Introduction to the QIS spreadsheets using imaginary IORP

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1 Disclaimer Please note that these slides are not part of the formal QIS on IORPs documentation as issued by the European Commission. They are not intended to, and do not, replace the QIS on IORPs technical specifications. The European Commission technical specifications take precedence. 1

2 Introduction to the QIS spreadsheets using imaginary IORP Frankfurt QIS for pensions # Launch event Barthold Kuipers & Pierre#Jean Vouette, 19 October 2012

3 Content of the published package 3

4 Published package reference material Update expected for the matching adjustment 4

5 The Holistic Balance Sheet concept 5

6 The capital requirement 6

7 The supporting material 7

8 Presentation General organisation of the spreadsheet and questionnaire Explanation of the options tested by the scenarios Use of MyIORP to complete a full scenario 8

9 The main scenarios 9 9

10 The specific scenarios tested 10 10

11 Scenario basic data Scheme opened 20 years ago A 2% yearly increase of contributions per member since So far, the yield on assets was 5% So far, observed mortality is in line with the mortality table used Current average age is 45 Retirement date is 65 Scheduled yearly increase on annuities for pensioners is 4.2% / year A 30% quota share agreement with a (re)#insurer 24 October October

12 What can be done? Estimating the current balance sheet o Current asset level o Expected cash flow pattern # Assumption: the contributions level will stay on the +2% / year trend. o Current pension liability level # Assumption: constant one year forward rate at 5% o QISP liabilities # According to the nominal yield curve and sensitivity analysis 12

13 Contributions and benefits 13

14 Expected future cash flows 14

15 Evolution of asset level 15

16 The QIS value of liabilities Note: CCP is using the shifted upward yield curve. Part of the reduction in liability may be transferred to the asset side (e.g. 30%) 16

17 Origin of the funding gap Expected investment return was set at 5% o For the HBS: assumption that the assets will earn the risk free rate, significantly lower at end Tested in SET5: the CCP, temporary measure triggered by supervisors in specific conditions Predicted investment income around 1% in the short term. Consistency with predictability return on existing fixed interest portfolio with higher yield? Will be tested with the Matching adjustment. 17

18 Comparison of discounting assumptions 18

19 Options tested in the holistic balance sheet Long#term nature adjustment Conditional benefits # Ex#post # Ex#ante Sponsor support and PPS 19

20 Conditional benefits Example: the expected starting annuity of 705, growing then by 4.2% / year is made of o An unconditional commitment of 500 (not indexed) o The difference being pending some conditions Total Best estimate (8951) o =Best estimate of unconditional benefits (2040) o +Best estimate of mixed benefits (6911) SET 11 test the assumption of not considering them as liabilities. 20

21 Conditional benefits 21

22 Expected inflation Assumption: Contributions follows inflation, Benefits: inflation+2.2% 22

23 Expected inflation result Column1 Contributions Benefits Total Previous Inflation Inflation Inflation

24 Overview of scenarios 24

My IOPR Characteristics CURRENT SITUATION Assets 275,0 Liabilities 287,7 Funding ratio 96% #required 100% Cash#flows sponsor 50 Shareholders funds 125 Sponsor liability towards IORP 15

25 My IOPR Characteristics CURRENT SITUATION Assets 275,0 Liabilities 287,7 Funding ratio 96% #required 100% Cash#flows sponsor 50 Shareholders funds 125 Sponsor liability towards IORP 15 Discount rate 5,0% Duration 12 Average death rate 1,67% Contribitions ,5 Contribitions ,5 Sponsor support unlimited Sponsor rating BB PPS cover rate 90% 19 October

