The document discusses pension fund supervision and risk-based supervision. It defines supervision as the oversight and enforcement of compliance with pension fund rules and regulations. Risk-based supervision focuses on identifying potential risks to pension funds and assessing factors that mitigate risks. This allows supervisors to direct resources towards the greatest risks. The document outlines challenges to implementing risk-based supervision and provides lessons learned from other countries. It also describes the IOPS principles of pension supervision and risk scoring models used in risk-based supervision.

1. Pension Supervision
Global Capital Markets Non-bank Financial
Institutions
Fiona Stewart
Pensions Core Course April 8 2013

2. What is Supervision?
• Regulation = legal foundations and system of rules and
regulations governing the Structure and operation of pension
funds
• Supervision = oversight and enforcement of compliance with the
rules
• May occur within the same organisation and in some cases
simultaneously
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3. Theoretical Basis for Supervision
• Market imperfections and failures
• Asymmetrical information
• Moral hazard
• Consumer myopia
• Competition and efficiency
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4. Why is Pension Supervision Important?
• Pension supervision focuses on protecting the interests of pension fund
members and beneficiaries, by promoting the stability, security and
good governance of pension funds.
• Pension supervision involves the oversight of pension institutions and
the enforcement of and promotion of adherence to compliance with
regulation relating to the structure and operation of pension funds and
plans, with the goal of promoting a well functioning pensions sector.
• In addition, achieving stability within the pension sector is an important
part of securing the stability of the financial system as whole (as
investments made by pension funds have a major impact on the real
economy in many countries).
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5. What is distinctive about Pensions?
• High vulnerability leads to low risk tolerance
• Greater share of average member wealth
• Less sophisticated clientele- lower income and less educated
• Mandates and limited choices by consumers
• Higher public fiscal expenditure
• Complex legal and regulatory structure
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6. 6
Elements of Supervision
Control of Licensing Pension Companies
–Fund Managers and Trustees
–Custodians, Actuaries and other Service
-Providers
Monitoring –Financial Reporting and Auditing
–Actuarial Reviews
–On-Site Reviews and Investigations
–Receiving Complaints & “Whistleblowers
Measurement –Comparison to Normative Standards
–Risk Scoring and Evaluation
Communication Disclosure
–Outreach and Education
–Training
Intervention –Notification of Violations
–Directive Actions
–Negotiated Resolutions
Correction - Punitive
–Remedial
–Compensatory

7. Nature of Supervision Varies by Country/ Pension System
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9. IOPS Principles
Principle 1: Objective National Laws should assign clear and explicit
objectives to pension supervisory authorities
Principle 2: Independence Pension supervisory authorities should have
operational independence
Principle 3: Adequate Resources Pension supervisory authorities
require adequate financial, human and other resources
Principle 4: Adequate Powers Pension Supervisory authorities should be
endowed with the necessary investigatory and enforcement power to
fulfil functions and achieve their objectives
Principle 5: Risk Orientation Pension supervision should seek to
mitigate the greatest potential risks to the pension system
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10. IOPS Principles
Principle 6: Proportionality + Consistency Pension supervisory authorities
should ensure that investigatory and enforcement requirements are
proportional to the risks being mitigated and that their actions are consistent
Principle 7:Consultation + Cooperation Pension supervisory authorities
should consult with the bodies they are overseeing and cooperate with
other supervisory authorities
Principle 8: Confidentiality Pension supervisory authorities should treat
confidential information appropriately
Principle 9: Transparency Pension supervisory authorities should
conduct their operations in a transparent manner
Principle 10: Governance The supervisory authority should adhere to its own
governance code and should be accountable
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11. IOPS Principles Assessment Methodology
Provides a structured framework for assessing the extent to which a
pension supervisory authority complies with the spirit and the letter
of the Principles
Can be used for external or self-assessment
Also indicates types of evidence that may help to answer questions
Compliance rated as:
• Full implemented – IOPS Principle is implemented in all material
respects
• Broadly implemented- IOPS Principle is implemented in all but one or
two material respects and the exceptions do not detract from the
overall opinion. It should be possible to say something positive about
compliance in answer to nearly every question
• Partially implemented – while a negative answer is given to some
questions, the response to the majority of questions is consistent
with compliance
• Not implemented - there are major shortcomings against the Principle
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12. Principle 9 Transparency – Assessment Questions
• Does the supervisory authority publish its rules and procedures?
• Is the supervisory authority subject to appropriate audit and
reporting requirements (that do not compromise its
independence)?
• Does the supervisory authority publish an Annual Report explaining
how it has (or has not) met its objectives?
• Does the supervisory authority explain to individual supervised
entities why it has taken particular action?
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13. Nigeria – Self-assessment vs. IOPS Principles
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14. IOPS Principles Self-assessment Results
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Well Implemented Medium Implemented Poorly Implemented
1. Objectives 10. Governance 5. Risk-based
supervision
4. Powers 9. Transparency 6. Proportionality +
Consistency
7. Communication 2. Independence 3. Adequate resources
8. Confidentiality

