Regulatory outlook for 2020 - Impact for pension funds and insurance companies - Aegon Asset Management
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Regulatory outlook for 2020
Impact for pension funds and insurance companies
Part of the Regulatory Insight series
By David van Bragt
January 2020
2020 is likely to become a very busy year for pension funds and insurance companies from a
regulatory point of view. The Dutch regulator (DNB) has drawn up a comprehensive agenda, with
topics ranging from close supervision of pension funds with low funding ratios to new topics like
cyber and technology risks. Preparations for the scheduled pension reform should also be going
underway, leading to increased attention from DNB. On the insurance side, the 2020 review of the
Solvency II framework is now well under way. The consultation period for the proposals by the
European regulator (EIOPA) is currently coming to an end. After collecting all feedback, the final
proposals by EIOPA are due halfway this year, leading to final amendments to the Solvency II
regulations by the European Commission.
Dutch pension funds – Regulatory agenda of
the Dutch Central Bank The financial position of many Dutch pension funds
continues to be worrying due to low interest rates
Last month, the Dutch Central Bank (DNB) has
which leads to very high liabilities. Recently, the
announced the following regulatory topics for Dutch
Minister of Social Affairs and Employment has avoided
pension funds.1 The main topics are briefly discussed
cuts of pension rights for most pension funds by
below.
1
See DNB (2019).
Intended for professional investors only. Click here for more research publications.
invoking Article 142 of the Pensions Act (citing special 2019, the European Commission has asked EIOPA to
circumstances). Nevertheless, DNB will ensure that issue their proposals. Subsequently these proposals
funds continue to comply with laws and regulations were shared with the industry in a consultation phase
concerning their financial position. This means that with a deadline of 15 January.2 Last week the industry,
the premium contribution and any changes to the including Aegon, responded to the EIOPA proposals.
premium system must fit within the legal framework. The reaction of Insurance Europe has now also been
In addition, DNB will monitor that pension funds that published.3
may be confronted with a cut of the pension rights in
the future will continue to adequately reflect their EIOPA will now use this input and conduct an overall
financial position in the run-up to a potential pension impact assessment before sending their final
rights cut. Finally, DNB wants to ensure that any right proposals to the European Commission by June 2020.
cuts are implemented in a controlled, correct and In addition, EIOPA is currently carrying out a field test
balanced manner. on revised and new templates for Solvency II reporting
and disclosure. After 1 July 2020, the European
Dutch pension funds should also prepare for the authorities will work on concrete legislative proposals
upcoming pension reform. A principle agreement on which then also have to be implemented in national
the reform of the second pillar pension was reached in law. All in all, it will be years after 2020 before this
2019. DNB will pay attention in its supervision to the review is finalized.
agility and resilience of pension institutions in order to
be able to respond to the announced reform. In this The current proposals by EIOPA mainly focus on the
context, DNB will for example pay attention to the following topics:
agility of (IT) systems and the improvement of data
quality with regard to pension administrations. Construction of the Solvency II discount curve for the
liabilities
DNB also expects pension funds to work on managing The Solvency II discount curve for the liabilities now
data quality, ESG and cyber risks, and relatively new starts to diverge from the market rate after 20 years
technological risks and digitization, such as artificial (the so-called last liquid point, or LLP). EIOPA,
intelligence and dependence on longer outsourcing however, argues that currently enough liquidity exists
chains. The implementation of IORP II is also a central in the euro swap market for maturities up to 50 years.
topic. With a selection of large funds, DNB will A last liquid point of 50 years leads to a much lower
supervise the proper functioning of the organization of discount rate for long-term liabilities, since the effect
key functions. Medium-sized and small funds must of the ultimate forward rate (UFR) method would then
motivate their staffing of key positions and submit only be visible for ultra-long maturities (of more than
them to DNB for approval. Finally, in 2020 DNB will 50 years). See Figure 1 for an illustration.
continue to gain experience with supervision aimed at
pension administration organizations.
European Insurance companies – 2020
review of Solvency II
The 2020 review of the Solvency II requirements for
European insurance companies is now well under way
and has already led to specific recommendations by
EIOPA (the European regulator) and the European
Commission in the coming year. In the beginning of
2 3
See EIOPA (2019). See Insurance Europe (2020).Figure 1: Impact of a different last liquid point (LLP) on the Solvency proposals. No definitive proposals are made at this
II discount curve for the Eurozone. Source: EIOPA, as of 31
point; feedback is requested from the industry about
December 2018.
different issues related to the VA.
