csspp/dnb international seminar june 9 – june 11 2010 supervision on pension funds experience from...
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CSSPP/DNB INTERNATIONAL SEMINAR
JUNE 9 – JUNE 11 2010
Supervision on Pension Funds
Experience from Romania and The Netherlands
Supervision on pension funds
Introduction to the seminar
Adina Dragomir/Leendert van Driel
Bucharest, Romania
June 9 to June 11, 2010
Supervision on Pension Funds
Objective of seminar Introduction of participants
Programme Seminar
Wednesday, June 9
09.00 Welcome and Introduction (Adina Dragomir/Leendert van Driel)
09.15 Review and summary of DNB seminar 2009(David Schelhaas/Leendert
van Driel)10.15 Morning coffee break
10.45 Review and summary of DNB seminar 2009 (2)
12.30 Lunch
Programme Seminar
Wednesday, June 9
14.00 IOPS Principles of Pension Supervision (Rick Hoogendoorn)
15.30 Break
16.00 Pension Fund Supervision in Romania
17.00 End of day programme
18.30 Dinner
Programme seminar
Thursday, June 10
09.00 Pension Fund Governance: OECD Guidelines (Rick
Hoogendoorn/David Schelhaas)
10.15 Morning coffee break
10.45 Risk Management (Paulus Dijkstra)
11.30 First Round of Investment Game (Paulus Dijkstra/David Schelhaas)
12.30 Lunch
Programme seminar
Thursday, June 10
14.00 Investigation into investments of pension funds during credit crisis (Paulus Dijkstra)
14.45 Afternoon coffee break15.15 Supervision in practice (Leendert van
Driel/David Schelhaas)16.00 Second Round of Investment Game
(Paulus Dijkstra/David Schelhaas)17.00 End of day programme18.30 Dinner
Programme seminar
Friday, June 11
09.00 Council of Europe position in respect of pension rights (Sixto Molina)
10.00 Morning coffee break 10.15 Final round of Investment Game
(Paulus Dijkstra/David Schelhaas)11.30 Seminar evaluation (Leendert van
Driel/David Schelhaas)12.30 Lunch14.00 End of seminar
Review seminar 2009
Summary
1. Pensions in the Netherlands2. FIRM and FAF
3. Dealing with the crisis in Holland
4. Dealing with the crisis in Europe
5. Financial crisis and the impact on pensions in Europe
10
The Netherlands:
1. Pension system
2. Pension supervision
Pensions in the Netherlands
Apeldoorn
• State• PAYG• Premiums via income taxes• All citizens• Mandatory
• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective
• Private• Capital-funded• Voluntary• Insurers only• Individual
Main Features Dutch pension system
11
3rd Pillar
2nd Pillar
1st Pillar
• State• PAYG• Premiums via income taxes• All citizens• Mandatory
• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective
• Private• Capital-funded• Voluntary• Insurers only• Individual
flat rate “AOW” for all Dutch citizens
Self-employed; Others: “the icing on the cake”
(1) Company (2) professional (3) multi-employer industry-wide pension funds
pension funds are autonomous; no link with sponsoring company
pension premiums are tax-deductable
Main Features Dutch pension system
3rd Pillar
2nd Pillar
1st Pillar
Figures 2008 second pillar Company funds number 526/participants 850.000
Industrywide funds number 91/participants 5.048.000
Occupational funds number 13/participants 44.000
Total assets Euro 688 billion/1,25 x GDP
Insurance companies 22.000 pension schemes/ 834.000 participants
Total number of employees in the Netherlands: 7.200.000
Pensions in the Netherlands
Participation in pension schemes
• Netherlands - Indirect system: participation is mandatory through collective agreements between employers and employees - Economic motives: level playing field, cost efficiency - Social motives: further reducing room for non- participation - What about self-employed?
• Elsewhere - Only 11 out of 30 OECD countries have mandatory private pension schemes - These countries show a high participation compared to countries with voluntary private pension schemes
Funded pension schemes in OECD
Funded private mandatory pension schemes in OECD
Statutory compulsory through employer
Statutory compulsory through employee
Compulsory through collective agreements
AustraliaIcelandSwitzerland
DenmarkMexicoHungaryPolandSweden
DenmarkNetherlands Sweden
Source: Pensions at a Glance, Public Policies across OECD Countries, OECD Publishing 2005
Why mandatory participation?
• Behavioral pitfalls
- Lack of self-control: inertia and procrastination- Hyperbolic discounting and myopia- Framing- Inconsistent preferences
• Financial (il)literacy
• Reduce negative external effects; poverty
• Cost efficiency
Conclusions
• International comparison indicates that compulsion is attended by higher participation
• Empirical evidence shows that Dutch pension savers too are prone to behavioral pitfalls
• On balance the public seems to be aware of this, given the dominant preference for a mandatory system with high certainty and limited autonomy
Conclusions
• Is our current pension system optimal?
- Overall, our pension system performs well vis-à-vis that in other industrial countries, but….
- Issue requires a broader analysis from different angles
- Broad spectrum from fully mandatory system to full autonomy; introducing more autonomy while at the same time preventing people from making major mistakes could be the way forward
- How to improve pensions for the self-employed?
