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Analysis of objective oriented perspectives for thecalculation of Solvency Capital Requirement for pension
funds considering Solvency II and IORP II
Joint work with Andreas Beckstette and Hans-Joachim Zwiesler
30th International Congress of Actuaries, Washington
Research Training Group 1100Simona CleverApril 1, 2014
Seite 2 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Motivation
Pension funds in Germany
pension fund
employerPSV
beneficiary
contract
insolvency
pension commitmentsubsidiary liability
subscription right
contractI increases in contributions (risks explicitly
assumed, recovery plans)I reduction of benefits in case of sponsor
default
pension protection schemesI PSV
national social, labour andsupervision law
I subsidiary liability of employer
Seite 3 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Motivation
Problem
I How to measure the risks and calculate Solvency Capital Requirement(SCR) for a pension fund?
I Which security mechanisms should be considered in the calculations atall? How can these security mechanisms be taken into account?
I conditional benefitsI risks explicitly assumed by employerI recovery plansI subsidiary liabilityI PSV
I How should reasonable supervision rules for pension funds be designed?
Seite 4 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Literature review
Literature review
Literature on risk measurement, security mechanisms andsupervision of IORPs
I [Queisser 1998]I [Brunner, Hinz, Rocha 2008]I [van Gaalen 2003], [Mihr 2004], [Gisler 2010]I [Haberman, Butt, Megaloudi 2000]I [Broeders, Chen 2010]
Discussion on IORP III [CEA 2009]I [GCAE 2010], [Hügelschäffer 2011], [Reuss 2008], [Velten 2008],
[Wiesner 2009]I [EIOPA 2012]
Seite 5 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Contents
Motivation
Literature review
Two possible supervision perspectives
The model
Analysis
Conclusions
Seite 6 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Who should be protected?
Protection ...
I ... of contractual partner?I ... of beneficiary within the system?I ... of stability of the system?I ... from regulatory arbitrage?
Seite 7 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 1: objectives
I protection of beneficiary within the system
pension fund
employerPSV
beneficiary
contract
insolvency
pension commitmentsubsidiary liability
subscription right
Seite 8 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 1: consequences
I consider contractual arrangements like risks explicitly assumed andrecovery plans
I consider national law like subsidiary liabilityI consider pension protection schemes like PSVI consider maximum value of sponsor support and pension protection
scheme
Seite 9 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 1: assessmentI in line with technical specifications of first QISI not consistent with Solvency III no protection of employerI risk for pension fund from financial situation of employer/PSVI systemic risk
pension funds employersPSV
risks fromoccupational
pensions
risks from actualbusiness
insolvency insolvency
pay-as-you-gofinancing
Seite 10 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 2: objectives
I protection of stability of the systemI protection of contractual partnerI protection from regulatory arbitrage
pension fund
employerPSV
beneficiary
contract
insolvency
pension commitmentsubsidiary liability
subscription right
Seite 11 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 2: consequences
I consider contractual arrangements like risks explicitly assumed andrecovery plans
Seite 12 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Two possible supervision perspectives
Perspective 2: assessment
I consistent with Solvency III adequate protection of employerI no risk for pension fund from financial situation of employer/PSVI adequate protection of beneficiary and stability of the system (within
pension fund’s area of responsibility)I control of employer’s risks?
