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30.06.2021 | KPMG Law Insights

Occupational pension schemes – BaFin publishes minimum requirements for business organization and own risk assessment of institutions for occupational retirement provision

BaFin publishes minimum requirements for business organization and own risk assessment of institutions for occupational retirement provision

At the turn of the year on December 30, 2020, the German Federal Financial Supervisory Authority (BaFin) published Circular 08/2020 (VA) on the minimum regulatory requirements for business organization (MaGo for IORPs) and 09/2020 (VA) on the minimum regulatory requirements for own risk assessment (ERB), which are addressed to institutions for occupational retirement provision (IORPs). The publication was preceded by a consultation last summer. The issuance of the circulars was long awaited – we have summarized the main contents and innovations for you.

 

  1. Starting point and objective

BaFin is the supervisory authority responsible for the supervision of IORPs (Pensionskassen and Pensionsfonds) in accordance with the implementation of the requirements of Directive (EU) 2016/2341 (IORP II Directive) in the German Insurance Supervision Act (VAG).

With the current circulars, which have now been published following a previous consultation period from August to the end of September 2020, BaFin is imposing updated requirements on IORPs.

IORPs are not subject to the requirements of Directive (EU) 2009/138/EC (Solvency II Directive) and are therefore not covered by MaGo in accordance with BaFin Circular 2/2017 (VA).

With the publication of Circular 08/2020 (VA), BaFin bundles its expectations regarding the design of the business organization of IORPs pursuant to sections 23 et seq. in conjunction with sections 234a et seq. §§ 234a ff. VAG. Although Circular 08/2020 (VA) does not go into effect until June 1, 2021. However, BaFin expects IORPs to address the requirements from the date of publication and to actively use the deadline of June 1, 2021 to make any necessary adjustments.

Circular 09/2020 (VA), on the other hand, contains guidance on the interpretation of provisions on ERB pursuant to section 234d VAG for Pensionskassen and section 237 VAG for Pensionsfonds. It entered into force upon its publication on December 30, 2020.

In Circulars 08/2020 and 09/2020, BaFin provides a binding interpretation of the provisions of the VAG that are relevant for the organization of business and for the company’s own risk assessment. The aim of this design is to ensure consistent u

and uniform application of the relevant regulations.

At the same time, the requirements from the two circulars form the BaFin’s standard of review and are intended to serve the IORPs as a point of reference for the measures required in accordance with BaFin’s supervisory practice.

 

  1. Essential contents

In particular, the circulars contain the following key topics:

  • MaGo circular 08/2020

Circular 08/2020 (VA) specifies the proportionality principle relevant for the implementation of the business organization requirements, in particular the criteria of “scale of activities” (including total assets), “size” (including number of employees) and “internal organization” (including internal organizational and operational structure) of the IORP, which are additionally addressed in sections 234a to 234c VAG compared to Solvency II companies. In this context, BaFin clarifies that the criteria “size” and “internal organization” can also be included in the proportionality considerations as general indicators outside of the statutory regulations. This should enable IORPs to flexibly and appropriately implement business organization requirements.

As in MaGo for insurance companies, responsibility for risk management is assigned to the entire Executive Board. The latter must ensure that the risk management system is effectively designed. This includes appropriate processes and reporting procedures that ensure in particular that, on the one hand, information is provided on all significant risks and, on the other hand, the risk management system is also actively monitored, analyzed and improved where necessary.

In addition, the circular also contains, among other things, essential aspects regarding key functions and the outsourcing officer, in particular in the event that these persons simultaneously perform similar tasks for the sponsor of the IORP and are therefore exposed to the risk of conflicts of interest.

Finally, BaFin also clarifies that the requirements for business organization must also be met by IORPs without employees and that no general relief is provided in this respect.

  • ERB Circular 09/2020

Circular 09/2020 (VA) clarifies that the ERB, as a time-defined component of the risk management system described in terms of content in section 234d VAG, must meet the following minimum documentation requirements:

  • Establish internal guidelines on the ERB process,
  • written documentation of the implementation of the ERB and
  • written report on the ERB performed (ERB report).

The obligation to prepare an ERB report applies to IORPs with total assets of more than EUR 1 billion as of December 31, 2019, as well as to Pensionskassen that have to fulfill additional reporting obligations to deal with the low-interest phase or are subject to BaFin’s intensified supervision (“Group 1”), in principle for the first time with an audit date of December 31, 2020. The audit must be completed by September 30, 2021, and the ERB report must be submitted to BaFin within two weeks (by October 14, 2021).

For all other IORPs (“Group 2”), the same deadlines apply, but the reporting obligation is postponed by one year. Deviations from the aforementioned deadlines are permissible for both groups insofar as the fiscal year is decoupled from the calendar year.

The ERB report shall refer to the requirements pursuant to section 234d para. 2 p. 1 no. 1-8 ISA. In addition to risks relating to the payment of retirement benefits (no. 5) and the mechanisms for protecting such benefits (no. 6) including, in particular, an assessment of overall funding needs and a description of measures to meet those needs (No. 4).

 

  1. Conclusion

IORPs should now react quickly and check whether the measures and processes already implemented meet BaFin’s requirements, as well as take the necessary steps for any additional measures.

As the recent past has shown, especially in the current low-interest environment, IORPs are forced to carefully address their risk management and risk assessment in order to secure their financial stability and avoid risks for sponsoring companies and beneficiaries.

This requires a detailed analysis of the measures and processes already implemented in order to identify and eliminate weaknesses against the background of regulatory requirements.

As experts in all areas of occupational pension provision, we will be happy to support you in reviewing and applying the regulatory requirements. In doing so, we always keep in mind the proportionality principle emphasized by BaFin in order to tailor the effort and weight of any necessary measures to the individual circumstances of the IORP.

We can assess and support implementation requirements not only from a substantive law perspective. In conjunction with the experts at KPMG AG Wirtschaftsprüfungsgesellschaft and their expertise in the areas of balance sheets, actuarial mathematics and taxes, we offer you comprehensive bAV expertise from a single source.

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