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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
15 October 2014
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
5
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: [email protected]