The Netherlands:
1. Pension system
2. Pension supervision
Contents
Apeldoorn
• Regulation - 1st pillar: Old Age Act (“AOW”) - 2nd Pillar: Pensions Act (“PW”)
• Regulator - Ministry of Social Affairs: pensions
- Ministry of Finance: all other financial markets segments
• Supervisor- DNB: De Nederlandsche Bank - AFM: Autoriteit Financiële Markten
Regulation
21
• In 2004 the Twin Peaks model was introduced - prudential supervision of financial institutions by DNB - supervisor for market conduct (“AFM”)
• Cooperation between two ‘Peaks’ is essential- potential for overlap/white spots- covenant between DNB and AFM
• Experiences
- more effective supervision- better grip on financial stability risks
- substantial cost savings
Supervision
• Supervisory principles:– Principle-based / Prudent person in investments– Risk-oriented– Integrity– Transparent / ICT facilitated
• Executive powers:– Quarterly and annual statements– Contractual agreements– Investment plan / strategy– Actuarial and business memorandum– Fit and proper test board & management– On-site inspections
• Sanctions and redress:– Imposing a binding direction– Fines and penalties– Appointing interim managers / administrator– Replacing the Board
In practice:• Open discussions• Principle-based• Discretionary powers• Sanctioning only if
dialogue fails• Focus on prudential
supervision (funding and solvency)
Supervisory approach
Review seminar 2009
Summary
1. Pensions in the Netherlands
2. FIRM and FAF
3. Dealing with the crisis in Holland
4. Dealing with the crisis in Europe
5. Financial crisis and the impact on pensions in Europe
Pension right
€ 1000,- whenretired
Pension fund
Risk based supervision
• Quantitative:Pension fund as a ´money factory
´
• Qualitative:Pension fund as a company
EUR 200 billion!
FIRM: Financial Institutions Risk Management method
Judgement based on risk analysis FIRM
Solvency Liquidity IntegrityControl &
Organisation
PlanningIntervention
Protect creditors and policy holdersContribute to the integrity of the financial system
Overall objectives DNB
FIRM
Uniform methodology for risk analyses Applicable for all institutions supervised
Standardized approach Covers ‘all’ supervisory activities
Promotes objectivinessSystematic
Smaller chance overlooking relevant informationSupports planning
Allows for allocation of scarce resources
Financial Institutions Risk Management Method
Risk and control assessment
Inherentrisks Mitigating
controls
Netrisk
Assessment of inherent risks and mitigating controls gives insight into the overall risk profile of the supervised institutions
Assessment of inherent risks and mitigating controls gives insight into the overall risk profile of the supervised institutions
Inherent risksmitigated by
controls =
net risk
Inherent risksmitigated by
controls =
net risk
Four-point scale to assess risks and controls
1 Low risk2 Limited risk3 Material risk4 High risk
Unknown / Not applicable
1 Low risk2 Limited risk3 Material risk4 High risk
Unknown / Not applicable
To identify“white spots” »
To identify“white spots” »
Risk scoreRisk score
1 Strong control2 Satisfactory control3 Unsatisfactory control4 Weak control
Unknown / Not applicable
1 Strong control2 Satisfactory control3 Unsatisfactory control4 Weak control
Unknown / Not applicable
Control scoreControl score
Using default scoresfor inherent risks
Using default scoresfor inherent risks
Matching/interest rate risk
Market risk
Operational risk
Credit risk
Insurance risk
Outsourcing risk
Business risk
IT- risk
Integrity risk
Legal risk
Risk categories
Governance
Solvency management
Risk based supervision
Integrity risk
Marketrisk
Legal risk
Insurance risk
Outsourcing risk
Risks, some examples
• ´Qualitative´:
• Bad management (governance)
• Lehman as transition manager (legal)
• Real estate fraud (integrity)
• `Madoff´ (outsourcing)
• IT systems failing (IT)
• Investments in weapons or child labor (integrity)
• Employee taking money from the fund (integrity)
Risks, some examples
Quantitative:
• Underfunding (solvency management)
• Great losses due to risky investments or credit crunch (market or credit)
• Raise in obligations due to declining interest rates (matching)
• People live ´too long´ (insurance)
Quantitative risks:Financial Assessment Framework (FAF)
• FAF is part of new Pension Law (2nd Pillar)
• FAF objectives:
Insight in the financial position of a pension fund
Market value valuation of investments and liabilities
Risk based approach
Risk sensitive capital requirements
Structured early intervention
Analysis of availability and power of policy instruments in the long run
Financial Assessment Framework
• Market valuation
• Full funding requirement
• Cost-effective premium
• Strict rules for premium rebates or contribution holidays
• Risk based solvency requirements & recovery plans
• Prudent person approach
• No investment restrictions
• Except for investments in the sponsoring company
Financial Assessment FrameworkThree questions
Does the pension fund have sufficient:
• 1. Assets to cover the liabilities?• Actual value (market-consistent)• Market rates, no fixed discount rate
• 2. Surplus to cover risks? • Risk horizon of 1 year• confidence level 97,5%, ‘once in 40 years’• Test available solvency to required level in solvency test
• 3. Flexible policy instruments to deal with long term risks?• Continuitiy analysis• Investment, premium and indexation policy
1. Possible funding ratios(regulatory intervention levels)
Contribution reduction possible
Free surplus
Level needed to fulfill indexation promises
Solvency deficit- Max recovery period 15 years
*) for a typical pension fund
Capital requirement
Funding deficit-Max recovery period 3 year
Minimal capital
requirement
Market value technical
provision
100%
105%
127% *)
Continuity Analysis
Goals from perspective of regulator/supervisor:
• Investigate the balance between premium-, indexation- and
investment policy
• Incorporate a long-term perspective
• Identify possible problems at an early stage
• Bring forward the moment of intervention
• Stimulating risk-awareness
• Tribute to more transparency and communication
Funding ratio
Dekkingsgraad
90%
110%
130%
150%
170%
190%
210%
230%
0 5 10 15jaar
de
kk
ing
sgra
ad
2,5% percentiel mediaan 97,5 percentiel
´Factor analysis´
Δ DG (oorzaken voor mutaties van de dekkingsgraad)
7,00%
Jaar DG primo premie uitkering toeslag rente rendement DG ultimo
% Δ%-punt Δ%-punt Δ%-punt Δ%-punt Δ%-punt %
