Prudential Regulation Authority Rulebook

2.1

Article 9(2) of the Solvency II Commission Delegated Regulation^[4] (Delegated Regulation) requires that most financial liabilities, including pension liabilities, should be recognised and valued in accordance with International Financial Reporting Standards.

2.2

There may be circumstances where International Financial Reporting Standards do not require a firm to recognise a pension scheme on its solo balance sheet.^[5]

2.3

In making the determination as to whether to recognise a pension scheme on their balance sheets, firms should have particular regard to the requirement in International Accounting Standard (IAS) 19 that a pension scheme should be recognised on the balance sheet of a firm if there is contractual agreement or stated policy in place under which the firm will contribute to the scheme.^[6]

2.4

Firms should also pay particular attention to relationships with intragroup service companies, where provision of staff can be regarded as having been outsourced to the service company for the purposes of Conditions Governing Business 7. The Delegated Regulation requires that, where a firm outsources critical or important operational functions or activities, a written agreement should be entered into between the firm and the service provider which clearly defines the respective rights and obligations of each party.⁷ Firms should consider whether a written agreement of this nature leads to a requirement under IAS 19 to recognise the pension scheme on the balance sheet of the authorised firm.

2.5

Obligations in relation to a pension scheme sponsored by an intragroup service company will generally be recognised on the group’s consolidated balance sheet, regardless of whether or not they are recognised on the balance sheet of an authorised firm. This will lead to obligations to a pension scheme being reflected in the calculation of group own funds and the group SCR.^[8]

2.6

Firms should also consider the extent to which a pension scheme sponsored by an intragroup service company poses a risk to the safety and soundness of an authorised firm whether or not obligations in connection with a pension scheme are recognised on the solo balance sheet. An example of such a risk is that the firm might find it necessary to provide support for the scheme in the future in order to assist an intragroup service company on which the firm’s operations depend. Firms should also consider the powers of the Pensions Regulator regarding entities that are considered to be connected to a pension scheme sponsor. These considerations should continue to apply if the sponsorship of the pension scheme were taken on by another group company, for example an intermediate holding company.

2.7

The PRA considers that pension schemes sponsored by intragroup service companies may pose a risk to authorised firms in that group. Therefore, where a firm intends to use an internal model to calculate its solo SCR, the model should take account of the risk posed by the pension scheme. Generally, such a model should take account of the risk of the firm needing to fund any existing pension scheme deficit that is not currently recognised on the firm’s balance sheet, as well as the risk of the pension scheme’s financial position deteriorating.

2.8

Where a firm decides not to model the risk posed by a pension scheme sponsored by an intragroup service company, on the basis that modelling this risk is not necessary, the firm is expected to provide evidence that this is the case, which might include evidence that: 

• the risk to the authorised firm would be addressed by the capital required to support the pension scheme being held elsewhere in the group and not in the authorised firm;
• the capital held elsewhere in the group is sufficient to support the pension scheme and that this capital is unencumbered; and 
•  this capital may be freely transferred to the authorised firm, including at times of stress, should the firm be required to support the pension scheme in the future.

2.9

Firms are required to assess the significance of the extent to which its risk profile deviates from the assumptions underlying the standard formula.^[9] As part of this assessment, the PRA expects firms to consider the risks posed by a pension scheme sponsored by an intragroup service company. Depending on whether the obligations in relation to the pension scheme are recognised on the solo balance sheet and the materiality of the pension scheme risk to the firm, the risk may be dealt with through Pillar 2 measures or the firm may need to consider whether it should use a partial internal model to calculate the SCR, in the event that the standard formula does not reflect the firm’s risk profile. The PRA will take a proportionate approach in assessing how the risk should be reflected.

2.10

Notwithstanding paragraph 2.9, the calculation of the group SCR should reflect the risks posed by any defined benefit pension schemes within the group, regardless of whether or not the risks have been reflected in the solo SCR of any authorised entity.