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1993 SNA Update Information - Consistency Issues
Redistribution of property income

Moderator
Peter Harper
Description
Property income payable and receivable is shown in the distribution of primary income account, giving the strong impression that it is an allocation of the primary incomes generated by production activities in the current period or an immediate reallocation of other property income flows in the same period. However, this need not necessarily be the case. The amounts recorded as dividends are those that enterprises declare as payable. Because they wish to have a steady pattern of dividends over time, in some years they may withhold some of the current period’s primary income and in some years may make dividend payments in excess of the current period’s primary income. This excess may be funded by the liquidation of assets or from holding gains realised in the same or earlier periods. The source of the funding does not affect the classification of the payment as dividends (property income). Likewise, when a bank pays interest, it is recorded as such without verifying what the source of the funding for the payment is. Given the increasing diversification of financial institutions, it is quite possible that some interest may in fact be paid from holding gains made by the bank from dealing in instruments other than loans and deposits.
Given this, the stricture that property income payable to insurance policy holders should be property income received by the insurance company excluding any holding gains seems questionable. The discussion on pension funds suggested that the correct amount of property income attributable to future pensioners should be a sum calculated as an appropriate interest rate times the level of liabilities of the fund to the beneficiary at the beginning of the year. It is in fact the increase in the liability due to the future pensioner because the pension date has become one year nearer. It is accepted that this should be the appropriate amount registered as property income payable to the beneficiary regardless of the source.
Although life insurance has never been discussed explicitly in the lead-up to the update, it seems straightforward to say that the property income payable to the beneficiaries should also represent a return to the beneficiaries which in most cases would be adequately represented as a rate of interest times the liability outstanding at the start of the year. Including this sum as the amount of insurance premiums supplements payable in the case of life insurance would go a long way to avoid the case of negative output for life insurance companies when only actual interest or dividends are included in the redistributed property income treated as premium supplements. It would also lead to similar levels of output for life companies with similar liabilities but one with a portfolio of interest bearing assets and one with assets bringing capital gains.
If this principal is accepted for life insurance, it would seem appropriate to follow it for non-life insurance also.
The role of own funds is relevant here also but not in the way that the SNA presently describes them. The purpose of “own funds” is to provide a source of finance for meeting liabilities in the case that the investment policy of the insurance company is unsuccessful in the sense of providing insufficient revenue in the current year to meet its liabilities falling due in the year. The level of own funds has little relevance to the amount of property income which should be regarded as being redistributed to the policy holders.
Next Steps
The AEG agreed that the conventions regarding what can be recorded as property income and what should be omitted from property income as a holding gain is not fully consistent in the SNA. The ABS volunteered to write a paper on the subject and moderate an electronic discussion on the topic to try to find a more consistent approach or better rationale for the present treatment for inclusion in the update.
Paper prepared by ABS:  
Comments
Number of comments: 19
  Date postedSourceComment
 04/10/2006Irena TvarijonaviciuteAgree
 02/10/2006Ole BernerAgree
 02/10/2006Brent MoultonI agree with Peter van de Ven's comments. I would have preferred that the measure used for calculation of output should have included expected holding gains/losses. Their omission in this case has created inconsistencies in the system. Regarding the specific question that was posed regarding rerouting, like Peter van de Ven I would have thought that this could be handled most simply as a revaluation.
 30/09/2006Peter van de VenLike Pete Harper, I would have preferred another decision on the recording of property income attributed to (non-life) insurance policy holders. In my opinion, one should first make a clear distinction between the (expected) income used for the calculation of output and the income recorded in the primary income accounts. In the former case, (expected) holding gains and losses should be included. In the latter case, including/excluding holding gains and losses depends, in my opinion, on the (non-)existence of a direct relationship between the income from the assets and the income allocated to the liabilities, i.e. much the same as the distinction that has been made in para. 37 of the original paper by Pete. As we are dealing with a kind of imputation here, I would generally prefer a recording including holding gains and losses (more or less according to defined benefit life insurance schemes).
Coming to the proposal of the ISWGNA, I do not understand the rerouting part. As I see it, the issue is how to add the holding gains (or losses) earned by the insurance corporation (and distributed to the insurance policy holders) to the liabilities of the insurance corporation and to the assets of the policy holders. In my opinion, this can be done by a simple revaluation of the relevant assets and liabilities. Or not?