2008 125,0 -1,0 1,3 -2,1 0,0 3,2 126,4
2009 126,4 -1,1 1,3 -2,3 0,0 3,3 127,7
2010 127,7 -1,1 1,4 -2,4 0,0 3,3 128,9
2011 128,9 -1,2 1,4 -2,6 0,0 3,3 129,9
2012 129,9 -1,2 1,5 -2,7 0,0 3,4 130,9
2013 130,9 -1,2 1,5 -2,8 0,0 3,4 131,8
2014 131,8 -1,3 1,6 -2,9 0,0 3,4 132,6
2015 132,6 -1,3 1,6 -3,0 0,0 3,4 133,3
2016 133,3 -1,3 1,7 -3,1 0,0 3,5 133,9
2017 133,9 -1,4 1,7 -3,2 0,0 3,5 134,5
2018 134,5 -1,4 1,7 -3,3 0,0 3,5 135,0
2019 135,0 -1,4 1,8 -3,4 0,0 3,5 135,5
2020 135,5 -1,4 1,8 -3,4 0,0 3,5 135,9
2021 135,9 -1,4 1,8 -3,5 0,0 3,5 136,3
2022 136,3 -1,5 1,8 -3,6 0,0 3,5 136,6
Summary
• Many risks regarding pension rights, both qualitative and
quantitative
• Supervision is risk based
• FIRM tool for assessment risks and controls
• Financial Assessment Framework for assessment and control of
quantitative risks
Review seminar 2009
Summary
1. Pensions in the Netherlands
2. FIRM and FAF
3. Dealing with the crisis in Holland
4. Dealing with the crisis in Europe
5. Financial crisis and the impact on
pensions in Europe
Agenda
• Full funding requirement
• Key developments in 2008
• Security mechanisms in the Dutch system
• Long term solutions
Why full funding is important
• Underfunding has a price • High and volatile recovery costs: prevention cheaper than cure
• Uncertainty reduces consumption and increases savings
• Funding contributes to confidence in pensions• Employees will be more confident that their pension will be there when they retire
• Encourages labour mobility: facilitates transfer of accrued rights
• Funding is a hedge for an ageing society• The ratio of retirees to workers is to double the next 30 years
• Less opportunity to ‘pass on the bill’
How is funding measured?
• Funding ratio = market value assets / market value liabilities
• Assets = all assets at free disposal of the pension scheme
• Liabilities = all non-discretionairy liabilities (accrued benefit
obligations) discounted at the current term structure of interest rates
Possible deficits
• Solvency deficit • Funding ratio is above 105% but
• Below the required level (127% for the average pension scheme)
• Long-term recovery plan (max 15 years)
• Funding deficit • Funding ratio is below 105%
• Short-term recovery plan (max 3 years)
Key developments in 2008
• The MSCI World total return index decreased by 37% • Solvency test is based upon a 25% decrease
• Overall, the interest rate term structure dropped by 140 basis points• Solvency test is based upon a 100 basis points decrease
• Intra year swings even bigger
Analysis of the change in funding ratio
-20
-15
-10
-5
0
5
10
15
Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
90
100
110
120
130
140
150
160
due to interest rates changes
due to investments results
Fundig ratio - right hand scale
%Change
How to safeguard pension liabilities in a defined benefit environment
• Security mechanisms in the Dutch system• Regulatory own funds
• Increases in the contractual contributions
• One-off sponsor commitments
• Adjustments in investment policy
• Reduction of future indexation
• If all security mechanisms are exhausted• Accrued pension rights can be reduced
• Note: there is no pension guarantee fund in the Netherlands• Like the PBGC in the US or the PPF in the UK
Supervisory dilemma
• Prevent unnecessary reduction of accrued pension benefits and
cause social disorder
…versus…
• Delay emergency measures for too long and let the situation
develop from bad to worse
Problems associated with current system
• Who provides the nominal pension guarantee, and is there a fair compensation for providing it? With the guarantors’ agreement?
• Conditional indexation is an option to reduce the real value of the pension. What if there is no inflation?
• If the funded ratio declines towards 105%, either contributions must be raised, or risk and hence higher return prospects must be removed from the balance sheet. Both are particularly unfair to young workers (especially in an aging society)
Problem #2Problem #2
Problem #1Problem #1
Problem #3Problem #3
Long term solutions
• Volatility in funding ratios seems to be underestimated
• Existing policy instruments have relatively low risk absorption
capacity
• Is the Dutch pension system in need for higher regulatory own
funds?
Reduction of balance sheet volatility can be accomplished by
• Investing in matching assets• Consider a pension scheme as a risk management vehicle
• Creating alternative liabilities• Consider a pension scheme as an life-cycle saving and investing vehicle
• Combination of the above
Matching assets
• Pension schemes can lay off risk in the international capital market
by funding pensions with corresponding assets
• A key purpose of funding is to diversify risks over international
markets
• Possible issue is the low liquidity in inflation let alone wage-indexed
products
Conclusion
• In both cases, at a macro level the pension sector can do with lower
solvency requirements
• In the first solution, matching assets allow for lower regulatory own
funds
• In second solution, the youth bear the residual risks of the
guarantees given provided to the elderly
Review seminar 2009
Summary
1. Pensions in the Netherlands
2. FIRM and FAF
3. Dealing with the crisis in Holland
4. Dealing with the crisis in Europe
5. Financial crisis and the impact on
pensions in Europe
Agenda
• Effects of the crisis on different systems
• Responses to the crisis
• Possible effects of the crisis
Effects of the crisis
Asset side of the balance sheet
• Decreasing value of equities
• Increasing value of fixed income products
(caused by decreasing market interest rate)
Liabilities side of the balance sheet
• Increasing liabilities
(caused by decreasing market interest rate)
Effects on different systems
Pay-as-you-go system
• Pensions in payment untouched
• Indirect effect through lower purchasing power?
Funded system
• Lower capital
• Lower interest rates when converting capital into annuity
Effects on funded systems
Defined Benefit
• No change to benefits
• Pension in payment continue as planned (for now)
• Recovery takes time and/or money (pro-cyclical)
• Direct loss of purchasing power for pensioners when indexation is
conditional
Effects on funded systems
Defined Contribution
• Direct effect on new pensioners
(lower than expected pension annuities)• No possibility for recovery
• No direct effect on active members
Reduction of effects through system choices
Defined benefit
• Adequate buffers (NL?)
