Guidance

SS5/15 – Solvency II: the treatment of pension scheme risk

Chapter

Allowance for diversification between pension scheme risks and a firm’s other risks in the calibration of an internal model

Printed on: 08/09/2024

Rulebook at: 25/11/2016

5

Allowance for diversification between pension scheme risks and a firm’s other risks in the calibration of an internal model

5.1

Firms should consider carefully the extent to which correlations exist and can be justified between the risks posed by a pension scheme and other risks that the firm faces. Relevant considerations include the extent to which:

  • correlations exist owing to the firm and the pension scheme holding similar assets or assets whose values are expected to be correlated; or
  • the pension scheme exposes the firm to demographic risks that are similar to the underwriting risks run by the firm. A particular example of strong correlations would be where a firm’s insurance business exposes it to longevity risk.
  • 25/11/2016

5.2

Where correlations between risks are not perfect, Solvency II permits this diversification benefit to be reflected in the calibration of an internal model.[13] However, the PRA expects the firm to justify robustly any allowance that has been made in an internal model for diversification between the risks associated with a pension scheme and the other risks faced by the firm.

  • 13. Solvency Capital Requirement – Internal Model 11.8(1) in the PRA Rulebook.
  • 25/11/2016