Adjustment for the Change in Pension Entitlements

Workers pay into pension schemes so that they will receive money when they retire. In National Accounts, we show this money in pension funds as belonging to the Household Sector. While the fund is held by a financial institution, and the workers cannot get their hands on it for several years, it belongs to the household, and is part of their wealth.

The Social Transfers for any year show what households have paid into pension funds as workers (paid to Government or the Financial Corporation that holds the pension fund), and what they have taken out as retirees in that year.  The difference between what was paid in and what was paid out is an accumulation in the pension fund, which we have to show as belonging to the household, not Government nor a Financial Corporation. This is the Adjustment for the Change in Pension Entitlements, which increases Household Saving.

In summary, employee pension contributions and employer pension contributions follow this winding path in National Accounts:

• They are first paid to households (the worker) as part of Compensation of Employees
• The Household then pays them to the pension fund (Government or a Financial Corporation) as social contributions
• Some of the pension fund total is paid out to households (retirees) as social benefits
• Any difference between what has been paid in as social contributions and paid out as social benefits is treated as if it is transferred to households as the Adjustment for the Change in Pension Entitlements.

Investment Income

Pension funds are invested so that they earn dividends and interest (and other types of Investment Income) for their owners. This income is shown as part of the Investment Income of households in the Sequence of Accounts because the household, not the financial institution, owns that income. It is then paid as Social Transfers by the household back to the fund, as if the household is receiving this income regularly and then paying it back, together with the other pension contributions. So just like other households' social contributions, it is then taken into account as the Adjustment for the Change in Pension Entitlements adds to Household Saving.

Revaluations

If pension funds are invested in shares and the share price goes up, then the pension fund is worth more due to this revaluation. The Adjustment for the Change in Pension Entitlements does not include changes due to these revaluations or other changes in volume which cause funds' value to go up or down. The Adjustment for the Change in Pension Entitlements reflects the value of transactions, not other types of flows. See Financial Assets for more information on flows. 

Read next: Household Saving

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