Analysis of objective oriented perspectives for the calculation 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 1100 Simona Clever June 24, 2013
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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
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
Seite 3 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Motivation
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
Seite 4 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Motivation
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
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
Seite 7 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 8 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Two possible supervision perspectives
Perspective 1: objectives
I protection of beneficiary within the system
pension fund
employerPSV
beneficiary
contractcontract
insolvency
pension commitmentsubsidiary liability
subscription right
Seite 9 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 10 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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
insolvencypension fund
subsidiaryliability
employer
insolvencyemployer
liabilityPSV
increased PSV-contributions
other employers
accumulation risk
increases risk
pay-as-you-gofinancing
increases risk
Seite 11 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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
contractcontract
insolvency
pension commitmentsubsidiary liability
subscription right
Seite 12 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Two possible supervision perspectives
Perspective 2: consequences
I consider contractual arrangements like risks explicitly assumed andrecovery plans
Seite 13 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 14 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 The model
Contents
Motivation
Literature review
Two possible supervision perspectives
The model
Analysis
Conclusions
Seite 15 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 16 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 17 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 The model
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
Two possible supervision perspectives
The model
Analysis
Conclusions
Seite 19 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 20 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Analysis
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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
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
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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
Seite 21 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Analysis
Employer bearing market risk
without 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
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
0,89 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
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
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
0,71 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
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
0,89 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
Seite 22 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Analysis
Employer bearing biometric risk
without 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
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
0,9 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
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
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
0,9 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
Seite 23 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Analysis
Employer bearing both market and biometric risk
without 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
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
0,71 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
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
0,9 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
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
0,71 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
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
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
0,71 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
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
0,9 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
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
0,71 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
coverage ratio (calculatory)
fre
e s
urp
lus
in E
uro
coverage ratio (market value)
Seite 24 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Analysis
Critical value for maximum support
without recovery plan:
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
coverage ratio (calculatory)
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
coverage ratio (calculatory)
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.
Seite 26 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 Conclusions
Seite 27 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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 28 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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)
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
Seite 29 Analysis of objective oriented perspectives for the calculation of SCR | June 24, 2013 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