UPDATE - 20 November 2015
On 20 November 2015 LSS 5/13 Pension obligation risk was deleted.
From its commencement on 1 April 2013, the Prudential Regulation Authority (PRA) has adopted a number of legacy Financial Services Authority (FSA) policy publications relevant to the advancement of its objectives. These two documents, initially issued by the FSA in the form of separate letters to the ABI, BBA and BSA in February 2011, have been adopted by the PRA as Supervisory Statements as part of this process. The PRA may choose to review these legacy publications at a later stage.
The Supervisory Statements below concern the approach that the PRA would expect insurers, banks and building societies to take when evaluating their capital requirements in relation to the defined benefit pension schemes they operate for the benefit of current and former employees.
Summary of the key issues
- A firm is required by GENPRU 1.2.26R to “at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due”. Accordingly, the PRA’s basic approach towards pension obligation risk capital (P2PRC) is that it exists to enable a firm to meet its pension obligations throughout a period of stress and beyond.
- The PRA uses the actuarial funding valuation prepared for a pension scheme’s trustees as a starting point for its own internal assessment of P2PRC. Where firms choose to value their P2PRC using a different valuation basis, they should be able to explain to the PRA why this is more appropriate than the actuarial funding valuation in their case.
- Firms should calculate P2PRC by considering risks to the funding of their pension schemes consistent with a 99.5% confidence level over one year (for INSPRU firms), or a stress event that has no more than a one in 200 probability of occurring in a one-year period (for BIPRU firms).
- P2PRC may be reduced by certain offsets and management actions. The Supervisory Statements provide high-level criteria which the PRA will use as a starting point in assessing whether specific offsets and management actions are acceptable.
- In assessing the allocation of P2PRC within a group, firms should consider those circumstances in which an individual firm may be subject to pension liabilities in addition to those resulting from past and present service of its employees (whether inside or outside the firm).