analysis of objective oriented perspectives for the ... · pdf fileanalysis of objective...

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

PBSS Colloquium, Lyon

Research Training Group 1100Simona CleverJune 24, 2013

Seite 2 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Motivation

Pension funds in Germany

pension fund

employerPSV

beneficiary

contractcontract

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


Risk situation of the parties involved

pension fund

contractualentitlementsto additionalcontributions

additionalcosts

for employer

employerpays

additionalcontributions

relevantrisks

conversion to insurance-type guaranteereduction of benefits

employer does not pay

reduction ofbenefits dueto insolvency

reduction ofconditional

benefits

subsidiaryliabilty

employer

occupationalpensionscheme

additionalcosts

for employeremployer

pays

benefitssecured

by the PSV?

risk ofemployerinsolvency

no

transfer assets/commitments

yes liabilityof PSV

benefitssecured

by the PSV?

employerinsolvent

reduction ofbenefits

for beneficiary

privatecontinuation

liabilityof PSV

yes

no PSVdoesnotpay

additional costsfor PSV(+ other

employers)

PSVpays


Problem

I How should reasonable supervision rules for pension funds be designed?I How to calculate Solvency Capital Requirement for a pension fund?I How to measure the risks of a pension fund?I Which security mechanisms should be considered in the calculations at

all? How can these security mechanisms be taken into account?

Seite 5 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 6 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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

contractcontract

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

insolvencypension fund

subsidiaryliability

employer

insolvencyemployer

liabilityPSV

increased PSV-contributions

other employers

accumulation risk

increases risk

pay-as-you-gofinancing

increases risk


Perspective 2: objectives

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

pension fund

employerPSV

beneficiary

contractcontract

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 14 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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

calculation of SCRSCR = BSCR + Adj

adjustment for security mechanismsAdj = −min(BSCR −nBSCR;maximum support)

nBSCR(consider all sec. mech.)

...

n1BSCR(consider first sec. mech.)

BSCR(consider no sec. mech.)

control maximum effectafter aggregation

control maximum effectafter aggregation

Seite 18 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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


Insurance type

without recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

1,2 1,3 1,4 1,5 1,6 1,7

0

0,05

0,1

0,15

0,2

0,25

0,3

SCR_2

SCR_1_min

SCR_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

1,2 1,3 1,4 1,5 1,6 1,7

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro


with recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

1,2 1,3 1,4 1,5 1,6 1,7

0

0,05

0,1

0,15

0,2

0,25

0,3

SCR_2

SCR_1_min

SCR_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

1,2 1,3 1,4 1,5 1,6 1,7

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro



Employer bearing market risk


0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,89 0,94 0,99 1,04 1,09 1,14 1,19 1,24

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,89 0,94 0,99 1,04 1,09 1,14 1,19 1,24

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro


with recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,89 0,94 0,99 1,04 1,09 1,14 1,19 1,24

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,71 0,76 0,81 0,86 0,91 0,96 1,01

0,00

0,02

0,04

0,06

0,08

0,10

0,12

0,14

0,16

0,18

0,20

SCR_2

SCR_1_min

SCR_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

0,89 0,94 0,99 1,04 1,09 1,14 1,19 1,24

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro



Employer bearing biometric risk


0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro


with recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro



Employer bearing both market and biometric risk


0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,71 0,76 0,81 0,86 0,91 0,96 1,01

0,00

0,02

0,04

0,06

0,08

0,10

0,12

0,14

0,16

0,18

0,20

SCR_2

SCR_1_min

SCR_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

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_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

0,71 0,76 0,81 0,86 0,91 0,96 1,01

-100000,00

-50000,00

0,00

50000,00

100000,00

150000,00

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro


with recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

0

0,05

0,1

0,15

0,2

0,25

SCR_2

SCR_1_min

SCR_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

0,71 0,76 0,81 0,86 0,91 0,96 1,01

0,00

0,02

0,04

0,06

0,08

0,10

0,12

0,14

0,16

0,18

0,20

SCR_2

SCR_1_min

SCR_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

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3

-100000

-50000

0

50000

100000

150000

SCR_2

SCR_1_min

SCR_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

0,71 0,76 0,81 0,86 0,91 0,96 1,01

-100000,00

-50000,00

0,00

50000,00

100000,00

150000,00

SCR_2

SCR_1_min

SCR_1_max


fre

e s

urp

lus

in E

uro



Critical value for maximum support


0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,30

0,02

0,04

0,06

0,08

0,1

0,12

0,14

0,16

0,18

0,2

insurance type

mkt

biom

mkt, biom


supp

ort

/ m

arke

t va

lue

liabi

litie

s

with recovery plan:

0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,30

0,05

0,1

0,15

0,2

0,25

insurance type

mkt

biom

mkt, biom


supp

ort

/ m

arke

t va

lue

liabi

litie

s

Seite 25 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Conclusions

Conclusions

I The answer to the question, which security mechanisms should be takeninto account for the calculation of the SCR, strongly depends on thesupervisory objectives 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 With Perspective 1, a recovery plan can increase the SCR.I The critical value increases with the number of risks assumed by the

employer.


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)

Neuburger A.: Solvency II für Einrichtungen der betrieblichen Altersversorgung(Zwischenbericht der Arbeitsgruppe Solvabilität/Risikosteuerung), Vortrag aufdem IVS-Forum am 14. November 2006 in Nürnberg

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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