Yes. A pension fund may set a rating itself on the grounds of Section 24(3) of the Pensions Act Supervisory Regulation (internal rating). When determining the credit risk (S5) a rating is set which as far as possible is based on the opinion of a qualified third party (external rating). DNB may set further rules in this regard. If no internal or external rating is available, the assumed risk impact of the lowest rating class (BB and lower) is taken as a basis for determining the S5.
Internal and external ratings
The risk scenario for calculating the credit risk (S5) is based on an assumed increase in the credit spread of credit-sensitive investments. The credit risk is calculated on the basis of scenarios for different rating classes.
Pursuant to Section 24(3) of the Pensions Act Supervisory Regulation, the rating is determined as far as possible on the basis of the opinion of a qualified third party. If no external rating is available, or if it is deemed to be of insufficient quality, the fund may also set a rating itself based on its own risk analysis.
DNB may set further conditions for the way in which the rating of investments with a credit risk is determined. These conditions may relate to the way in which external ratings are treated and, where applicable, the way in which the fund itself sets a rating. These conditions may relate among other things to the organisational embedding (such as documentation, validation and data management), technical aspects (such as adequate, up-to-date information, use of market data) and specific reports.
Ratings can be determined using a model developed by an external party, provided this is tailored to the relevant risk characteristics of the product or product category. Pension funds must ensure that there will be no undesirable dependence on a particular supplier and that the continuity of the model is guaranteed.
In principle, DNB will assess retrospectively whether the calculation of the required own funds has been applied adequately and whether the calculation and application of the rating is appropriate. To make a proper assessment, DNB may need detailed information on the justification and application of the rating assigned. DNB may ask the pension fund to provide the documentation used in determining the rating.
Confidence level 97.5%
One important point for attention when setting the rating is that the assumed risk shock corresponds adequately with the risk profile of the investment at a confidence level of 97.5%. For example, if a rating method for a particular pension fund investment results in an A rating with a standard shock of 130 basis points, whereas the annual spread fluctuation of that investment is more than 150 basis points, it is not appropriate to apply the standard shock of 130 basis points to this investment.