26 My IORP Asset allocation ASSET ALLOCATION 19 October 2012 % million EUR BREAKDOWN BY CREDIT million RATING % EUR Real assets 40,0% 110 Government bonds EEA 25,0% 68,8 Property 10,0% 28 # AAA 10% 27,5 Global equity 20,0% 55 # AA and lower 15% 41,3 Other equity 10,0% 28 Government bonds non#eea 15,0% 41,3 Fixed income 60,0% 165 # AAA 5,0% 13,8 Government bonds EEA 25,0% 69 # AA 5,0% 13,8 Government bonds non# EEA 15,0% 41 # A 2,5% 6,9 Corporate bonds 20% 55 # BBB 2,5% 6,9 # non#financials 13,3% 37 Corporate bonds 20% 55,0 # financials 6,7% 18 # AAA 0% 0,0 TOTAL 100% 275 # AA 5% 13,8 # A 5% 13,8 Foreign exchange exposure 20% 55 # BBB 2% 5,5 # BB 2% 5,5 Duration fixed income 7 # B 2% 5,5 # government bonds 8 # CCC or lower 2% 5,5 # corporate bonds 5 # unrated 2% 5,5 26

27 Participant information Participant information Q1 Intitution name Institution abbreviation (to be used in excel columns headers) MyIORP MyIORP Q2 Legal form of the institution - Q3 Type of institution IORP Q4 Ring-fenced occupational retirement provision (% total business) - Q5 Institution completing the QIS Q6 Type of data used Date of submission Supervisor Aggregate / Representative data - Reporting reference year 2011 Year end used Reporting currency used EUR Reporting unit used Million Country - National supervisor - Local registration number - 19 October

28 Current regime 1. Technical provisions and assets for pension liabilities Total of which: Pure DC of which: Health benefits of which: Others Technical provision for pensions liabilities (Gross) Are you using (re)-insurance instruments? - If yes, how are the recoverables currently recognized? - (Re)-insurance and SPV recoverables - Technical provision for pensions (net) 288 Other liabilities - Total liabilities 288 Investment assets 275 Sponsor support - Pension protection schemes - Other assets - Total assets 275 of which: assets held for pure defined contributions schemes - 2. Current funding requirements value of items eligible to cover current funding requirements 275 fundi ng requi rement (higher or uni que) 288 Surplus (higher) -13 funding requirement (minimum if more than one exists) - Surplus (minimum) October

29 Common Breakdown of bonds 19 October Indicative mapping of credit quality steps Government bonds and equivalents from non-eea Covered bonds Other bonds and loans (incl. bank deposits) Tradable securities based on repackaged loans (incl. mortgages) Total # Credit quality step 0 AAA # Credit quality step 1 AA # Credit quality step 2 A # Credit quality step 3 BBB # Credit quality step 4 BB # Credit quality step 5 B # Credit quality step 6 CCC or lower # Credit quality step unknown Unrated #

30 Common sheet - Investments Assets Sponsor support and PPS Investments (other than assets held for pure DC) 275 Property (including for own use) 28 Equities 83 global equities 55 other equities (incl. participations, private equ 28 Bonds and loans (excluding mortgages) 165 Government Bonds and equivalents 110 EEA States and equivalent 69 Others 41 Covered bonds 0 Other bonds and loans (incl. bank deposits) 55 Tradable securities based on repackaged loans ( 0 Mortgages - Derivatives - Residual Investment funds - Other investments - 19 October

31 Common sheet Level B returns Portfolio shares (EUR) Value # Expected return Fixed income 165 # - - AAA government bonds 41 # 2,98% - AA government bonds or lower 69 # 4,51% - Corporate bonds 37 # 3,88% - Banks bonds 18 # 3,96% - Other - # 3,93% Non-fixed income 110 # 5,98% Calculation of the "Level B" discount rate Shares # Expected return Fixed income asset 60,0% # 3,93% Non-fixed income asset 40,0% # 5,98% Discount rate used for the "Level B" # 4,75% 19 October

32 Common sheet Foreign currency exposure & contributions Net Assets Liabilities Currency name # exposure exposure exposures Euro EUR # British pound GBP # Norwegian krone NOK # Swedish krona SEK # Other currencies # Of which Pure Total Contributions and expenses defined amount contributio # n Gross contributions received (12 months prior to the previous 12# 18 - Total gross contributions received in the previous 12 months # 18 - Annual expenses in respect of pure DC obligations # - 19 October

