The German financial supervisory authority, BaFin, has stressed the need to comply with the strict solvency rules for Pensionskassen and Pensionsfonds in the new circular 5/2021(VA).
The regulator has thus amended the circular 4/2005 (VA) on solvency rules for insurance companies following the implementation of the EU Directive 2016/2341 on the activities and supervision of institutions for occupational retirement provision (IORP II Directive) into German law.
The new circular addresses Pensionskasssen, Pensionsfonds, Sterbekassen and insurance companies.
According to BaFin, which offers a binding interpretation of the solvency rules in the Insurance Supervision Act (VAG), creditors of subordinated loans are already liable before the insolvency of a Pensionskasse or a Pensionsfond, if the regulator approves the decision for occupational pension institutions to cut benefits or orders it according to Section 314 paragraph 2 VAG.
A subordinated loan for Pensionskassen and Pensionsfonds’ creditors is cancelled if benefits are cut, it said.
The main goal of supervision activities is to safeguard the interests of policyholders and beneficiaries of insurance contracts, BaFin said in the circular, citing section 294 paragraph 1 of the VAG.
Pensionskassen and Pensionsfonds must always have available funds for at least the required amount according to section 234 paragraph 1 and section 238 paragraph 2 of the VAG.
In case of risk of underfunding, occupational pension schemes and insurance companies must submit a realistic restructuring plan to the supervisory authority for approval within two months from the time when they determined they had insufficient funds, it said.
For IORPs, the deadline to submit such plan can be extended by one month to a total of three months upon request.
Occupational schemes must take appropriate measures to increase their own funds or to reduce their risk profile and restock solvency capital within six months from determining their underfunding.
Pensionskassen and Pensionsfonds must submit an annual account of their solvency capital and also provide evidence of their own funds to the supervisory authority.
A difficult time
BaFin has currently 20 life insurers and around 40 Pensionskassen under intense supervision. Low interest rates and the effects of the pandemic continue to pose a challenge for Pensionskassen.
In a speech at the annual conference for insurance supervision, BaFin’s executive director Frank Grund warned that the proposals made by the European Insurance and Occupational Pension Authority (EIOPA) relating to the review of the Solvency II Directive could lead to concerns for German life insurers, “in the form of a risk-free yield curve
This would “lead to significantly higher capital requirements”, he said, adding that the regulator expects a change to the proposal.
For Jörg Kukies, state secretary for Financial Market Policy and European Policy at the Federal Ministry of Finance, the Solvency II regime has contributed to giving the insurance industry a stabilising role during the pandemic.
Therefore, the state secretary believes that deep changes to the current regime through the review are not necessary.