• Quantitative restrictions• Limitations to equity investments
• Limitations to foreign investments
• Limitations on securitised products (DE)
• Technical provisions• Fixed discount rate (ES, DE)
• Expected return on investment (UK-funds, IE)
• Corporate bond yield curve (UK-employers)
• Positive effect of currency risk (UK)
Reduction of effects through system choices
Defined contribution
• Effects only for people reaching retirement age during crisis
• Young DC-systems (RO, SK, etc)
• Life-cycling
Dutch response to the crisis
Defined benefit
• In ‘normal’ market conditions the maximum recovery period is 3
years once the minimum funding level of 105% is breached
• Given the exceptional circumstances, the minister of Social Affairs
has decided to extend this period to 5 years
• The recovery period for a solvency deficit remains at 15 years
Dutch response to the crisis
Defined benefit (2)
• Recovery plan must contain measures how to get back to the
minimum funding level of 105% within 5 years• If all other measures fail, reduction of accrued benefits might be neccessary
• Reduction of benefits no earlier than April 1st, 2012• Result of discussions over total crisis management package between
government and social partners
Dutch response to the crisis
Defined contribution
• In ‘normal’ market conditions, a life-time annuity must be bought at
retirement
• Given the exceptional circumstances, the minister of Social Affairs
has decided to allow a capital segmentation
• This is a temporary measure, for those who retire before 2014
Dutch response to the crisis
Defined contribution (2)
• Capital segmentation:• Step 1: what would be the life-time annuity under current market
conditions?• Step 2: accrual of that benefit for 5 years• Step 3: the rest of the pension capital remains invested and (hopefully)
profits from market recovery
• If ´satisfied´ with current market circumstances, the remaining
pension capital can be used to buy a deferred life-time annuity
(following on the temporary annuity).
Possible effects?
Short-term effects
• Reduction of benefits
• Investing in liquid assets (with government guarantee)
Long-term effects
• Lower pensions promise, even with steady premiums
• Shift from DB to DC?
• Doubts on adequacy of DC-schemes• Closure of voluntary schemes (IT)
• Return of mandatory schemes to the public system (SK)
Review seminar 2009
Summary
1. Pensions in the Netherlands
2. FIRM and FAF
3. Dealing with the crisis in Holland
4. Dealing with the crisis in Europe
5. Financial crisis and the impact on pensions in Europe
70
Agenda
• Pension savings in the European Union• Consequences of the financial crisis• Are private pension savings a thing of the past?• The importance of pension plan design: lessons from the Dutch
experience?• Concluding remarks: policy recommendations• Questions/discussion
71
Three pillars of a pension system
1st pillar 2nd pillar 3rd pillar
• pay-as-you-go• organised by government• compulsory
• funded• occupational pension funds• (semi-)compulsory
• funded • individual savings• voluntary
72
First versus second/third pillar
First pillar• Financed by taxes/public
funds• Demographics have strong
impact• Inflation has little impact• Financial markets have little
impact• Fiscal policy has strong
impact
Second pillar• Financed by private
savings• Demographics have little
impact• Inflation has strong
impact• Financial markets have
strong impact• Fiscal policy has little
impact
73
Ageing and the dependency ratio
74
Collective versus individual
Collective scheme• Low cost• No conversion risk• Little choice• Professional management
Individual scheme• High cost• Conversion risk• Adaptable to individual
preferences• Behavorial finance
arguments
75
An unprecedented shock
Funding ratio Q2 2008 143.2%
Required funding ratio Q2 2008 121.9%
Hypothetical funding ratio assuming a correlation of 1 between shocks
112.3%
Realised funding ratio Q4 2008 103.7%
Stress testing with respect to one of APG Group’s client funds
76
Funding ratio in perspective
Interest rate Funding ratio
Estimated
3.6%
(Swaprate end 2008)
90%
4%
(Former fixed interest rate)
95%
5% 110%
6% 126%
77
The glass is half full…
78
Dutch lessons?
• Automatic enrollment• Default asset mix• Low costs• Mitigation of conversion risk• Governance• Transparency and communication
Interesting for other Member States
• Even though the Dutch system cannot be transferred one-on-one to the EU, the Dutch experience and expertise in this particular area appears to be of interest to other Member States
• If an exportable Dutch pension product can be defined, which markets would potentially be fertile grounds for the Dutch pension system?
Construction of the so-called transferability index
• “the Dutch pension system” ≈ the pension deal as it is common in the Dutch second pillar, macro perspective; no distinction w.r.t. individual pension products
79
Two important factors
• Need for reforms
Member States that have to move from PAYG to funded schemes are potentially interesting export markets
• Characteristics
Those countries that bear most similarities with the foundations of the Dutch pension system should be the ones most susceptible for it
80
Analysis of the results
• Belgium, Finland France, Germany, Ireland, Spain and the United Kingdom show highest transferability opportunities
• For Estonia, Hungary, Poland and Slovakia transferability is lowest• Transferability for several countries could change in upcoming years• When considering the exportability of Dutch pension asset
management as such, all countries in quadrant I, II and IV should be considered
• For Member States with the largest need for reform (quadrants I and IV), two options for future development exist
81
82
Concluding remarksPolicy recommendations
• Need for private pensions savings
in the EU has increased:– Higher estimates costs of ageing– Worse budgetary positions
• Appropriate policy incentives– Automatic enrollment
• Importance of pension plan design– Avoid pitfalls of traditional DC– Lessons to be learned from the Dutch?