33 Helper tab interest rate risk cash flows liabilities and assets Total Total In year Cash flow Spot curve ,065% ,962% ,006% ,190% ,385% ,576% ,743% ,874% ,985% ,083% ,175% ,258% ,319% ,363% ,393% ,410% ,416% ,415% ,410% ,402% ,420% ,459% ,509% ,563% ,618% ,672% ,724% ,774% ,821% ,866% ,908% ,948% ,985% ,021% ,054% ,086% ,116% ,144% ,171% ,196% ,221% ,244% ,266% ,287% ,308% ,327% ,345% ,363% ,380% ,396% ,412% ,427% ,442% ,456% ,469% ,482% ,495% ,507% ,519% ,530% In year Cash flow Spot curve ,065% ,962% ,006% ,190% ,385% ,576% ,743% ,874% ,985% ,083% ,175% ,258% ,319% 14 2,363% 15 2,393% 33

34 Best estimate technical provisions and duration Results Discounted cash flows for the best estimate: 398 Discounted cash flows under the upward interest rate scenario: 349 Discounted cash flows under the downward interest rate scenario: 460 Durations 14,14 13,14 15, Best estimate - Total (without pure DC) - health benefit obligations 398 total other benefits 14 Average duration of pension liabilities 398 Unconditional other obligations - (-) benefit reductions in case of sponsor default "Level B" value of pension liabilities - (-) BE of ex-post reduction - Total pure conditional benefits ====> of which - Ex-ante mechanism reduction - pure discretionary benefits - mixed benefits Sensitivity analysis 0 Pure defined contributions liabilities "Level A" value of pension liabilities - Deferred tax liabilities Under an upward stress (+100 bp) 0 Other liabilities Under a downward stress (-100 bp) 19 October

35 Level B and sensitivity analysis Level B Results Discounted cash flows for the best estimate: bps bps Results Discounted cash flows for the best estimate: 349 Results Discounted cash flows for the best estimate: Risk margin 398 Best estimate - Total (without pure DC) - health benefit obligations 398 total other benefits 14 Average duration of pension liabilities 398 Unconditional other obligations - (-) benefit reductions in case of sponsor default 296 "Level B" value of pension liabilities - (-) BE of ex-post reduction - Total pure conditional benefits ====> of which - Ex-ante mechanism reduction - pure discretionary benefits - mixed benefits Sensitivity analysis 0 Pure defined contributions liabilities "Level A" value of pension liabilities - Deferred tax liabilities 349 Under an upward stress (+100 bp) 0 Other liabilities 460 Under a downward stress (-100 bp) 19 October

36 Maximum sponsor support INPUT INPUT Duration of settlement sponsor support 14 EC t Sponsor default risk (annual probability) 1,2% Year Total Recovery plan Cash flows Shareholder funds of sponsor 125 contributions 100% Liabilities sponsor towards IORP Limit to maximum sponsor support OUTPUT Maximum sponsor support without credit risk Maximum sponsor support with credit risk

37 Value sponsor support INPUT Value financial assets 275 Value technical provisions 430 Duration of settlement sponsor support 14 Sponsor default risk (annual probability) 1,2% Value maximum sponsor support 304 Recovery rate sponsor support on default 30% OUTPUT Value sponsor support (limited to maximum) 145,7 Difference calculated and maximum value sponsor support (if > 0) 0 19 October

38 Value pension protection scheme INPUT Value financial assets 275 Value technical provisions 430 Duration of settlement sponsor support 14 Sponsor default risk (annual probability) 1,2% Recovery rate sponsor support on default 30% Coverage rate pension protection scheme (% technical provisions) 90% Difference calculated and maximum value sponsor support (if > 0) 0 OUTPUT Value pension protection scheme as an asset (incl. calculated minus maximum sponsor support) 3,6 Value pension protection scheme (incl. calculated minus maximum sponsor support) (100% coverage rate) 9 Value reduction benefits in case of sponsor support (with pension protection scheme) -5,7 19 October

