ  across

Europe.  In  some  jurisdictions,  e.g.  the  UK,  there  is  a  national  standard  for  business

accounting  which  is  similar  to  IAS19,  while  in  other  countries  a  historical  approach

continues  to  be  used,  which  can  be  quite  different  from  IAS19.  In  Germany,  for

example, an ABO approach and a fixed interest rate were used for a long time. With

recent reforms in 2009, however, the German GAAP is now closer to IAS19, requiring

a  PBO  approach  and  a  time-variant  discount  rate  (which  is  regularly  defined  by  the

Deutsche Bundesbank).

It is important to stress that data reported by corporations for regulatory purposes may

use  a  different  basis  than  company  accounting  practices.  Generally,  it  should  be

examined  which  approach  is  applied  in  accounting  practices.  Preferably,  the

approaches used for the columns of the supplementary table should be comparable. If

e.g. both ABO and PBO data are available, the latter should be used to complete the

supplementary table.

c.

International Public Sector Accounting Standard (IPSAS)

The  international  accounting  standard  for  the  employer  pension  schemes  of  public

bodies  is  set  out  in  International  Public  Sector  Accounting  Standard  (IPSAS25  –

‘Employee  Benefits’).  This  standard  is  largely  based  on  IAS19,  including  the  use  of
the  projected  unit  credit  method42.  Yet  it  diverges  from  IAS19  in  one  main  respect:

there is more leeway concerning the discount rate, as it can be based on the yields of

either  government  or  corporate  bonds.  In  this  context,  the  IPSAS  Board  has

concluded  that  the  required  rate  should  reflect  the  ‘time  value  of  money’  and  that  in

some jurisdictions the yield on government bonds would be the most appropriate. The

new standard will apply to reporting periods commencing on or after 1 January 2011.

It  should  be  noted  that  the  IPSAS25  standard  does  not  cover  reporting  by  social

security pension schemes.

Where IAS19 or IPSAS25 based accounts are available, they can often be readily used to 

complete  the  main  parts  of  the  supplementary  table.  In  these  accounts,  the  pension 

41 More specifically, the following changes in benefit costs should be presented separately: 1) service cost — in 
profit or loss,  2) finance cost (i.e. net interest on the  net  defined benefit  liability) — as  part of finance costs in 
profit or loss and 3) remeasurement — in other comprehensive income. . 
42 Similar to the current legal status of IAS 19, the IPSAS 25 recognises a corridor approach. Presently, there is 
no 

this  approach  will  be  eliminated. 

information 

that 

 Pension Compilation Guide 

59 

Data sources

6 

entitlements  are  measured  on  an  actuarial  basis  and  the  assumptions  made  are  usually 

readily available from the notes to the accounts.  

Access  to  business  accounts  varies  between  countries.  In  some  cases,  the  full  data  are 

available  through  central  balance  sheet  offices  or  similar  central  data  collections,  while  in 

other  countries  the  collection  might  be  based  on  the  largest  companies  or  some  other 

sample-based approach. However, the data available might not be broken down by defined 

contribution schemes and defined benefit schemes — for this, regulatory data sources may 

need to be used (see below). 

6.2  Regulatory data (rows A through F) 

All  European  countries  have  a  government  agency  (or  possibly  several  agencies) 

responsible for the regulation of pension schemes (possibly life insurance, too). This agency 

will have laid down clear reporting requirements for pension schemes, usually on an annual 

basis,  though  in  some  cases  with  a  limited  collection  of  key  quarterly  data.  National 

accountants  are  usually  already  in  touch  with  this  agency,  but  close  cooperation  is 

nevertheless recommended on this point. 

While many pension regulators collect data based on business accounts (for example they 

require the annual accounts of the schemes to be provided), some data requirements relate 

to quite specific measurement and valuation standards. For example, pension requirements 

may be reported on an ABO basis while they are recorded on a PBO basis in the business 

accounts. It will be useful for national accountants to obtain the precise definitions used to 

compile  the  regulatory  data,  usually  available  as  a  technical  manual.  Comparable 

approaches should be chosen for the columns of the supplementary table. A PBO approach 

should thus be used if the necessary data are available. 

Where regulatory data are published, they will be readily available to national accountants. 

It  is  usually  helpful  to  agree  on  direct  data  transfer  from  the  pension  regulator,  possibly 

subject to safeguards on confidentiality of individual returns. 

Additionally, data on pension funds can be obtained from the European Structural Business 

Statistics. This database — which is collected by Eurostat — includes pension contributions 

(differentiated  by  defined  contribution,  defined  benefit  and  hybrid  schemes),  pension 

payments,  capital  gains  and  losses  as  well  as  liabilities.  However,  it  has  to  be  underlined 

that the data are provided with a time lag of three years. 

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6 

The European Structural Business Statistics are available at:43 

http://epp.eurostat.ec.europa.eu/portal/page/portal/european_business/data/database      

Practical examples of the use of regulatory and accounting pension data for completing the 

supplementary table are given in Section 8.2. 

6.3  Other pension data (columns G and H)  

While  non-government  employer  pension  schemes  are  usually  recorded  on  a  business 

accounting basis or subject to reporting requirements for regulatory purposes, this is often 

not  the  case  for  government-managed  pension  schemes.  Especially  for  social  security 

pension schemes, usually only cash data are available. In government employer schemes 

as  well,  regular  ‘long-term’  accounting,  e.g.  of  pension  liabilities,  is  not  widely  used. 

Therefore, 

for 

these  government-managed  pension  schemes 

the 

figures 

for 

the 

supplementary table (in columns H and G) can only be partly derived directly from statistics. 

Only some rows can be extracted from government finance data. Large parts of the rows in 

columns H and G need to be estimated with an actuarial model. 

6.3.1  Pension data directly obtained from statistics (rows 2.1, 2.3 and 4) 

Parts  of  columns  G  and  H  can  be  derived  directly  from  the  administrative  data  of  general 

government, namely for: 

•  row 2.1 (employer actual social contributions); 
•  row 2.3 (household actual social contributions); and  
•  row 4 (reduction in pension entitlements due to payment of pension benefits). 

The pension data should be recorded in gross terms and social assistance schemes should 

not  be  included.  Table  3  illustrates,  for  example,  the  aggregated  budget  data  for  Spain’s 

social security pension scheme required to complete rows 2.1, 2.3 and 4. 

If pension data cannot be obtained from administrative entities, alternative sources may be 

used. They are described in Box 7. 

43  Once  the  link  to  the  European  Structural  Business  Statistics  has  been  opened  pension  funds  data  can  be 
found under the following folder ‘SBS — services/financial services statistics/ Statistics on pension funds’. 

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Table 3 

Required aggregated budget data (social security in Spain) 

EUR billions 

Data sources

6 

Source: Müller et al. (2009). 

6.3.2  Pension data to be estimated by an actuarial approach (all rows except 

2.1, 2.3 and 4) 

Most of the rows in columns G and H — namely all rows other than 2.1, 2.3 and 4 — need 

to  be  estimated  by  means  of  an  actuarial  model.  Different  actuarial  tools  already  exist 

across  European  countries, 

ranging 

from  simple  dynamic  simulation  models 

to 

comprehensive stochastic micro-simulation models. At national level there are an increasing 

number  of  models  for  individual  pension  schemes,  often  developed  by  the  ministries  of 

finance  or  social  security  and/or  government  bodies  responsible  for  pensions.  Moreover, 

various  research  institutions  use  pension  models  for  long-term  projections  of  government-

managed pension schemes. These models may be used and extended to estimate pension 

entitlements under social security and government employee pension schemes. 

In the course of the AWG exercises, experience has been gained with a unified approach to 
long-term  projections  of  government-managed  pension  schemes.44  However,  the  concept 

used  in  these  exercises  is  an  OSL  concept  which  differs  from  the  concept  of  ADL  with 

respect  to  the  time  horizon  applied  (for  more  details  see  Box  ).  Nevertheless,  both 

approaches  —  the  estimation  of  pension  entitlements  in  national  accounts  and  the 

projections  carried  out  by  the  AWG  —  rest  upon  similar  input  data.  Therefore,  close 

cooperation  and  exchange  of  data  sources  and  underlying  assumptions  (e.g.  employment 

rates  and  productivity  growth)  between  the  Eurostat/ECB  Contact  Group  dealing  with 
estimations of ADL and the AWG is recommended.45 

For some pension schemes whose pension entitlements are reflected in columns G and H, 

actuarial estimates may already exist. These actuarial estimates may be used to fill in the 

44  The  AWG  publishes  an  ‘Ageing  Report’  including  long  term  budgetary  projections.  The  last  report  was 
published in 2009: http://ec.europa.eu/economy_finance/publications/publication14992_en.pdf . 
45 For an overview of the current national representatives in the AWG see the European Commission (2009), p. 
4ff. 

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6 

supplementary table. However, the concept and approach applied to estimate these figures 

should  be  cross-checked  against  other  data  in  the  supplementary  table.  In  particular,  it 

needs to be ascertained whether the ADL approach is always taken. 

a)  Data inputs for the actuarial estimation of pension entitlements 

Generally,  pension  data  for  actuarial  estimations  of  social  security  and  government 

employer  pension  schemes  can  be  obtained  from  the  institutions  responsible  for  the 

pension  schemes  in  question.  The  government  entities  responsible  for  a  specific  pension 

scheme  usually  collect  (and  publish)  data  on  contributors  and  pensioners  on  a  regular 

basis. 

The necessary pension data include both macro data and micro data: 

•  Generally, the required macro data cover information on total pension expenditure 

and contributions (also required for rows 2.1, 2.3 and 4) as well as the total number 

of  beneficiaries  and  contributors  differentiated  by  age  and  gender  in  a  given  base 

year. 

•  The required micro data relate to individual contribution and benefit levels in a given 

base  year  —  preferably  broken  down  by  age  and  gender.  Additionally,  individual 

accounts  stating  the  contribution  history  of  contributors  should  be  obtained  if 

available.  Some  countries  provide  their  citizens  with  periodical  information  about 

their  accrued  pension  entitlements.  The  pension  schemes  as  observable  in 

Sweden,  Poland  and  Austria  have  introduced  individual  pension  accounts  that 

explicitly  show  the  value  of  personal  entitlements.  Such  information  should  be 

collected and applied in the actuarial calculations if obtainable. However, individual 

accounts might not always be available. Furthermore, the compilation of these data 

may  turn  out  to  be  time-consuming  and  costly.  In  such  cases,  the  pension 

entitlements  of  contributors  can  be  approximated  e.g.  on  the  basis  of  present 
pensioners.46 

The  quality  of  data  sources  may  vary  across  countries  and  schemes.  For  the  actuarial 

estimation, ideally, processed data provided by the institutions responsible for the pension 

schemes  in  question  should  be  used.  The  advantage  of  these  data  is  that  they  cover 

(nearly) all members of the pension scheme and are already processed, e.g. average data 

per cohort are given. Therefore, they can be more easily used in the calculations. 

46  The  PROST  model  of  the  Worldbank  works  on  this  basis  but  also  the  Freiburg  model  —  used  for  the 
benchmark calculations of the Contact Group on pensions — uses data of present pensioners to estimate the 
pension level of future pensioners. For a detailed description see Heidler et al. (2009). 

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6 

Apart  from  publicly  available  pension  data,  files  provided  by  the  pension  scheme 

administrations may also be used. These data sets provide users with a broader and more 

detailed picture of the pension scheme. This is thus useful for modelling complex features of 

pension  schemes  such  as  e.g.  the  development  of  minimum  pensions,  which  generally 

requires detailed information on the distribution of entitlements. The application of such data 

bases may demand knowledge of statistical software and can be relatively time-consuming.  

If  no  pension  data  can  be  obtained  from  the  institutions  responsible  for  the  pension 

schemes, alternative data sources may be used as described in Box 7. 

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Data sources

6 

Box 7 
Additional data sources to compile pension entitlements 

Macroeconomic data 

ESSPROS 

One  additional  data  source  based  on  macroeconomic  data  is  the  European  System  of  Social 
Protection Statistics (ESSPROS) maintained by Eurostat. It contains statistics on the financial flows 
of social security expenditure and receipts. ESSPROS is based on registers and other administrative 
sources,  surveys,  and  estimates  by  EU  Member  States  and  is  designed  to  provide  a  comparable 
data base for EU countries plus Iceland, Switzerland and Norway. Pension data are categorised by 
various  types  of  pensions  such  as  old  age  pension,  disability  pension  or  survivor’s  pension. 
ESSPROS data are generally available with a time lag of 2–3 years. Similar to the distinction made 
between social insurance and social assistance pension schemes — the latter are not to be included 
in the supplementary table (see Section 3) — ESSPROS divides benefits into means-tested benefits 
and  those  that  are  not  means-tested.  However,  ESSPROS  should  only  be  used  if  no  other  data 
sources  are  available  because  it  lacks  precision  on  a  number  of  issues.  For  example,  it  provides 
only limited information on the number of beneficiaries, which is differentiated by gender but not by 
age.  Furthermore,  it  does  not  provide  aggregated  contribution  data.  Also,  no  distinction  is  made 
between government employee and social security pension schemes. 

COFOG 

Another macroeconomic data source refers to data based on the Classification of the Functions of 
Government  (COFOG),  which  is  compiled  under  the  ESA  transmission  programme.  It  provides  a 
breakdown  of  general  government  expenditure  by  economic  function  and  by  type  of  transaction. 
Pension data are divided into old age, survivor, and sickness/disability pensions. It should be noted 
that  COFOG  data  provide  only  a  very  rough  overview  of  pension  expenditure  aggregates.  They 
cannot  give  a  differentiated  picture  of  pensions  since  they  do  not  distinguish  between  social 
insurance  and  social  assistance.  Furthermore,  no  differentiation  is  made  between  government 
employee and social security pension schemes. Also, the category of sickness and disability benefits 
should ideally be split into two groups — sickness and disability — since only the latter is relevant for 
the supplementary table. Accordingly, COFOG data should only be used for the supplementary table 
if no other data source is available.  

Microeconomic data 

National and EU household surveys 

Household surveys focus on the living conditions of representative households and generally cover 
pensioners too. Household surveys are usually available at national level but also at European level. 
Since  national  surveys  generally  cover  a  larger  sample,  it  is  recommended  to  use  these  data 
sources.  If  national  household  surveys  are  not  available,  European  household  surveys  should  be 
used.  

One  major  European  household  survey  is  the  European  Union  Statistics  on  Income  and  Living 
Conditions  (EU-SILC),  which  was  launched  in  2003  and  collects  comparable  multidimensional 
micro-data  on  income,  poverty,  social  exclusion  and  living  conditions  on  an  annual  basis.  Every 
year, both cross-sectional data (covering a given time or a certain time period) and longitudinal data 
(relating to individual-level changes over time, observed periodically over — typically — a four-year 
period)  are  collected.  EU-SILC  covers  all  EU  Member  States  as  well  as  Iceland  and  Norway.  It 
differentiates  between  various  pension  types,  namely  old  age,  survivors,  disability  and  sickness 
benefits. Furthermore, benefits are distinguished by whether they are paid out by a pension scheme 
managed by general government or not. The same differentiation applies to contributions. However, 
EU-SILC  does  not  differentiate  between  pensions  paid  out  by  government  employee  and  social 
security pension schemes.  

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6 

Before using household survey data, it has to be examined whether the individuals covered by the 
household  survey  are  representative  of  the  members  of  the  pension  scheme  analysed.  Generally, 
these surveys cover a sample characteristic of the overall population. Therefore, household surveys 
may be a particularly suitable alternative data source for social security pension schemes 

b)  Further quality issues and benchmarking 

While  the  estimation  of  pension  entitlements  should  be  based  on  a  harmonised  approach 

across Europe, this may not always be feasible in practice. Nonetheless, to ensure accurate 

estimations, the following general guidelines should be followed:  

•  Pension data and estimations should be divided by gender; this is necessary since 

men and women show differences not only in the level of contributions and pensions 

but also in expected life expectancy, and should therefore be modelled separately.  
•  Pension data and estimations should be differentiated by age; pension entitlements 

should ideally be calculated in one-year age groups (i.e. entitlements of a 20-year-

old,  21-year-old  etc.  should  be  calculated),  which  can  considerably  improve  the 

accuracy of results since e.g. pension reforms may affect a cohort born in the year 

but not in the year 

. 

It  is  furthermore  recommended  to  divide  participants  of  a  pension  scheme  into  present 

beneficiaries  and  future  beneficiaries,  i.e.  present  contributors.  The  latter  have  accrued 

pension  rights  but  have  not  yet  received  any  payment,  while  present  beneficiaries  have 

accrued  ‘full’  entitlements  and  are  receiving  payments  from  the  pension  scheme.  Both 

groups  may  also  be  differently  treated  due  to  pension  reforms  and  indexation  rules.  It  is 

thus reasonable to estimate the pension entitlements of these two groups independently.   

Pension  models  are  usually  relatively  complex  —  often  considered  even  a  ‘black  box’. 

Therefore, benchmarks are crucial in order to cross-check the plausibility of the outcomes. 

This is particularly the case when new pension models are introduced to estimate pension 

entitlements.  Here,  the  probability  of  error  is  generally  higher  than  in  frequently  used  and 

well-established  models.  Different  generic  models  can  be  used  for  benchmarking  and 

quality  assurance.  These  include  the  World  Bank’s  pension  reform  modelling  software 

PROST,  although  generational  accounting  models  can  be  used  for  benchmark  exercises 
too.47 

47 For an application of PROST to estimate pension entitlements see e.g. Holzmann et al. (2004) who examined 
public pension schemes of 35 low and middle income countries. For an application of generational accounting 
see e.g. Müller et al. (2009) who calculated ADL of government employee and social security pension schemes 
in 19 EU countries. This model is outlined as a worked example in section 8.1. 

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A  high  level  of  transparency  in  the  compilation  process  should  be  ensured.  Countries  are 

therefore  encouraged  to  publish  a  description  of  the  compilation  of  the  supplementary 

figures.  This  may  include  an  outline  of  the  actuarial  model  used  to  estimate  pension 

liabilities as well as a description of the external actuarial valuations and data sources used.  

Data sources

6 

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Data sources

6 

Description of the approach to 
estimating pension 
entitlements for government-
managed pension schemes 

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68 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

7  Description of the approach to estimating 

pension entitlements for government-managed 
pension schemes 

7.1  Overview 

The aim of the following section is to outline step-by-step the procedure to estimate pension 
entitlements  of  unfunded  public  pension  schemes.  The  actuarial  approach48  to  estimating 

these new figures in national accounts is presented in a general way to provide a description 

which  can  be  applied  for  a  variety  of  pension  schemes.  This  chapter  will  address  a  broad 

audience,  including  actuaries,  as  well  as  non-actuaries  (statisticians,  data  compilers,  etc). 

Against this background, the calculation procedure is outlined using formal equations as well 

as  various  illustrative  examples.  Furthermore,  this  section  is  intended  to  assist  countries 

which have not yet (fully) built up a model to calculate accrued-to-date pension liabilities. 

Before the calculation procedure is outlined, it is useful to state the aim: pension entitlements 

accrued-to-date  of  all  public  unfunded  pension  schemes  in  the  country  concerned.  This 

figure  represents  the  sum  of  entitlements  of  each  participant  in  the  relevant  pension 

schemes. Of course, individual entitlements differ by age and gender. Figure  illustrates the 

typical distribution of pension entitlements, by age groups as well as by gender. Cohorts at 

the  age  of  retirement,  i.e.  around  the  age  of  60,  have  usually,  accrued-to-date  comparably 

high  pension  entitlements.  They  have,  generally,  contributed  to  a  pension  scheme  over  a 

longer period than younger cohorts, and have therefore accrued higher pension entitlements. 

Furthermore, cohorts at the age of retirement usually show a higher value of pension rights 

than  older  age  groups.  This  is  mainly  due  to  the  fact  that  only  future  pension  benefits  are 

taken  into  account  in  the  calculations.  New  retirees  can  look  forward  to  a  relatively  longer 

remaining retirement period. Older retirees, on the other hand, have already received some 

of  their  pension  benefits.  Their  entitlements  are,  therefore,  accumulated  over  a  shorter 

remaining pension period.  