Rick Hoogendoorn
Seminar ‘Supervision on pension funds, experience from Romania and the Netherlands’
June 9-11, 2010
IOPS PRINCIPLES OF PRIVATE PENSION
SUPERVISION
84
Agenda
1. Introduction: How to use the Principles
2. OECD Core Principles of Occupational Pension Regulation
3. IOPS principles of pension supervision1. The principle
2. The assessment questions
3. Applying the principle to the Netherlands
4. Pitfalls to this principle
85
Introduction: How to use the principles
Methodology (1)
• Provides a structured framework for assessing the extent to which
regulation (OECD) / a pension supervisory authority (IOPS)
complies with the letter and spirit of the Principles
• Can be used for external or self-assessment
• Also indicates type of evidence that may help to answer questions
• Accountable to e.g. Parliament, members and beneficiaries
86
Introduction: How to use the principles
Methodology (2)
Compliance is rated as:
• Fully implemented: the Principle is implemented in all material respects
• Broadly implemented: the Principle is implemented in all but 1 or 2
material respects and the exceptions do not significantly detract from the
overall opinion.
• Partly implemented: while a negative answer is given to some questions,
the responses to the majority of the questions are consistent with
compliance
• Not implemented: there are major shortcomings against the principle
• Not applicable: the Principle does not apply due to structural, legal or
institutional features
87
OECD Core Principles on Occupational Pension Regulation
The OECD Council has published 7 Core Principles on Occupational Pension
Regulation. Various guidelines have been approved which develop specific
core principles.
# Core Principle Corresponding guideline
1 Conditions for effective regulation and
supervision
2 Establishment of pension plans,
pension funds and pension fund
management companies
IOPS-OECD Guidelines on the Licensing of
Pension Entities
88
OECD Core Principles on Occupational Pension Regulation
# Core Principle Corresponding guideline
3 Pension plan liabilities, funding rules,
winding up and insurance
OECD Guidelines on Funding and Benefit
Security
4 Asset Management OECD Guidelines on Pension Fund Asset
Management
5 Rights of members and beneficiaries
and adequacy of benefits
OECD Guidelines for the Protection of
Rights of Members and Beneficiaries in
Occupational Pension Plans
6 Governance OECD Guidelines for Pension Fund
Governance
7 Supervision IOPS Principles of Private Pension
Supervision
89
IOPS Principles of Pension Supervision
The International Organisation of Pension Supervisors (IOPS) was
formed in 2004 as a world-wide forum for dialogue and the
exchange of information as well as the standard setting organisation
promoting good practices in pension fund supervision.
IOPS currently has around 60 members and observers representing
approximately 50 countries and territories worldwide
90
IOPS Principles of Pension Supervision
The aims and purposes of IOPS are:
• Serving as the standard-setting body on pension supervisory
matters and regulating issues related to pension supervision
• Promoting international co-operation on pension supervision
• Providing a worldwide forum for policy dialogue and exchange of
information on pension supervision
• Participating in the work of relevant international bodies in the area
of pensions
More information about IOPS can be found on: www.iopsweb.org
91
Element
SeparationSeparation
Description
• Pension assets are legally separated from the corporation in a trust
MandatoryMandatory• The Minister of Social Affairs may make participation in an industry
wide pension scheme mandatory for the profession as a whole
Risk SharingRisk Sharing • Risks are shared within and across generations
EfficientEfficient • Significant economies of scale through large pension providers
Prudent personPrudent person• The Pension Act imposes no investment restrictions, except for
investments in the sponsor
Elements of the Dutch pension system
92
IOPS Principles of Pension Supervision
Principle 1
National laws should assign clear and explicit objectives to pension
supervisory authorities
• Strategic objectives should be clear and public
• Responsibilities of the pensions supervisor should give a clear
mandate and assign specific duties
93
Principle 1: Clear and Explicit Objectives
Assessment questions
• Is there legislation providing for a pension supervisor?
• Does the legislation set out objectives?
• Are the objectives public and binding?
• Does the legislation explicitly set out responsibilities and duties of the pension
supervisor?
• Does the supervisor explicitly set out its responsibilities and duties?
94
Principle 1: Clear and Explicit Objectives
Assessing the Dutch supervisory system
Principle 1 is fully implemented in the Netherlands. The supervisory objectives are clear
and the supervisor has set out how it deals with these objectives. Rules are in the
Pension Act and DNB has published a strategic ‘Vision on supervision’ for 2010 -
2014. This document states the objectives, responsibilities and duties of DNB.
Principle 1: Clear and Explicit Objectives
Pitfalls
96
IOPS Principles of Pension Supervision
Principle 2
Pension supervisory authorities should have operational independence
• Autonomy in day-to-day operations and decision making
• Funding to ensure independence
• Appointment procedures transparent
• Judicial review of supervisory actions
97
Principle 2: Operational Independence
Assessment questions
• Is the supervisory authority established as a body with operational independence?
• What type of restrictions exist on the ability of the government to make directions to
the supervisory authority?
• Is there transparency in the process for appointing senior positions ?
• Is there transparency in the process for terminating senior positions?
• Are senior officers replaced when there is a change of government?
• If funded by levies on supervised entities is there freedom from interference by these
entities?
98
Principle 2: Operational Independence
Assessing the Dutch supervisory system
Principle 2 is broadly implemented in the Netherlands. DNB operates under full
operational independence. A flaw in this respect might be the fact that DNB can be
held liable in civil court actions.
99
Principle 2: Operational Independence
Pitfalls
100
IOPS Principles of Pension Supervision
Principle 3
Pension supervisory authorities require adequate financial, human and
other resources
• Able to conduct functions efficiently and independently
• Funding to ensure independence
101
Principle 3: Adequate Resources
Assessment questions
• Is the budgetary timeframe long enough (e.g. 3 years) to provide stability in planning
and recruitment?
• Is the budget sufficient to enable the supervisory agency to meet its responsibility?
(very subjective)
• Does the agency have freedom in hiring with regard to staff numbers and salary?
• Are senior staff appropriately qualified?
