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

Background QIS on IORPs oNeed for market-consistent and risk-based prudential regime on EU level oMethodologies valuation holistic balance sheet oSupervisory responses Own initiative work of EIOPA, in its capacity as independent advisor to the EU institutions oScope consultation paper is broader than previous work Consultation paper is further step towards tested EIOPA advice to the Commission oNot related to Commission’s proposal for IORP II 15 October 20142

Mapping exercise (I) 15 October Valuation standards and funding requirements Mapping exercise

Mapping exercise (II) 15 October 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 valuation oGeneral valuation approach oBalancing item approach Contract boundaries Discretionary decision-making processes Benefit reduction mechanisms Legally enforceable sponsor support Pension protection schemes 15 October CP – Valuation holistic balance sheet

Valuation of sponsor support (I) 15 October 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 support oStep 1 – no assessment if company value exceeds M times value of sponsor supports oStep 2 – if company value < M, IORPs have to establish maximum sponsor support using a principles-based approach Sponsor default probability oCredit ratings linked to market-implied/historical probabilities oCredit ratios of the sponsor based on financial reporting data linked to market-implied/historical probabilities oCredit assessment following approach proposed by UK PPF 15 October 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 3 oCompetent authorities empowered to take supervisory action based on pillar 2 assessment oPublic disclosure of outcomes of pillar 2 assessment 15 October CP – Supervisory responses

Benefit adjustment and security mechanisms HBS used as risk-management/transparency tool oIncl. all available benefit adjustment and security mechanisms HBS used to set funding requirements oIncl. legally enforceable sponsor support oIncl. unconditional and pure conditional benefits (incl. ex ante benefit reductions), excl. pure discretionary benefits Options: oIncl./excl. ex post reductions and reductions in case of sponsor default oIncl./excl. pension protection schemes oIncl./excl. non-legally enforceable sponsor support oIncl./excl. mixed benefits 15 October CP – Supervisory responses

Tiering of (financial) assets Liabilities to be covered with financial assets oRisk-free interest rate (Level A) or expected return on assets (Level B) oRecovery period: i) harmonised & short, ii) harmonised & longer, iii) left to discretion of member states Liabilities & SCR to be covered with assets (incl. security mechanisms oRisk-free rates (Level A) or expected return on assets (Level B) oRecovery period: i) harmonised & short, ii) harmonised & longer, iii) left to discretion of member states 15 October CP – Supervisory responses

Examples of supervisory frameworks Six examples, representing a broad range of possibilities: oUse of holistic balance sheet oInclusion/exclusion benefit adjustment and security mechanisms oTiering of (financial) assets and recovery periods Analysis of examples regarding impact on: oProtection of members and beneficiaries oFunctioning of the internal market oEconomy, i.e. sponsors and long-term investments oNational IORP systems 15 October CP – Supervisory responses

Timeline 13 January 2015 oDeadline responses public consultation End-March 2015 oDraft technical specifications for quantitative impact assessment Mid-2015 oQuantitative impact assessment of further work on solvency of IORPs End-2015 oTested advice for European Commission 15 October

Thank you EIOPA