The own-risk assessment (ORA) is obligatory for institutions for occupational retirement provision, and IORPs are also required to provide BaFin with a report on this assessment. BaFin has evaluated the reports on the own-risk assessments (ORA reports) from 82 IORPs. This corresponds to a market share of more than 90 percent. For its evaluation, BaFin used a structured evaluation template that allows for both qualitative and quantitative analysis. The results showed that around 90 percent of IORPs need to make corrections or additions to their reports. In its responses to these IORPs, BaFin included individual advice on how to implement improvements.

A lot of IORPs seemed to be unsure of how to meet the minimum requirements set out in the ORA Circular 09/2020 (VA) ; there also seemed to be some uncertainty with regard to the meaning of certain terms. Based on its evaluation of the ORA reports, BaFin has therefore formulated the following guidance, which may be of interest to numerous IORPs – and which is intended to assist institutions in preparing their future ORA reports in compliance with the requirements.

General guidance

Completeness

A lot of the IORPs failed to include some of the requirements of the ORA Circular entirely. For example, according to the ORA Circular, IORPs should address problems relating to data quality in their ORA reports. However, the majority of the ORA reports did not contain any information about data quality. The reports should at least contain a statement confirming the absence of any problems.

As a general rule, in their ORA reports, IORPs should address all of the requirements in the ORA Circular. There are cases, however, when specific requirements are not relevant to a certain institution. In such cases, the IORP should still mention the requirement in its report, providing a detailed description of why the requirement does not apply. This makes it clear why the IORP has not addressed the requirement in question in their ORA report and allows BaFin to assess the reasons for this. If IORPs do not provide justification for failing to include a requirement, it is not clear whether the requirement was left out accidentally or whether the IORP deliberately did not meet the requirement.

Time periods

Where the ORA Circular sets out specific minimum requirements as regards the time periods to be observed, the information provided should at least relate to these time periods. If, for example, institutions are required to take the following five years into account in the assessment of overall funding needs, then an assessment based on three years would not be sufficient.

Structure

The ORA Circular recommends that institutions structure the ORA report in such a way that it is clear which requirements are addressed in the report – for example by aligning the structure of the report, as far as possible, with section 234d (2) sentence 1 of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG ). The evaluation has shown that this recommendation is very helpful in ensuring that all of the requirements with regard to a clear presentation are met.

Comprehensibility

The ORA report must contain sufficient detail and must be understandable in itself. For example, it is not sufficient to simply claim that a requirement has been met. Rather, IORPs should also provide justification for claims made in their reports. As justification, companies might, for example, specify the methods used and include a short summary of the results. A detailed description could then be contained in the institution’s internal documentation.

The IORPs should present all quantitative information in a clear format, give precise figures and present changes in the figures over time, for example in table format. This applies in particular to information regarding the overall funding needs.

Developments

According to margin number 29 of the ORA Circular, IORPs should include a description of expected developments. Furthermore, they should describe how their own plans impact the individual areas of the own-risk assessment under nos. 1 to 8 of section 234d (2) sentence 1 of the VAG.
In accordance with section 234d (2) sentence 1 no. 1 of the VAG, IORPs must describe how the own-risk assessment is integrated into their management and decision-making processes. BaFin’s evaluation of the ORA reports submitted has shown that IORPs should pay particular attention to these points to ensure the information contained in the relevant descriptions is not only correct, but also detailed enough.

Specific guidance

In addition to the general guidance, the following contains specific guidance and required improvements:

Sponsoring undertakings within the meaning of the ORA

If a company uses an IORP to provide an occupational pension scheme for its employees, this company is deemed to be a sponsoring undertaking of the IORP within the meaning of section 234d (2) sentence 1 no. 3 and no. 6 of the VAG. This applies regardless of the IORP’s legal form and regardless of how the term “sponsoring undertaking” is used in its statutes or other documents.

Conflicts of interest in the context of the ORA

Section 234d (2) sentence 1 no. 3 of the VAG only covers cases in which “the person responsible for a key function also performs a similar function in the sponsoring undertaking”. Further information on this can be found in section 9.5 of the Minimum Requirements on the System of Governance of Institutions for Occupational Retirement Provision (MaGo for IORPs). If an IORP wishes to state that there are no conflicts of interest, it should reference the case above in its statement. For example: “No persons responsible for a key function also perform a similar function in the sponsoring undertaking.”

Assessment of overall funding needs

IORPs should provide the required quantitative data in a clear format, ideally in a table, in reference to the (at least) four areas of overall funding needs in order to provide the relevant figures for these areas for each year (or for shorter time periods if applicable) of the period under review – both with and without consideration of risks. For example, for each year of a five-year review period, IORPs should compare the expected solvency capital requirement and the expected own funds available to cover this requirement.

As set out in the ORA Circular, IORPs should take a forward-looking approach to determining and evaluating the risks. In doing so, they should bear in mind that overly optimistic estimates usually result in insufficient findings.

Clarification regarding margin no. 81 of the ORA Circular

Some IORPs have evidently interpreted margin no. 81 of the ORA Circular as defining the “overall funding needs” referred to in section 234d (2) sentence 1 no. 4 of the VAG. This is a misconception.

