Consultation Paper on Further Work on Solvency of IORPs

Barthold KuipersOPSGFrankfurt, 15 October 2014

Background

• QIS on IORPso Need for market-consistent and risk-based prudential

regime on EU levelo Methodologies valuation holistic balance sheeto Supervisory responses

• Own initiative work of EIOPA, in its capacity as independent advisor to the EU institutionso Scope consultation paper is broader than previous work

• Consultation paper is further step towards tested EIOPA advice to the Commissiono Not related to Commission’s proposal for IORP II

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Mapping exercise (I)

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AT BE BG DE DK EE ES FI FR GR HR IE IT LU MT NL NO PT SE SI UK TOTDiscount rate PF FN A4- current risk-free market rates Y Y Y Y 4- expected return on assets Y Y Y Y Y 5- fixed discount rate Y Y Y Y Y Y Y Y Y Y Y 11- other Y Y Y Y Y Y Y Y Y Y Y 9Mortality assumptions- current mortality rates Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 14- trend included Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 13- prudence added Y Y Y Y Y Y Y Y Y Y Y Y Y Y 12Regulatory own funds (Art 17.1) Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 15- yes Y Y Y Y Y Y Y Y Y Y Y 10- some IORPs Y Y Y Y Y 5Additional national capital requirements

Y Y Y Y Y Y Y 7

Valuation standards and funding requirements

Mapping exercise

Mapping exercise (II)

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AT BE BG DE DK EE ES FI FR GR HR IE IT LU MT NL NO PT SE SI UK TOTPF FN A4

Sponsor support Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 15- unlimited Y Y Y Y Y Y Y Y Y Y Y Y Y 12- limited Y Y Y Y 4- non-legally enforceable Y Y Y Y Y Y Y Y Y Y Y 10Benefits with discretionary mechanisms

Y Y Y Y Y Y Y Y Y Y Y 11

- mixed benefits Y Y Y Y Y Y Y Y 8- pure discretionary benefits Y Y Y Y Y Y Y Y 8Benefit reduction mechanisms Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y 17- ex ante Y Y Y Y Y Y Y Y Y 9- ex post Y Y Y Y Y Y Y Y Y Y Y 11- in case of sponsor default Y Y Y Y Y Y Y Y Y Y 11Y

Benefit adjustment and security mechanisms

Mapping exercise

Consultation paper and holistic balance sheet

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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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Valuation holistic balance sheet

• Approaches to valuationo General valuation approacho 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

CP – Valuation holistic balance sheet

Valuation of sponsor support (II)

• Sponsor affordability/maximum sponsor supporto Step 1 – no assessment if company value exceeds M

times value of sponsor supportso Step 2 – if company value < M, IORPs have to establish

maximum sponsor support using a principles-based approach

• Sponsor default probabilityo Credit ratings linked to market-implied/historical

probabilitieso Credit ratios of the sponsor based on financial reporting

data linked to market-implied/historical probabilitieso Credit assessment following approach proposed by UK

PPF

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CP – Valuation holistic balance sheet

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 3o Competent authorities empowered to take supervisory

action based on pillar 2 assessmento 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 toolo Incl. all available benefit adjustment and security

mechanisms

• HBS used to set funding requirementso Incl. legally enforceable sponsor supporto Incl. unconditional and pure conditional benefits (incl. ex

ante benefit reductions), excl. pure discretionary benefitsOptions: o Incl./excl. ex post reductions and reductions in case of

sponsor defaulto Incl./excl. pension protection schemeso Incl./excl. non-legally enforceable sponsor supporto Incl./excl. mixed benefits

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CP – Supervisory responses

Tiering of (financial) assets

• Liabilities to be covered with financial assetso 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 mechanismso 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 sheeto Inclusion/exclusion benefit adjustment and security

mechanisms o Tiering of (financial) assets and recovery periods

• Analysis of examples regarding impact on:o Protection of members and beneficiarieso Functioning of the internal marketo Economy, i.e. sponsors and long-term investmentso National IORP systems

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CP – Supervisory responses

Timeline

• 13 January 2015 o Deadline responses public consultation

• End-March 2015 o Draft technical specifications for quantitative impact

assessment

• Mid-2015o Quantitative impact assessment of further work on

solvency of IORPs

• End-2015o Tested advice for European Commission

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Thank you

EIOPAemail: barthold.kuipers@eiopa.europa.euwww.eiopa.europa.eu