The German financial supervisory authority, BaFin, has released further guidelines for occupational pension schemes to improve their own risk assessment reports, which are so far not in line with the requirements set by the regulator.
IORPs are not meeting the minimum requirements specified in the circular 09/2020 (VA), that provides information on the interpretation of regulations on own risk assessment (ERB) according to paragraph 234d of the Insurance Supervision Act (VAG).
The ERB circular recommends that occupational schemes structure risk-assessment reports in detail, clearly addressing requirements, with quantitative information, specific figures and development over time.
This applies above all to information on financing requirements, according to BaFin. The regulator has now given further, specific tips to address the issue on the lack of detailed information provided by occupational pension schemes.
According to BaFin, occupational schemes should ideally provide the necessary quantitative information in a clear form in risk assessment reports for at least four aspects relating to financing requirements in tabular form, in order to specify the relevant figures for each year, or a shorter timeframe. IORPs should anticipate and assess the risks.
The regulator also underlined in a note that occupational schemes have misinterpreted part of the ERB circular, believing that it defines the “entire financing requirement” within the meaning of paragraph 234d (2) sentence 1 no. 4 of the VAG.
The circular, however, only points at pure define contributions and pension promises of Pensionsfonds, as prescribed in the VAG, not leading to build up additional funds to secure commitments.
Therefore, the schemes are not required to detail the funds necessary to cover the promises in the ERB report. IORPs whose business is based on such promises, however, must assess the financing requirement in accordance with paragraph 234d (2) sentence 1 no. 4 of the VAG, BaFin noted.
Moreover, according to additional guidelines listed by BaFin, occupational schemes must clearly state guaranteed and non-guaranteed benefits, and their specific risks, and give an outlook on future returns on investments, or a best-estimate scenario.
IORPs must also qualitatively assess guarantees, binding obligations and any other financial support from the sponsoring company, a new task for occupational schemes, according to BaFin.
Occupational pension schemes have until the end of October to submit their detailed risk assessment reports. BaFin will evaluate the reports to check whether there is further need for action, with new information or clarifications, it said.
Pensionskassen demand simplification of supervisory rules
While BaFin is asking German occupational schemes to make an effort to further detail their risk assessment reports, Pensionskassen are demanding simplification of supervisory procedures.
According to a survey conducted by WTW, three quarters of companies’ Pensionskassen are demanding specific and streamlined supervisory rules for occupational pension schemes, with only a quarter considering the provisions of the Insurance Supervision Act (VAG) appropriate.
Half of Pensionskassen surveyed by WTW believe they have sufficient leverage to face the current high-inflation scenario. The survey also showed that half of Pensionskassen expect interest rates to rise significantly, and almost a third expect interest rates to stabilise at the present level.
“It therefore makes sense for Pensionskassen to assess different scenarios and to precisely determine the longer-term effects of a further rise in interest rates, but also of a stabilisation of the current interest rate level,” said Tim Voetmann, head of Pensionskassen consulting at WTW.