Measuring PAYG Pension Liabilities of Listed Chinese SOEs to Incorporate Future Cash Flows

Abstract

Using simulated data and the expected cash flow (ECF) technique, Level 3 fair value estimates can be applied to estimate the Generational Imbalance (GI) measure arising from the unreported underfunded position of pay-as-you-go (PAYG) pensions incurred by a sample of Hong Kong listed Chinese SOEs. The GI measure helps examine the financial implications of including future cash flow estimates in current financial position for PAYG pensions as well as their enterprise and government sponsors. Positive GI figures imply net cash outflows over the period of funding current pension plan members and project net pension liabilities as an alternative measure of funded status at the end of the period. Pension underfunding imposes a funding burden on future pension plan members, a contingent claim against income of the SOEs or requires supplementary subsidies of the governments. The magnitude of GI is sensitive to the ECF estimates, the discount rate adopted in present value calculations, and the retirement age of pension plan members.