Seite 13 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
Contents
Motivation
Literature review
Two possible supervision perspectives
The model
Analysis
Conclusions
Seite 14 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
Stress scenarios
market valueassets
securitymechanisms
market valueliabilities
Net Asset ValueNAVnormal
economic balance sheet under normalconditions
market valueassets(stress scenario)
securitymechanisms(stress scenario)
market valueliabilities(stress scenario)
Net Asset ValueNAVstress
economic balance sheet under stressscenario
∆NAV = NAVnormal − NAVstress
Seite 15 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model - basic idea (without security mechanisms)
aggregation to SCRSCR =
√∑i ,j Corri ,j · SCRi · SCRj
aggregation to market riskSCRmkt =
√∑r ,c Corrmktr ,c · mktr · mktc
aggregation to pension liability riskSCRpension =
√∑r ,c Corrpensionr ,c · pensionr · pensionc
interest rate andinflation
mktint
equitymktequ
salary increasemktsal
mortalitypensionmort
longevitypensionlong
disabilitypensiondis
Seite 16 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model with adjustment for security mechanisms
BSCRconsidered sec. mech.: –
.!testtest test
Seite 16 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model with adjustment for security mechanisms
n1BSCRconsidered sec. mech.: 1
sec. mech. 1:conditional benefits
BSCRconsidered sec. mech.: –
control maximum effectafter aggregation
Seite 16 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model with adjustment for security mechanisms
n2BSCRconsidered sec. mech.: 1, 2
sec. mech. 2:risks explicitly assumed by employer
n1BSCRconsidered sec. mech.: 1
sec. mech. 1:conditional benefits
BSCRconsidered sec. mech.: –
control maximum effectafter aggregation
Seite 16 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model with adjustment for security mechanisms
SCR_P2 = n3BSCRconsidered sec. mech.: sec. mech.: 1, 2, 3
sec. mech. 3:recovery plan
n2BSCRconsidered sec. mech.: 1, 2
sec. mech. 2:risks explicitly assumed by employer
n1BSCRconsidered sec. mech.: 1
sec. mech. 1:conditional benefits
BSCRconsidered sec. mech.: –
control maximum effectafter aggregation
control maximum effectafter aggregation
Seite 16 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 The model
The model with adjustment for security mechanisms
SCR_P1 = n4BSCRconsidered sec. mech. 1, 2, 3, 4
sec. mech. 4:subsidiary liability
SCR_P2 = n3BSCRconsidered sec. mech.: sec. mech.: 1, 2, 3
sec. mech. 3:recovery plan
n2BSCRconsidered sec. mech.: 1, 2
sec. mech. 2:risks explicitly assumed by employer
n1BSCRconsidered sec. mech.: 1
sec. mech. 1:conditional benefits
BSCRconsidered sec. mech.: –
control maximum effectafter aggregation
control maximum effectafter aggregation
control maximumsponsor support
Seite 17 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Contents
Motivation
Literature review
Two possible supervision perspectives
The model
Analysis
Conclusions
Seite 18 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Example for Analysisbeneficiary
I retired male beneficiary of age 70I annuity payment of 1000 EUR / survivorship annuity of 600 EUR per monthI no contractually specified pension dynamics
possible contractual risk sharing with employerI market risksI biometric risksI recovery plan
pension fundI assets: varying coverage ratio of pension account, additional own funds 5 %I investment of assets: 35 % in shares, 65 % in fixed interest bearing securitiesI calculatory interest rate: 4.0 % or 1.75 %I calculatory mortality tables: Heubeck 2005 G or DAV 2004 R
Seite 19 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Employer bearing market risk (1)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,95 1 1,05 1,1 1,15 1,2 1,25 1,3 1,35
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
SC
R /
ma
rke
t va
lue
lia
bili
ties
coverage ratio (market value)
Seite 20 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Employer bearing market risk (2)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,95 1 1,05 1,1 1,15 1,2 1,25 1,3 1,35
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
SC
R /
ma
rke
t va
lue
lia
bili
ties
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,95 1 1,05 1,1 1,15 1,2 1,25 1,3 1,35
-100.000
-50.000
0
50.000
100.000
150.000
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,95 1 1,05 1,1 1,15 1,2 1,25 1,3 1,35
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
su
pp
ort
em
plo
yer
/ ma
rke
t va
lue
lia
b. coverage ratio (market value)
Seite 21 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Insurance type
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,28 1,38 1,48 1,58 1,68 1,78
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
SC
R /
ma
rke
t va
lue
lia
bili
ties
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,28 1,38 1,48 1,58 1,68 1,78
-100.000
-50.000
0
50.000
100.000
150.000
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,28 1,38 1,48 1,58 1,68 1,78
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
su
pp
ort
em
plo
yer
/ ma
rke
t va
lue
lia
b.
