Since the transposition of the IORP II Directive into German law in the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) in 2019, institutions for occupational retirement provision (IORPs) – i.e. Pensionskassen and Pensionsfonds – have been required to carry out their own-risk assessment (ORA) at least every three years. This must include an assessment of operational risk, sustainability risks and risks for the institutions’ members and beneficiaries. Institutions must also demonstrate how they are preparing to deal with such risks. This is set out in section 234d of the VAG.

The requirements are further specified in BaFin’s Circular 09/2020 (VA). According to this, Pensionskassen and Pensionsfonds must compile a report on the ORAs performed and sub-mit this report to BaFin. The Circular also stipulates that institutions must submit such a re-port for the first time either in 2021 or in 2022, depending on their total assets.

The evaluation of the reports submitted to BaFin in 2021 by 82 Pensionskassen and Pensionsfonds gave cause for serious consideration. Many institutions had interpreted the Circular in different ways or had misunderstood it. BaFin had to request around 90% of the insti-tutions to make improvements to their reports. Last year, BaFin published an expert article on its website detailing the most common issues – and how they should be resolved.

Useful supervisory tool

BaFin has now also analysed the ORA reports which had to be submitted for the first time in 2022 and has therefore obtained a complete overview of the sector.

The quality of the reports has, on the whole, improved. While improvements were needed at around 80% of the Pensionskassen and Pensionsfonds, the shortcomings were less severe than in the previous year. The IORPs that did not have to submit their first ORA reports until last year therefore appear to have taken advantage of the additional time and taken BaFin’s guidance into account.

In BaFin’s view, the ORA is a useful and practicable supervisory tool. However, IORPs should more closely consider and implement BaFin’s guidance.

Two weaknesses

BaFin sees a need for improvement in two areas. One area is the assessment of overall funding needs. In this context, Pensionskassen and Pensionsfonds must also check whether the requirements for covering technical liabilities will continue to be met in the future – also taking risks into account (see margin no. 73 et seq. of the Circular). IORPs should not only focus on coverage at book value, but also at fair value.

There is also room for improvement with regard to the information on the protection provided by sponsoring undertakings under section 234d (2) sentence 1 no. 6 of the VAG. BaFin addressed this topic in its expert article last year. In this assessment, it is not sufficient to rely on variables such as the sponsoring undertaking’s rating, its turnover or its number of customers. This is because such information does not in itself indicate whether a sponsoring undertaking could actually provide an IORP with the necessary funds if needed. IORPs should also consider the own funds or profits of their sponsoring undertakings, at least when this information is publicly available.

Is too little attention being paid to sustainability risks?

Surprisingly, BaFin found more shortcomings in institutions’ assessment of sustainability risks (section 234d (2) sentence 1 no. 8 of the VAG) in the current assessment compared with the previous year’s ORA reports. BaFin takes a very critical view of this, as climate change in particular poses major risks. All IORPs should therefore devote more attention to the issue of sustainability and comprehensively assess sustainability risks in their future ORA reports.

In 2023, BaFin will systematically analyse how IORPs deal with sustainability risks in their ORA reports. This is also in line with the strategy set out in BaFin’s Risks in Focus 2023. BaFin may adjust its requirements with regard to the ORA and ORA reports based on the results of this analysis.