48  As  outlined  in  section  2  an  actuarial  calculation  bases  on  a  forward  looking  approach.  For  the  estimation  of 
pension entitlements it is, simply speaking, applied to project pension benefits in the future and to accumulate and 
discount them finally to the present value of the base year. . 

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Estimating entitlements for government-managed pension schemes 7 

Figure 10 

 Example showing distribution of pension entitlements by age and gender 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

Besides  age-specific  differences,  differences  in  pension  rights  between  genders  are  also 

apparent.  As  displayed  in  Figure  10,  women  have  usually  accrued  lower  pension 

entitlements than men. Such gender differentials may be explained by, for instance, shorter 

contribution periods, as well as lower average wages for women, which result in comparably 

lower  pension  benefits  and  entitlements.  To  estimate  accrued-to-data  liabilities,  these  age- 

and gender-specific differences in pension entitlements should be taken into account.  

Two major steps are required to estimate accrued-to-date pension liabilities. In the first step, 

average pension entitlements of different age and gender groups are estimated, as illustrated 

in Figure 10. 

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Estimating entitlements for government-managed pension schemes 7 

Figure 11 

Exemplary cohort sizes by age and gender 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

In a second step, these group-specific pension rights (shown in Figure 10) are multiplied by 

the  respective  age-  and  gender-specific  cohort  sizes  of  the  pension  scheme  members 

(displayed in Figure 11Figure ). Step 2 generates the final result: the total value of pension 

entitlements. To give a general overview, both major steps to calculate pension liabilities are 

displayed in Figure 12 below. 

Figure 12: Overview on the calculation of pension entitlements 

Step  1:  Estimating  age-  and  gender-
specific average pension entitlements 

Step  2:  Weighting  these  average 
pension  entitlements  by 
the 
respective cohort sizes 

x

= 

Pension 

entitlements 

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71 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

Step 1 (Chapter 7.2 – 7.4) considers the pension entitlements of a single participant. In step 

2 (Chapter 7.5), these individual pension rights are aggregated. 

7.2  Estimating individual pension entitlements 

Pension entitlements represent the sum of all future pension benefits which are accrued-to-

date  in  present-value  terms  of  a  base  year.  The  approach  to  calculating  this  figure  will  be 

demonstrated below. A formal outline will be given first, to provide an introduction, especially 

for actuaries. Then the estimation approach will be illustrated through various examples. 

Formal outline of the estimation approach 

Equation  5  presents  the  general  approach  to  calculating  pension  entitlements.49  In  the 

following sections, further extensions of this formula are discussed. 

(5)

E

x,g,b

=

where 

D

∑

= +
s x
1

B

accrued

s g f
,
,

*

p
s g f
,
,

*(1

+

r −
x s
)

=  the  pension  entitlements  of  a  representative  individual  of  age  and  gender

  in 

the base year  ,  

=  the annual pension benefits accrued-to-date of a representative individual at age 

 and gender 

 in a future year 

 ), 

=  the probability of a representative individual of gender 

 of surviving to age  in a 

future year

 ),50 

=  the maximum life time, 

=  the discount rate. 

The aim is to calculate pension entitlements 

for an average representative of different age 

groups 

  and  genders 

in  a  given  base  year 

.  The  variable 

  denotes  the  annual 

49  Please  note  that  the  following  definitions  may  not  be  fully  applicable  for  disability,  survivors’  and  early 
retirement  pensions.  It  should  be  e.g.  taken  into  account  that  after  the  death  of  a  retiree  his/her  surviving 
spouses/orphans  (if  existing)  are  entitled  to  a  survivors’’  pension  benefit.  For  a  further  description  of  the 
differentiation by pension type see section 7.4.4. 
50  These  survival  rates  should  reflect  the  expected  increase  of  the  life  expectancy  according  to  the  newest 
EUROPOP projections. For a further discussion see section 5.3. 

 Pension Compilation Guide 

72 

 
 
 
 
 
 
 
                                                            
Estimating entitlements for government-managed pension schemes 7 

pension  level  accrued-to-date.  How  to  derive  this  pension  level  accrued-to-date  is  then 

discussed  in  detail.  It is  important  to  note  that  only  future  pension  payments  are  taken  into 

account for the estimation of pension entitlements. All payments durin g or before the base 

year are disregarded. Therefore, the control variable   starts with the age 

 i.e. one year 

after  the  base  year,  and  ends  at  the  age 

.  In  this  context,  the  variable 

  denotes  the 

highest  maximum  life  time  considered  in  the  calculations.  Usually,  a  level  of  100  years  is 

chosen  for  the  variable 

.  Pension  entitlements  represent  the  expected  amount  of  pension 

payments  accrued-to-date.  In  line  with  this  concept,  future  survival  rates  are  taken  into 
≤ is 
1)

account  for  the  calculation  of  entitlements.  For  this  purpose,  the  variable 

p≤

  (0

introduced. It represents the probability of an individual of gender  surviving to a certain age 

  (in  the  year 

).  In  accordance  with  the  applied  present  value  concept,  all  future 

pension payments are discounted to the base year. 

Distinguishing between current retirees and current contributors 

For  the  estimation  of  pension  liabilities,  it  is  important  to  distinguish  between  pension 

entitlements  accrued  by  present  retirees,  and  pension  entitlements  accrued  by  current 

contributors.  The  former  group  has  its  working  and  contribution  period  behind  it,  and  is 
therefore  already  entitled  to  full  pension  benefits.51  For  the  estimation  of  accrued-to-date 

liabilities,  it  is  important  to  take  into  account  that  current  contributors  have  not  yet  accrued 

100 per cent of their future (expected) full pension benefits upon retirement. They still have 

an (expected) contribution period ahead of them, whether this is one year (in case of a 59-

year-old) or 40 years (in case of a 20-year-old, in our example). It is strongly recommend to 

distinguish  between  present  retirees,  who  have  already  accrued  full  pension  benefits,  and 

present contributors, who have only partially accrued their future full pension benefits. Figure 

13 illustrates this important distinction. 

51 Of course, in some pension systems — such as in Germany — it is possible to contribute and accrue further 
pension rights after receiving a pension benefit. . 

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Estimating entitlements for government-managed pension schemes 7 

Figure 13 

Differentiation between present contributors and retirees 

Pension entitlements reflect the present value of all future pension benefits which have been 

accrued-to-date. Contrary to other figures in national accounts, accrued-to-date liabilities are 

not  calculated  solely  on  the  basis  of  historic  data;  rather  a  projection  of  future  pension 

payments is required. This forward-looking approach will be discussed in further detail below. 

First, the actuarial method for estimating pension entitlements for current pensioners will be 

outlined  (Chapter  7.3).  Then  an  equivalent  description  will  be  provided  for  present 

contributors  (Chapter  7.4).  The  following  two  sections  always  consider  an  average 

representative of a certain age group and gender.   

7.3  Estimating individual pension entitlements for current 
retirees 

Current  pensioners  are  entitled  to  pension  benefits  on  the  basis  of  past  accrued  pension 

rights.  As  outlined  above,  this  group  is  entitled  to  full  pension  benefits.  In  other  words,  the 

benefits  they  receive  in  the  base  year  are  fully  accrued.  It  is  important  to  note  that  current 

pensioners  are  entitled  to  pension  benefits  not  just  for  one  year  but,  in  fact,  to  all  future 
pension  payments,  usually  until  they  die.52  To  illustrate  the  estimation  approach  for  current 

retirees, see the example in Box 8. 

52 In fact, one may furthermore attribute future survivor’s benefits — which accumulate after the death of present 
retirees — to the entitlements of current pensioners. For a further description see Box 18. . 

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Estimating entitlements for government-managed pension schemes 7 

Estimating pension entitlements for current retirees 

Box 8 

To  outline  the  estimation  approach  applied  for  current  retirees,  take  the  example  of  an  average 
male pensioner, aged 70. His pension entitlements are relatively straightforward to calculate. The 
current  retiree’s  pension  benefit  level  is  projected  over  his  remaining  (expected)  life  span. 
Generally,  the  pension  data  needed  for  this  projection  can  be  obtained  from  the  respective 
pension  scheme  institutions,  while  assumptions  on  the  (contingent)  life  expectancy  should  be 
obtained  from  Eurostat.53  For  the  following  example,  the  representative  retiree  will  receive  an 
annual  pension  payment  of  EUR  10,000  in  the  year  2010.  His  life  expectancy  at  age  70  is  10 
years. In other words, he can expect to receive EUR 10,000 per year over an (expected) period of 
10 years, which adds up to EUR 100,000 over the rest of his retirement. 

Calculation of the present value of pension entitlements 
Pension  entitlements  represent  the  aggregated  present  value  of  future  pension  payments.  In 
accordance  with  this  present  value  concept,  pension  benefits  in  the  far  future  are  generally 
considered  less  valuable  than  present  pension  payments.  To  estimate  entitlements,  therefore,  a 
discount factor is applied — described in Section  5.1 — to translate future pension benefits into 
present-value  terms.  As  a  consequence,  a  pension  payment  of  EUR  10,000  in  10  years  is,  for 
instance, worth only EUR 7,440 in present-value terms at a discount rate of 3 per cent. The blue 
bars in Figure 14 represent the respective present values of the future pension payments.  

Figure 14 
Aggregating annual pension benefits in present value terms 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

In the final result, pension entitlements are calculated by summing up all future pension payments 
in present- value terms. In this example, the total pension entitlements of a 70-year-old pensioner 
would  amount  to  about  EUR  85,000  EUR.  From  the  point  of  view  of  the  government,  this  figure 
represents the accrued-to-date pension liability. In other words, the value of EUR 85,000 reflects 
the amount of money which has to be set aside today by the government to finance all accrued 
pension rights of the hypothetical 70-year-old average retiree. 

53 For a further description of the demographic data and assumptions see section 5.3. 

 Pension Compilation Guide 

75 

 
 
 
                                                            
 
Choosing a base year for the calculations 

Estimating entitlements for government-managed pension schemes 7 

Only future pension benefits over the remaining life cycle of an individual are considered in 

estimating  pension  entitlements.  All  pension  benefits  received  in  the  past  —  or  more 

precisely, before the end of a certain base year — are not taken into account. The pension 

payments considered, therefore, depend on the base year applied. If the base year is 2010, 

the  aim  is  to  estimate  the  stock  of  pension  entitlements  at  the  end  of  the  year  2010  for 
inclusion in row 10 of the supplementary table of the base year 2010.54 

Consideration of pension indexation rules 

For the calculation of entitlements, the indexation practice of the respective pension scheme 

should, possibly, be reflected. Most EU countries, including, for instance, France and Spain,  

adjust pension benefits annually in accordance with the change in the consumer price index 

(CPI).  This  is  ‘price  indexation’.  Several  EU  countries,  for  instance,  Slovenia  or  the 

Netherlands,  base  annual  pension  adjustments  on  general  wage  growth  in  the  economy. 

This is referred to as ‘wage indexation’. Other countries have a mixed indexation system. In 

their annual pension indexation changes, they consider the CPI and, to some extent, wage 
growth.55 In accordance with the respective pension indexation, an accrued pension benefit 

in  year 

  may  differ  from  that  in  the  previous  year 

  (see  Equation  6).  The 

variable 

  denotes  the  annual  adjustment  factor,  which  reflects  the  indexation  rules  in  the 

respective country. 

(6)

accrued
B
+
t
1

= +
(1

a
t

+
1

) *

accrued
B
t

Before implementing country-specific indexation rules, it is crucial to decide whether future 
payments will be calculated in nominal or in real terms. As outlined in Section 5.4.1, the 
difference between these two approaches concerns the way in which future inflation is 
considered. A nominal estimation approach takes into account assumptions on future inflation, 
while a real approach disregards such expectations.56 The indexation of pensions with prices 
as well as with wages is illustrated in Box 9

Box , which shows calculating pension entitlements both in nominal and in real terms.  

54 For an overview on the new supplementary table see chapter 4. 
55 For example Finland adjusts pension benefits annually with 80 per cent of CPI changes and with 20 per cent of 
the growth of the earnings level. 
56 For a further discussion on these two approaches see section 5.4.1. 

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76 

 
 
 
  
                                                            
Estimating entitlements for government-managed pension schemes 7 

Box 9 
Estimating pension entitlements for current retirees — considering pension 
indexation rules 

Below are outlines of examples regarding pension indexation rules. The case again is a typical 70-
year-old  male  pensioner,  on  the  same  assumptions  as  in  Box  8Box  .  First,  the  application  of  a 
price indexation is described. Under these rules, an expected future price rise of e.g. two per cent 
would  translate  into  annual  pension  increases  of  two  per  cent  —  see  green  bars  in  Figure  15.  If 
future pensions are projected in real terms, an indexation of the pension in line with prices would 
imply that pensions stay constant in real terms — see red bars in Figure 15. 

Consideration of price indexation in real and in nominal terms 

Figure 15 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

As outlined in Section 5.4.1,  both approaches, a nominal and a real calculation approach, should 
lead to almost the same level of pension entitlements. It is, however, crucial that the approach used 
for  the  pension  indexation  is  also  applied  to  the  discount  rate.  In  other  words,  if  the  projection  is 
undertaken in real terms, inflation expectations should not be considered in either the discount rate, 
or the pension indexation. 

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77 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

Further assumptions have to be taken in pension schemes which apply wage-growth indexation. To 
estimate  pension  entitlements  for  these  schemes  appropriately,  assumptions  on  future  growth  of 
wages are required. For the sake of simplicity, constant wage growth of 1.5 per cent in real terms is 
assumed  in  the  following  example.  This  translates  into  nominal  wage  growth  of  3.5  per  cent.57 
Obviously, future pension levels differ if varying pension indexation rules are applied. To take the 
example of a current pensioner aged 70 again, if pensions are adjusted only according to the CPI, 
this  retiree  can  expect  an  increase  in  his  pension  benefits  from  EUR  10,000  currently  to  EUR 
12,200  (EUR  10,000)  in  nominal  (real)  terms  until  the  age  of  80.  Under  wage  indexation,  as 
observed in the Netherlands or Germany, his pension level would, on the other hand, rise to EUR 
14,100 (EUR 11,600) in nominal (real) terms at the age of 80 — see Figure 16. 

Indexation rules play an important role in the estimation of pension entitlements, since the effects of 
indexation  accumulate  over  the  entire  retirement  period.  This  is  also  apparent  in  our  example.  In 
the case of price indexation, the pension entitlements of the 70-year-old pensioner add up to about 
85 000 EUR. However, they are considerably higher, by 7 000 EUR, if wage indexation is applied to 
the entitlement.  

Consideration of wage indexation in real and in nominal terms 

Figure 16 

Source: Forschungszentrum Generationenverträge, University of Freiburg.  

Consideration of future adjustments in the benefit formula  

Besides indexation rules, future pension levels of current retirees might also be altered due 

to  future  adjustments  in  the  benefit  formula.  For  example,  the  German  statutory  pension 

scheme  has  a  sustainability  factor.  With  this  new  element  in  the  benefit  formula,  pensions 

are  adjusted  annually  in  accordance  with  demographic  and  employment  changes.  Such 

57 The level of 1.5 per cent follows closely the forecasts of the AWG on the labour productivity in EU countries. As 
discussed in section 5.2, the AWG labour productivity predictions should, possibly, be applied as a basis for the 
future wage growth. Furthermore, as outlined in chapter 5.4.1 an inflation rate of two per cent should be used in 
the calculations. This value has also been chosen in the example above. 

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Estimating entitlements for government-managed pension schemes 7 

future  alterations  in  the  benefit  formula  should  if  possible  be  taken  into  account  when 

projecting  future  pension  benefits  of  current  retirees.  The  variable 

  in  Equation  7  denotes 

such changes in the benefit formula.  

(7)

accrued

B

+
1

t

= +
(1

a
t

+
1

) *(1

+

b
t

+
1

)*

accrued
B
t

For  the  estimation  of  entitlements,  it  has  to  be  taken  into  account  that  in  most  European 

countries,  future  adjustments  in  the  benefit  formula  affect  only  future  new  pensioners,  i.e. 

current (and future) contributors. For example, the future rise in the age of retirement in the 

United  Kingdom,  or  the  gradual  change  of  accrual  factors  in  Portugal,  only  play  a  role  for 

future new pensioners. Such changes in the benefit formula will be discussed in Section 7.4 

below, which outlines the estimation procedure for future new pensioners. 

The  conclusion  is  that  data  on  the  annual  pension  level  and  life  expectancy  are 

required 

for 

the  estimation  of  pension  entitlements  of  current  pensioners. 

Furthermore,  pension  indexation  rules  as  well  as  future  adjustments  in  the  benefit 

formula  of  the  respective  pension  scheme  should  be  reflected  in  the  calculation 

procedure. To obtain the present value of entitlements, a discount rate of, preferably, 

three (five) per cent in real (nominal) terms should be applied. 

7.4  Estimating individual pension entitlements for current 
contributors 

7.4.1  A general overview 

The estimation of pension entitlements for current contributors closely follows the approach 

described  in  the  previous  section.  However,  two  further  aspects  need  to  be  considered 

when calculating the accrued pension rights of this group. On the one hand, the fact should 
be taken into account that present contributors are not yet entitled to the full pension58 they 

would receive after a complete contribution career. On the other hand, current contributors 

are not yet retired. Hence, their future pension payment needs to be newly estimated. 

Current contributors are, generally, expected to accrue further pension rights in the future. 

This  differentiates  them  from  current  retirees.  To  indicate  the  extent  to  which  a  future  full 

58  A  full  pension  is  defined  as  the  pension  level  one  receives  after  the  completion  of  the  individual  contribution 
career. The individual contribution career may vary considerably. Some individuals may retire already at the age 
of 40 due to a disability while others finish their contribution career not until the age of 65 or later. Consequently, 
also the full pension levels can differ. This aspect is discussed in further detail in the following sections. 

 Pension Compilation Guide 

79 

 
 
 
  
                                                            
pension 

has  been  accrued-to-date,  the  so-called  accrual  factor 

  is  introduced  (see 

Estimating entitlements for government-managed pension schemes 7 

Equation 8).59 

(8)

E

x,g,b

=

D

∑

= +
1
s x

B

full
,
,
s g f

λ
*

x,g,b

*

p
,
,
s g f

*(1

+

r

)

−
x s

s g fB

accrued
,
,

Equation  8  illustrates  the  link  between  the  estimation  of  pension  entitlements  and    other 

pension projections such as the AWG exercises. While the latter group, generally, takes into 

account  only  pensions after  a  full  contribution career  (

,  the ADL  approach  considers 

only  a  certain  proportion  (

  of  such  ‘full’  pensions  (in  the  case  of  current  contributors).  In 

other  words,  only  accrued-to-date  pension  benefits  (

)  are  considered  in  ADL 

calculations. 

The value of  (0

1)λ≤ ≤  may differ by age and gender. For present pensioners, the accrual 

factors sum by definition to unity, i.e. they are fully entitled to their pensions paid in future 

years.  For  current  contributors,  who  are  still  expected  to  earn  further  pension  rights  in 

future, the accrual factor, generally, amounts to less than unity. 

For present pensioners, the level of pension benefits can be obtained from the institutions 

responsible  for  the  respective  pension  scheme.  For  current  contributors,  on  the  contrary, 

this  future  retiree  income  has  to  be  newly  estimated.  The  following  two  sections  describe 

how to estimate the initial annual pension benefit accrued-to-date (

 at the point of 

retirement r.  

Generally, there are two approaches for calculating the ‘starting pension’ to which a current 

contributor  is  entitled.  On  the  one  hand,  the  estimation  may  be  based  on  the  assumption 

that  all  contributors  feature  homogeneous  contribution  careers  (homCC).  With  this 

approach,  future  pension  levels  of  current  contributors  are  not  estimated  using  past 

contribution data. In fact, future retirement benefits are approximated on the basis of current 

pension  levels.  This  approach  has  the  advantage  of  significantly  limiting  the  input  data 

required  for  estimations,  so  data  on  past  contributions  can  be  (partly)  disregarded.  The 

homCC  approach  is,  therefore,  recommended  if  no  or  only  limited  contribution  data  are 

available.  Alternatively,  heterogeneous  contribution  careers  (hetCC)  may  be  considered. 