Margin no. 81 merely clarifies that, owing to the characteristics of pure defined-contribution plans and commitments by Pensionsfonds within the meaning of section 236 (2) and (3) of the VAG, IORPs normally do not encounter situations requiring them to make additional funds available to safeguard commitments. The ORA report therefore typically does not need to describe how such additional funds would be obtained.

The requirement to assess the overall funding needs in accordance with section 234d (2) sentence 1 no. 4 of the VAG also applies to IORPs whose business consists only of such commitments.

Risks for members and beneficiaries

IORPs must assess the risks to members and beneficiaries relating to the paying out of their retirement benefits (section 234d (2) sentence 1 no. 5 of the VAG). As part of this, they must also take into consideration non-guaranteed benefits such as profit participation. This requirement is likely to be new for the majority of IORPs.
In their ORA reports, IORPs should clearly specify which details provided in accordance with section 234d (2) sentence 1 no. 5 of the VAG apply to guaranteed and which to non-guaranteed benefits.

If there are different forms of profit participation, the IORPs should explain how this could impact the members and beneficiaries. For example, in the overall consideration of an IORP’s risks, the funding of a supplementary time period based on projected pension contributions (Zurechnungszeit) for the calculation of an invalidity pension may be relatively simple, but the impact on individual members could be substantial if the funds required for this supplementary time period were unavailable as a result of risks materialising.

If the members and beneficiaries are not granted profit participation due to the economic situation of the IORP or, for example, because the funding system does not result in any profit to be shared, this should be detailed in the ORA report.

In the information in accordance with section 234d (2) sentence 1 no. 5 of the VAG, IORPs should also detail operational risks that are directly related to the paying out of retirement benefits – including the possibility of delayed pension payments due to IT system downtimes.

IORPs should also detail the specific risks associated with non-guaranteed components of benefits from unit-linked products or comparable products offered by Pensionsfonds. For example, there may be significant differences in the capital investments underlying the unit-linked component of the product and the capital investments underlying the guaranteed benefits. If this is the case, the extent of certain risks associated with the capital investments underlying the unit-linked component of the product may be different.

In accordance with section 8 of the Regulation on Information Obligations under the VAG (VAG-Informationspflichtenverordnung – VAG-InfoV) , IORPs are required to calculate a projection of their pension benefits, which must include a realistic estimate of future investment income or a best estimate scenario. Both of these estimates can change over the course of time and, above all, may reduce the projected pension benefits. Since members and beneficiaries may view such effects as risks, or at least as an indication of existing risks, IORPs should provide information about this in accordance with section 234d (2) sentence 1 no. 5 of the VAG. IORPs should also carry out a qualitative assessment with regard to the risk that benefits, including profit participation, may fall short of the projections in accordance with section 8 of the VAG-InfoV.

Protection from sponsoring undertakings

IORPs must carry out a qualitative assessment of guarantees, covenants or any other type of financial support by the sponsoring undertaking (section 234d (2) sentence 1 no. 6 of the VAG). For a lot of IORPs, this is also likely to be new, at least in part.

The following points should, for the most part, already be contained in the written internal documents regarding the ORA, and should also be included in the ORA report to ensure that it is clear and comprehensible.

• In their ORA reports, IORPs should explain which information specifically they used in order to comply with section 234d sentence 1 no. 5 of the VAG and whether or not this information is publicly available, for example the annual financial statements of the sponsoring undertaking. With regard to margin no. 112 of the ORA Circular, IORPs should clearly describe why certain information is not publicly available or cannot be accessed with a reasonable amount of effort. This is necessary for the assessment of whether the ORA report meets the requirements of the ORA Circular.
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• IORPs should also provide a summary of the specific aspects from the information and documentation used that they considered in order to reach their assessment, for example the sponsoring undertaking’s equity.
• In addition, they should provide a clear presentation of the criteria they applied in reaching their assessment based on the information considered. For example: the sponsoring undertaking’s equity is equal to x times the amount that would be required by the IORP in the event that the risks materialise – as calculated in the assessment of overall funding needs.
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Operational risks, including risks in the context of outsourcing

In the ORA reports, some IORPs stated that they did not have any operational risks since all activities were outsourced. This is not correct. There are operational risks associated with specific activities regardless of who carries them out. It is therefore essential that IORPs provide information in accordance with section 234d (2) sentence 1 no. 7 of the VAG.

Conclusion and outlook

The evaluation of the ORA reports has shown intensive engagement with the topic of own-risk assessments on the part of IORPs. However, the own-risk assessment is very comprehensive and contains various new requirements. It is therefore not surprising that the reports evaluated do not yet meet all of the requirements in full.

With regard to the ORA reports in question, BaFin has provided specific information to a number of IORPs. This article offers additional guidance intended to further improve the quality of reports.

IORPs that have not yet submitted an ORA report must do so by October 2022. BaFin will also assess these reports and review whether there is further need for action on the part of BaFin, for example publishing additional information or clarifications.