 29/09/2006Bank of KoreaWe are generally in agreement with the recommendation of the AEG.
 29/09/2006A.C. KulshreshtaI am inclined to agree with the proposed ISWGNA treatment of the ‘rerouting’ of holding gains and losses on non-life insurance technical reserves
 29/09/2006Johan PrinslooYes, I support the ISWGNA‘s proposal.
 28/09/2006Reimund MinkI also agree with the ISWGNA decision not to record expected holding gains and losses on non-life insurance technical reserves as a transaction. It should be recorded as a re-routing as described in the annex.
 28/09/2006Peter HarperI could live with the proposed ISWGNA treatment of the 're-routing' of holding gains and losses on non-life insurance technical reserves, but I'm disappointed that it has been decided that the expected holding gains should not be shown as a transaction. I believe that, conceptually at least, these expected holding gains do form part of premium supplements (as part of the 'price' of the insurance service), but I recognise that in practice they could be difficult to measure.
 27/09/2006Mariam CoverRegarding question #6 I support option #3 mentioned paragraph 25.
 26/09/2006Heidi ArboledaI agree with the treatment of holding gain and losses on non-life insurance but not quite convinced with the entry of holding gain to households and back to non-life insurance.
 20/09/2006Roberto Luis Olinto RamosQuestion 1: yes
Question 2; yes
Question 3: yes
Question 4: yes
Question 5: no
Question 6: no
Question 7: yes
Question 8: yes
Quesiton 9: yes
Question 10: yes
Question 11: yes
Question 12: yes
 15/09/2006Johann PrinslooQuestion #1
I agree that the source of income is not relevant when recording interest in the system.
Question #2
Yes, a clarification in line with the revised BOPM is important.
Question #3
Yes, I agree that the principle should also be applied to other corporations.
Question #4
Yes, agree that retained earnings should be recorded excluding holding gains.
Question #5
Suggestion is no change to the 1993 SNA.
Prefers alternative 3 in paragraph 25.
Question #6
No I do not support this proposal.
Question #7
Yes I agree.
Question #8
Yes the SNA 1993 treatment should be retained.
Question #9
Yes I agree to treat property income the same way for life insurance and analogous pension funds.
Question #10
Yes I agree.
Questions #11
No, there seems to be no general consistency problem.
Questions #12
N/A
 13/09/2006UNSDQuestion 1: yes
Question 2; yes,
Question 3: yes,
Question 4: yes,
Question 5: no,
Question 6: no,
Question 7: yes
Question 8: retain current treatment
Quesiton 9: yes
Question 10: yes
Question 11:no
Question 12: no inconsistency
 13/09/2006Robin LynchQuestion #1
YES. It is not the source of funds or payments that the System records; but the entitlement to earn interest over a given period of time regardless of the source of funds to effect payment.
Question #2
YES. There is merit in adopting this approach. It avoids the introduction of erratic movements in the GNI series.
Question #3
YES. It is important that consistency is maintained within the System, which is one of the objectives of the updating process.
Question #4
YES. Consistency of treatment is paramount within the System. There is no compelling argument for them to be treated differently from insurance enterprises or depository corporations.
Question #5
NO. While problems of estimating the output of insurance enterprises are widely acknowledged, this issue can not be resolved by introducing an inconsistency into the System. Again, if this were to be done, insurance output series are likely to be erratic as a result of movements in the level of holding gains and losses.
Question #6
NO. For the same reasons as given in Question 5 above. These flows should not be treated in the same way as interest or stock dividends. Unlike interest or stock dividends such income is irregular and their magnitudes can sometimes be substantial and/or erratic. Recognising these as primary income would undoubtedly introduce erratic movements in GNI series.
Question #7
YES. It is reasonable.
Question #8
YES. The treatment should be retained.
Question #9
YES. It is reasonable.
Question #10
YES. It is reasonable.
Question #11
NO. There is no inconsistency. However, the proposed changes will undoubtedly lead to an inconsistency in the SNA.
Question #12
See answer to Question #11.
