Options for assessing employer covenant and the holistic balance sheet

Document description

In June 2012 the Institute and Faculty of Actuaries commissioned Barrie & Hibbert and PricewaterhouseCoopers to undertake research on the topic of how employer covenants are best taken into account when assessing the capital supporting Institutions of Occupational Retirement Provision (IORPs).

The Barrie & Hibbert research discusses how a market consistent valuation of the sponsor covenant can be undertaken. The paper provides a general overview of the valuation problem and introduces a Monte Carlo simulation framework for the valuation of the sponsor covenant. Later in the paper simpler, faster calculations are developed to estimate the full valuation method used earlier in the paper. Case studies are used to illustrate the accuracy and reliability of the methods proposed. In addition this work also considers how the market consistent pension fund balance sheet can be used to assess risk based capital requirements before finally setting out the team’s  conclusions.

The PwC research goes back to basics and considers what sponsor support actually means and looking at some of the definitions used. The paper then looks at what an appropriate basis of valuation might be for sponsor support and how valuation analysis is currently used in assessing and understanding sponsor support.  The paper then addresses the EIOPA proposals reviewing the  principles and specific points on methodology. This is illustrated by using an example calculation showing the impact of some of the assumptions which drive the calculations.The paper then suggests an alternative process and methodology for placing a value on the sponsor support of the purposes of the Holistic Balance Sheet.

This paper combines both their reports.