102
Principle 3: Adequate Resources
Assessing the Dutch supervisory system
Principle 3 is fully implemented in the Netherlands. DNB is able to (and has achieved
to) hire adequate, experienced and expert staff. DNB is granted access to sufficient
resources to enable it to properly perform its duties. Even so, the credit crisis proved
that external shocks can seriously put pressure on the organization and its capacity.
103
Principle 3: Adequate Resources
Pitfalls
104
IOPS Principles of Pension Supervision
Principle 4
Pension supervisory authorities should be endowed with the necessary
investigative and enforcement powers to fulfill their functions and
achieve their objectives
• Powers appropriate to the system being supervised
• Powers appropriate to the manner of supervision e.g. appropriate
investigatory and enforcement powers
105
Principle 4: Adequate Powers
Assessment questions
• Are the supervisor’s powers clearly established by its governing legislation?
• Can the supervisor gain access to the information it needs?
• Is there a licensing or registration process that enables the supervisory agency to
obtain relevant information and to reject/amend/revoke the license/registration in the
case of serious non-compliance ?
• Can the supervisor enforce legislation relating to funding/capital adequacy, fitness
and propriety?
• Have there been difficulties in using available powers?
106
Principle 4: Adequate Powers
Assessing the Dutch supervisory system
Principle 4 is broadly implemented in the Netherlands. DNB has adequate powers to
deal with pension funds breaching their legal obligations. DNB can also obtain any
information it deems necessary, from any party at no cost. The only flaw with respect
to this Principle is the limited direct access of DNB regarding third parties performing
outsourced pension fund functions.
107
Principle 4: Adequate Powers
Pitfalls
108
IOPS Principles of Pension Supervision
Principle 5
Pension supervision should seek to mitigate the greatest potential risks
to the pension system
• Objectives of supervision should be risk-based
• Allocate supervisory resources to highest risk areas
• Pro-active approach to avoid problems before they occur
109
Principle 5: Risk Orientation
Assessment questions
• Are the supervisory authority’s objectives risk based rather than focusing on
compliance?
• Are resources of the authority allocated to the highest risk areas?
• Do the supervisors consider both the probability and likely impact of potential risks?
• Does the supervisor assess risks for each entity under supervision (for example by a
risk scoring model)
110
Principle 5: Risk Orientation
Assessing the Dutch supervisory system
Principle 5 is fully implemented in the Netherlands. DNB uses a risk assessment
approach for its supervision of pension funds. Both the risks and the risk control
mechanisms are scored in the risk scoring model FIRM. Priorities in supervision d
allocation of resources are based on aggregate and individual scoring in the FIRM
system.
111
Principle 5: Risk Orientation
Pitfalls
112
IOPS Principles of Pension Supervision
Principle 6
Pension supervisory authorities should ensure that investigatory and
enforcement requirements are proportional to the risks being
mitigated and that their actions are consistent
• Important to have the appropriate range of legal powers and tools
• Similar cases dealt in similar manner
113
Principle 6: Proportionality and Consistency
Assessment questions
• Can the supervisory authority vary its activities according to the risks being
addressed?
• Does the supervisory have procedures for helping the choice of a proportionate
response, such as an enforcement pyramid?
• Does the supervisory allow entities appropriate flexibilty in deciding how to comply
with legislation?
• Are there processes in place to ensure consistency between actions where
circumstances are similar?
114
Principle 6: Proportionality and Consistency
Assessing the Dutch supervisory system
Principle 6 is fully implemented in the Netherlands. DNB has attention for the
proportionality and consistency of its actions towards pension funds. Proportionality
is ensured through the use of the FIRM system and consistency through well-
developed documentation systems.
115
Principle 6: Proportionality and Consistency
Pitfalls
116
IOPS Principles of Pension Supervision
Principle 7
Pension supervisory authorities should consult with the bodies they are
overseeing and cooperate with other supervisory authorities
• Industry consultation assists to get ‘buy-in’
• Information exchange with co-regulators at home and under cross-
border arrangements promotes efficiency and supports preventive
measures
117
Principle 7: Consultation and Cooperation
Assessment questions
• Does the supervisory authority consult with the pensions industry when determining
strategic supervisory approaches?
• Is the supervisory authority empowered to exchange information with equivalent
oversees authority, subject to appropriate requirements?
118
Principle 7: Consultation and Cooperation
Assessing the Dutch supervisory system
Principle 7 is fully implemented in the Netherlands. DNB is open towards pension funds,
pension fund associations, social partners and other supervisory authorities, within
the limitations of its confidentiality requirements. This includes consultations with the
pension sector when DNB is considering new regulation and regular meetings with
these parties to discuss developments in the pension sector.
119
IOPS Principles of Pension Supervision
Principle 8
Pension supervisory authorities should treat confidential information
appropriately
• Only release if permitted by law
• If in doubt, check first
• Principle extends ‘down the line’
120
Principle 8: Confidentiality
Assessment questions
• Does the supervisory authority have a confidentiality policy which sets out the
authority’s procedures to prevent inappropriately disclosure of non public
information?
• Are there mechanisms to prevent disclosure of confidential information by staff,
including after they have left the supervisory authority?
121
Principle 8: Confidentiality
Assessing the Dutch supervisory system
Principle 8 is fully implemented in the Netherlands. The Pension Act sets high
confidentiality standards, complemented with processes and rules to ensure that
information on individual funds is not shared if the confidentiality of that information is
not protected with the envisaged recipient.
122
Principle 8: Confidentiality
Pitfalls
123
IOPS Principles of Pension Supervision
Principle 9
Pension supervisory authorities should conduct their operations in a
transparent manner
• Adopts clear, transparent and consistent processes
• Regularly reports on policy and performance
• Subject to external review
• Publishes industry information
124
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 actions?
125
Principle 9: Transparency
Assessing the Dutch supervisory system
Principle 9 is fully implemented in the Netherlands. DNB is transparent with regard to its
supervisory processes. An example of this transparency is Open Book Supervision
(on DNB’s website www.dnb.nl ), an information system that discloses regulations,
policy rules, supervisory processes and Q&A’s.