59 Please note that Equation 8 follows the same notation as Equation 5. 

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Estimating entitlements for government-managed pension schemes 7 

This  approach  requires  comprehensive  data  on  past  contributions.  The  hetCC  approach 

has  the  advantage  of  reflecting  cohort-specific  employment  careers.  Its  application  may 

therefore lead to more accurate estimations than the homCC approach. 

The  following  sections  are  structured  as  follows:  first,  the  estimation  of  the  initial  annual 

pension  benefit  accrued-to-date  (

  is  outlined,  applying  a  homCC  approach 

(Chapter  7.4.2)  and  a  hetCC  approach  (Chapter  7.4.3);  then  (in  Chapter  7.4.4),  these 

annual pension benefits will be projected over the remaining retirement phase to calculate 

the final result, namely the pension entitlements of current contributors. 

7.4.2  Estimating the initial pension by applying homogeneous contribution 

careers  

With  the  homCC  approach,  future  accrued-to-date  pension  benefits  (

)  of  current 

contributors  are  not  directly  calculated  on  the  basis  of  past  contribution  data.  In  fact, 

  at  the  future  point  of  retirement  r  is  estimated  from  current  pension  levels.  This 

small detour helps to limit the required data inputs for estimations, namely to limit the data 

on  past  contributions.  This  procedure,  therefore,  can  be  valuable  for  countries  wishing  to 

limit  the  data  input  for  calculations.  A  worked  example  applying  the  homCC  approach  is 

provided in Chapter 8.1. 

The estimation under the homCC approach proceeds as follows. In the first step, future full 

pensions60 

  of  current  contributors  are  estimated  using  the  pension  data  of  current 

retirees.  The  second  step  takes  into  account  the  fact  that  current  contributors  are  only 

partially  entitled  to  their  expected  full  pension 

which  is  accounted  for  with  the  so-

called  accrual  factor

.  Equation  9  summarises  formally  the  steps  for  the  estimation  of 

.  

(9)

accrued

B

full

λ
= B
*
{ {
Step
Step
2
1

Both  steps  —  1)  the  approximation  of  future  full  pensions  and  2)  the  estimation  of  the 

accrual factor — are outlined in detail below.  

60  As  outlined  before  a  full  pension  is  defined  as  the  pension  level  one  receives  after  the  completion  of  the 
individual contribution career. 

 Pension Compilation Guide 

81 

 
 
 
 
 
 
                                                            
Step 1: Approximation of future full pensions 

Estimating entitlements for government-managed pension schemes 7 

For the first step, the approximation of future full pensions

 of current contributors, the 

basis can be the pension data of present retirees. It is assumed that future full pensions of 
current  contributors  are  equivalent  to  pension  benefits  of  current  new  pensioners.61  All 

future  new  retirees  are  assumed  to  have  the  same  contribution  history  as  present  new 
pensioners,  i.e.  using  homCC  as  a  basis.62  As  a  consequence,  future  new  retirees  will 
receive (almost)63 the same pension benefit as current pensioners.   

In a flat-rate pension scheme, the homCC approach implies that all cohorts are assumed to 

have  the  same  number  of  contribution  years  at  the  point  of  retirement  as  current  new 

pensioners.  In  an  earnings-related  pension  scheme,  this  assumption  would  mean  that 
contributors  show  not  only  the  same  contribution  periods  but  also  (almost)64  the  same 

reference earnings over their contribution career as present pensioners. A formal outline of 

the  procedure  to  estimate  full  pensions  of  future  new  pensioners  is  provided  below.  As  a 

start, the pension benefit 

of a new pensioner in the base year  would be equivalent to 

the  pension  of  a  new  retiree  in  the  following  year 

,  as  outlined  in  Equation  10.  Of 

course, Equation 10 ignores the impact of 1) pension reforms and 2) indexation effects. 

(10)

B

full

+
1

b

=

full
B
b

Most  European  countries  have  implemented  profound  pension  reforms  in  recent  years. 

Usually, these reforms will lower the level of pensions for future new retirees. Therefore, a 
deduction factor  θ should be applied (defined by a reform or, for instance, inherent in the 

benefit formula, as in the notional defined contribution scheme). 

61 It is recommended to base on the contribution history of present new pensioners and not all current pensioners. 
The  former  group  is  temporally  ‘closer’  to  current  contributors.  Therefore,  their  contribution  history  can  be 
assumed  to  be,  generally,  more  similar  to  current  contributors.  This  is  e.g.  the  case  when  looking  on  female 
participation rates. While very old female retirees often show low participation rates, new female retirees feature, 
usually,  a  higher  labour  activity  over  their  contribution  history  which  is  more  comparable  to  current  female 
contributors. 
62  It  should  be  stated  that  such  an  assumption  is  only  reasonable  in  pension  schemes  which  are  sufficiently 
matured. 
63  Of  course,  the  pension  level  of  future  new  retirees  might  differ  from  current  retirees  even  if  one  assumes 
homogeneous  contribution  histories.  For  example  pension  reforms  may  lower  pension  levels  of  future  new 
retirees. This aspect is considered later in the text. 
64 We will outline later that not exactly the same reference earnings should be assumed. In fact, one should take 
into  account  wage  growth  effects,  i.e.  one  should  consider  (under  the  PBO  approach)  that  reference  earnings 
increase yearly with the general wage growth in the economy. . 

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Estimating entitlements for government-managed pension schemes 7 

=

full
B
b

θ
*
+
b
1

+
*(1 )
v

(11)

full

B

+
1
b

Secondly,  pre-retirement  indexation  effects  need  to  be  considered.  The  valorisation  of 

pension  rights  of  current  contributors  up  to  the  point  of  retirement  should  be  taken  into 

account. In a number of countries, past entitlements are indexed annually to wage growth. 
These pre-retirement indexation effects are reflected with the valorisation factor v.65  

In schemes where past pension rights are indexed only to prices, the valorisation factor also 

comes  into  play.  Here  future  pensioners  have,  usually,  earned  higher  reference  earnings 

than present retirees, due to general wage growth in the economy. As a result, they should 

in  earnings-related  pension  schemes  benefit  from  higher  pensions  than  their  present 
counterparts.66  This  aspect  is  also  taken  into  account  with  the  valorisation  factor  v  in 

Equation 11.  

Step 2: Estimating the proportion of the full pension entitlements accrued-to-date 

The second step takes into account the fact that current contributors are not yet fully entitled 
since  they  are,  generally,  expected  to  accrue  further 
to  their  future  full  pension 

pension  rights.  In  fact,  current  contributors  are  only  entitled  to  a  fraction  of 

  which  is 

denoted by the so-called accrual factor  . 

The crucial question is the extent to which current contributors are entitled to their future full 

pensions. The answer depends on the choice between the ABO and the PBO approach, as 

described in Section 2.2. Generally, the PBO approach should be applied for the estimation 
of  government-managed  defined  benefit  pension  schemes.67  Against  this  background,  the 
following  description  of  the  accrual  factor  is  based  on  the  PBO  method.68  Generally,  the 

65 Under the ABO approach v would equal to zero in schemes with a wage-indexation. 
66  For  an  illustration  we  want  to  imagine  a  final  earnings  scheme  where  the  pension  level  depends  on  the  last 
earnings in the year before retirement. We want to compare the initial pension benefit of a 60 year old new retiree 
in 2010 and a 60 year old new pensioner in 2020. Due to the future general wage growth the last earnings of the 
new retiree in 2020 are expected to be higher than the last salaries of its ‘2010-counterpart’. In accordance with 
the benefit formula, also the initial pension benefit of ‘2020-retiree’ would be greater than the pension payment of 
the  new  retiree  in  2010.  This  example  outlines  that  even  if  past  earnings  are  ‘only’  indexed  to  prices,  wage 
increases need to be considered under the homCC approach. 
67 As stated in chapter 17 of the ESA 2010(paragraph 17.177) the PBO approach should be followed where the 
benefit  formula  ‘includes  implicitly  or  explicitly  a  factor  for  wage  increases  (before  or  after  retirement)’.  With  the 
PBO approach reference earnings applied in the pension benefit formula are projected over the entire (remaining) 
contribution career. In this sense the PBO approach is similar to the projected unit credit method — widely used in 
the private sector accounting (e.g. in IAS). 
68 It should be noted, that the accrual factor can also be applied — after a few modifications — for the calculation 
of ABO entitlements. 

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accrued  proportion  of  the  full  pension  under  the  PBO  approach  depends  on  contribution 

Estimating entitlements for government-managed pension schemes 7 

periods (see Equation 12). 

(12)

=
λ

base year

c
retirement
c

≈

−
e
x
−
l e

Where 

   = the contribution periods of the participant until the base year, 

= the total expected contribution periods of the participant until retirement,69  

= the age of the participant in the base year, 

= the age at which the participant entered the pension scheme, 

 = the expected retirement age of the pension scheme participant,70 

As outlined in Equation 12, the level of the accrual factor depends on the ratio of contribution 

years accrued until the base year (

) to the (expected) total number of contribution 

years  upon  retirement  (

).  A  longer  accrued  contribution  period  automatically 

translates into higher pension entitlements.  

In  the  absence  of  data  on  contribution  years  accrued  until  the  base  year  (

),  this 

figure  can  be  approximated  by  subtracting  the  age  at  which  the  scheme  member  started 

paying contributions ( ) from the age in the base year ( ) — as outlined in Equation 12. The 

value of total contribution years upon retirement (

) is then calculated in the same 

way.  To  illustrate  the  approach  to  estimating  the  accrual  factor  further,  some  illustrative 

examples are given in Box 10. 

69 In case of disability pensions 
expected  to  become  disabled  while  in  case  of  survivors’  pensions 
periods at the expected age of death of the pension scheme participant. 
70 Please note that this definition holds for old age and early retirement pensions. In case of disability pensions   
denotes the age when an individual is expected to become disabled while for the estimation of survivors’ pensions 
  represents  the  expected  age  of  death  of  the  pension  scheme  participant.  For  a  further  discussion  on  a 
differentiation of the estimations by pension type see section 7.4.4. 

denotes the total contribution periods of the participant when he/she is 
  represents  the  total  contribution 

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Estimating entitlements for government-managed pension schemes 7 

Box 10 

Estimating pension entitlements for current contributors — the accrual factor 

The case of an average contributor, aged 40 in the base year 2010, will provide an example of how 
to  estimate  the  accrual  factor.  Selection  of  a  base  year  always refers  to  the situation  at  the  end of 
that  year.  This  case  takes  a  40-year-old  at  the  end  of  2010  with,  for  simplicity,  a  birthday  at  the 
beginning of 2011. The 40-year-old is assumed to have accrued 20 out of 40 contribution years in a 
final-earnings pension scheme, and is expected to retire at the age of 61. The accrual rates applied 
in  the  benefit  formula  are  constant  over  the  contribution  career.  Under  the  PBO  approach,  this 
individual is not yet entitled to a full pension. In fact, he/she has accrued 50 per cent of his/her full 
pension. This value is calculated on the basis of the relative contribution history. The 40-year-old can 
only look back on 20 contribution years out of 40 (expected) contribution years. For the calculation of 
entitlements, the accrual factor would, therefore, amount to 0.5. 

A  21-year-old  contributor  who  also  started  to  contribute  at  the  age  of  21  and  who  likewise  looks 
forward to  retiring at 61 with 40 contribution years is, however, entitled to a considerably lower future 
pension benefit as of end-2010. At the end of the base year, this individual can look back on just one 
contribution  year  out  of  an  expected  40.  Due  to  this  relatively  short  contribution  record,  this 
contributor has accrued pension rights amounting to only 2.5 per cent (=1/40) of his/her (expected) 
full pension. Figure 17 illustrates the relationship between the proportion of the full pension accrued-
to-date and the relative contribution history. It displays the accrual factor for each age group. To keep 
the  example  simple,  it  is  assumed  that  one  contribution  year  is  accrued  in  each  year  of  the 
contribution career. 

Proportion of full pension accrued-to-date (PBO approach) 

Figure 17 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

Of  course,  the  proportion  of  the  full  pension  accrued-to-date  depends  on  the  starting  and  finishing 
point of the individual contribution career. A further example is a 40-year-old contributor who started 
to contribute at the age of 24 and who can be expected to retire at 66. This 40-year-old would not be 

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Estimating entitlements for government-managed pension schemes 7 

entitled to 50 per cent of his/her full pension benefit, but only to roughly 38 per cent (=17/42) — see 
Figure 1.71  

Proportion of full pension accrued-to-date (PBO approach) — varying contribution 
behaviour 

Figure 18 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

The examples outline that the starting point (the age at which contributions are first paid) as well as 
the  finishing  point  of  the  contribution  career  (the  expected  retirement  age)  are  significant  for  the 
estimation of the accrual factor. The choice of these parameters is outlined below. 

Choosing the age to pay first contributions 

For the estimation of the accrual factor, the number of contribution periods accrued until the 

base year are required. If such data is not available, one may approximate this figure on the 

basis of the average age at which contributions are first paid (see Equation 12). Generally, 

this starting point is usually at the age of 20 across European pension schemes. However, in 

government  employee  pension  schemes,  the  age  may  vary  due  to  specific  employment 

policies  in  the  government  sector.  The  age  at  which  contributions  are  first  paid  can  be 

derived from contribution data which is usually obtainable from the institutions responsible for 
the respective pension scheme. It can differ by birth cohorts and gender.72  

71 Of course, it has to be considered that a relatively longer contribution period (in the example 42 instead of 40 
years) may also lead to comparably higher full pension levels. 
72  To  limit  the  data  input  one  may  base  the  estimations  on  one  single  average  age  to  pay  first 
contributions for all current contributors. For example, it may be assumed that all contributors started 
their  contribution  career  on  the  age  of  20  years  —  if  this  is  reflected  in  the  data.  Nevertheless,  it  is 
recommended to apply a differentiation by birth cohorts and gender. 

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Choosing the expected retirement age  

Estimating entitlements for government-managed pension schemes 7 

For the choice of the end of the contribution career, one has to make assumptions regarding 

future  retirement  age.  One  option  is  to  assume  a  constant  retirement  behaviour,  but  a 

change  in  retirement  behaviour  in  future  may  be  considered.  For  further  discussion  on  the 

choice of retirement age, see Box11 below. 

Box 11 

Choosing the retirement age 

To  estimate  pension  entitlements,  various  assumptions  on  future  retirement  age  are  possible.  There  is  a 

choice  between  constant  or  changing  retirement  behaviour,  as  well  as  between  homogeneous  or 

heterogeneous retirement behaviour. Below, we discuss the appropriate choice of assumptions. 

Constant vs. changing retirement behaviour 

One option is to assume constant retirement behaviour. We assume that future pensioners will retire at the 

same  age  as  their  current  counterparts.  Of  course,  such  a  scenario  is  only  appropriate  if  the  pension 

legislation allows current retirement behaviour to be prolonged into the future. In some countries, such as the 

UK or Malta, the age of retirement will gradually rise in the coming decades. For these countries, a constant 

retirement approach would not be suitable. The future expected retirement age should always be chosen in 

accordance  with  future  legal  retirement  ages  (it  has  to  be  underlined  that  only  changes  of  the  statutory 

retirement age which have been legislated until the base year are considered in the estimations).  

Alternatively,  one  may  assume  changing  retirement  behaviour  on  the  basis  of  behavioural  forecasts.  For 

some  countries,  there  are  authoritative  predictions  on  future  retirement  choices.  Berkel  and  Börsch-Supan 

(2004) provide such a forecast for Germany.  

It  should  be  noted  that  the  choice  between  a  constant  and  changing  retirement  behaviour  should  have  no 

impact on the level of pension entitlements if the respective pension scheme can be considered actuarially 

neutral  (actuarial  neutrality  in  the  context  of  pension  systems  means  that  the  present  value  of  accrued 

pension entitlements does not change due to an earlier or later pension start date. For a detailed description 

of this concept see Queisser and Whitehouse (2006). As these authors indicate numerous pension systems 

in the OECD cannot be considered actuarially neutral. A substantial number of countries do subsidise early 

retirement  and  penalise  late  retirement  since  pension  decrements  as well  as  increments  are  lower  than an 

actuarial neutral rate.  In  these  countries  one  would  overestimate  (underestimate)  pension  entitlements with 

the  constant  retirement  behaviour  assumption  if  future  pensioners  will  decide  to  retire  later  (earlier)  than 

today. 

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Estimating entitlements for government-managed pension schemes 7 

Homogeneous vs. heterogeneous retirement behaviour 

When  choosing  the  assumption  on  future  retirement  age,  the  question  arises  as  to  whether  to  consider 

retirement  ages  as  homogeneous  or  heterogeneous.  Should  a  single  retirement  age  be  assumed  for  all 

contributors,  or  not?  As  a  starting  point,  it  is  sufficient  to  take  one  retirement  age,  preferably  the  average 

retirement  age,  as  a  basis  (however,  a  differentiation  between  genders  is  highly  recommended  since 

retirement  behaviour  usually  differs  considerably  between  males  and  females).  If  possible,  however, 

heterogeneous retirement ages should be taken into account. Box 1 provides a further description of how to 

include  heterogeneous  retirement  behaviour  in  the  calculation  of  pension  entitlements,  under  the  homCC 

approach. 

Considering pension increments and decrements 

For  the  estimation  of  pension  entitlements,  it  is  important  to  consider  that  the  level  of  pension  benefits 

depends on the choice of future retirement age. In most pension schemes, retirement after (before) the legal 

retirement  age  leads  to  an  increase  (decrease)  in  annual  pension  benefits.  Such  pension  increments 

(decrements) should always be taken into account in the calculations. 

Taking into account heterogeneous retirement behaviour 

Box 12 

Usually,  retirement  ages  vary  between  males  and  females.  Different  retirement  behaviour  may  also  be 

observed  within  a  cohort.  Some  individuals  may  choose  to  work  until  the  age  of  65,  while  others  prefer  to 

retire  at  60.  How  should  such  heterogeneous  retirement  behaviour  be  taken  into  account?  To  give  an 

illustration,  let  us  return  to  the  example  of  the  average  40-year-old  contributor  (see).  As  stated,  this 

contributor  can  look  back  on  a  contribution  history  of  20  years.  For  the  example  with  heterogeneous 

retirement behaviour, let us assume that the probability of this person retiring at the age of 61 is 50 per cent. 

Furthermore,  he/she  might  retire  at  60  (with  a  probability  of  25 %),  or  at  62  (with  a  probability  of  25 %). 

Pension entitlements are calculated separately for each of these three retirement paths. In the first path, the 

40-year-old individual is assumed to retire at 60, and has therefore accrued-to-date 51 per cent (=20/39) of 

his/her full pension for that retirement age. According to the second path, he/she is expected to work until the 

age of 61, and has consequently accrued-to-date 50 per cent (=20/40) of the full pension to which they will be 

entitled at the age of 61. The third path is calculated analogously, resulting in an accrual factor of 0.49. Of 

course, it has to be considered that in most pension schemes a later retirement age would result in a higher 

full pension level. This issue will be discussed below. Finally, the sum of these pension rights, weighted with 

the respective probabilities, represent the pension entitlements of the 40-year-old female contributor.  

Equation 13 provides a formal outline of the procedure to calculate pension entitlements with heterogeneous 

retirement behaviour under the homCC approach (please note that Equation 13 can be applied for old age 

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Estimating entitlements for government-managed pension schemes 7 

and early retirement pensions). For the consideration of other pension types, such as e.g. disability pensions 

(see Box 18) In fact, this formula represents an extension of Equation 5. In Equation 13, the final entitlements 

of a contributor are reflected by the probability-weighted sum of pension entitlements for each possible 

choice of the retirement age 

. Furthermore, the accrual factor 

as well as the annual 

pension benefit 

 depend on the respective choice of the retirement age  

(13)

E

x,g,b

=

where  

max

l

∑

l=x+1

[

λ

x,g,l,b

*q

x,g,l,b

*(

D

∑

=
s l

B

full
,
s g l b s x

+ −

, ,

*

p

,
s g b s x

+ −

,

*(1

+

r

)

−
x s

) ]

= the highest possible retirement age, 

= the accrual factor for a given retirement age  ,  

 = the probability of a 

 year old in the base year   to retire at age  , 

= the annual full pension benefit of a   year old in the year b

 after retirement at age . 