15. ‘Seven Deadly Sins of Supervision’
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1. Structure – lack of independence /opaque appointments/ poor governance/
lack power
2. Staff - insufficient numbers/ poorly paid/ poorly trained/ little guidance material
3. Style - Risk vs. Rules based
4. Statistics – offsite reviews?/ separate unit?/ how much information?/ what to
analyse (x summarize)/ trends/ finding relevant peer group/ means what?
5. Scope – what determines inspection cycle?/ full or partial inspections?/ who
sets the scope/ what is it based on (offsite analysis/ previous review/ industry
gossip/ media)?
6. Significance – report significant matters – not a list of minor transgressions/
require reports to be discussed at Board level/ require a response and plan of
action
7. Staying the distance – if it is significant enough to report, it is worth pursuing/
allow reasonable time for response/ written response from the Board not the
management/ if action plans have time lines in them, follow up on the date the
activity is meant to be completed / arrange for follow inspection not wait till the
next routine inspection
RUN TONY VIDEO

16. What is Risk-based Supervision
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A structured approach focusing identifying potential risks faced by pension
funds and assessing the financial and operational factors in place
mitigate those risks. This process then allows the supervisory authority
to direct its resources towards the issues and institutions which pose the
greatest threat.
Can be applied in many different ways
• quantitative measures of risk vs. qualitative judgement of risk management
• risk-scores for each entity vs. analysis of risks systemic to pension system
• identify weak areas within a supervised entity vs. which institutions amongst
thousands may pose the greatest threat
Elements common to all RBS systems
• Determine objectives of supervisory authority + greatest risks to these
• Assess hazard or adverse events + likelihood of these occurring
• Assign scores and / or ranks to firms or activities based on assessments
• Link supervisory response to the risk scores assigned

17. Risk-based vs. Compliance-based Approach
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18. Can Combine ‘Risk-based’ and ‘Rules-based’ Approach
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19. Risk-based Supervision DB vs. DC
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RBS DB
• Focus on sponsor
• Solvency + funding issues key
• Use of quantitative measurement
tools
RBS DC
• Focus on Individual Members
• Focus on Risk-management
systems
• Qualitative measurement more
appropriate

20. Why adopt Risk-based Supervision?
• To improve supervisory effectiveness and efficiency
• To address internal organisational concerns
• To adapt to changes in the overseen industry
• To gain legitimacy following supervisory failure
• To meet requirements imposed by legislation
• To adapt to the changing nature of financial risks themselves, as these
become more complex and - with the growth of DC pension systems -
are increasingly transferred to individuals
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21. Challenges to Introducing Risk-based Supervision
• Combining simplicity with complexity
• Knowledge and data
• Ensuring that assessments of firms are forward looking
• Going beyond the individual firm in assessing risk
• Structure and operation of internal risk governance processes
• Changing the culture to embed the risk based approach across the
whole organization
• Managing blame
• Making resources follow risks
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22. Nzomo Mutuku Video
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23. Lessons Learnt
Adaptation of Models - consult widely but build own/ flexibility, upgrades, pilot test
Application of Models – know weaknesses /use with judgment
Data Collection – plan properly/ use existing where possible/ collect electronically
Reorganisation of the Supervisory Body – allow plenty of time
Staff – train all on philosophy as well as process
Industry – explain new approach and what is expected of them
Powers – make sure sufficient data collection + enforcement powers
Risk-based solvency – apply flexibly in volatile conditions / counter-cyclical
Systemic risk – build into analysis
Think in terms of achievability – target resources for maximum impact
It is worth doing
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24. IOPS Toolkit for Risk-based Supervision
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Module 1 ‘Supervisory Management Issues’
Module 2 ‘Regulatory Framework’
Module 3 ‘Obtaining Information’
Module 4 ‘Qualitative Assessment of Risk’
Module 5 ‘ Risk Scoring Models’
Module 6 ‘Supervisory Responses’

25. RBS Process
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26. Risk Scoring Matrix
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27. Enforcement Pyramid
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29. IS RBS Right for Everyone?
• Yes if lots of funds
• Yes if DB / guarantees (based on solvency measures)
• Yes if lots of supervisory resources
• Yes if integrated authority (apply same model across all sectors)
• No if only few funds
• No if DC (quantitative not appropriate long term investments/ qualitative too
subjective)
• No if developing pension market and supervisory authority (not got
resources/ expertise - regulation based more secure / restrictions not such
an issue)
• No if specialist authority (?)
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