Retained earnings of Mutual funds

1
Retained earnings of Mutual funds

• SNA review issue 42

2
UN web Problem statement

• In the 1993 SNA retained earnings of an entity
  are generally treated as the income and saving of
  the entity, rather than the owner. However,
  exceptions are made for life insurance companies,
  pension funds and foreign direct investment
  companies, where there is an imputed flow to the
  policyholders, beneficiaries, and owners, with an
  equal financial account flow.

3
UN Problem statement (contd)

• The ESA 95 introduces an imputed transaction for
  the retained earnings of the mutual funds where
  income is attributed to the investors and then
  reinvested in the fund. That treatment brings
  about consistency with the treatment of life
  insurance and pension funds which are other types
  of collective investment schemes. Other
  symmetries of the treatment of retained earning
  have been suggested, either to expand or to
  reduce the imputations.

4
SNA93 and BPM5 treatment

• Interest on loans, deposits, bonds
• Accrued, as if paid out and reinvested
• Insurance and Pension funds
• Property income attributed to policy-holders
• Returned as premium/contribution supplements if
  social insurance
• Or directly net equity in financial account
• But nothing about Mutual funds

5
IMF five options

• The status quo as in SNA93 and BPM5
• The ESA95 approach
• Distribute as D41 Interest, D42 Dividends
• The modified ESA approach
• Distribute as D46 Retained earnings of mutual
  funds.

6
IMF five options

• Treat the retained earnings of pension funds in
  the same manner as mutual funds in SNA93 and
  BPM5, but leave technical reserves of life
  insurance as they are in SNA93.
• Treat the retained earnings of life insurance and
  pension funds in the same manner as mutual funds
  in SNA93.

7
European proposal

• Transactions
• Distribute Investment income of mutual funds to
  owners of shares as D46 Property income
  attributed to holders of investment funds.
• Reinvested in financial accounts as F.5 Equity

8
European proposal (contd)

• Definition of investment funds and sectoring
• Collective investment undertakings investing in
  financial and non-financial assets to the extent
  that their sole objective is the investment of
  capital being raised from the public.
• Pension funds are excluded and also investment
  funds issuing highly liquid liabilities of a
  monetary nature. The latter institutions, known
  as money market funds are classified in Other
  depository corporations (S.122)

9
Justifications

• Align treatment with other forms of collective
  investment.
• Best estimates of household income and saving
• Simplest solution

10
Questions to AEG

• Does the AEG agree on the principle of recording
  retained earnings of investment funds in a
  similar way to income attributed to policy
  holders?
• Agree to record as new D46
• Agree definition of investment funds
• Agree to separately identify funds issuing
  monetary liabilities within S.122 ?