Accrual factors considering different retirement ages 

Figure 19 

7.4.3  Estimating the initial pension by applying heterogeneous contribution 

careers  

A more detailed approach to estimating pension entitlements represents the consideration 

of  heterogeneous  contribution  careers  (hetCC).  This  procedure  allows  the  contribution 

career of a future new retiree to differ from those of current pensioners. For example, due to 

longer  unemployment  or  education  periods  for  younger  age  groups,  contribution  careers 

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Estimating entitlements for government-managed pension schemes 7 

may  vary  considerably  between  birth  cohorts.73  To  consider  such  hetCC,  comprehensive 

data on the contribution history of current contributors need to be collected. On this basis, 

the  accrued-to-date  pension  benefit  (

at  the  future  point  of  retirement  r  is  directly 

estimated, and later projected over the remaining retirement phase.  

The way in which the past contribution career precisely translates into pension entitlements 

varies from pension scheme to pension scheme and is formulated in the respective benefit 

formula.  Therefore,  before  describing  the  required  steps  to  estimate

  of  current 

contributors, it is useful to classify government-managed employee pension schemes more 

closely with regard to the benefit formula applied. Across Europe, pension schemes may be 

distinguished as follows: 

1)  flat-rate pension schemes  

2)  earnings-related pension schemes  

final earnings schemes 

pension account schemes 

In flat-rate pension schemes, the final pension level depends on the individual’s number of 

contribution  or  residence  years,  as  well  as  on  a  certain  benchmark  pension.  In  earnings-

related pension schemes, on the other hand, the level of benefits depends not only on the 

number of years during which contributions were made, but also on the amount of reference 

earnings or contributions during the contribution career. Earnings-related pension schemes 

can  be  further  differentiated  into  final  earnings  types  and  pension  account  types.  A  more 

detailed classification of pension schemes with respect to the benefit formula is provided in 

Box 13. 

Classification of pension schemes with regard to the benefit formula 

Box 13 

In all government-managed defined benefit pension schemes covered in the supplementary table, the 
calculation of pension benefits is based on the past contribution career of scheme participants. How 
this  past  contribution  career  precisely  translates  into  pension  benefits  and  entitlements  varies  from 
one pension scheme to another and is formulated in the benefit formula. It is useful to classify these 
pension schemes with regard to the benefit formula applied. In this context, dividing pension schemes 
into flat-rate and earnings-related schemes. 
Flat-rate pension schemes can be found in the Netherlands or in the UK, for instance. They provide a 
basic  flat-rate  pension  (in  the  UK  also  earnings-related  public  pension  schemes  can  be  found.74  In 
these  schemes,  the  final  pension  level  depends  on  the  individual´s  number  of  contribution  or 
residence years 

) as well as a certain benchmark pension 

), as outlined in Equation 14. The 

is,  generally,  the  highest  possible  pension  one  can  receive  after  a  certain  number  of  contribution 

73 Such differences are also referred to as cohort effects. 

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90 

 
 
 
 
                                                            
 
Estimating entitlements for government-managed pension schemes 7 

years. 

(14)

accrued

B

=

benefit formula C BP

(

,

)

Most  other  European  countries  —  such  as  France,  Poland,  Greece  and  Germany  —  feature 
earnings-related pension schemes. In these schemes, the level of benefits depends not only on the 
number of years of contribution, but also on the amount of reference earnings or contributions during 
the contribution career. All earnings-related pension schemes are based — at least to some extent — 
on  the  principle  of  equivalence.  According  to  this  notion,  higher  reference  earnings  should  result  in 
higher  pension  benefits.  This  aspect  plays  a  role  and  should  be  reflected  in  estimates  of  pension 
entitlements. 

Earnings-related pension schemes can be differentiated further with respect to their benefit formula. 
Traditionally,  benefit  formulas  across  Europe  are  designed  as  final  earnings  schemes.  In  such 
) before 
schemes, the pensions are calculated, as the name implies, on the basis of final earnings (

retirement. These

 may comprise the earnings over the entire contribution career, or over a shorter 

period, such as the last year or the last 10 years before retirement. Furthermore, benefit formulas of 
)  and 
final  earnings  schemes  explicitly  take  into  account  the  number  of  past  contribution  years 

generally also a so-called accrual rate 

). 

A  formal  outline  of  the  calculation  for  accrued-to-date  pension  benefits  in  final  earnings  benefit 
formulas  is  provided  in  Equation  15.  The  earnings-related  part  of  social  security  pensions  in  the 
Czech Republic is an example of a final earnings scheme. In this scheme, future pension benefits are 
calculated  by  multiplying  contribution  years  by  the  accrual  rate  (amounting  to  0.015)  and  the 
respective reference earnings75. 
=

benefit formula FE C AR

accruedB

(15)

(

)

,

,

In  recent  years,  final  earnings  benefit  formulas  have  been  replaced  in  many  countries  by  pension 
account  schemes.  The  characteristic  of  such  schemes  is  that  individual  contributions  are  directly 
).  In  comparison  to  final  earnings 
converted  and  recorded  in  an  individual  pension  account 
schemes, individual accounts are explicitly considered in the benefit formula — see Equation 16. 

(16)

accruedB

=

benefit formula PA
)

(

Typical  examples  of  such  pension  account  schemes  are  notional  defined  contribution  (NDC) 
accounts,  as  found  in  Poland,  Latvia,  Italy  or  Sweden.  In  these  systems,  the  amount  of  yearly 
individual  contributions  is  directly  transformed  into  an  equivalent  increase  in  individual  pension 
accounts.  Pension  point  systems,  found  in  Germany  or  Slovakia,  are  also  examples  of  pension 
account  benefit  schemes.  In  these  schemes,  individual  earnings  translate  into  a  certain  level  of 
pension points, recorded in individual accounts.76  

The following description distinguishes between flat-rate pension schemes and two types of 

earnings-related pension schemes, namely final-earnings and pension accounts types.     

74 In the UK also earnings-related public pension schemes can be found. 
75 Currently reference earnings in this scheme cover all earnings since 1985. 
76 Generally, one pension point is accrued by contributors who earn in a certain year the average earnings in the 
economy. Higher or lower salaries result in increased or diminished pension point values per year. 

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Collection of data on the past contribution career  

Estimating entitlements for government-managed pension schemes 7 

In  a  first  step,  data  on  the  contributions  of  current  contributors  need  to  be  collected.  The 

extent of data required depends on the benefit formula of the respective pension scheme.  

In a flat-rate pension scheme like those found in the Netherlands, the accumulated number 

of contribution or residence years should be taken into account. It is useful to collect past 

contribution data broken down by one-year age groups and by gender. This are data for the 

accumulated  contribution  years  for  an  average  x  year-old  male,  an  average  x  year-old 

female, an average x +1 year-old male, an average x +1 year-old female and so forth. 

In earnings-related pension schemes, additionally, past earnings or contributions of current 

contributors  should  be  considered.  This  past  contribution  data  depend  on  the  type  of 

earnings-related pension scheme. The following description, therefore, distinguishes further 

between final earnings and pension accounts schemes. 

For  pension  accounts  schemes,  past  earnings/contributions  are,  generally,  already 

accumulated  in  individual  pension  accounts.  These  accounts  facilitate  the  collection  of 

contribution  data  since  they  also  reflect  (implicitly)  the  number  of  past  contribution  years. 

For pension schemes classified as pension accounts, the recommendation is to collect past 

contribution data broken down by one-year age groups and by gender. An example of such 

data  is  presented  in  Figure  20,  which  displays  the  required  average  notional  defined 
contribution accounts, distinguished by age and gender, in the case of Poland.77 

77  Contributors  older  than  60  years  have  no  NDC  account  in  the  Polish  general  pension  system.  They  are 
insured according to the old, pre-NCD pension rules. For a description of the pension system and the use of this 
data to project future pension levels see Jablonowski et al. (2010), p. 26-36. 

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Estimating entitlements for government-managed pension schemes 7 

Value of NDC accounts differentiated by age and gender 

Figure 20 

Source: Forschungszentrum Generationenverträge, University of Freiburg, based on data provided by the Polish 
social insurance institution (Zaklad Ubezpieczen Spolecznych, ZUS). 

In  pension  schemes  classified  as  final-earnings  types,  such  as  those  in  Bulgaria  or 

Portugal,  past  reference  earnings  and  the  number  of  contribution  years  of  current 

contributors need to be collected, preferably broken down by one-year age groups and by 

gender, that is, data for past reference earnings and the number of contribution years for an 

average x year-old male, an average x year-old female, an average x+1 year-old male, an 

average x+1 year-old female, and so forth.   

On  the  basis  of  the  contribution  data,  future  initial  pension  levels  accrued-to-date  can  be 

calculated.  Below,  this  estimation  procedure  is  outlined  separately  for  1)  flat-rate,  2)  final 

earnings and 3) pension account schemes.  

I.  Estimation of accrued pensions in flat-rate pension schemes  

The  aim  is  to  estimate  the  annual  accrued-to-date  pension  benefit 

of  current 

contributors at the point of their future (expected) retirement. For flat-rate pension schemes, 

this  calculation  is  relatively  simple.  In  a  first  step,  the  future  retirement  age  of  current 

contributors should be set. A discussion on the appropriate choice of future retirement ages 

is provided in Box .  

As a second step, the information about accumulated contribution or residence years in the 

base year 

 is applied in the respective benefit formula. 

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(17)

accrued
B
r

=

benefit formula C

(

base year

,

BP
r

)

Estimating entitlements for government-managed pension schemes 7 

Furthermore, it is necessary to project in a third step the benchmark pension 

 from the 

base year b to the future year of retirement r. Here — in accordance with the PBO approach 

— the annual adjustments of 

 starting from the year after the base year b until the year of 

retirement  r  should  be  considered  (see  Equation  18).  In  most  flat-rate  pension  schemes, 

wage indexation is applied. But other indexation arrangements, such as an adjustment for 

prices, can also be found. In correspondence with the indexation rules, the level of the 
adjusted annually by a factor   – as outlined in Equation 18.78 

is 

(18)

=

BP
r

r

+∏
[1

= +
1
s b

v

s

] *

BP
b

An example of the procedure to estimate 

 in flat-rate pension schemes on the basis 

of the hetCC approach is provided in Box 14. 

Estimation of accrued pensions in a flat-rate pension scheme 

Box 14 

Below  is  a  case  study  on  how  to  estimate  annual  accrued-to-date  pensions  at  retirement  in  a  flat-rate 
pension  scheme.  The  example  is  an  average  50-year-old  male  contributor  who  participates  in  a  flat-rate 
pension scheme, similar to the basic state pension scheme in the United Kingdom.  

The  final  basic  pension  level  received  at  the  point  of  retirement  depends  solely  on  the  number  of 
contribution  years  the  individual  accumulates.  A  ‘full  basic  pension’79  (FBP)  —  corresponding  to  the 
benchmark  pension  in  the  general  description  above  —  is  granted  if  30  or  more  contribution  years  have 
been earned. In the example given, the FBP would amount to EUR 5,000 in the base year. Furthermore, it 
is  assumed  that  the  FBP  is  adjusted  annually  for  wage  growth  in  the  economy.  The  example  assumes 
constant future wage growth of 1.5 % (in real terms). Pensions are reduced if fewer than 30 qualifying years 
have  been  accrued.  More  precisely,  the  number  of  qualifying  years  is  compared  to  the  number  of  years 
needed for a FBP (30 years). This ‘contribution years ratio’ is then multiplied by the amount of a FBP (in the 
retirement year) to estimate the individual pension level at retirement. In the example, the representative 50-
year-old  male  contributor  has  accumulated  on  average  23  contribution  years.  To  keep  the  description 
simple,  it  is  further  assumed  that  all  contributors  retire  at  the  age  of  65.  This  representative  50-year-old 
contributor will retire 15 years after the base year.  

The estimation of 

 of the 50-year-old contributor would be as follows: First, the ratio of contribution 

years  accrued  until  the  base  year  (23  years)  to  the  number  of  years  needed  for  a  FBP  (30  years)  is 
calculated — amounting to about 76 percentage points. Thereafter, in accordance with the PBO approach, 
the FBP is projected to the year of retirement r. Finally, both the contribution years ratio and the projected 

78 Often a time lag of one or two years is set in the benefit formula. In other words pensions are indexed to the 
wage  growth  one  or  two  years  before  the  base  year.  The  impact  of  indexation  can  be  considerably.  In  the 
example given in Box 1 the level of a full basic state pension in 15 years — when the current 50 year old  will 
retire  —  would  increase  by  roughly  25  per  cent  (in  real  terms)  with  a  wage  indexation  in  comparison  to  an 
indexation with prices. 

 Pension Compilation Guide 

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Estimating entitlements for government-managed pension schemes 7 

FBP are multiplied to estimate 

at the point of retirement. 

(19)

B

accrued
male r
,
50,

=

23
30

*[(1.015) *5000 €] 4800 €

15

≈

As outlined in Equation 19, the 50-year-old male contributor would be entitled to an annual pension benefit 
of roughly EUR 4, 800 at his (expected) retirement age. 

II.  Estimating accrued pensions in final earnings schemes 

In  final  earnings  schemes,  pension  levels  depend  not  only  on  the  number  of  contribution 

years  accumulated  until  the  base  year  (

),  but  also  on  final  earnings  before  the 

retirement year r (

). Moreover, in most final earnings schemes, an accrual rate 

 is 

applied. For the estimation of 

of current contributors, all the factors outlined above 

should be taken into account (see Equation 20).  

(20)

B

accrued
r

=

benefit formula FE C AR

(

,

,

)

r

b

Most  of  the  above-mentioned  input  factors  can  be  relatively  simply  obtained  from  past 

contribution data. This includes information about 

 but also about past earnings until the 

base  year  b.  Furthermore,  the 

  is  defined  in  the  respective  benefit  formula  and  can 

therefore be directly applied in the estimations. 

For the estimation of ABO pension entitlements, the above-mentioned input data would be 
sufficient.80 However, to estimate pension entitlements with the PBO approach — described 

in Chapter 2.2 — some further steps need to be taken: future wage increases have to be 

considered  for  the  estimation  of 

.  This  involves  a  projection  of  future  earnings 

periods. The framework and the assumptions of such a projection are outlined below.  

Defining the starting and finishing point of the projection 

First,  it  is  important  to  set  the  starting  and  finishing  point  of  the  required  projection. 

Commonly,  the  projection  of  the  future  contribution  career  should  start  after  the  year  for 

which  the  latest  data  on  past  earnings  is  available.  Since  the  aim  is  to  estimate  pension 

79 A ‘full basic pension’ should not be mixed up with the term ‘full pension’. The latter expression represents a 
pension  benefit  received  after  a  full  contribution  career,  while  a  ‘full  basic  pension’  is  granted  after  30 
contribution years. . 
80 Under the ABO approach only reference earnings until the base year are applied for the estimation of 
This approach requires no projection of future wage increases. 

. 

 Pension Compilation Guide 

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Estimating entitlements for government-managed pension schemes 7 

benefits upon retirement, the natural finishing point of the projection is the year r in which 

the  respective  contributor  is  expected  to  retire.  A  discussion  on  the  appropriate  choice  of 

future retirement ages is provided in Box 11. 

The  example  is  an  average  40-year-old  contributor  in  base  year  2010.  He  is  expected  to 

retire at the age of 60. Data on his past contributions are assumed to be available until the 
base year 2010.81 Figure 21 illustrates the required projection period for this example. Data 

on his past contribution career — reflected by past reference earnings — is obtainable until 
the  base  year.  For  all  future  years,  starting  from  2011,  until  the  year  2030,82    when  he  is 

expected to retire, his contribution career needs to be projected. 

Projection of the future contribution career under the PBO approach 

Figure 21 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

Required assumptions for the earnings projection 

Generally, the development of individual future earnings depends on two main factors: 

81 Sometimes data on the past contribution may only be available for years before the base year. Of course, in 
such a case the projection of the future contribution career may begin already in the base year or even in the 
years before. 
82  To  be  precise,  the  projection  should  finish  already  at  the  end  of  the  year  2029  in  this  example.  If  the 
contributor is expected to retire in beginning of 2030 his contribution career finishes at the end of 2029. 

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Estimating entitlements for government-managed pension schemes 7 

1) future promotions and  

2) future general wage growth in the economy  

To  project  future  earnings  over  the  (expected)  remaining  contribution  career,  assumptions 

about these two factors need to be taken. The choice and application of these is described 

in detail below.  

As outlined in Chapter 5.2, it is recommended to forecast future promotions on the basis of 

profiles  reflecting  the  reference  earnings  or  contributions  for  different  age  groups  and 

genders. Figure 22 shows such an earnings profile for contributors to the German statutory 

pension  scheme  (DRV).  The  profile  reflects  a  number  of  factors  which  might  vary  by  age 

and gender, such as the average wage paid per hour, the number of hours worked per year, 

the  part-time  employment  of  older  (55+)  and  younger  cohorts  (20  to  25)  and  so  forth.  For 

the following description, all these factors will be summed up by the term ‘promotions’. The 

picture makes clear that earnings vary over the working career. Generally, salaries increase 

with age and decline slightly before retirement. In this sense, the profile shown displays the 

usual hump shape which can be found in many European countries.  

Figure 22 

Age- and gender-specific earnings profile (DRV 2006) 

Source:  Forschungszentrum  Generationenverträge,  University  of  Freiburg,  based  on  data  for  2006  provided  by 
the Deutsche Rentenversicherung (DRV). 

For the projection of the future contribution career, it is appropriate to base the calculation 

on  a  constant  earnings  or  contribution  profile  over  time.  A  current  average  contributor 

 Pension Compilation Guide 

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Estimating entitlements for government-managed pension schemes 7 

‘walks’  along  this  profile  over  his/her  remaining  employment  life  cycle  until  retirement. 

Equation 21 provides a formal outline of how to calculate future earnings with this approach.   

w

x y m
,

,

=

w

y b
,

*

m

∏

= +
1
i b

[(1

+

π
i

) *(1

+

g

i

)]

(21)

where 

           = the age of a participant whose future earnings shall be projected, 

         = the future age of the participant 

, 

= the projected earnings of the current   year old participant than he/she reaches the     

            age of   in the future year 

       = the future year for which the wage of a current participant is projected  

,  

     = the earnings of a current

 year old in the base year  , 

      = the inflation rate in a future year 

,  

      = the general wage growth in a future year 

.  

On  the  one  hand,  future  earnings  are  determined  by  future  promotions.  According  to  the 

formula  outlined  above,  a  current  pension  scheme  member  aged 

  can  expect  to  receive 

the same earnings at age as a current member aged 

. On the other hand, future salaries 

increase  by  inflation   and  general  wage  growth  in  the  economy 

.  Of  course,  inflation 

should only be considered if the calculation is carried out in nominal terms.83   

Data used for earnings profiles can usually be obtained from the institution responsible for 

the  pension  scheme.  Household  surveys  can  be  an  alternative  data  source.  For  a  further 

discussion  on  data  sources,  see  Chapter  6.3.2.  As  outlined  in  Section  5.2,  the  AWG 

assumptions  on  future  labour  productivity  growth  provide  a  suitable  basis  for  estimating 
general wage growth in the economy.84 

With the application of the earnings profile and the assumption on general wage growth and 

inflation  (if  required),  earnings  can  be  estimated  for  each  year  of  the  individual’s  future 

contribution career. For an example showing how to project future earnings, see Box 15. 

83 For a further discussion see section 5.4.1. 
84 For a more detailed discussion on the future wage growth assumption see chapter 5.2. 