 06/09/2006A.C. KulshreshtaQuestion#1
Yes. If the interest is from current income, it is o.k.If it is from other sources, it would be appropriately considered in the system
Question#2
Yes, should be clarified
Question#3
Yes
Question#4
Yes, retained earnings should be recorded excluding holding gains
Question#5
In my view No case for seeking change in SNA 93 treatment
Question#6
No i would not support
Question#7
Yes, it is reasonable
Question#8
Yes, SNA1993 treatment of property income on defined contribution pension schemes should be retained
Question#9
Yes
Question#10
Yes
I fully agree to what is said in para 37, 38,and 39,
Question#11
No. I dont think a case of inconsistency in SNA1993 with regard to the treatment of property income and holding gains that needs to be addressed in update process
Question#12
In view of response to Q#11, Not applicable
 06/09/2006A.C. KulshreshtaQuestion#1
Yes. If the interest is from current income, it is o.k.If it is from other sources, it would be appropriately considered in the system
Question#2
Yes, should be clarified
Question#3
Yes
Question#4
Yes, retained earnings should be recorded excluding holding gains
Question#5
In my view No case for seeking change in SNA 93 treatment
Question#6
No i would not support
Question#7
Yes, it is reasonable
Question#8
Yes, SNA1993 treatment of property income on defined contribution pension schemes should be retained
Question#9
Yes
Question#10
Yes
I fully agree to what is said in para 37, 38,and 39,
Question#11
No. I dont think a case of inconsistency in SNA1993 with regard to the treatment of property income and holding gains that needs to be addressed in update process
Question#12
In view of response to Q#11, Not applicable
 06/09/2006IMFQuestion #1
We agree that the source of income is not relevant when recording interest in the system.
Question #2
We agree that the SNA should be clarified in line with the revised BOPM. Some further thought should be given to the character of bonus shares as they might cover both equity and property income payments.
Question #3
We agree with the extension of the recommendation regarding dividends from public corporations to other corporations (in obvious cases), although a concern was raised about making this extension in this late stage of the update process.
Question #4
We agree with excluding holding gains from the retained earnings in investment funds.
Question #5
We do not think the 1993 SNA should be changed to have property income attributed to non-life insurance policyholders include holding gains accruing to non-life insurance enterprises. Concerning the alternatives you offer in paragraph 25, we prefer rerouting holding gains through the other changes in volume account (option (3)).
Question #6
We do not support this proposal.
Question #7
We agree to record property income on defined benefit pension schemes disregarding the sources from which they are paid when due.
Question #8
We wish the SNA 1993 treatment retained.
Question #9
We agree to treat property income the same way for life insurance and analogous pension funds.
Question #10
We agree with this proposal.
Questions #11 and #12
We do not think there is a general consistency problem. The table in paragraph 37 provides a neat coherent way to deal with holding gains in the context of property incomes. That said, we also think there is still some work to be done to clear up issues around dividends, dividends adjusted for exceptional payments, and reinvested earnings, but we do not think this could be done as part of this Update. Rather, these are issues the income task force should work out further.
 06/09/2006IMFQuestion #1
We agree that the source of income is not relevant when recording interest in the system.
Question #2
We agree that the SNA should be clarified in line with the revised BOPM. Some further thought should be given to the character of bonus shares as they might cover both equity and property income payments.
Question #3
We agree with the extension of the recommendation regarding dividends from public corporations to other corporations (in obvious cases), although a concern was raised about making this extension in this late stage of the update process.
Question #4
We agree with excluding holding gains from the retained earnings in investment funds.
Question #5
We do not think the 1993 SNA should be changed to have property income attributed to non-life insurance policyholders include holding gains accruing to non-life insurance enterprises. Concerning the alternatives you offer in paragraph 25, we prefer rerouting holding gains through the other changes in volume account (option (3)).
Question #6
We do not support this proposal.
Question #7
We agree to record property income on defined benefit pension schemes disregarding the sources from which they are paid when due.
Question #8
We wish the SNA 1993 treatment retained.
Question #9
We agree to treat property income the same way for life insurance and analogous pension funds.
Question #10
We agree with this proposal.
Questions #11 and #12
We do not think there is a general consistency problem. The table in paragraph 37 provides a neat coherent way to deal with holding gains in the context of property incomes. That said, we also think there is still some work to be done to clear up issues around dividends, dividends adjusted for exceptional payments, and reinvested earnings, but we do not think this could be done as part of this Update. Rather, these are issues the income task force should work out further.
Conclusion
The ISWGNA concluded that it would not be advisable to record expected holding gains and losses on non-life insurance technical reserves as a transaction; that is, as a premium supplement. They should first be recorded as a revaluation in the revaluation account of the household sector and then rerouted to the insurance companies through an institutional reassignment in the other changes in the volume of assets account.

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