Report on QIS on IORPs. Barthold Kuipers, Chair OPC Subgroup QIS QIS for Pensions closing event Frankfurt, 10 July 2013

Transcription

1 Report on QIS on IORPs Barthold Kuipers, Chair OPC Subgroup QIS QIS for Pensions closing event Frankfurt,

2 Outline Holistic balance sheet Participation in QIS Benchmark scenario Upper and lower bound scenario Specific sets of options Qualitative findings Way forward

3 Holistic balance sheet Comparability and transparency Market-consistent valuation basis All security and benefit adjustment mechanisms included QIS tests 18 sets with various combinations of options Key measures are excess of assets over liabilities and surplus over SCR

4 Participation in QIS Participation and approaches QIS conducted by IORPs, supervisor or combination of both Almost 100 IORPs participated, over 6,500 IORPs assessed Swedish foundations & Art 4 insurer only described in qualitative terms Completing QIS: Country: IORPs Supervisor Belgium 14 - Germany: PF 11 - PK 27 - Ireland - representative data Netherlands 9 - Norway 7 - Sweden: PF 9 supervisory assistance Found. - representative foundations Art United Kingdom IORPs

5 Participation in QIS Outcomes current supervisory regimes Current discount curves range from risk-free rates, to fixed rates, to expected return on assets Current capital requirements range from non-existent, to Solvency I, to national risk-based requirements Comparison between countries not meaningful

6 Benchmark scenario Assumptions and presentation Assumptions for benchmark scenario (set 3) o Market valuation using basic risk-free interest rate curve o All security mechanisms and benefit types included (except pure discretionary benefits) o Ex post benefit reductions and reductions in case of sponsor default included Two groups distinguished o Set 3A excludes such reduction mechanisms and all countries are included o Set 3B includes such reduction mechanisms and UK is not incuded

7 Benchmark scenario Set 3A: Technical provisions Technical provisions rise by 20%-70% in 5 out of 7 countries Transition to riskfree interest rate in BE, DE, IE and UK Inclusion mixed benefits in NL Lower liabilities in NO and SE due to basic risk-free rate Upward effect of risk margin in all countries

8 Benchmark scenario Set 3B: Technical provisions Ex post benefit reductions amount to 75% and 20% of current liabilities in NL and IE

9 Benchmark scenario Set 3A: Sponsor support and PPS In DE and UK value sponsor support 25% to 40% of current liabilities In BE and SE value of sponsor support is negligible In IE and NO sponsor support is limited conditional, so value zero In NL also limited conditional or not automatic, but significant value Value PPS relatively small

10 Benchmark scenario Set 3B: Sponsor support and PPS No impact of including ex post benefit reductions on sponsor support in NL and IE

11 Benchmark scenario Analysis pension protection schemes Analysis of zero default risk assumption in QIS Description of pension protection schemes in Germany, Sweden and United Kingdom Default risk close to zero o Legal requirement for sponsors / IORPs to support pension protection scheme representing large part of national economy o No default events of pension protection schemes, for example due political or systemic risk Conclusion: assumption acceptable for purpose of this QIS

12 Benchmark scenario Set 3A: Solvency capital requirement SCR with 99.5% confidence level ranges from 0% to 35% of liabilities Market risk most important followed by pension liability risk and counterparty default risk in countries with unlimited sponsor support Full loss-absorbency for Pensionsfonds in DE, no lossabsorbency in IE

13 Benchmark scenario Set 3B: Solvency capital requirement Lower SCR in IE and NL when including ex post benefit reductions SCRs with 97.5% and 95% confidence levels are calculated using simplified formula

14 Benchmark scenario Set 3A: Overall impact Excess of assets over liabilities and surplus over SCR range from substantial surpluses to large shortfalls

15 Benchmark scenario Set 3B: Overall impact Shortfalls in IE much lower when including ex post benefit reductions Surpluses in NL when including ex post benefit reductions

16 Upper & lower bound scenario Upper bound set 1: Technical provisions Sponsor support and pension protection schemes not included on the asset side of holistic balance sheet Ex post benefit reductions excluded as well in upper bound scenario Decline in excess of assets over liabilities in all countries

17 Upper & lower bound scenario Upper bound set 1: Overall impact Pensionsfonds in DE and IORPs in NL (compared to set 3B) have now negative excess of assets over liabilities Countries with unlimited sponsor support combine large shortfalls compared to liabilities with large surpluses over SCR Maximum sponsor support is recognised as ancillary own fund that can cover the SCR

18 Lower bound set 2A: Overall impact More favourable impact in all countries due to exclusion of risk margin Pensionskassen in DE and IORPs in NL benefit from exclusion mixed benefits Positive excess of assets over liabilities for Pensionskassen in DE, but still shortfall compared to SCR

19 Lower bound set 2B: Overall impact

20 Specific sets of options Sets with specific options Sets 4-18 test specific options for HBS and SCR o Risk-free discount curve (sets 4-7) o Risk margin (8-9) o Security and adjustment mechanisms (set 10-15) o Equity dampener in SCR equity risk module (set 16-17) o Inflation module in SCR interest rate risk module (set 18) Not all sets are available for all countries o Options not relevant in some countries o Results not representative in some countries

21 Qualitative findings Overall assessment of results Assessment of reliability of outcomes IORPs have most confidence in value technical provisions and least confidence in value sponsor support IORPs in NO assess reliability of technical provisions and SCR as good More confidence in best estimate unconditional benefits than nonunconditional benefits

22 Qualitative findings Best estimate of technical provisions Most participant relied on deterministic valuation for best estimate of technical provisions Large incidence of stochastic valuations in NL and NO where all IORPs provide mixed resp. conditional benefits

23 Qualitative findings Discretionary decision-making processes Exclusion of future IORP management actions with possibly some material impact 40% to 100% of IORPs ignored future management actions even though they may have had a material impact on the outcomes

24 Qualitative findings Methods sponsor support Valuation method sponsor support Nearly all participants made use of the two simplifications provided in the technical specifications Exception is NL where sponsor support is often limited Participants experienced difficulties establishing maximum sponsor support, sponsor default probabilities and recovery rates of claims on the sponsor

25 Qualitative findings Solvency capital requirement (SCR) All SCR sub-modules relevant for IORPs in some participating countries Modelling of loss-absorbing capacity of security mechanisms generally approved of Practical difficulties o Calculating loss-absorbency for every individual submodule o Classification of assets not in line with current reporting o Look-through approach to investment funds

26 Way forward First study and further work First study to assess financial situation of IORPs in transparent and comparable way QIS reinforces need to continue working towards EU regulatory regime for IORPs that is: o Market-consistent o Risk-based Further technical work needed to fully assess holistic balance sheet: o Sponsor support o Benefit adjustment mechanisms o Discretionary decision-making processes o Supervisory responses

27 Way forward Next steps Discussion Paper on sponsor support published together with final report o Stakeholders are invited to provide feedback no later than 31 October 2013 EIOPA will prepare work programme for conducting further study on technical issues o EIOPA s own, realistic timelines o Stakeholder involvement