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Estimating entitlements for government-managed pension schemes 7 

Box 15 

Projection of future earnings 

The following case study illustrates a projection of future earnings. This example takes the case of 
a 25-year-old man, an average contributor who is expected to follow the earnings profile shown in 
Figure  .  The  aim  is  to  calculate  his  projected  earnings  at  the  age  of  40.  Of  course,  the  same 
approach can also be applied to other periods of the individual's contribution career.  

The  projection  is  carried  out  in  real  terms,  i.e.  inflation  is  disregarded.  In  base  year  b,  the 
contributor earns about EUR 20,000 (see Figure 23). Assuming a constant earnings profile over 
time, he can expect to earn a 75 per cent higher wage at the age of 40 (in 2021), due to career 
progression. However, there are factors other than promotions to consider for the projection of his 
future contribution career. The level of future contributions and reference earnings is also affected 
by  general  wage  growth  in  the  years  until  2021.  The  assumption  here  is  that  annual  real  wage 
growth  in  the  economy  is  1.5  per  cent,  and  that  all  employees  benefit  equally.  Under  these 
assumptions, the 25-year-old contributor can expect to improve his relative income position in the 
workforce due to promotions as well as from general wage growth in the economy. In quantitative 
terms,  this  implies  that  in  15  years'  time,  he  will  exceed  the  earnings  of  a  current  40-year-old 
contributor,  about  EUR  35,  000  annually.  When  the  25-year-old  reaches  the  age  of  40,  he  can 
expect  future  earnings  of  about  EUR  45, 000  due  to  general  salary  growth.  The  dotted  lines  in 
Figure  23  illustrate  the  increase  in  the  earnings  profile  due  to  expected  wage  growth  after  15 
years. 

 Age- and gender-specific earnings profile considering general wage growth (DRV 2006) 

Figure 23 

Source: Forschungszentrum Generationenverträge, University of Freiburg.  

For the estimation of 

a number of further aspects of the benefit formula need to be 

taken  into  account,  such  as  the  definition  and  valorisation  of  final  earnings.  The  most 

important issues are discussed below.  

 Pension Compilation Guide 

99 

 
 
 
 
 
Defining final earnings 

Estimating entitlements for government-managed pension schemes 7 

Generally,  final  earnings  reflect  the  average  of  annual  reference  earnings  (RE)85  over  the 

last n years before retirement (as outlined in Equation 22). 

(22)

t

=

FE
r

RE

t r
,

−
1

r

∑

(

r

= − − −
1) (
1)
n
n

The calculation of final earnings may differ widely from one pension scheme to another. In 

most pension schemes across Europe, not all contribution periods until retirement age are 

relevant  for  the  pension  calculation.  In  some  schemes,  only  the  earnings  in  the  last  three 

years before retirement matter (e.g. in the German civil servants pension scheme). In other 

pension  schemes,  the  reference  earnings  of  the  best  25  years  (e.g.  in  France)  before 

retirement or even of the entire contribution career (e.g. in Slovakia) are taken into account. 

The  length  of  the  contribution  career  considered  in  the  benefit  formula  can  have  a 
significant  impact  on  future  pension  levels.86  It  is  important  to  reflect  this  aspect  in  the 

estimation of 

. The definition of final earnings should, therefore, always be chosen 

precisely in accordance with the benefit formula. Furthermore, it has to be considered that 

these  past  earnings  are  usually  valorised  to  the  point  of  retirement  r.  This  aspect  is 

described below.   

Indexation of past earnings  

To  estimate  future  pension  levels,  the  indexation  of  reference  earnings  until  the  point  of 

retirement  should  be  reflected.  These  adjustments  are  also  referred  to  as  pre-retirement 

indexation.  Most  pension  schemes  across  Europe  apply  indexation  to  past  earnings 
according to wage growth in the economy.87 Only a few pension schemes (e.g. in Portugal) 
choose  a  lower  indexation  of  past  contributions,  using  the  CPI.88  In  accordance  with  the 

benefit  formula,  a  past  earning  w  in  a  year  t  is  indexed  by  a  factor  v  until  the  year  of 

retirement r (see Equation 23). This valorised past salary represents the reference earning 

(RE) of the year t applied in the benefit calculation (see Equation 22). 

85 Reference earnings are defined as the past earnings relevant in the benefit formula. 
86  Generally,  an  extension  of  the  reference  earnings  translates  into  a  decrease  of  pension  levels  —  given  the 
ceteris paribus condition. 
87 In these schemes the AWG assumptions on the future labour productivity growth provide a suitable proxy for 
the future wage growth. For a further discussion see section 5.2. 
88 In fact, in Portugal reference earnings are indexed to the growth of CPI from 2012 onwards. Before the year 
2012 a slightly higher indexation is applied. . 

 Pension Compilation Guide 

100 

 
 
 
 
                                                            
Estimating entitlements for government-managed pension schemes 7 

(23)

RE

,
t r

=

w
t

*

r

+∏
[1

= +
1
t

i

v
i

]

Considering future adjustments to the benefit formula  

Besides the contributions career, future changes to the benefit formula should also be taken 

into account. For example, alterations to accrual rates (e.g. in Austria or Hungary) as well 

as  extensions  of  the  periods  relevant  for  reference  earnings  (e.g.  in  Portugal  or  Malta) 

should be considered. In some countries, moreover, demographic factors should be applied 

when estimating the final pension level upon retirement. These factors, often referred to as 

sustainability factors, link future pension levels to demographic trends and play a role in, for 

instance,  Germany,  Austria  or  Portugal.  It  is  important  to  stress  that only  pension  reforms 

which  have  already  been  enacted  in  the  base  year  for  calculations  should  be  taken  into 

account. 

Once  final  earnings  have  been  accurately  defined  and  valorised, 

  at  the  point  of 

retirement  can  be  estimated.  An  example  for  the  estimation  of 

  at  the  point  of 

retirement in final-earnings pension schemes (applying the hetCC approach) is provided in 

Box 16. 

Box 16 

Estimation of accrued pensions in a final-earnings pension scheme 

The  following  case  study  illustrates  how  to  estimate  annual  accrued-to-date  pensions  at 
retirement  in a  final-earnings  pension  scheme.  Take  the  case  of a  50-year-old  male contributor 
who  is  a  member  of  a  final-earnings  pension  scheme.  The  individual  pension  received  at  the 
,  the  valorised  final 
point  of  retirement  ( will  depend  on  the  number  of  contribution  years 

earnings  of  the  year  before  retirement  (

and  on  an  accrual  rate  of  two  percentage  points. 

Equation 24 provides a formal outline of the applied benefit formula.  
(24)

P FE C

* *2%

=

To keep the description simple, it is assumed that all contributors retire at the legal retirement age 
of  65.  Moreover,  it  is  assumed  that  reference  earnings  are  wage-indexed  up  to  the  year  of 
retirement.  The  example  assumes  constant  future  wage  growth  of  1.5 %  (in  real  terms).  In  the 
base year, the representative contributor earned a salary of EUR 20,000. In the case of the ABO 
.  However,  as  pension  entitlements  will  be  based  on  the 
approach,  this  would  be  applied  as 

PBO  approach,  future  wage  increases  need  to  be  taken  into  account,  requiring  an  earnings 
projection.  According  to  this  projection  the  representative  contributor  will  earn  an  (expected) 
annual salary of EUR 30,000 (in real terms) in the year before his retirement. Of course, in line 
with the benefit formula, these final earnings need to be valorised to the year of retirement. Here 
the  valorised  FE  would  amount  to  EUR  30,450  EUR  (=  EUR  30,000  *  1.015)  in  real  terms. 
Furthermore, this contributor has collected 30 contribution years until the base year.  

 Pension Compilation Guide 

101 

 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

=

30,450 € * 30*2% = 18, 270 €

(25)

B

accrued
male
50,

,65

These  inputs  yield  an  estimate  of  the  level  of 

  at  the  future  point  of  retirement  r  —  as 

presented in Equation 25. In this example, the 50-year-old male contributor would be entitled to 
an annual pension benefit of EUR 18, 270 at his (expected) retirement age of 65. 

III.  Estimation of accrued pensions in pension account schemes 

In recent years, final earnings benefit formulas have been replaced in many countries by a 

pension  account  scheme.  The  characteristic  of 

these  schemes 

is 

that 

individual 

contributions  are  directly  converted  and  recorded  in  an  individual  pension  account 

). 

Individual accounts are explicitly taken into account in the benefit formula — see Equation 

26. This aspect distinguishes them from final earnings schemes.  

(26)

accrued

rB

=

benefit formula PA
)

(

In pension account schemes, accrued pension rights are reflected by the value of the 

 in 

the base year. In line with the ADL approach, pension rights accrued in future years are not 

taken  into  account.  The  degree  to  which  the  level  of  the  pension  accounts  translates  into 

future pension payments depends on the pension formula used. Pension account schemes 

can be divided into: NDC, pension point and other pension schemes (as outlined below).  

Pension account schemes  

Pension point schemes 

NDC pension schemes 

Other pension account schemes  

The  following  description  of  the  estimation  of 

  distinguishes  between  these  three 

types of pension account schemes. 

NDC pension schemes 

NDC schemes are typical examples of pension account schemes such as those in Poland, 

Latvia,  Italy  or  Sweden.  In  these  systems,  the  amount  of  yearly  individual  contributions  is 
directly transformed into an equal increase in individual pension accounts.89  

89 Characteristic for NDC plans is that their benefit formula mimics the build-up of pension accounts in DC plans. 
Similarly to DC schemes, individual accounts in NDC schemes already reflect to a certain degree the value of 
individual pension entitlements — at least of old age pensions. Against this background, one may argue that an 
estimation of pension entitlements based on a projection of future pension payments is not required in case of 
NDC schemes because pension entitlements should correspond to the value of the NDC account. However, this 

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102 

 
 
 
 
 
 
 
 
 
                                                            
 
Estimating entitlements for government-managed pension schemes 7 

For  the  estimation  of 

  of  current  contributors,  one  has  to  take  into  account  mainly 

two factors: 1) the NDC account (

 of the base year b valorised to the future retirement 

age r and 2) the average remaining life expectancy 

 at retirement age r (see Equation 

27). 

(27)

accrued
B
r

=

PA

b r
,
LE
r

As  a  first  step,  appropriate  assumptions  about  the  future  retirement  age  r  of  current 
contributors  are  needed.90  As  a  second  step,  the  base  year  NDC  account  (

)  should  be 

valorised until the future retirement age   to reflect future wage growth.  

(28)

PA

,
b r

=

PA
b

*

r

+∏
(1

= +
1
i b

v
i

)

Usually,  individual  NDC  accounts  (PA)  are  adjusted  annually  in  accordance  with  wage  bill 

growth or GDP growth. The indexation rules applied are reflected in the annual valorisation 

factor 

  (see  Equation  28).  On  the  basis  of  these  two  steps,  the  level  of 

  may  be 

estimated – as outlined in Equation 27 above.    

Pension point schemes 

Pension  point  systems,  such  as  those  in  Germany  or  Slovakia,  are  also  examples  of  a 

pension  account  benefit  formula.  In  these  schemes,  individual  earnings  translate  into 
pension  points  which  are  recorded  on  individual  accounts.91  The  level  of 

  at  the 

future point of retirement depends on 1) the total number of pension points accrued until the 

base year (

) and 2) the valorised point value in the retirement year (

).  

(29)

accrued
B
r

=

TP PV
*

b

b r
,

‘non-projection approach’ has a number of shortcomings. First of all, the results would not be comparable to the 
estimations  of  other  countries  which  apply  a  (PBO)  projection  approach  based  on  harmonised  assumptions. 
With the above described ‘non-projection approach’ also cases where contributors die before retirement cannot 
be appropriately reflected. Furthermore, a projection is in most NDC schemes required since survivor’s pension 
benefits  are  usually  linked  to  old  age  NDC  pensions.  Against  this  background,  a  projection  approach  as 
described in Equation 27 should be applied for the calculation of NDC pension schemes. Only if this approach is 
not  yet  realisable  for  a  start  a  ‘non-projection  approach  may  be  acceptable  for  the  estimation  of  current 
contributors´ entitlements. In other words under such circumstances the sum of individual pension accounts may 
serve as a proxy of total current contributors´ (old age) pension entitlements. 
90 For a further discussion on the choice of future retirement ages see Box . 
91 Generally, one pension point is accrued by contributors who earn in a certain year the average earnings in the 
economy. Higher or lower salaries result in increased or diminished pension point values per year. 

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Estimating entitlements for government-managed pension schemes 7 

Generally,  the  level  of 

  is  adjusted  annually  to  the  growth  of  average  earnings  in  the 

economy. But other indexation rules are also possible. The valorisation factor v reflects the 

respective indexation rules for the annual adjustments of 

.  

(30)

PV

,
b r

=

PV
b

*

r

+∏
(1

= +
1
i b

v
i

)

To take into account future wage growth, the

 of the base year is valorised until the future 

point  of  retirement  r  (see  Equation  30).92 

  may  then  be  estimated  as  outlined  in 

Equation 29 above.  

Other pension account schemes 

In  all  pension  account  schemes,  accrued  pension  rights  are  directly  reflected  in  individual 

accounts.  These  accounts  are  then  explicitly  considered  in  the  benefit  formula.  Besides 

NDC and pension point schemes, there are also other forms of pension account schemes. 

One  example  is  the  UK  civil  service  pension  scheme,  Nuvos.  In  this  scheme,  participants 

pay  a  certain  percentage  of  pension  earnings  into  a  PA  each  year.  In  other  words,  the 

amount of yearly contributions is directly transformed into an equal increase in the individual 

PA. Finally, in the year of retirement r the initial annual pension payment equals the level of 

the PA. 

(31)

accrued
B
r

PA=

b r
,

For the estimation of 

 it is necessary to valorise the base year pension account to 

the future point of retirement r. This procedure is outlined in Equation 32. In the case of the 

Nuvos  pension  scheme,  the  pension  account  value  of  a  year  t  is  increased  in  line  with 

inflation  to  the  following  year  t+1.  In  fact,  under  such  price  indexation,  no  future  wage 

increases  need  to  be  taken  into  account.  As  a  consequence,  the  results  of  the  PBO 

estimation  approach  would  equal  the  ABO  outcomes.  Of  course,  other  annual  adjustment 

rules, such as wage indexation, are possible. The valorisation factor v — in Equation 32 — 

reflects the indexation rule of the pension scheme analysed.    

(32)

PA

,
b r

=

PA
b

*

r

+∏
(1

= +
1
i b

v
i

)

92 For a discussion of the choice of the retirement age see Box 11Box . 

 Pension Compilation Guide 

104 

 
 
 
 
 
 
 
 
                                                            
7.4.4  Estimating pension entitlements 

Estimating entitlements for government-managed pension schemes 7 

In  the  sections  above,  the  procedure  to  estimate  the  initial  annual  pension  accrued-to-date 

was outlined — applying both a homogeneous (Chapter 7.4.2) and a heterogeneous 

contribution careers approach (Chapter 7.4.3). In other words, the calculation of the ‘starting 

pension’ of current contributors was described. On this basis, it is relatively straightforward to 

estimate pension entitlements of present contributors. First, the initial pension level 

at retirement year r is projected over the entire remaining retirement phase. This projection 

follows  the  same  procedure  described  for  current  retirees.  For  the  projection  of  current 

contributors´ benefits, (post-retirement) indexation rules also need to be taken into account. 
and  future  adjustments  in  the  benefit  formula  have  to  be  considered.  A  more  detailed 

description  of  the  projection  of  pension  benefits  over  the  remaining  retirement  phase  is 

provided in Chapter 7.3.  

On the basis of the benefit projection, 

 the annual pension benefit received 

by  a  current  contributor  can  be  calculated  for  any  future  year.  To  estimate  the  expected 

entitlements,  future  pension  payments  are  weighted  in  a  further  step  by  the  respective 

survival probabilities 

. Finally, all future pension payments are summed up and discounted 

to the base year (see Equation 33 below).93  

(33)

E

x,g,b

=

D

∑

= +
s x
1

B

accrued
s g f
,
,

*

p
s g f
,
,

*(1

+

r −
x s
)

An  example  of  the  procedure  to  estimate  pension  entitlements  for  current  contributors  is 

provided in Box 17. 

Box 17 

Estimation of pension entitlements of current contributors 

This  case  study  outlines  the  estimation  procedure  to  calculate  pension  entitlements  of  current 
contributors.  This  example  is  used  to  calculate  the  pension  rights  of  a  40-year-old  male 
contributor, base year 2010. This individual is expected to retire at the age of 61 (in 2031). At the 
beginning of his retirement he can look forward to receiving a full pension benefit of EUR 10,000 
(see first green bar, Figure 24), representing a pension payment after a full contribution career.  

For the estimation of pension entitlements, however, only accrued-to-date pension benefits are 

 Pension Compilation Guide 

105 

 
 
 
 
  
Estimating entitlements for government-managed pension schemes 7 

taken  into  account.  In  the  example  given,  the  initial  annual  pension  benefit  accrued-to-date 
) will amount to EUR 5,000 (see first red bar, Figure 24). In other words, the 40-year-
(

old contributor would be entitled only to half of his future (expected) full pension. This proportion 
has been estimated on the basis of the homCC approach, described in Chapter 7.4.2. 

Pensions  are  paid  until  his  expected  death  after  the  age  of  80  (after  2050).  To  keep  the  case 
study simple, all values are calculated in real terms and price indexation is assumed. According 
to  these  assumptions,  he  can  expect  to  receive  the  value  of  the  initial  pension  over  his  entire 
retirement. 

The  aim  is  to  calculate  pension  entitlements  in  the  present  value  terms  of  the  base  year.  All 
future accrued pension payments are therefore discounted. Since these future flows are paid out 
in the far future, in 20 to 40 years they are heavily discounted (see blue bars in Figure 20). At 
this  stage  of  the  estimation,  an  important  aspect  becomes  apparent.  Younger  contributors 
especially  have  accrued  only  relatively little  pension entitlement. This can  be explained  by two 
factors.  First,  their  future  pension  payments  are  paid  out  in  the  far  future,  and  are  therefore 
heavily  discounted.  Secondly,  they  have  accrued  only  a  relatively  small  proportion  of  their  full 
pension. Therefore, younger cohorts play only a minor role in the total of pension liabilities. This 
aspect  should  be  kept  in  mind  when  setting  up  a  pension  model.  It  is  important  to  focus 
especially  on  the  estimation  of  pension  entitlements  of  present  pensioners  and  older 
contributors, since they have the largest impact on the total value of pension liabilities. 

Finally, all discounted accrued-to-date pension payments are accumulated to obtain the stock of 
pension entitlements. For the example of the 40-year-old male contributor, these pension rights 
would amount to about EUR 30, 000 in the base year (see blue bar to the far left). Analogously, 
for  all  other  age  groups,  pension  rights  should  be  calculated  and  projected  differentiated  by 
gender.94 

Figure 24 

Estimating pension entitlements of current contributors 

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

93 Please note that Equation 33 equals Equation 5. For a description of the used parameters and variables see, 
therefore, Equation 5. 
94 In the given example it was so far assumed that current contributors reach with certainty the age of retirement. 
This is of course not a realistic presumption since a certain, though, small proportion of contributors is expected to 
die before they can receive any pension benefits. The aim of the estimations is to calculate the expected pay-out 
of pension benefits. Therefore, the mortality of current contributors should be taken into account by weighting the 
final pension with the probability to reach the respective retirement age. This aspect is considered in Box 18 with 
the probability to die before retirement. 

 Pension Compilation Guide 

106 

 
 
 
                                                                                                                                                                                          
 
7.4.5  Differentiation by type of pension 

Estimating entitlements for government-managed pension schemes 7 

As  outlined  in  Box  3,  the  supplementary  table  covers  various  types  of  pensions.  The  most 

significant  category  for  the  estimation  of  entitlements  is  old  age  pensions.  Generally,  the 

largest  amount  of  pension  expenditure  and  entitlements  is  determined  by  this  type  of 

pension.    However,  disability,  early  retirement,  widows'  pensions  and  orphans'      pensions 

should  also  be  considered  in  this  new  table  of  national  accounts.  As  an  example  Table  4 

displays  the  breakdown  of  aggregate  payments  by  type  of  pension  for  the  social  security 

pension scheme in Slovakia. 

