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Ageing populations is an issue for countries across Europe
Every once in a while we are told there is a new accounting standard in development that will change everything and it strikes fear into the hearts of accountants and political leaders alike.
Well it has arrived.
The new social benefits standard being developed by the international Public Sector Accounting Standards Board has the potential to add billions to governments’ liabilities to their balance sheet.
The ‘social benefits exposure draft (ED63)’ was issued for consultation on 31 October 2017 and responses were due by 31 March 2018.
This was the culmination of over 15 years of deliberation and debate.
And still there was no full agreement on the way forward.
This was evident in the ED where some of the IPSAS board members presented an alternate view.
So what is it and why is it so difficult?
Social benefits were defined in the ED as benefits provided to:
- specific individuals and/or households that meet the eligibility criteria
- mitigate effect on social risks
- address the needs of society as a whole
- aren’t universally accessible
these would include unemployment benefits, disability benefits and state pensions.
The board proposed that jurisdictions should disclose: the characteristics of the social benefits provided, amounts in the financial statements and best estimates of future cash flows.
‘The ageing population is an issue for many European countries and some have started to change policy and raise the age that the state pension can be claimed.’
However, following discussion at the June 2018 meeting the board agreed to make the definition clearer.
In particular, the definition of social benefits will refer to cash transfers and based on respondents feedback, the last two disclosures are being removed, and replaced with an alternative disclosure focusing on describing the risks, cost drivers and funding that will affect social benefit scheme.
The reason for not including the reconciliation is that all the figures are already available in the financial statements, so it would just be duplication/clutter.
So what does that mean?
The jurisdiction would need to explain which benefits are paid and how they operate; how much that has been included in the accounts (the liability – this is defined in the ED as for the next period only i.e. one year’s pension liability); and the future liabilities estimate which the board recommended should be limited to 5 years.
However, three board members proposed an alternate view, based on the conceptual framework to effectively recognise the full pension liability when the individual retires, rather than spread over the retirement period say 25 years, or recognise the liability when the individual starts to work, slowly building up to the full liability when they retire.
Either way, this would add significant amounts to the government’s liabilities.
The standard will soon be upon us. The board expects to approve the final IPSAS (standard) on social benefits at its December board meeting.
The IPSASB is considering whether it should formalise its processes for Post Implementation Reviews (PIRs), and the board noted that a social benefits IPSAS would be a good candidate for a PIR.
In the UK we largely have this information and it is publicly available in the Office for Budget Responsibility’s biennial Fiscal Sustainability Report (FSR).
In the latest version of the report published July 2018 it showed the forward projections (50 years+) of public finances if the policies do not change. The picture is not good.
Ever since the publication of the first FSR in November 2011, using the Whole of Government Accounts information, one of the most comprehensive set of government financial statements in the world (consolidating over 7000 government entities in the 2016-17 WGA published June 2018), it is evident that public finances are not sustainable.
The ageing population will increasingly add huge pressure to public services including the state pension – which is the biggest single area of spend, followed by health and welfare benefits third.
If policies remain the same by 2068 almost 30% of government spending will be taken up by age-related spend.
But proposing a cut to the state pension, or an increase to the age at which it can be claimed is not exactly a vote winner.
The UK is not alone.
The ageing population is an issue for many European countries and some have started to change policy and raise the age that the state pension can be claimed.
Recently Russia has announced it will raise the pension age from 60 to 65 for men and 55 to 63 for women.
If it’s so difficult why is the IPSASB issuing the standard?
One of the many benefits of implementing accrual accounting across the public sector is to provide comprehensive information on public finances so that public sector leaders can take informed decisions and course correct as necessary.
The challenge is there the political will?
There are tough choices ahead on public finances and the introduction of a social benefits standard will help shine a light on this area.
Don’t blame the standard. You have been warned.
