Analysis of objective oriented perspectives for the ... · PDF filecalculation of Solvency...

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


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?


Perspective 1: objectives

I protection of beneficiary within the system

pension fund

employerPSV

beneficiary

contract

insolvency


subscription right


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


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


Perspective 2: objectives

I protection of stability of the systemI protection of contractual partnerI protection from regulatory arbitrage

pension fund

employerPSV

beneficiary

contract

insolvency


subscription right


Perspective 2: consequences

I consider contractual arrangements like risks explicitly assumed andrecovery plans


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


The model

Analysis

Conclusions


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


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


The model with adjustment for security mechanisms

BSCRconsidered sec. mech.: –

.!testtest test



n1BSCRconsidered sec. mech.: 1

sec. mech. 1:conditional benefits


control maximum effectafter aggregation



n2BSCRconsidered sec. mech.: 1, 2

sec. mech. 2:risks explicitly assumed by employer







SCR_P2 = n3BSCRconsidered sec. mech.: sec. mech.: 1, 2, 3

sec. mech. 3:recovery plan










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








control maximumsponsor support

Seite 17 Analysis of objective oriented perspectives for the calculation of SCR | April 1, 2014 Analysis

Contents

Motivation

Literature review


The model

Analysis

Conclusions


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


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)


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


SC

R /

ma

rke

t va

lue

lia

bili

ties


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


fre

e s

urp

lus

in E

uro


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


su

pp

ort

em

plo

yer

/ ma

rke

t va

lue

lia

b. coverage ratio (market value)


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


SC

R /

ma

rke

t va

lue

lia

bili

ties


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


fre

e s

urp

lus

in E

uro


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


su

pp

ort

em

plo

yer

/ ma

rke

t va

lue

lia

b.



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


SC

R /

ma

rke

t va

lue

lia

bili

ties


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


fre

e s

urp

lus

in E

uro


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


su

pp

ort

em

plo

yer

/ ma

rke

t va

lue

lia

b. coverage ratio (market value)


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


SC

R /

ma

rke

t va

lue

lia

bili

ties


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


fre

e s

urp

lus

in E

uro


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


su

pp

ort

em

plo

yer

/ ma

rke

t va

lue

lia

b.


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.


Contact

Research Training Group 1100Ulm University

Simona [email protected]

Thank you for your attention!


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

http://www.insuranceeurope.eu/uploads/Modules/Publications/cea_note_on_regulatory_challenges_for_pension_funds.pdf

http://www.insuranceeurope.eu/uploads/Modules/Publications/cea_note_on_regulatory_challenges_for_pension_funds.pdf

http://www.dnb.nl/en/binaries/268%20-%20Pension%20benefit%20security_tcm47-243121.pdf

http://www.dnb.nl/en/binaries/268%20-%20Pension%20benefit%20security_tcm47-243121.pdf

http://www.gcactuaries.org/documents/IORPSecurity_full_May2010.pdf

http://www.gcactuaries.org/documents/IORPSecurity_full_May2010.pdf


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


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

https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/QIS/OPC/qis1/Technical_specifications/Commission_-_Technical_specifications_QIS_on_IORPs_-_8_October_2012.pdf




http://www.soa.org/library/monographs/retirement-systems/the-great-controversy/2004/june/m-rs04-1-07.aspx

http://www.soa.org/library/monographs/retirement-systems/the-great-controversy/2004/june/m-rs04-1-07.aspx

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