Table 4 

Differentiation of aggregate payments by type of pension — the example of the 

Slovakian social security pension scheme 

Type of pension payments 

Total of pension payments 

Old age pensions 

Disability pensions 

Survivor pensions 

Pension payments 

SKK billions, 2007 

126.519 

96.148 

15.380 

14.991 

It is desirable to distinguish among pension types, for two main reasons: the benefit formula 

and  the  resulting  pension  levels  may  vary  considerably  between  pension  types;  and  the 

duration  for  which  participants  receive  a  specific  benefit  may  vary  significantly  by  pension 

type.  While  old  age  pensions,  for  instance,  are  granted  until  death,  disability  benefits  are 
usually paid until the legal retirement age or the death of the beneficiary.95 Box 18 outlines 

how to differentiate the calculation procedure by pension type.  

In  some  countries,  however,  the  data  and  resources  to  differentiate  by  pension  types  in 

making  the  calculations  may  not  yet  be  available.  In  such  cases,  it  is  best  to  focus  on  the 

calculation of old age pension entitlements, due to their relative importance (see Table 4): a 
detailed estimation of disability and survivors' pension entitlements (for current contributors)96 
may  initially  be  disregarded.97  Under  such  circumstances,  the  final  old  age  pension 

95 Also pension type specific survival rates may represent a reason to differentiate the calculation by pension type. 
E.g. survival rates of disabled individuals (
may deviate from the average survival rates applied for old age. 
If possible — as outlined already in section 5.3.1 — such pension type-specific survival rates should be taken into 
account. 
96 For present pensioners the estimation procedure is more straightforward. For this group a differentiation in the 
course of the calculations by pension type should, possibly, always be applied. 
97  For  the  development  of  a  pension  model  it  should  always  be  taken  into  account  which  factors  play  the  most 
decisive  role  for  the  final  results.  Generally,  about  half  of  pension  entitlements  are  accrued  by  current 

 Pension Compilation Guide 

107 

 
 
 
 
 
 
                                                            
Estimating entitlements for government-managed pension schemes 7 

entitlements of a current contributor should be rescaled by a factor reflecting the ratio of the 

total  aggregate  pension  payments  and  the  aggregate  of  old  age  pension  payments  in  the 
base year.98  

Differentiation of estimations for current contributors by pension type 

Box 18 

The  aim  of  the  calculations  is  to  estimate  entitlements  for  different  types  of  pension:  old-age  and 
early  retirement,  disability  and  survivors’  pensions.  The  calculation  procedure  should  distinguish 
between these pension categories. This approach is explained below. The description is provided 
for a homCC approach. But it is also applicable for a hetCC approach after the consideration of a 
few minor modifications.99  

at age 

Pension entitlements of current contributors should reflect the fact that these individuals retire with 
a certain probability 
, but also that they may become disabled or may die with a certain 
probability  at  an  age .  Their  pension  rights  should  represent  the  probability-weighted  sum  of 
entitlements  for  each  of  these  pension  types.  Equation  34  provides  a  formal  outline  of  the 
estimations  differentiating  by  pension  type.  The  formula  reflects  heterogeneous  retirement  ages 
 is calculated. Moreover, the present value 
  is  calculated  for  each  type  of  pension  considering  the  type-

.100 For every  the accrual factor 

of  the  expected  payment  stream 
specific survival rates p and pension benefits B.  

(34)

E

x,g,b

=

D

∑

d=x+1

λ
[
x,g,d,b*[q

old

x,g,d,f

*
PV

old

+

q

disab
x,g,d,f

*
PV

disab

+ q

surv
x,g,d,f

*
PV

surv

]

PV

old
x g d f
,
,

,

=

PV

disab
x g d f
,
,
,

= 

PV

surv
x g d f
,
,

,

=

old

D

∑

=
s d
disab
D

∑

=
s d
+
d D

∑

=
s d

(

p

old

s g m
,

,

*

B

full old
,

s g d m
,

,

,

*

(1

+

r

)

−
x s

)

full disab
,

s g d m
,

,

,

*(1

+

r

)

−
x s

)

(

p

disab
s g m
,
,

*

B

surv

p

surv

surv

+
s u

,

g

surv

,

m

*

B

full surv
,

s g d m
,

,

,

*(1

+

r

)

−
x s

where  

  the  accrual  factor  of  a  participant  of  age  x  and  gender  g  in  the  base  year  who 

retires/becomes disabled or dies at age ,  

 = the probability of a 
101  

 year old to retire at an age 

 and to receive 

 in a future year 

contributors.  Of  these  half  about  70  per  cent  are  old  age  pension  entitlements.  Old  age  pensions  are  therefore 
rather  significant  for  the  final  level  of  pension  entitlements  while  disability  and  survivors’  pensions  play  a  less 
important role. One may conclude that ‘only’ about 15 per cent of overall pension entitlements are calculated not 
in depth when disregarding disability and survivors’ pensions of current contributors. 
98 This rescaling approach has been applied e.g. by Holzmann et al. (2004), see p.34. In the Slovakian example 
shown in Table 4 the rescale factor would amount to about 1.3. In this example it is assumed that only old age 
pension have been calculated in detail by the actuarial model. Of course, it also imaginable that further types of 
pensions (besides old age pensions) can be estimated in detail and fewer categories have to be disregarded. In 
this case the rescale factor would consequently decrease. . 

 Pension Compilation Guide 

108 

 
 
 
                                                                                                                                                                                          
 
 
 
 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

 = the probability of a 

 year old to become disabled at an age 

 and to receive 

 in a 

future year 

, 

 = the probability of a 

 year old to die at an age 

 and to have a surviving spouse/orphan 

who receives 

 in a future year 

=  the  present  value  of  the  expected  payment  stream  of  old  age  and  early  retirement 

pensions after retirement at age d in future year

, 

= the present value of the expected payment stream of disability pensions, 

= the present value of the expected payment stream of survivors pensions,  

=  the  annual  full  old  age  or  early  retirement  pension  benefit  at  age 

in  year 

  after 

retirement at age 

, 

= the annual full disability pension benefit at age   in year 

 after the participant became 

disabled at age 

= the annual full survivor’s pension benefit at age   in year 

 after a participant died at 

age 

, 

= a future year after retirement/disability/death 

    = the highest possible age to receive 

, i.e. the highest age considered in the calculations, 

     = the highest possible age to receive 

, 

      = the number of years a spouse/orphan at age 

 can at most receive 

, 

      = the probability of an old age pension beneficiary of gender 

to survive an age  , 

     = the probability of a disability pension beneficiary of gender 

to survive an age  , 

            =  the  probability  of  a  survivor’s  pension  beneficiary  of  gender

  to  survive  an  age 

, 

= the number of years, positive or negative, that when added to the participant’s age (in the 

year of his death) gives the age of the surviving spouse (in this year).  

 would be omitted. Furthermore, annual pension benefits 

99  In  case  a  hetCC  approach  is  applied  accrued  pension  benefits  are  estimated  directly.  Therefore,  the  accrual 
factor 
 would reflect not a full pension but accrued-to-
date pension payments estimated on the basis of past contribution data — as described in chapter 7.4.3. 
100  In  case  homogeneous  retirement  behaviour  is  assumed  it  is  recommended  to  choose  separately:  1)  one 
average retirement age, 2) one average age to become disabled and 3) one average age to die during the time of 
contribution. For a further description on heterogeneous and homogeneous behaviour see Box . 
101  In  various  countries  the  entitlement  of  a  pension  is  dependent  on  a  minimum  period  of  membership  or 
contribution  in  the  pension  system.  For  example,  in  Italy  20  years  (for  people  insured  before  the  year  1996)  of 
contribution are necessary to receive a pension entitlement while in Belgium no minimum period of membership in 
the  pension  system  is  required.  The  variable 
  should  possibly  reflect  the  probability  to  reach  the  minimum 

periods of contributions, i.e. to be eligible to a pension benefit.   

 Pension Compilation Guide 

109 

 
 
 
                                                                                                                                                                                          
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimating entitlements for government-managed pension schemes 7 

The  approach  to  calculating  pension  entitlements  for  average  present  pensioners  (Section 

7.3) and for average current contributors (Section 7.4) has been described). The distribution 

of pension entitlements for each age group and gender can then be estimated. The last step 

for  estimating  the  total  pension  entitlements  of  a  respective  pension  scheme  is  relatively 

simple. As outlined in Equation 35, all average pension entitlements calculated by age and 

gender in the previous steps need to be multiplied by the respective cohort sizes N in these 

groups. The sum represents the total of pension entitlements 

 in the respective scheme 

in present values of the respective base year b.  

(35)

=

TE
b

D

∑

=

0

s

E

male
s b
,

*

N

male
s b
,

+

D

∑

=

0

s

E

female
s b
,

*

N

female
s b
,

 Pension Compilation Guide 

110 

 
 
 
   
 
Estimating entitlements for government-managed pension schemes 7 

Worked examples 

 Pension Compilation Guide 

111 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worked examples

8 

8  Worked examples 

In this section worked examples are provided in order to complete the new supplementary 

table  of  national  accounts.  These  case  studies  include  the  application  of  an  actuarial 

model  to  estimate  both  the  pension  entitlements  of  social  security  pension  systems 

(column  H),  and  those  of  government  employee  pension  schemes  (column  G)  —  see 

Section  8.1.  Additionally,  the  use  of  business  accounting  data  and  regulatory  data  to 

compile the figures in columns A to C is described — see Section 8.2. 

8.1  Using an actuarial approach to fill in columns G and 
H 

The  following  section  provides  a  worked  example  for  the  estimation  of  pension 

entitlements recorded in columns G and H. First, the so-called Freiburg model is outlined 

— which is applied to estimate these new figures in the national accounts. Thereafter, the 

outcomes  of  the  actuarial  approach  will  be  presented  using  the  example  of  the  German 

supplementary table of 2007. 

The  Freiburg  model  has  been  developed  to  make  benchmark  calculations  of  pension 
entitlements  on  behalf  of  the  Eurostat/  ECB  Contact  Group  on  Pensions.102  The  starting 
point for the Freiburg model is the method of generational accounting.103 This method can 

be  used  for  a  wide  variety  of  purposes.  For  this  project,  the  method  is  applied  to 
government-managed pension schemes104 in isolation and to a group of existing retirees 
and  current  contributors  (future  retirees)  only.105  Additionally,  the  standard  method  is 

modified  to  account  for  the  amount  of  benefits  accrued  to  date,  instead  of  considering 

future  pension  benefits  in  total.  These  calculations  include  old-age  pensions,  disability 

pensions and survivors’ pensions. Any kind of means-tested social assistance is excluded 

wherever  feasible.  In  order  to  estimate  the  entitlements  of  current  contributors,  the 

approach  is  based  on  the  homCC  approach  described  in  Chapter  7.4.2.  However,  the 

Freiburg model may also be applied to a hetCC approach as outlined in Chapter 7.4.3. 

102 The model has been applied for 19 EU countries. For an outline of the results see Müller et al. (2009). 
103  This  method  was  developed  by  Auerbach  et  al.  (1991,  1992  and  1994).  See  Raffelhüschen  (1999)  and 
Bonin (2001)  for  a  detailed  depiction  of  theory  and  application  as  well  as  limitations  of  the  method  of 
generational accounting. 
104  The  terms  ‘public  pension  scheme’,  ‘government  pension  scheme’  and  ‘pension  scheme  in  general 
government’ are used as synonyms. However, we differentiate between two different types of schemes. The 
government  employer  pension  scheme  indicates  a  pension  scheme  for  civil  servants,  whereas  a  social 
security  pension  scheme  describes  a  general  pension  scheme.  For  a  discussion  of  the  definition  of 
government pension schemes see Eurostat/ ECB Task Force (2008), p. 20 et seq. 
105 For a closer look on the application of generational accounting to public pension schemes see Müller et al. 
(2010) or Jablonowski et al. (2010) who employed the concept of open-system net liabilities to investigate the 
sustainability of the German and the Polish statutory pension scheme respectively. 

 Pension Compilation Guide 

112 

 
 
 
                                                            
Worked examples

8 

The core presumption is a projection of per capita future pension benefits based on those 

of  today’s  existing  retirees:  the  entire  calculation  procedure  is  set  out  in  the  five  steps 

described below. 

Step  1  —  Population  projection:  Age-sex-specific  projections  of  the  base  year’s 

population  need  to  be  calculated.  The  demographic  model  used  to  generate  these 

projections is based on a discrete and deterministic formulation of the cohort component 
method.106 

In general, the three major determinants of future population changes are fertility, mortality 

and  migration.  Since  ADL  only  take  into  account  rights  accrued  by  existing  and  former 

workers  before  the  base  year,  the  future  migration  of  the  base  year  population  is 

irrelevant.  The  development  of  survival  rates  is  examined  by  adjusting  the  initial  set  of 
survival rates using an exponential adjustment procedure.107 

Figure 25 

Projected German population 

Source: Source: Forschungszentrum Generationenverträge, University of Freiburg, based on data provided by 
Eurostat. 

The population data used for the calculation come from Eurostat. Also the assumptions on 

the  future  trend  in  life  expectancy  are  based  on  data  provided  by  Eurostat,  i.e.  the 

106 For a detailed description of the demographic model applied see Bonin (2001), p. 245 et seq. 
107 This procedure is suggested by Pflaumer (1988). See also Bonin (2001), p. 248. 

 Pension Compilation Guide 

113 

 
 
 
 
                                                            
Worked examples

8 

Eurostat population projection (EUROPOP). Both declining fertility rates and the ongoing 

and  fairly  steep  increase  in  life  expectancy  have  led  to  a  significant  ageing  process  in 

Germany.  As  a  result,  the  configuration  of  the  German  population  pyramid  will  change 

considerably in the coming decades. Figure 25 illustrates the outcomes of the population 
projection for the years 2006, 2020 and 2050 as examples.108   

Step  2  —  Projecting  the  pensions  of  existing  retirees:  The  projection  starts  by 

estimating the benefits of the average age-sex-specific existing retirees in the base year. 

As  mentioned  above,  the  projection  of  these  pension  benefits  is  the  centrepiece  of  the 

calculations,  the  accrued  pension  benefits  of  the  future  new  retirees  are  developed  by 

changing the benefits of the existing retirees. Please note that future new retirees include 

all  individuals  who  retire  after  the  base  year,  while  existing  retirees  are  already  in 

retirement in the base year.  

It has to be emphasised that these calculations look only at average individuals within the 

respective age groups, i.e. they are not separated into different income groups. In fact, the 

calculation of age-sex-specific benefits is separated into existing and future new retirees, 

assuming  that  an  average  representative  of  an  age  group  is  to  some  extent  an  existing 

and a future new retiree in every year of his or her life-cycle.   

The example of a 65 year old average representative may make this easier to understand. 

At this age this representative individual is to a large extent already retired, as he/she is an 

existing  retiree.  Nevertheless,  with  the  concept of  the  representative  individual,  the  fact  is 

also  taken  into  account  that  —  although  the  probability  is  low  —  the  65  year  old  average 

representative may not retire until he/she is aged 66 or older. Hence, the average 65 year 

old taken as an example in the calculations is also to some extent a future new retiree. 

Generating age-specific pension profiles 

Before going further into detail, the projection approach for the benefits of existing retirees 

is  outlined  here.  First  of  all,  the  benefits  are  calculated  by  distributing  the  aggregated 

amount  of  today’s  pension  expenditure  to  the  different  cohorts  of  retirement  age.  This 

procedure creates a cross-section profile of age-sex-specific benefits generated from the 

budget and micro data of the observed country, in this case Germany.  

Figure 26 shows an average rescaled109 profile of existing retirees’ benefits for living male 
cohorts  in  the  year  2006.110  This  profile  reflects  heterogeneous  retirement  behaviour.111 

108 In line with the ADL concept future migration is neglected. 

109  The  profiles  are  rescaled  in  a  way  that  the  aggregates  based  on  micro-profiles  and  population  data 
correspond  to  the  respective  government  budget  aggregates  in  the  base  year.  This  rescaling  approach  is 
described in further detail below. 

 Pension Compilation Guide 

114 

 
 
 
                                                            
Worked examples

8 

Benefits  are  measured  in  per  capita  of  the  population  units.  In  other  words  the  pension 

benefits  pb,k  (in  the  base  year  b  of  the  cohort  born  in  k)  of  a  x  (x=b-k)  year  old 
representative  residing  in  the  respective  country  in  a  given  base  year  are  quantified.112 

Formally (see Equation 35), pb,k is derived by multiplying the average pension benefit of a 

scheme’s retiree Bb,k of a certain age x by the number of scheme retirees at this age Mb,k 

and dividing this product by the cohort size of the overall population. 

(35)

p

b k
,

=

b k
,

B M
*
C

b k
,

b k
,

Figure 26 

Rescaled profile of average existing retirees’ benefits in 2006 
(Social security in Germany, men, EUR) 

fff
fits
e
n
e
 b
n
io
s
n
e
 p
ita
p
a
r c
e
p

25000

20000

15000

10000

5000

0

0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

age in 2006

Typical  of  most  European  pension  schemes  is  the  sharp  increase  in  the  pension  profile 

around  the  age  of  60.  A  steep  rise  of  this  type  can  also  be  observed  in  the  German 

example (see Figure 26). It mainly reflects an increasing share of pension cases, because 

110  For  illustrative  reasons  we  only  show  here  a  male  profile.  For  the  calculations  also  a  female  profile  was 
applied. 
111 For a description of heterogeneous retirement behaviour see Box . Most former surveys apply one constant 
average  retirement  age  for  their  calculations  instead  of  an  age-sex-specific  pension  profile.  From  our  point  of 
view, this approach represents a simplification of retirement behaviour and leads to less accurate results. 
112 Since our projection method  does not correct aggregates for business cycle effects, base  year economic 
performance is perpetuated indefinitely. This may lead to a bias. Nonetheless this effect seems not as critical 
in case of considering pension expenditure only since they are for the most part dominated by demography. 

 Pension Compilation Guide 

115 

 
 
 
 
 
                                                                                                                                                                                       
Worked examples

8 

the  probabilities  of  retirement  around  the  age  of  60  are  relatively  high.113  It  should  be 

noted  that  the  profile  also  reveals  other  age-specific  characteristics, namely  the  average 

rate  of  participation  in  the  respective  pension  scheme  (in  per  cent  of  the  population)  as 

well as the average pension benefits at a given age (Bb,k). 

The profiles applied include payments in respect of old-age pensions, disability pensions 
and survivors’ pensions.114  

Rescaling the pension benefits of existing retirees 

Formally, the estimation of the existing retirees’ benefits is based on the following identity:  

(36)

P

b

b

= ∑

= −
k b D

p C

b k
,

b k
,

This identity states that the sum of age-specific individual pension benefits pb,k (in the base 

year  b  of  the  cohort  born  in  k)  weighted  by  the  cohort  size  Cb,k  must  equal  the 
corresponding  overall  aggregate  pension  expenditure,  denoted  by  Pb.115  The  problem  of 

Equation  36  is  that  it  applies  only  in  theory.  While  macroeconomic  data  –  which  are, 

typically  taken  from  national  accounting  statistics  -  are  relatively  exact,  micro  data  are 

generally difficult to gather and often inaccurate. To resolve this problem, re-scaled age-

sex-specific benefit profiles are estimated in two stages. First, age-sex-specific information 

regarding per capita pension benefits has to be collected in order to calculate the relative 

fiscal  position  of  different  age  groups  as  accurately  as  possible.  The  vector  of  relative 
pension benefits by age taken from the statistics, (τt,t-D, …τt,k, …, τt,t), is then denoted by 
τt,k.116 This vector is supposed to show only the relative pension position in period t of an 

individual  born  in  the  year  k,  and  thus  imposes  a  lesser  restriction  on  the  accuracy  and 

availability  of  micro  data  at  the  absolute  level.  Second,  the  estimated  relative  age 

distribution  is  checked  against  the  corresponding  aggregate  pension  benefit  Pb  by  the 
application  of  a  proportional,  non-age-specific  benchmarking  factor,  denoted  by  ϕ.  The 

relative distribution of pension payments is re-evaluated according to 

(37)

p

rescal
b k
,

ϕτ=

b k
,

for all living generations b-D ≤ k ≤ b, where ϕ is defined by 

(38)

=
ϕ

∑

b

b

P
τ

= −
k b D

,
b k

. 