EIOPA also considers an alternative approach, where a Matching adjustment
blend of market and UFR rates is used. This would lead The matching adjustment (VA) is conceptually related
to a smaller effect on the final discount curve than to the VA and stimulates insurance companies to set
simply moving the last liquid point to 50 years. In the up matching asset portfolios alongside their long-term
consultation phase, feedback from the industry is annuity books. The MA is now mostly used in the UK,
requested about the different options on the last and to a lesser extend in Spain. For the Dutch market,
liquid point for the euro (including the alternative assets and liabilities do not always meet the criteria for
extrapolation method). the application of the MA. For that to happen,
eligibility criteria would have to be relaxed, but that is
Required capital for interest rate risk largely out of scope in EIOPA’s advice. On the contrary,
EIOPA advises that an additional requirement is
This topic was already raised by EIOPA in the 2018
introduced to clarify the eligibility of restructured
review of the standard formula under Solvency II, but
assets for the MA.
was then postponed by the European Commission to
the 2020 review. This is an important topic, since
Currently, possible diversification benefits are not
EIOPA proposes to increase the interest rate shocks
taken into account for portfolios which apply the MA.
which should be used in the standard required capital
EIOPA proposes to change this, which will lead to a
calculation.
capital relief. An impact analysis by EIOPA shows that
this (positive) effect will be quite significant for
EIOPA states that the current calibration
Spanish insurers under the MA, but more limited for
underestimates the interest rate risk and does not
UK insurers. For Dutch insurers, this proposal does not
take into account the possibility of a steep fall of
offer any capital relief, because the MA is not used by
interest rates as experienced during the past years and
them.
the existence of negative interest rates. EIOPA
therefore advises to model interest rate risk in the
The risk margin
standard formula with an alternative (relative shift)
The risk margin is an additional technical provision, on
approach. This new approach would lead to a much
top of the best-estimate value of the insurance
lower solvency ratio for many life insurers.
liabilities. The sum of the risk margin and the best
estimate liabilities should be equal to the amount
required to transfer the liabilities to another
undertaking.
Volatility adjustment
The volatility adjustment (VA) allows insurance Critics of the current (cost-of-capital) approach have
companies to add part of the spread on fixed income been vocal, stating that the risk margin under Solvency
investments to the liability curve. This way, spread II is too large and too sensitive to interest rate
movements on the asset side are partly reflected in movements for life annuity providers. Nevertheless,
similar movements on the liability side, with the aim of the analysis carried out by EIOPA has not yet resulted
reaching more stable own funds. in a proposal to change the calculation of the risk
margin.
Currently, the VA does not reach that result though
since the actual spreads on assets are not well Other changes
reflected in the (reference portfolio of) the VA. Various
The current proposals by EIOPA contain various other
modifications to the VA are mentioned in the current
topics (the entire document contains 878 pages!).
proposals of EIOPA, but none of the EIOPA-proposals
Other important topics are reporting and disclosure,
really seem to help for the Dutch industry since the
group supervision and macro-prudential policy and
actual spread on mortgages is not included in the
recovery and resolution. We refer the interestedreader to EIOPA’s (2019) full document for a broad Aegon Asset Management collaborate on research
overview and all details. and publications in areas such as regulatory impact,
capital optimization and asset-liability management.
References The joint knowledge and expertise is used to support
DNB (2019), “Toezichtagenda 2019” (in Dutch), clients with research insights and suitable solutions.
December 3, 2019. Available via Click here for more research publications.
https://www.dnb.nl/nieuws/dnb-
nieuwsbrieven/nieuwsbrief-pensioenen/nieuwsbrief- More information
pensioenen-december-2019/index.jsp. Frank Drukker, Executive Director Institutional
Business Development
EIOPA (2019), “Consultation Paper on the Opinion on Aegon Asset Management
the 2020 review of Solvency II”, EIOPA-BoS-19/465, T. + 31 (0)6 10 13 28 25
October 15, 2019. Available via E. frank.drukker@aegonassetmanagement.com
https://eiopa.europa.eu/Publications/Consultations/
EIOPA-BoS-19-465_CP_Opinion_2020_review.pdf Marianne Hamerslag, Executive Director Institutional
Business Development
Insurance Europe (2020), “Joint industry comments on Aegon Asset Management
EIOPA’s opinion on the 2020 review of Solvency II”, 16 T. + 31 (0)6 12 41 67 68
January 2020. Available via E.
https://www.insuranceeurope.eu/sites/default/files/ marianne.hamerslag@aegonassetmanagement.com
attachments/Joint%20response%20to%20EIOPA%20c
onsultation%20on%20its%20draft%20advice%20on%
202020%20review%20of%20Solvency%20II%20.pdf.
About the author
This article is written by David van Bragt of Aegon
Asset Management. David van Bragt is a senior
consultant in the Investment Solutions team at Aegon
Asset Management. The author advises institutional
investors about ALM, LDI, risk management and
regulatory developments.
About the Investment Solutions Center
The Investment Solutions Center of Aegon Asset
Management is the knowledge hub for balance sheet
and investment strategy solutions. Various experts ofImportant Information: This communication is impartial investment advice or give advice in a
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