126
IOPS Principles of Pension Supervision
Principle 10
The supervisory authority should adhere to its own governance code
and should be accountable
• Controls, checks and balances
• Code of conduct
• Decisions are reviewable
• Accountable to e.g. Parliament, members and beneficiaries
127
Principle 10: Governance
Assessment questions
• Does the supervisory authority have appropriate codified procedures for internal
governance, and is compliance with these monitored and enforced?
• Is there a code of conduct for all staff regarding gifts, hospitality etc and declaring
conflicts of interest?
• Is there independent review within the agency of decisions which have significant
implications for the supervised entity?
• Is there an appeals process against decisions?
• Does the supervisory agency measure its performance against objectives and provide
external stakeholders with the results?
128
Principle 10: Governance
Assessing the Dutch supervisory system
Principle 10 is fully implemented in the Netherlands. DNB has established clear
governance codes and due processes to be held accountable for its conduct and
activity.
129
Principle 10: Governance
Pitfalls
Clear and Explicit Objectives National laws should assign clear and explicit objectives to supervisor
Operational Independence Supervisor should have operational independence
Adequate ResourcesSupervisor requires adequate financial, human and other resources
Adequate PowersSupervisor should have the necessary investigatory and enforcement
powers
Risk OrientationSupervisor should seek to mitigate the greatest potential risks to the
pension system
Summary of IOPS Principles
4
1
3
2
5
Proportionality and Consistency
Supervisor should ensure that investigatory and enforcement requirements are proportional to the risks being mitigated
Consultation and Cooperation
Supervisor should consult with the they oversee and cooperate with
othersupervisors
ConfidentialitySupervisor should treat confidential information approprisate
TransparencySupervisor should conduct its operations in a transparent manner
Governance Supervisor should adhere to its own governance code and should beaccountable
Summary of IOPS Principles
9
6
8
7
10
132
Self-Assessment Results
Well Implemented
Principles
Medium Implemented
Principles
Poorly Implemented
Principles
1. Clear and Explicit
Objectives
2. Operational
Independence
3. Adequate Resources
4. Adequate Powers 9. Transparency 5. Risk Orientation
7. Consultation and
Cooperation
10. Governance 6. Proportionality and
Consistency
8. Confidentiality
133
END
David Schelhaas + Rick Hoogendoorn
Seminar ‘Supervision on pension funds, experience from Romania and the Netherlands’
June 9-11, 2010
PENSION FUND GOVERNANCE: OECD
GUIDELINES
135
Agenda
1. OECD Core Principles of Occupational Pension Regulation
2. OECD Guidelines on Pension Fund Governance
3. Governance in Practice
136
Governance structureGovernance structure
Governance mechanismsGovernance mechanisms
8 guidelines about the structure of pension fund governance 8 guidelines about the structure of pension fund governance
3 guidelines about mechanisms that should enable boards to govern pension funds
3 guidelines about mechanisms that should enable boards to govern pension funds
OECD Guidelines for Pension Fund Governance
137
OECD Guidelines for Pension Fund Governance
Governance structureGovernance structure
11• Identification of responsibilities: there should be clear identification and separation
of operational and oversight responsibilities
• Identification of responsibilities: there should be clear identification and separation
of operational and oversight responsibilities
• Accountability: the governing body should be accountable to the pension plan
members and beneficiaries, its supervisory board and the competent authorities.
• Accountability: the governing body should be accountable to the pension plan
members and beneficiaries, its supervisory board and the competent authorities.
• Governing body: every pension fund should have a governing body vested with the
power to administer the pension fund.
• Governing body: every pension fund should have a governing body vested with the
power to administer the pension fund.
33
22
• Suitability: membership in the governing board should be subject to minimum suitability standards in order to ensure a high level of integrity, competence, experience and professionalism in the governance of the pension fund
• Suitability: membership in the governing board should be subject to minimum suitability standards in order to ensure a high level of integrity, competence, experience and professionalism in the governance of the pension fund
44
138
OECD Guidelines for Pension Fund Governance
Governance structureGovernance structure
55• Delegation and expert advice: the governing body may rely on the support of sub-
committees and may delegate functions to internal staff or external providers
• Delegation and expert advice: the governing body may rely on the support of sub-
committees and may delegate functions to internal staff or external providers
• Actuary: an actuary should be appointed by the appropriate body for all defined
benefit plans financed via pension funds.
• Actuary: an actuary should be appointed by the appropriate body for all defined
benefit plans financed via pension funds.
• Auditor: an independent auditor should be appointed by the appropriate body to
carry out a periodic audit consistent with the needs of the arrangement.
• Auditor: an independent auditor should be appointed by the appropriate body to
carry out a periodic audit consistent with the needs of the arrangement.
77
66
• Custodian: custody of the pension fund assets may be carried out by the pension entity, the financial institution that manages the pension fund or by the independent custodian.
• Custodian: custody of the pension fund assets may be carried out by the pension entity, the financial institution that manages the pension fund or by the independent custodian.
88
139
OECD Guidelines for Pension Fund Governance
Governance mechanismsGovernance mechanisms
99• Risk-based internal controls: there should appropriate controls in place to ensure
that all persons and entities with responsibilities act in accordance with objectives.
• Risk-based internal controls: there should appropriate controls in place to ensure
that all persons and entities with responsibilities act in accordance with objectives.
• Disclosure: the governing body should disclose relevant information to all parties
involved.
• Disclosure: the governing body should disclose relevant information to all parties
involved.
• Reporting: reporting channels between all persons and entities involved in the
governance should established.
• Reporting: reporting channels between all persons and entities involved in the
governance should established.