C

,
b k

113 At this point it is worth mentioning that we employ age-sex-specific pension data which is broken down into 
one-year intervals. Most former surveys use five-year interval data which can lead to inaccuracies especially 
when looking at the cohorts retiring in. 
114 In doing so, we are able to take into account survivor pensions in a rather accurate way, compared to most 
other surveys dealing with the measurement of pension liabilities. 
115 Please note that D represents the maximum age of an individual which is 100 years by our assumption. 
116 For ease of notation we drop the sex-specific notation as from now on. 

 Pension Compilation Guide 

116 

 
 
 
 
 
                                                            
Worked examples

8 

Equation  38  ensures  that  Equation  36  is  finally  satisfied.  On  the  basis  of  the  rescaling 
factor ϕ, it is ensured that the micro pension data match the given macro data.  

Projecting the pension benefits of existing retirees  

Lastly,  the  resulting  rescaled  average  age-sex-specific  benefits  of  existing  retirees’  are 

projected according to the indexation rules of the respective country: 

(39)

exis

p

,
t k

=

p

rescal

,
b k

+

(1

t b

g −
)

, 

for all cohorts b-D ≤ k ≤ b living in the base year. This Equation 39 states that an individual 

already retired in base year b receives the same pension in a specific year t as in the base 

year  b,  only  corrected  by  the  indexation  g  of  a  pension  in  payment.  In  the  case  of  the 

German  statutory  pension  scheme,  pensions  are  adjusted  annually  to  wage  growth.  For 

the calculations, a real wage growth rate of 1.5 per cent is applied. 

Phasing out the average profile of existing retirees’ benefits from 2006 to 2045 (Social 

security in Germany, men, EUR) 

Figure 27 

2006

2015

2025

2035

2045

fff
rs
a
e
 y
e
tiv
c
le
e
r s
 fo
fits
e
n
e
 b
n
io
s
n
e
 p
ita
p
a
r c
e
p

25000

20000

15000

10000

5000

0

0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

age in year y

Equation 39 also involves a ‘phasing out’ of the stock of existing pension benefits, since it 

applies only to all living generations. Thus, the pensions of all existing retirees for the base 

year  will  have  disappeared  at  the  latest  when  the  youngest  existing  retiree  of  the  base 

year  is  dead.  To  account  for  this  future  cohort-specific  development  of  the  pension 

benefits  of  existing  retirees,  the  rescaled  age-sex-specific  existing  retirees’  profile  is 

 Pension Compilation Guide 

117 

 
 
 
 
Worked examples

8 

phased  out  year-by-year  and  the  pension  benefits  are  indexed  according  to  the  benefit 

formula (see Figure 27). Consequently, the pension benefit of a 65 year old existing retiree 

in base year 2006, for example, would equal the pension benefit of an 84 year old existing 
retiree  in  2025,  disregarding  indexation  effects.117  In  year  2045  the  65  year  old 

representative in the base year would be 104 years old. However, his benefits in that year 

would  be  disregarded,  since  the  calculations  do  not  take  account  of  any  payments  after 

the age of 100.  

Step 3 — Projecting the pensions of future new retirees: The age-sex-specific pension 

profile  for  future  new  retirees,  which  is  the  basis  for  the  estimation  of  accrued-to-date 

entitlements, is calculated by manipulating existing retirees’ benefits in the base year. This 

is  done  in  five  stages.  First,  the  difference  of  the  existing  benefits  for  consecutive  age 

groups (during the base year) provides the pension benefits for new retirees in the base 
year.118  This  provides  the  basis  to  estimate  pension  benefits  for  new  retirees  in  future 

years. In a third step, pension benefits for new retirees are evaluated for a specific year t. 

Thereafter,  if  necessary,  future  new  pension  benefits  are  altered  by  a  deduction  factor 

defined, for example, by a pension reform. As a fifth and last step, the cumulated average 

benefits  of  future  retirees  are  calculated  by  totalling  year-by-year  the  benefits  of  new 

retirees, which explains why an individual can receive a new retiree benefit on average for 
any future year t.119 All of these four steps will be described in greater detail below. 

Estimation of pension benefits for new retirees in the base year 

First, the pension benefits for new retirees in the base year are estimated. Formally (see 

Equation 40), the new retirees’ benefit 

new

b kp

,

 in the base year b for a cohort k is generated 

by calculating the absolute change in existing retirees’ benefit 

cohort one year younger in the base year, namely k+1.120  

exist

b kp

,

of the cohort k to the 

(40)

p

new

,
b k

=

⎡
⎣

p

exis

,
b k

−

exis

p +

,
b k

1

⎤
⎦  

This  example  estimates  the  average  pension  benefit  of  a  60  year-old  new  retiree  in  the 

base  year  2006,  that  is  a  representative  of  the  cohort  born  in  1946  (k=1946).  From  the 

pension data of existing retirees we know that an average male individual of the population 

117  Please  note  that  for  illustrative  reasons  in  all  figures  wage  growth  rates  have  been  set  to  zero. 
Correspondingly, no pension indexation effects can be observed in the figures. 
118 Note that new retirees’ benefits represent those benefits that are paid for the first time upon retirement in a 
specific year t>b. 
119 The separation of existing pensions and future new pensions (pensions paid out for the first time after the 
base  year)  bears  one  big  advantage:  In  case  of  a  pension  reform  which  affects  only  future  pensions,  only 
these pensions are changed while existing pensions are held constant. 
120 Changes after the age of 67 years are generally set to zero since new retirees’ old-age benefits after the 
age of 67 are negligible. The only exception from this rule is widow’s pensions. 

 Pension Compilation Guide 

118 

 
 
 
                                                            
Worked examples

8 

at the age of 59 (i.e. of the cohort k+1=1947) received a pension benefit of EUR 1,300121 in 

2006.  This  figure  reflects  all  pensioners  who  retired  at  the  age  of  59  or  earlier.  The  male 

cohort that is one year older, i.e. born in 1946 and aged 60, received an average pension of 

EUR 3,500 per capita. This pensioner aged 60 is assumed to have been to some extent a 

new  pensioner  in  2006  and  to  some  extent  an  existing  pensioner  —  who  already  retired 

before  the  age  of  60.  So  the  pension  benefit  of  EUR  1,300  —  which  reflects  pension 

benefits  of  pensioners  who  retired  at  the  age  of  59  or  earlier  —  is  allocated  to  existing 

pensioners. The remaining increase of the average pension from the age of 59 (EUR 1,300) 

to  60  (EUR  3,500)  is  accorded  to  new  retirees  entering  at  the  age  of  60.  In  line  with 

Equation 40, the benefit received by new retirees at the age of 60 in base year 2006 would 

amount to EUR 2,200. 

Figure 28 

Rescaled profile of average new retirees’ benefits for 2006 

(Social security in Germany, men, EUR) 

r 
fo
fits
e
n
e
 b
n
io
s
n
e
 p
ita
p
a
r c
e
p

25000

20000

15000

10000

5000

0

0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

age in 2006

The  same  estimation  procedure  as  for  the  example  of  the  60  year  old  new  retiree  in  the 
base  year  is  applied  to  all  relevant  age  groups  from  the  age  of  0  to  100.122  Figure  28 

121 It should  be once again underlined that this figure does  not represent the average pension benefit of a 59 
year  old  retiree.  In  fact,  it  quantifies  the  amount  of  pension  payments  an  average  male  representative  of  the 
overall  population  receives  at  the  age  of  59.  This  representative  individual  is  with  a  high  probability  not  yet 
retired — which explains the relatively low average pension benefit of EUR 1,300 per capita. 
122  We  consider  only  differences  until  the  age  of  67.  After  this  age,  new  retirees’  benefits  are  negligible  This 
treatment  allows  designing  maturation  effects  for  future  retirees’  cohorts  and  is  necessary  since  the  existing 
retirees’ benefit profile after the age of 67 is not a good predictor for future retirees’ benefits. This is due to the 
fact  that  both  average  benefits  and  the  share  of  pension  cases  vary  substantially  across  existing  retirees 
cohorts  reflecting  past  differences  in  working  careers.  Note  that  this  proceeding  nonetheless  maintains  base 
year economic structures for new retirees indefinitely. In particular, the analysis thus abstracts from changes in 
labour force participation and unemployment rates for future new retirees’ benefits. Please note that this does 
not count in case the age-sex-specific survivor pensions are available. In this case we consider the difference of 
the  rescaled  base  year  profile  until  the  age  of  90  in  order  to  take  into  account  widow’s  pensions  in  a  more 

 Pension Compilation Guide 

119 

 
 
 
 
                                                            
Worked examples

8 

illustrates the resulting profile of average benefits of new (male) retirees for the year 2006. 

This  profile  reflects  the  average  pension  payment  per  capita  of  the  population  of  a  male 

individual at age  x, who retires in 2006. The shape of this profile is mainly determined by 

the  probability  of  retiring  at  age  x.  The  kinks  at  the  ages  of  60  and  63  indicate  that  the 

highest probabilities of retiring can be found at these ages. 

Estimation of pension benefits for new retirees in a future year  

So  far  we  have  estimated  the  age-specific  pension  benefits  of  new  retirees  in  the  base 

year. For future years this profile remains constant, i.e. the base year retirement behaviour 
continues  in  the  years  to  come.123  As  a  consequence,  the  pensions  of  new  retirees  in 

future years t are estimated in the same way as in the base year (see Equation 41, step 

2).  Only  the  notation  of  the  respective  cohorts  is  slightly  altered  and  now  linked  to  the 

future year t and the base year b. Accordingly, a new retiree’s benefit 

new

t kp

,

 in a specific 

year t of a cohort k is developed by calculating the absolute change in the benefit of the 

existing retirees of the cohort b-(t-k) (the cohort with the same age (t-k) in the base year b) 
to the cohort one year younger in the base year, namely b-(t-1-k).124 Equation 41 sums up 

the calculation of pension benefit for future new retirees in a given future year t: 

(41)

p

new

,
t k

exis

p

= ⎡
−
+
* (1
)
⎤
⎣
⎦ 14243
144424443
Step

θ−
*
{
Step
4

− − −
t

Step

p

v

− −
(

exis

t b

t k

,
b b

,
b b

,
t k

2

3

1

k

)

(

)

for all cohorts b-D ≤ k ≤ b. 

Added value of the pension benefit for a future new retiree  

The third step takes into account the fact that past pension rights are re-valued annually 
according  to  the  benefit  formula.125  As  a  result,  in  most  pension  schemes  the  pension 

benefits of new retirees in year t+1 will be higher than in the previous year t. This aspect is 
reflected by the valorisation rate (
valorisation factor calculated according to the benefit formula.126  

(see Equation 41, step 3). The variable v is the 

) −+1
t bv

accurate  way. After this age, the data usually is non-representative due to small numbers of cases in the age 
cohorts above 90. 
123 Only in some cases where a future increase of the legal retirement age has been legislated, we alter future 
retirement behaviour respectively. 
124 Changes after the age of 67 years are generally set to zero since new retirees’ old-age benefits after the 
age of 67 are negligible. The only exception from this rule is widow’s pensions. 
125 In some pension schemes past earnings are valorised in other schemes so called pension points during the 
contribution career are yearly adjusted. In NDC schemes individual accounts are annually valorised. Usually, 
the valorisation of such past pension rights — whether reflected by reference earnings, NDC accounts or 
pension points — is linked to wage growth. 
126 Usually, the valorisation rate is linked to the wage growth. 

 Pension Compilation Guide 

120 

 
 
 
   
 
 
 
                                                                                                                                                                                       
Pension reforms 

The majority of European government-managed pension schemes have introduced wide-

ranging reforms in recent years which will lower future pension benefits. In a fourth step, 

Worked examples

8 

the benefits of future new retirees’ are therefore reduced accordingly by a deduction factor 
θ

(see  Equation  41,  step  4).  This  factor  reflects  already  implemented  pension  reforms, 

,t k

such as the raising of the legal retirement age in Germany from 65 to 67. 

Estimating the cumulated benefits of future new retirees  

Lastly,  the  accumulated  future  benefits  of  new  retirees  need  to  be  calculated.  This  fifth 

step  cumulates  year-by-year  all 

future  new  pension  benefits  of  an  x-year-old 

representative (in the base year) during his remaining life cycle. Thus, for example, a 59 

year  old  representative  (in  the  base  year)  will  have  a  certain  probability  of  retiring at  the 

age of 60, 61 and so on. Formally, this is done by cumulating year-by-year 

new

t kp

,

according 

to Equation 42. The accumulated age-sex-specific future pension benefits

for a specific year t of the cohort k are defined as follows: 

(42)

=

p

fut
t k
,

p

fut
−
1,

t

k

(1

+

+

g

)

p

new
t k
,

, 

fut

t kp  of a retiree 

,

From  this  equation  it  follows  that  the  average  individual  born  in  year  k  receives  a  future 

benefit  in  year  t  (t>b)  which  consists  of  the  accumulated  pension  payment  one  period 
earlier (t-1) corrected by the pension indexation g127 plus the pensions paid to new retirees 

in  that  year.  In  other  words,  a  future  new  retiree  (i.e.  an  individual  who  retired  after  the 

base year) in year t is to some extent a new retiree in this year t — receiving 

new

t kp

,

– and to 

some  extent  an  ‘old’  retiree  who  has  already  received  a  pension  benefit  in  the  years 

before t-1. Thus, the age-sex-specific benefit profile for future retirees builds up year-by-

year to project the future accumulated benefits of retirees.   

Figure  29  shows  the  development  of  future  retirees’  pension  benefits  for  selected  years. 

An  example  is  a  50  year  old  male  future  new  retiree  (in  the  base  year  2006).  He  is 

increasingly  likely  to  enter  retirement  in  future  years  (after  the  base  year).  In  particular 

there is a strong probability that he will retire between the ages of 60 and 65, as can be 

seen by looking at the kinks in the profile for the year 2006. In 2025 — when he is aged 69 

— his accumulated future new pension benefits will amount to EUR 12,000. After the age 

of  69,  i.e.  after  the  year  2025,  his  probability  of  taking  retirement  is  close  to  zero.  This 

explains why, in the year 2035 (at the age of 79) or in the year 2045 (at the age of 89), the 

127 The growth rate g reflects the annual indexation of pensions. In Germany pensions are indexed to the wage 
growth. The impact of the sustainability factor needs also to be taken into account. 

 Pension Compilation Guide 

121 

 
 
 
                                                            
amount  of  the  accumulated  future  new  pension  benefits  of  this  person  is  almost 

unchanged and equal to the level in 2025, which was roughly EUR 12,000. 

As Figure 29 shows, after being built up almost completely the right to a full pension (year 

2055), in the case of Germany his profile is considerably lower than the profile of existing 
retirees. This is due to reforms which will considerably lower future pension levels.128 

Worked examples

8 

Figure 29 

Build-up of accumulated future new retirees’ pension  
benefits profile from 2006 to 2055 
(Social security in Germany, men, EUR) 

2006

2015

2025

2035

2045

2055

fff
rs
a
e
 y
e
tiv
c
le
e
r s
 fo
fits
e
n
e
 b
n
io
s
n
e
 p
ita
p
a
r c
e
p

2 5 0 0 0

2 0 0 0 0

1 5 0 0 0

1 0 0 0 0

5 0 0 0

0

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

4 5

5 0

5 5

6 0

6 5

7 0

7 5

8 0

8 5

9 0

9 5 1 0 0

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

age in year y

Step 4 — Considering the proportion of full pensions accrued-to-date: Now, in order 

to  meet  ADL,  only  that  part  of  the  future  pension  benefits  (of  current  workers)  which  is 

earned  until  the  base  year  has  to  be  considered.  This  means  in  turn  that 

new

t kp

,

  must  be 

reduced by a factor  λ

,t k

 representing the cohort-specific amount of entitlements of current 

contributors in relation to the full entitlements.129 

Future pension benefits are thus finally defined by 

(43)

p

fut
t k
,

=

p

fut
−
1,

t

k

(1

+

g

)

+

pλ

t k
,

new
t k
,

, 

for all cohorts b-D ≤ k ≤ b. 

128 For an overview of the considered reforms see Müller et al. (2009), p. 51ff. 
129 The calculation of the factor  λ
Many other surveys work with one single average wage over the whole career which leads to different results. 

requires the knowledge of the average age-sex-specific wage distribution. 

,t k

 Pension Compilation Guide 

122 

 
 
 
 
 
                                                            
Worked examples

8 

The reduction of future retirees’ benefits to account for only the part that is accrued to date 

is outlined in Figure 30. Given that  PBO is applied in this case, the benefits are cut in a 

linear  manner  according  to  the  ratio  of  contribution  years  until  base  year  to  average 

contribution years until retirement. 

Figure 30 

Amount of average future retirees’ pension benefits accrued to date 
Profile from 2006 to 2055 (Social security in Germany, men, EUR) 

2006

2015

2025

2035

2045

2055

fff
rs
a
e
 y
e
tiv
c
le
e
r s
 fo
fits
e
n
e
 b
n
io
s
n
e
 p
ita
p
a
r c
e
p

25000

20000

15000

10000

5000

0

0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

age in year y

Note that the accrued-to-date concept requires a definition of the valorisation and accruing 

process  for  the  entitlements.  As  a  matter  of  principle  there  are  several  possibilities  that 

have to be accounted for, including ABO and PBO. These two approaches, which applied 

in the Freiburg model, are described below. 

Step  5  —  Aggregating  and  discounting  pension  benefits:  Finally,  the  ADL  of  the 

pension scheme are calculated by discounting and adding up the above projected pension 

benefits over the cohorts living in the base year. For the real discount rate, a value of 3 per 

cent has been applied. 

Thus, the ADLb

 (accrued-to-date liabilities of the base year b) can be expressed as follows: 

(44)

ADL

b

=

(

+
b D

b

∑ ∑

=
t b k b D

= −

+

exis

,
t k

p
(1

+

r

)

C

,
t k

fut

,
t k

p
)

−
t b

This means that, in every period t, the pension benefits of the existing retirees (

exis

t kp

,

) and 

the pension rights accrued until the base year (

fu t

t kp

,

) — which are both discounted by the 

factor (1+r) for every future year (t-b) — are multiplied by the number of members of this 

 Pension Compilation Guide 

123 

 
 
 
 
 
Worked examples

8 

age  cohort  Ct,k.  This  is  done  for  each  age  group,  beginning  with  those  born  in  k=b-D, 

which goes back 100 years prior to the base year. 

Figure  31  shows  the  development  of  the  projected  aggregates.  The  sum  of  the  existing 

retirees’ benefits decreases due to the phasing out of the profiles, i.e. due to the ageing of 

existing retirees. By contrast, the aggregated benefits of future retirees show an inverse u-

shaped  pattern,  because  the  future  retirees’  benefits  initially  increase  as  a  result  of  the 

building up of the profile. However, these benefits are reduced accordingly, since only the 

accrued-to-date amount is considered. 