39 Holistic balance sheet - completed Assets # Liabilities Sponsor support and PPS 149 # 425 Total balance sheet value Sponsor support 146 # Contingent assets - # Other 146 # 1 Excess of assets over liabilities Credit risk reduction due to PPS - # Pension protection scheme 4 # Investments (excluding pure DC) 275 # 31 Risk margin (Re)insurance / SPV recoverables 0 # 392 Best estimate - Total (without pure DC) health benefit obligations - # - health benefit obligations total other benefits 0 # 392 total other benefits Unconditional other obligations - # 398 Unconditional other obligations (-) benefit reductions in case of spons - # -6 (-) benefit reductions in case of sponsor default (-) BE of ex-post reduction - # - (-) BE of ex-post reduction Total pure conditional benefits - # - Total pure conditional benefits ====> pure discretionary benefits - # - pure discretionary benefits mixed benefits - # - mixed benefits Assets held for pure DC 0 # 0 Pure defined contributions liabilities Deferred tax assets - # - Deferred tax liabilities Other assets (excluding pure DC) 0 # 0 Other liabilities 19 October

40 Maximum loss-absorbency and qualitative questions Ancillary own funds Sponsor support as ancillary own fund - Max value of ex-post benefit reduction 392 Maximum sponsor support value 304 Maximum PPS value 387 Q32: Valuation method used to establish the unconditional benefits Deterministic valuation Q33: Valuation method used to establish the non-unconditional benefits Not applicable Q34: Methodology used for ex-post and maximum ex-post reduction assessment Not applicable Q48: Valuation method used to establish the market value of sponsor support Simplification 2 Q49: Valuation method used to establish the market value of PPS as an asset Value of pension protection scheme Q52: Method used to establish the maximum amount of sponsor support Standard method provided Q63: Method used to calculate the adjustment for default of the (re)insurer Not applicable 19 October

41 Operational & counterparty default risk Capital requirement for Operational risk Risk-Module level value 2 Contributions based risk component 1 Gross contributions received 18 of which pure DC - Contributions of previous 12 months 18 of which pure DC - TP based risk component 2 Tech. Prov. for pension obligations 392 of which pure DC 0 Annual expenses for pure DC (12 month - Gros s ri s k Adj. Net ri s k Capital requirement for Counterparty default risk Risk-Module level values SCR for counterparty default risk of type SCR for counterparty default risk of type 2 Methodology used 2 - standard method 19 October

42 Interest rate risk Initial position Assets Liabilities Net Asset Value Value Interest rate shock Assets Liabilities Net Asset Value Up Down October 2012 Net asset values pre-s tres s # Wi thout LAC Scenario based stressed values Stress scenario va lue # As s ets Lia bil ities Gros s ris k Adj. Net ris k Interest rates risk values # Scenario kept for interest rates stress # Interest rates altered upward # Interest rates altered downward # Nominal term structure altered upward -234 # Nominal term structure altered downwar -234 # Inflation term structure altered upward 1 # Inflation term structure altered downwar 1 # Down 42

43 Helper tab spread risk Mkt sp bonds loss absorbing capacity of technical provisions nmkt sp bonds Bonds ΣMV i average weighted duration sum per rating of 9,7 10 capital charge per rating MV i *dur i , , , , , , ,06 unrated ,83 Non-EEA sovereign bonds, issued in domestic currency ΣMV i weighted average duration sum per rating of MV i *m(dur i ) capital charge per rating , unrated October

44 Other market risk Equity risk values # Approach retained for equity risk # Duration Stress on the global equity portfolio 1 # Stress on the other equity portfolio 1 # Equity stress (Duration approach) 83 # Property stress and risk values 28 # Spread risk values # Spread on bonds and loans 96 # Spread on repackaged loans 1 # Spread on credit derivatives # Scenario kept for credit derivatives # Down Upward shock on credit derivatives 1 # Downward shock on credit derivatives 1 # Currency risk values # Currency stress upward 1 # Currency stress downward 55 # Concentration risk values # CCP risk 1 # October

