Consultation Paper on Further Work on
Solvency of IORPs
Barthold Kuipers
OPSG
Frankfurt, 15 October 2014
Background
• QIS on IORPs
o Need for market-consistent and risk-based prudential
regime on EU level
o Methodologies valuation holistic balance sheet
o Supervisory responses
• Own initiative work of EIOPA, in its capacity as
independent advisor to the EU institutions
o Scope consultation paper is broader than previous work
• Consultation paper is further step towards tested
EIOPA advice to the Commission
o Not related to Commission’s proposal for IORP II
15 October 2014
2
Mapping exercise
Mapping exercise (I)
Valuation standards and funding requirements
AT BE BG DE DK EE ES FI FR GR HR IE IT LU MT NL NO PT SE
Discount rate
PF FN A4
- current risk-free market rates
Y Y
Y
- expected return on assets
Y
Y
Y Y
- fixed discount rate
Y Y
Y Y
Y Y Y Y Y
Y Y
- other
Y Y
Y
Y Y
Y
Y Y Y Y
Mortality assumptions
- current mortality rates
Y Y
Y
Y Y
Y Y Y Y Y Y Y Y Y Y
- trend included
Y
Y Y
Y
Y Y Y Y Y Y Y
Y Y Y
- prudence added
Y Y Y Y
Y
Y Y Y Y
Y Y Y
Regulatory own funds (Art 17.1) Y Y Y Y Y Y
Y Y
Y
Y
Y Y Y
Y
Y
- yes
Y
Y Y
Y
Y
Y Y Y
Y
Y
- some IORPs
Y Y Y
Y
Y
Additional national capital
Y
Y
Y
Y Y
Y
Y
requirements
15 October 2014
SI UK TOT
Y
Y
4
5
11
9
Y
Y
Y
14
13
12
15
10
5
Y
Y
Y
Y
Y
7
3
Mapping exercise
Mapping exercise (II)
Benefit adjustment and security mechanisms
Sponsor support
- unlimited
- limited
- non-legally enforceable
Benefits with discretionary
mechanisms
- mixed benefits
- pure discretionary benefits
Benefit reduction mechanisms
- ex ante
- ex post
- in case of sponsor default
15 October 2014
AT BE BG DE DK EE ES FI FR GR HR IE IT LU MT NL NO PT SE
SI UK TOT
PF FN A4
Y Y
Y Y
Y Y
Y Y Y Y
Y Y Y Y Y Y
Y 15
Y Y
Y Y
Y Y
Y Y
Y
Y Y Y
Y 12
Y
Y
Y
Y
4
Y Y
Y
Y Y Y
Y Y Y Y
Y
10
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
11
Y
8
8
17
9
11
11
Y
Y
Y
Y
Y
4
Consultation paper and holistic
balance sheet
Part 1: Valuation
• Market-consistent
valuation of items
on holistic balance
sheet
Part 2: Supervisory
responses
• Inclusion/ exclusion
of security and
benefit adjustment
mechanisms
• Tiering of (financial)
assets and recovery
periods
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CP – Valuation holistic balance sheet
Valuation holistic balance
sheet
• Approaches to valuation
o General valuation approach
o Balancing item approach
•
•
•
•
•
Contract boundaries
Discretionary decision-making processes
Benefit reduction mechanisms
Legally enforceable sponsor support
Pension protection schemes
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CP – Valuation holistic balance sheet
Valuation of sponsor support
(I)
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•
IORPs with
strong sponsors
can treat
unlimited
sponsor support
as a balancing
item
•
IORPs with weak
sponsors have to
perform a
(simplified)
valuation of
sponsor support
7
CP – Valuation holistic balance sheet
Valuation of sponsor support
(II)
• Sponsor affordability/maximum sponsor support
o Step 1 – no assessment if company value exceeds M
times value of sponsor supports
o Step 2 – if company value < M, IORPs have to establish
maximum sponsor support using a principles-based
approach
• Sponsor default probability
o Credit ratings linked to market-implied/historical
probabilities
o Credit ratios of the sponsor based on financial reporting
data linked to market-implied/historical probabilities
o Credit assessment following approach proposed by UK
PPF
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CP – Supervisory responses
Uses of the holistic balance
sheet
• Set solvency capital requirement (SCR) at the EU
level, as part of pillar 1 requirements
• Set minimum funding requirements at the level of
technical provisions, as part of pillar 1
• Risk management / transparency tool, as part of
pillar 2 and 3
o Competent authorities empowered to take supervisory
action based on pillar 2 assessment
o Public disclosure of outcomes of pillar 2 assessment
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CP – Supervisory responses
Benefit adjustment and
security mechanisms
• HBS used as risk-management/transparency tool
o Incl. all available benefit adjustment and security
mechanisms
• HBS used to set funding requirements
o Incl. legally enforceable sponsor support
o Incl. unconditional and pure conditional benefits (incl. ex
ante benefit reductions), excl. pure discretionary benefits
Options:
o Incl./excl. ex post reductions and reductions in case of
sponsor default
o Incl./excl. pension protection schemes
o Incl./excl. non-legally enforceable sponsor support
o Incl./excl. mixed benefits
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CP – Supervisory responses
Tiering of (financial) assets
• Liabilities to be covered with financial assets
o Risk-free interest rate (Level A) or expected return on
assets (Level B)
o Recovery period: i) harmonised & short, ii) harmonised &
longer, iii) left to discretion of member states
• Liabilities & SCR to be covered with assets (incl.
security mechanisms
o Risk-free rates (Level A) or expected return on assets
(Level B)
o Recovery period: i) harmonised & short, ii) harmonised &
longer, iii) left to discretion of member states
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CP – Supervisory responses
Examples of supervisory
frameworks
• Six examples, representing a broad range of
possibilities:
o Use of holistic balance sheet
o Inclusion/exclusion benefit adjustment and security
mechanisms
o Tiering of (financial) assets and recovery periods
• Analysis of examples regarding impact on:
o
o
o
o
Protection of members and beneficiaries
Functioning of the internal market
Economy, i.e. sponsors and long-term investments
National IORP systems
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12
Timeline
• 13 January 2015
o Deadline responses public consultation
• End-March 2015
o Draft technical specifications for quantitative impact
assessment
• Mid-2015
o Quantitative impact assessment of further work on
solvency of IORPs
• End-2015
o Tested advice for European Commission
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13
Thank you
EIOPA
email: barthold.kuipers@eiopa.europa.eu
www.eiopa.europa.eu