In 2003 the IORP Directive was introduced, in which the occupational pensions in Europe are regulated. In order to obtain a more harmonized framework of quantitative requirements for European pension funds, the European Commission asked EIOPA to revise the IORP Directive. Pension systems across Europe differ significantly, since a variety of policy instruments is available. In order to take into account the differences in pension systems, a holistic balance sheet is proposed by EIOPA. A holistic balance sheet is an extension of the traditional balance sheet, since next to the usual assets and liabilities, conditional assets and liabilities are stated on it. These conditional assets and liabilities are the economic value of the various policy instruments, which can be valued as embedded options with the help of derivative pricing techniques. The holistic balance sheet framework enables regulators to compare various pension systems across Europe in one framework.

We use an own ALM model to value the embedded options on the holistic balance sheet. Within this ALM model a risk model (economic scenario generator) is used which includes both stochastic jumps and a time-varying covariance matrix for normally distributed shocks. This risk model provides both real world and risk neutral scenarios. In order to compose the holistic balance sheet, risk neutral valuation is used to value the embedded options on the holistic balance sheet.

A pension fund can have various policies, where the fund can make use of various policy instruments. Therefore, each policy, or pension contract, will result in an alternative holistic balance sheet, as each policy instrument can be valued as an embedded option. It turns out that adding an additional policy instrument to the existing policy has a significant effect on all the embedded option values stated on the holistic balance sheet, since introducing an additional instrument changes how risks and rewards are allocated within the pension fund and therefore changes the value of the policy instruments valued as embedded options.

This thesis aims to provide the pension industry insights into the valuation of the holistic balance sheet and the effects of implementing it. This thesis comes up with three concrete proposals to improve the proposed holistic balance sheet framework: an open fund framework instead of a closed one, a dynamic solvency measure instead of a static one, and a prescription regarding the risk model to be used in the valuation of the holistic balance sheet.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.


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