45 Helper tab longevity risk 2 Longevity Result of the longevity risk (simplification) Best estimate contract subject to longevity risk Expected average death rate for the following year 1,67% Modified duration October

46 Pension liability risk Net asset values pre-s tres s # Wi thout LAC Scenario based stressed values Stress scenario value # Assets Liabilities Gross risk Adj. Net risk Stress on Mortality 1 # Stress on Longevity 1 # Stress on Disability 1 # Benefit option # Scenario retained for benefit option # Down Benefit option - lapse up 1 # Benefit option - lapse down 1 # Benefit option - mass 1 # Expenses 1 # Revision 1 # CAT 1 # October

47 Loss-absorbency of technical provisions and security mechanisms Gross stress Lossabsorbency A L SS PPS L Interest rate #up #11 #49 #35,7 #1,4 0,9 Interest rate # down ,0 2,0 #1,0 Equity #18 # 16,9 1,0 #0,1 Property #7 # 6,6 0,4 0,0 Currency #14 # 13,2 0,7 #0,1 Spread #10 # 9,4 0,5 0,0 Counterparty #75 # 0,0 39,6 #35,3 Longevity # 34 32,0 1,4 #0,6 19 October

48 Post-stress balance sheet values Nominal term structure altered upward Nominal term structure altered downwar Inflation term structure altered upward Inflation term structure altered downwar Equity risk values Approach retained for equity risk Stress on the global equity portfolio 0 Duration Stress on the other equity portfolio Equity stress (Duration approach) Property stress and risk values Spread risk values Spread on bonds and loans Spread on repackaged loans Spread on credit derivatives Scenario kept for credit derivatives Upward shock on credit derivatives 0 Down Downward shock on credit derivatives Currency risk values Currency stress upward Currency stress downward

49 Capital requirements Own funds SCR OF - SCR MCR OF - MCR Own funds compared to capital requirements Excess of assets over liabilities at the 99.5% confidence level Ancillary own funds at the 97.5% confidence level Total own funds at the 95% confidence level Main results of the capital requirements according to formula defined in the QIS technical specifications Adjustments for loss absorbency # Exposure Diversif. Gross risk Adj. Net risk Risk module Part of the max. sponsor support availab 158 # Market risk Part of the maximum PPS available 383 # Counterparty default risk Discretionary / Conditional Liabilities 386 # Pension liability Adjustment for loss absorbency (AdjTS) -135 # Health risk Net deferred taxes in the HBS 0 # Intangible asset risk Magnitude of the DT shock -136 # Operational risk Post stress net deferred taxes - # Basic SCR (BSCR) before intangible risk Deferred taxes adjustment (AdjDT) - # Basic Solvency Capital Requirement (BSCR) Maximum value for Adj2 793 # Solvency capital requirement (SCR) [99.5%] Adjustment for loss absorbency (Adj2) -2 # Solvency capital requirement (SCR) [97.5%] Total adjustment for loss absorbency -137 # 88 0 Solvency capital requirement (SCR) [95%] 49

50 Overview Overall impact (= surplus (SCR) minus current surplus) at the 99.5% level 14 Overall impact (= surplus (SCR) minus current surplus) at the 97.5% level 14 Overall impact (= surplus (SCR) minus current surplus) at the 95% level 14 - change in value investments 0 - change in value sponsor support change in value pension protection schemes 4 - change in value (re-)insurance recoverables 0 - change in value other assets 0 - change in value best estimate technical provisions change in value risk margin change in value other liabilities 0 Change in excess of assets over liabilities (= HBS minus current) 14 - change in solvency capital requirement at the 99.5% level 0 - change in solvency capital requirement at the 97.5% level 0 - change in solvency capital requirement at the 95% level 0 - change in sponsor support as ancillary own funds - 50

51 Thank you Barthold Kuipers & Pierre#jean Vouette

User Guide for Input Spreadsheet QIS on IORPs

Updated 15 November 2012 User Guide for Input Spreadsheet QIS on IORPs Contents 1. Introduction... 2 2. Overview of spreadsheet... 2 3. Participant information... 4 4. Current regime... 5 5. Holistic balance