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Consultation Paper on Further Work on Solvency of IORPs

Consultation Paper on Further Work on Solvency of IORPs. Barthold Kuipers OPSG Frankfurt, 15 October 2014. Background. QIS on IORPs Need for market-consistent and risk-based prudential regime on EU level Methodologies valuation holistic balance sheet Supervisory responses

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Consultation Paper on Further Work on Solvency of IORPs

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  1. Consultation Paper on Further Work on Solvency of IORPs Barthold Kuipers OPSG Frankfurt, 15 October 2014

  2. Background • QIS on IORPs • Need for market-consistent and risk-based prudential regime on EU level • Methodologies valuation holistic balance sheet • Supervisory responses • Own initiative work of EIOPA, in its capacity as independent advisor to the EU institutions • Scope consultation paper is broader than previous work • Consultation paper is further step towards tested EIOPA advice to the Commission • Not related to Commission’s proposal for IORP II

  3. Mapping exercise Mapping exercise (I) Valuation standards and funding requirements

  4. Mapping exercise Mapping exercise (II) Benefit adjustment and security mechanisms

  5. 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

  6. CP – Valuation holistic balance sheet Valuation holistic balance sheet • Approaches to valuation • General valuation approach • Balancing item approach • Contract boundaries • Discretionary decision-making processes • Benefit reduction mechanisms • Legally enforceable sponsor support • Pension protection schemes

  7. CP – Valuation holistic balance sheet Valuation of sponsor support (I) • 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

  8. CP – Valuation holistic balance sheet Valuation of sponsor support (II) • Sponsor affordability/maximum sponsor support • Step 1 – no assessment if company value exceeds M times value of sponsor supports • Step 2 – if company value < M, IORPs have to establish maximum sponsor support using a principles-based approach • Sponsor default probability • Credit ratings linked to market-implied/historical probabilities • Credit ratios of the sponsor based on financial reporting data linked to market-implied/historical probabilities • Credit assessment following approach proposed by UK PPF

  9. 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 • Competent authorities empowered to take supervisory action based on pillar 2 assessment • Public disclosure of outcomes of pillar 2 assessment

  10. CP – Supervisory responses Benefit adjustment and security mechanisms • HBS used as risk-management/transparency tool • Incl. all available benefit adjustment and security mechanisms • HBS used to set funding requirements • Incl. legally enforceable sponsor support • Incl. unconditional and pure conditional benefits (incl. ex ante benefit reductions), excl. pure discretionary benefits Options: • Incl./excl. ex post reductions and reductions in case of sponsor default • Incl./excl. pension protection schemes • Incl./excl. non-legally enforceable sponsor support • Incl./excl. mixed benefits

  11. CP – Supervisory responses Tiering of (financial) assets • Liabilities to be covered with financial assets • Risk-free interest rate (Level A) or expected return on assets (Level B) • 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 • Risk-free rates (Level A) or expected return on assets (Level B) • Recovery period: i) harmonised & short, ii) harmonised & longer, iii) left to discretion of member states

  12. CP – Supervisory responses Examples of supervisory frameworks • Six examples, representing a broad range of possibilities: • Use of holistic balance sheet • Inclusion/exclusion benefit adjustment and security mechanisms • Tiering of (financial) assets and recovery periods • Analysis of examples regarding impact on: • Protection of members and beneficiaries • Functioning of the internal market • Economy, i.e. sponsors and long-term investments • National IORP systems

  13. Timeline • 13 January 2015 • Deadline responses public consultation • End-March 2015 • Draft technical specifications for quantitative impact assessment • Mid-2015 • Quantitative impact assessment of further work on solvency of IORPs • End-2015 • Tested advice for European Commission

  14. Thank you EIOPA email: barthold.kuipers@eiopa.europa.eu www.eiopa.europa.eu

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