coverage ratio (market value)
Seite 22 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Employer bearing biometric risk
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,11 1,16 1,21 1,26 1,31 1,36 1,41 1,46 1,51 1,56
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
SC
R /
ma
rke
t va
lue
lia
bili
ties
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,11 1,16 1,21 1,26 1,31 1,36 1,41 1,46 1,51 1,56
-100.000
-50.000
0
50.000
100.000
150.000
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
1,11 1,16 1,21 1,26 1,31 1,36 1,41 1,46 1,51 1,56
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
su
pp
ort
em
plo
yer
/ ma
rke
t va
lue
lia
b. coverage ratio (market value)
Seite 23 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis
Employer bearing both market and biometric risk
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,85 0,9 0,95 1 1,05 1,1 1,15 1,2
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
SC
R /
ma
rke
t va
lue
lia
bili
ties
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,85 0,9 0,95 1 1,05 1,1 1,15 1,2
-100.000
-50.000
0
50.000
100.000
150.000
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3
0,85 0,9 0,95 1 1,05 1,1 1,15 1,2
0,00
0,05
0,10
0,15
0,20
0,25
0,30
P_2
P_1_min
P_1_max
coverage ratio (calculatory)
su
pp
ort
em
plo
yer
/ ma
rke
t va
lue
lia
b.
coverage ratio (market value)
Seite 24 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Conclusions
Conclusions
I The answer to the question, which security mechanisms should be takeninto account for the calculation of the SCR, depends on the supervisoryobjectives assumed.
I A general statement about which perspective delivers a higher SCR andtherefore is the more stringent one, is not possible. The result stronglydepends on the constellation of risk sharing, the coverage ratio and thelimitation of additional support from security mechanisms.
I On the subject of systemic risk further research is needed.
Seite 25 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Conclusions
Contact
Research Training Group 1100Ulm University
Simona Cleversimona.clever@uni-ulm.de
Thank you for your attention!
Seite 26 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Conclusions
Literature I
CEA (Comité Européen des Assurances): Regulatory Challenges for PensionFunds in Europet vom 17. 12. 2009, Download unterhttp://www.insuranceeurope.eu/uploads/Modules/Publications/cea_note_on_regulatory_challenges_for_pension_funds.pdf am20. 6. 2012
Broeders D., Chen A.: Pension benefit security: a comparison of solvencyrequirements, a pension guarantee fund and sponsor support, DNB WorkingPaper, No. 268, vom 1. 12. 2010, Download unterhttp://www.dnb.nl/en/binaries/268%20-%20Pension%20benefit%20security_tcm47-243121.pdf am 10. 1. 2013
Brunner G., Hinz R., Rocha R.: Risk-Based Supervision of Pension Funds –Emerging Practices and Challenges, in: International Social Security Review, Vol.51, 2/98
Groupe Consultatif actuariel europeen Security in occupational pensions vom Mai2010, Download unter http://www.gcactuaries.org/documents/IORPSecurity_full_May2010.pdf am 20. 6. 2012
Seite 27 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Conclusions
Literature IIGisler T.: Solvency Tests for Pension Funds: An International Analysis with aStandard Model, Books on Demand, Norderstedt, 2010
Haberman S., Butt Z., Megaloudi C.: Contribution and solvency risk in a definedbenefit pension scheme, Insurance: Mathematics and Economics 17, S. 237–259
Hügelschäffer H.: Das Grünbuch zur Sicherung der Renten - Wegbereiter für einevereinheitlichte europäische Zusatzversorgung?, in: BetrAV 66 (2011), S. 249–263
Mihr E.: Vorschlag zur Bestimmung der Solvabilität bei Pensionskassen,Diplomarbeit (Swiss Pension Actuary Course)
Queisser M.: Regulation and supervision of pension funds: Principles andpractices, World Bank Publications, Washington DC, 2008
Reuss A.: Die Auswirkung risikobasierter Eigenmittelanforderungen auf PensionFunds, in: BetrAV 63 (2008), S. 655–659
Seite 28 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Conclusions
Literature IIIEIOPA (European Insurance and Occupational Pensions Authority): QuantitativeImpact Study (QIS) on Institutions for Occupational Retirement Provision (IORPs)- Technical Specifications - vom 8.10. 2012, Download unter https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/QIS/OPC/qis1/Technical_specifications/Commission_-_Technical_specifications_QIS_on_IORPs_-_8_October_2012.pdf am 17.10. 2012
van Gaalen, R.: Pension Funds: A Capital Adequacy Test With A Soft MismatchCushion, Society of Actuaries, Download unterhttp://www.soa.org/library/monographs/retirement-systems/the-great-controversy/2004/june/m-rs04-1-07.aspx am 02. 1. 2013
Velten C.: Bericht der Leitung der Fachvereinigung Pensionsfonds, in: BetrAV 63(2008), S. 566–567
Wiesner B.: Der Weg nach Europa, in: BetrAV 64 (2009), S. 179–180
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