Figure 31 

Future pension expenditure 
(Social security in Germany, EUR billions, present value in 2006) 

fff
R
U
. E
n
 b
s in
re
itu
d
n
e
xp
 e
n
io
s
n
e
p

250

200

150

100

50

0

Sum

Existing Retirees

Future Retirees

2006

2015

2025

2035

2045

2055

2065

2075

Source: Forschungszentrum Generationenverträge, University of Freiburg. 

year

Implementation of ABO and PBO in the Freiburg model 

As described previously in this chapter, pension entitlements are estimated by calculating 

future  pension  payments.  In  layman’s  terms  this  is  done  by  projecting  present  age-sex-

specific  pension  payments  into  the  future,  taking  into  account  the  indexation  of  the 

respective  pension  scheme  plus  any  pension  reforms  which  have  already  been  decided 

and which will have an impact on future pensions. In order to receive the ADL of a pension 

scheme, it is crucial to divide the beneficiaries of future pension payments into two groups: 

The  first  group  consists  of  those  who  are  receiving  pension  payments  today.  The 

members of this group enjoy full pension entitlements because they have already retired 

 Pension Compilation Guide 

124 

 
 
 
 
 
Worked examples

8 

and  are  unable  to  increase  their  pensions  by  paying  contributions.130  The  pension 

payments  of  this  group  —  the  ‘existing  retirees’  (or  more  precisely:  persons  who  are 

already in retirement in the base year) — are accordingly projected in line with the relevant 

indexation until the last retiree dies.  

The  second  group  consists  of  persons  who  do  not  yet  receive  pension  payments.  They 

have earned some kind of pension entitlements in the past — regardless of whether they 

took up employment only one year ago or are close to retirement — and they will probably 

earn more pension entitlements in the future, up to the time when they retire. It follows that 

this  group  does  not  yet  enjoy  full  pension  entitlements.  The  ADL  approach  includes 

entitlements  earned  up  to  the  base  year  only;  therefore  the  projected  future  pension 

payments  of  a  ‘future  retiree’  (or  more  precisely:  a  person  who  will  retire  after  the  base 
year)131 has to be reduced. This introduces the issue of ABO versus PBO: 

New pensioners will enter the pension scheme in every year after the base year. The initial 

question to be answered is what will be the amount of the first paid benefit in relation to the 

new  pensioners’  benefits  in  the  base  year.  Let  the  amount  of  first  paid  pension  — 

sometimes referred to as the primary insurance amount (PIA) — in the year 

 be 

 and 

the constant per-capita wage growth in real terms be 

. When applying the PBO approach, 

the first paid pension will be defined as follows: 
+

=

B

t

(1

g

)

(45)

B

t

Since 

 is assumed to be constant over time, the first paid pension can also be expressed 

subject to the base year  . 

(46)

=

B

+

1

t

B

b

(1

+

g −
) t b

When  changing  to  the  ABO  approach,  it  has  to  be  borne  in  mind  that  no  allowance  is 

made for future pay increases. In the current case, only general wage growth is observed. 

It follows that the first paid pension of a future year t in the ABO approach changes to: 

(47)

B

t

B=

b

The  difference  between  Equations  46  and  47  can  be  explained  by  the  different 

approaches of ABO and PBO. The latter takes into account general future wage growth, 

130 This counts only for pension schemes which do not allow their beneficiaries to increase their pension after 
retirement, i.e. by taking up employment, paying contributions and thus augmenting their pension entitlements. 
131  Please  note  that  ‘future  retirees’  involve  all  individuals  that  retire  after  the  base  year.  In  contrast  to  this, 
‘new retirees’ indicate individuals who retire in a certain year x in the future. Those individuals who retire in the 
year x will in that year enter the group of ‘future retirees’. In the year x +1 they will still be ‘future retirees’ but 
not ‘new retirees’ anymore. 

 Pension Compilation Guide 

125 

 
 
 
 
 
 
                                                            
Worked examples

8 

while ABO does not consider any future changes of earnings; the wage level of the base 
year is kept constant in real terms.132 

The second difference between ABO and PBO can be observed when reducing the initially 

calculated  full  benefits  of  ‘new  pensioners’  according  to  the  concept  of  ADL.  The  full 

benefits  are  reduced  by  a  vector  —  the  ‘accrued-to-date  vector’  –  which  expresses  the 

entitlements  earned  up  to  the  base  year  as  a  share  of  the  amount  of  entitlements  which 

qualifies for a full pension. This share is given for every projection year. It is straightforward 

that  the  share  decreases  from  a  value  close  to  one  for  primary  pensions  paid  out  shortly 

after the base year to a value of close to zero for primary pensions paid out in the distant 

future. This vector is multiplied by the respective accounts of full pension entitlements and 

the  outcome  is  the  amount  of  pension  entitlements  earned  up  to  the  base  year  for  every 

projection year, known as the ‘accrued-to-date entitlements’. The difference between ABO 

and PBO is shown by the different consideration of increases in personal earnings during 

the person’s working life. Generally, the earnings at the beginning of a person’s career are 

less  than  the  average  earnings  and  end  up  somewhere  above  average  as  the  person 

comes closer to retirement. PBO takes this effect into account, ABO does not. 

Regarding  the  accrued-to-date  vector  in  the  PBO  approach,  only  the  missing  amount  of 

contribution  years  has  to  be  taken  into  account,  given  that  the  full  pension  primarily 

calculated by the model includes assumptions for both personal and general wage growth. 

In summary, the difference between ABO and PBO consists of two parts. The first part is 

general wage growth, which in most cases is connected to general economic growth. The 
second part is the development of earnings over the individual’s career.133 

Results of the Freiburg model — the supplementary table of 2007 

Table  5  illustrates  the  results  of  the  actuarial  model,  the  non-core  accounts  of  the 

supplementary  table  for  Germany  in  2007.  A  distinction  is  made  between  social  security 

(column H) and government employee pension schemes (column G). The stocks of pension 

entitlements in these columns are estimated on the basis of the Freiburg model using the 

PBO approach. 

132 It is crucial that this only counts for the calculation of the first paid pension or PIA. When projecting a benefit 
which has already been paid out before, i.e. the indexation of existing benefits, a constant real wage growth is 
assumed. In this regard the ABO approach displays a schizophrenic world where in one situation future wage 
growth  is  considered  and  in  the  other  it  is  not.  Please  note,  that  there  are  other  interpretations  of  the  ABO 
approach which do not consider (post-retirement) pension indexations. 
133 For a further description see also section 7.3. 

 Pension Compilation Guide 

126 

 
 
 
 
                                                            
Table 5 

Supplementary table for Germany 

PBO, EUR billions, 2007 

Worked examples

8 

Source: Source: Forschungszentrum Generationenverträge, University of Freiburg, based on data provided by 
the respective pension schemes.  

Starting  with  the  general  government  employer  pension  scheme  (column  G),  pension 

entitlements  at  the  beginning  of  2007  total  EUR  1129,18  billions  (row  1).  This  figure  is 

calculated  on  the  basis  of  the  Freiburg  model.  In  contrast  to  social  security  pension 

schemes,  there  are  no  actual  contributions  to  this  scheme,  and  so  zeros  are  entered  in 

rows 2.1 and 2.3. The imputed social contributions amount to minus EUR 5.41 billions (row 

2.2).  This  row  serves  as  a  balancing  item.  It  represents  the  difference  between  current 

benefits  and  actual  contributions  payable 

(by  both  employers  and  employees). 

Supplements to household social contributions account for EUR 56.58 billions. In practice, 

they  are  equal  to  the  nominal  discount  rate  (5  per  cent  in  this  case)  times  the  pension 

entitlements at the beginning of the respective base year. The overall increase in pension 

entitlements due to social contributions (row 2) — reflecting the sum of rows 2.2 and 2.4 — 

amounts to EUR 51.17 billions. Pension benefits paid out in 2007 reduce the entitlements 

by  EUR  46.52  billions.  This  figure  has  been  provided  by  the  institutions  responsible  for 

government  employee  pension  schemes,  namely  the  general  civil  servants’  scheme  and 

the supplementary pension scheme (VBL).  

The change in benefits (row 5) amounted to EUR 4.65 billions in 2007. It is calculated by 

subtracting  row  4  from  the  total  of  rows  2  and  3.  There  were  no  changes  of  pension 

entitlements due to other transactions (row 7) such as legislated pension reforms. Nor has 

 Pension Compilation Guide 

127 

 
 
 
 
Worked examples

8 

there  been  a  transfer  of  entitlements  between  schemes  in  2007  (in  column  G). 

Furthermore,  no  changes  in  entitlements  due  to  revaluation  (row  8)  or  other  changes  in 

volume (row 9) need to be considered in 2007. At the end of 2007, pension entitlements 

(row 10) amount to EUR 1,133.83 billions, which is equal to 46.8 per cent of GDP in 2007. 

This figure is also estimated using the actuarial model. Unfortunately, no data on financial 

services —on the cost of running the pension scheme during 2007 — have been provided. 

Therefore, the letter L is entered in the last row 11 — indicating that no data are currently 

available. 

With regard to social security pensions in Germany (column H), the value of the opening 

stock of pension entitlements was EUR 6,522.94 billions in 2007. Actual contributions paid 

by  households  and  employers  account  for  EUR  84.89  billions  and  EUR  78.21  billions 

respectively.  The  data  needed  to  complete  the  rows  2.1  and  2.3  have  been  provided  by 

the  statutory  pension  insurance  scheme  as  well  as  the  old  age  insurance  for  farmers, 

which is also covered by social security in Germany. 

The household contribution supplement comes to EUR 326.17 billions, the residual value 

(row  3)  is  minus  EUR  75.23  billions.  This  row  reflects  the  case  of  actual  social 

contributions  that  are  not  actuarially  based.  In  the  case  of  this  base  year  the  negative 

value is due inter alia to the increase in pension contributions from 19.5 to 19.9 per cent in 

the  German  statutory  pension  insurance  scheme,  without  an  increase  in  pension 

entitlements. Pension benefits in 2007 amount to EUR 234.87 billions, which has led to a 

difference of EUR 179.17 billions in pension entitlements. 

In  2007  Parliament  approved  a  major  pension  reform  of  the  statutory  pension  insurance 

scheme by increasing the legal retirement age gradually from 65 to 67 between 2011 and 

2029.  Furthermore,  a  catch-up  element  was  introduced  into  the  pension  formula  in  2007 

which factors in non-implemented deductions from the period 2011 to 2013. According to 

actuarial  estimates  this  reform  lowered  the  level  of  pension  entitlements  by  EUR  178.19 

billions. — as shown in row 7 (changes in pension entitlements due to other transactions). 

The  final  result,  is  a  closing  stock  of  pension  entitlements  amounting  to  EUR  6,523.92 

billions, which is equivalent to 269.2 per cent of GDP in 2007. 

The service fees to run the pension schemes covered under social security are recorded 

as additional information in row 11. According to the published data, the German statutory 

insurance scheme service fees amounted to EUR 3.57 billions in 2007. 

 Pension Compilation Guide 

128 

 
 
 
Worked examples

8 

8.2  Using business accounts and regulatory data — to 
complete columns A to C 

The  following  section  presents  a  case  study  of  the  completion  of  columns  A  to  C  in  the 

supplementary  table.  Accordingly  only  pension  schemes  recorded  in  the  non-general 

government  sector  are  taken  into  account.  The  worked  example  is  given  for  the 

supplementary table for Germany in the base year 2006. Table 6 shows columns A to C. 

Columns A to C of the supplementary table for Germany, 2006 

Table 6 

Source: Destatis. 

As the example makes clear, the German data do not enable a differentiation to be made 

between defined contributions (column A) and defined benefit schemes (column B). Only 

 Pension Compilation Guide 

129 

 
 
 
 
Worked examples

8 

the  total  of  pension  schemes  classified  in  the  non-general  government  sector  can  be 

reflected  in  the  supplementary  table  in  column  C.  Generally,  when  compiling  the 

supplementary  table,  countries  should  make  a  distinction  between  defined  contribution 

(column A) and defined benefit schemes (column B). 

The total of pension entitlements at the beginning of 2006 (row 1) amounted to EUR 479 
billions. This figure is published annually by the Deutsche Bundesbank.134 It is based on a 

number  of  sources.  Much  of  the  pension  data  was  provided  by  the  German  Federal 

Financial  Supervisory  Authority  (BAFIN).  This  public  institution  is  responsible  for  the 

supervision  of  banks  and  financial  services  providers.  In  this  context  most  pension 

schemes  are  required  to  submit  frequent  reports  to  this  body.  However,  not  all  types  of 

pension  schemes  are  covered  by  the  BAFIN  in  Germany:  other  institutions  such  as  the 

German  Insurance  Association  (GDV),  which  is  the  umbrella  organisation  for  private 

insurers  in  Germany,  provide  data  to  complete  the  data  on  pension  schemes.  The  data 

sources consist of both regulatory and accounting data. In cases where the entries did not 

appropriately  reflect  the  current  value  of  pension  entitlements  on  the  market,  further 

conversions  have  been  applied  in  line  with  the  accounting  standards  of  the  ESA.  The 

increase in pension entitlements due to social contributions (row 2) during the year 2006 

amounted to EUR 49 billions. This number is made up of employers’ actual contributions 

of EUR 35 billions (row 2.1) plus actual household social contributions (row 2.3) amounting 

to EUR 14 billions in 2006. These values come from the German Federal Statistical office 

(Destatis).  It  should  be  emphasised  that  the  data  used  in  row  2.1  and  row  2.3  are  also 
used  in  the  core  accounts.135  Furthermore,  entitlements  have  been  reduced  during  the 

year 2006 due to payments of pension benefits (row 4) amounting to EUR 32 billions. This 
figure  was  also  provided  by  Destatis  and  is  taken  from  the  core  accounts.136  Altogether, 

pension  entitlements  during  the  year  increased  due  to  social  contributions  and  pension 

benefits (row 5) by EUR 17 billions. The stock of entitlements at the end of 2006 (row 10) 

amounted  to  EUR  499  billions.  This  figure,  which  is  provided  by  the  Deutsche 

Bundesbank, is based on the same data as the opening balance (row 1).  

134 See Deutsche Bundesbank (2007), p. 26. 
135 See Destatis (2010), p.248. 
136 See Destatis (2010), p. 244. 

 Pension Compilation Guide 

130 

 
 
 
      
                                                            
Worked examples

8 

References 

 Pension Compilation Guide 

131 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References

References 

Auerbach,  A.,  J.  Gokhale  and  L.  Kotlikoff  (1994),  Generational  accounts:  a  meaningful 
way to evaluate fiscal policy, The Journal of Economic Perspectives, 8 (1), 73-94. 

Auerbach,  A.,  J.  Gokhale  and  L.  Kotlikoff  (1992),  Social  security  and  medicare  policy 
from the perspective of generational accounting, Tax policy and the economy, 6, 129-145. 

Auerbach,  A.,  J.  Gokhale  and  L.  Kotlikoff  (1991),  Generational  accounts:  a  meaningful 
alternative to deficit accounting, Tax policy and the economy, 5, 55-110. 

Berkel,  B.  and  A.  Börsch-Supan  (2004),  Pension  reform  in  Germany:  The  impact  on 
retirement decisions, FinanzArchiv, 60 (3), 393-421. 

Bonin, H. (2001), Generational accounting: Theory and application, Springer, Berlin. 

Börsch-Supan, A., A. Ludwig, and J. Winter (2004), Aging, Pension Reform, and Capital 
Flows: A Multi-Country Simulation Model, Sonderforschungsbereich 504, Discussion Paper 
04-61, University of Mannheim. 

Canton,  E.,  C.  van  Ewijk  and  P.J.G.  Tang  (2003),  Population  Ageing  and  International 
Capital  Flows,  European  Network  of  Economic  Policy  Research  Institutes,  Occasional 
Paper 4. 

Contact  Group  —  Eurostat/ECB  Contact  Group  on  pensions  (2009),  Report  of  the 
Eurostat/ECB Contact Group on the statistical measurement of the assets and liabilities of 
pension schemes in general government to the CMFB, Luxembourg. 

Destatis (2010), Volkswirtschaftliche Gesamtrechnungen (national accounts), Fachserie 18 
Reihe 1.4, Wiesbaden.  

Deutsche Bundesbank (2007), Monatsbericht Juni 2007, Frankfurt am Main. 

Dippelsman, R. (2010), Recording of Defined Benefit Pension Schemes in Macroeconomic 
Statistics, ECB/Eurostat E-Book, p. 18-27. 

European Central Bank (2009), ‘Workshop on Pensions’ 
http://www.ecb.int/pub/pdf/other/ecbeurostatworkshoponpensions201002en.pdf 

European  Central  Bank  (2010),  Entitlements  of  households  under  government  pension 
schemes in the euro area — results on the basis of the new system of national accounts, 
ECB monthly bulletin, 1, Frankfurt am Main. 

European  Commission  (2009),  ‘The  2009  Ageing  Report:  Economic  and  budgetary 
projections for the EU-27 Member States (2008-2060)’, European Economy, 2, Brussels. 

Eurostat/  European  Central  Bank  Task  Force  (2008),  Final  report  of  the  Eurostat/ECB 
Task Force on the statistical measurement of the assets and liabilities of pension schemes 
in general government to the CMFB, Luxembourg. 
Eurostat (2010), Statistical Database, 

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes 

 Pension Compilation Guide 

132 

 
 
 
References

Franco,  D.  (1995),  Pension  liabilities  —  their  use  and  misuse  in  the  assessment  of  fiscal 
policies, Economic Papers, European Commission, p.110. 

Heidler,  M.,  C.  Müller  and  O.  Weddige  (2009),  Measuring  accrued-to-date  liabilities  of 
public  pension  systems  —  method,  data  and  limitations,  Discussion  Paper  Series 
Forschungszentrum Generationenverträge, No 37. 

Holzmann,  R.,  R.  Palacios  and  A.  Zviniene  (2004),  Implicit  pension  debt:  issues, 
measurement  and  scope  in  international  perspective,  Social  Protection  Discussion  Paper 
Series, No 0403. 

IAS  19  — 
http://www.ifrs.org/IFRSs/IFRS.htm  

International  Accounting  Standard  19  Employee  Benefits  (2010), 

IPSAS25  —  International  Public  Sector  Accounting  Standard  25  Employee  Benefits 
(2008), www.ipsas.org/PDF_ipsas_standards_ifac/IPSAS25.pdf 

Mink,  R.  (2007),  General  government  pension  obligations  in  Europe,  IFC  Bulletin,  No  28 
(1), p. 199-209.  

Mink, R. and P. Rother (2007), The statistical recording of implicit pension liabilities and its 
impact  on  household  wealth  and  general  government  obligations,  IFC  Bulletin,  No  25  (1), 
p.241-251. 

Müller, C., B. Raffelhüschen and O. Weddige (2009), Pension obligations of government 
employer  pension  schemes  and  social  security  pension  schemes  established  in  EU 
countries, survey by order of the European Central Bank (ECB), Freiburg. 

Müller,  C.,  B.  Raffelhüschen  und  O.  Weddige  (2010),  Using  pension  data  for  policy 
making — the case of the German pension reforms, ECB/Eurostat E-Book, p. 113-121. 

Raffelhüschen,  B.  (1999),  Generational  accounting  in  Europe,  The  American  Economic 
Review, Papers and Proceedings, 89 (2), 167-170. 

Reinsdorf,  M.  (2010),  Actuarial  Measures  of  Defined  Benefit  Pension  Plan,  ECB/Eurostat 
E-Book, p. 188-215. 

Semeraro,  G.  (2007),  Should  financial  accounts  include  future  pension  liabilities?  IFC 
Bulletin, No 25 (1), p.179-198. 

SNA  —  System  of  National  Accounts  2008  (2009),  released  by  the  United  Nations,  the 
European  Commission,  the  International  Monetary  Fund,  the  Organisation  for  Economic 
Cooperation and Development, and the World Bank, New York. 

Winklevoss H. (1993), Pension mathematics (2nd edition), Pension Research Council of the 
Wharton School of the University of Pennsylvania. Philadelphia. 

 Pension Compilation Guide 

133 

 
 
 
 
 
European Commission 

Technical Compilation Guide for Pension Data in National Accounts

Luxembourg: Publications Office of the European Union 

2011 —  133 pp. —  21 x 29.7 cm 

Theme: Economy and finance 
Collection: Methodologies & Working papers 

ISBN 978-92-79-22515-4 
ISSN 1977-0375 
doi:10.2785/217 
Cat. No KS-RA-11-027-EN-N 

 
 
 
 
 
 
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