1111
1010
Governance in Practice
Liabilities
Pensions
Act
Finance Investments
Governance in Practice
Liabilities
Management
Pensions
Act
Finance Investments
Supervisory strategy 2010 - 2014
• Supra institutional
benchmarking
thematic investigations
• Conduct and culture
Supervisory themes 2010
• Pension Fund Governance
• Follow up investment investigations
• Financial structure
• Outsourcing
• Quality of provided data
• Evaluation of recovery plans
Pension Fund Governance
• Decision making process
• Transparency
• Consistency
• Balanced representation of interests
Pension fund governanceDecision making processes
• Selection process of advisors
• Financial agreement
• Self assessment process of the board
• Internal supervision
146
END
Risk management for investments
Paulus Dijkstra
Reinsurance and Asset & Liability Management
department
June 10 2010
Agenda
• Supervision and risk management
• Levels of risk management
• A simple case
• Sources of complexity
• Example
Supervision and risk management
• Risk management central part of governance
• Prime focus of supervision: Assessing quality and independence of risk
management function
• Risk management not only technical:
– Tone at the top
– countervailing power on all levels
Levels of risk management
Board levelFinancial setup:Premium policyIndexation policy
SAA
ALMConsultants
Board Staff/Investment CieMandates to asset managers
Investment Advisory Cie
Asset Manager
Asset Manager
Asset Manager
Performance and risk reports
Aggregatedperformanceand risk reports
Supervision and risk management
• Our pension fund law is principle-based:
• Boards should behave as prudent person• Business environment should be controlled and integer
• In practice: Balance between complexity of investments and robustness of risk control
No one size fits all!
A simple case
• Investment mandate in liquid asset class with:
• Clearly defined market index as benchmark: Communicates strategic risk-return preferences Broadly defines desired portfolio composition Yardstick for measuring market and active performance
• Limited degrees of freedom for active positions• No ‘out of benchmark’ positions• No (non-linear) derivatives (including embedded options)• Limits on concentration risks• Effective limits on active risk exposures (e.g. duration bands, tracking error)
• Risk management: ex post checking of compliance with guidelines and restrictions
Signs of complexity
• Broadly defined investment universe, more room for ‘new ideas’• Significant use of derivatives (especially option-like)• Higher risk asset classes• Illiquid asset classes• Alternative asset classes• Asset classes that involve underlying cash investments (e.g. commodities)
Risk management much more proactive:• Continuous monitoring of actual portfolio composition• Identification of type and form of risk exposures• Frequent assessment of adequacy of risk measures and methodologies• Challenging of choices made by asset managers
Alternative asset classes
• Issues that complicate risk management:
• Lack of suitable benchmarks to
– Guide composition of actual portfolio
– Distinguish between market performance and active performance
• Lack of transparency of portfolio and risk composition
• Fee schedules encourage high risk taking
• Higher levels of leverage
• Illiquidity hides true risk profile (smoothing)
Example: Fiduciary management
• Common division of roles and responsibilities:
• Board determines strategic asset allocation
• FM responsible for implementation of SAA
– Goal:
• FM outperforms strategic benchmarks ...
• … within a preset budget for active management risk
• Remuneration:
• FM gets base fee plus performance related fee
Example: Fiduciary management
• Services outsourced to FM:
• Selection of active managers
• Risk control of active management risks
• Potential conflicts of interest:
• Investment mandates managed by FM
• Performance related fees and risk management responsibilities
Example: Fiduciary management
8 700 1140 -100Japan 16 400 860 -20
3 600 1400 -975US small cap 20 500 925 -325
23 500 950 -890EM 1 14 550 550 -50EM 2 17 600 1600 315Total 101 220 525 -261
54 200 850 -231038 200 530 -21028 250 1325 -890
US HY 13 250 250 6007 250 250 215
Total 140 110 415 -1060
20 350 490 -285
GSCI 25 300 950 -855
GTAA 25 140 180 -88
FM product 60 500 -1500
Total 371 130 260 -792,55
Active Risk Budget
Asset class Mandates AUM (mln) Target TE (bp) Realized TE 60 days Excess return ytd (bp)
Equity Europe
Global
Global small cap
Fixed IncomeEuro govt AAAGlobal IG credit
Emerging market govt
Europe HY
Real estate Global listed
Commodities
Hedge funds
De Nederlandsche BankInvestigation into investments of pension funds
Paulus DijkstraReinsurance and Asset & Liability Management departmentJune 10 2010
Investigation into investments
• Presented findings are based on:
Sectorwide analysis of quarterly and yearly standard reporting and
recovery plans.
Experiences of regular supervision (among which a quick scan on
active management).
In-depth investigations into investments of 10 pension funds
Overall picture
Total loss of reserves of pension sector in 2008 was: € 219 bln, roughly for
60% caused by decreasing asset values and for 40% due to increasing
value of liability
Losses attributable to severity of crisis, strategic exposures of pension
funds and additional losses in implementation of these strategies
Loss due to implementation around € 20 bln
Risks of investments generally underestimated
Boards not always in control
Risk management function generally not robust enough
Strategic investment policyThere is a strong relationship between required capital (RC) and losses as a percentage of initial funding ratio.
However, there is a large degree of dispersion around this relationship
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
0% 10% 20% 30% 40% 50% 60% 70%
x-as: required capital in percentage of liabilitiesy-as:decraese in funding ratio as a percentage of initial funding ratio
Decrease in funding ratios
Some questionable strategies:
• A large number of funds lost more than 60 percentage points of funding ratio (more than twice the required capital of a standard pension fund).
• Some funds even lost more than 100 percentage points
• A large number of funds had a fairly aggressive asset mix, even when funds where closed for new participants
• A number of funds in liquididation maintained their original market and interest rate risks.
2,6%5,8%
13,0%
34,7%
24,0%
10,4%
5,2%1,6% 1,3% 0,0% 1,0% 0,3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
<10% <20% <30% <40% <50% <60% <70% <80% <90% <100% <110% =110%
Impact crisis and strategic choices not easily separable, but ….
x-as: decrease in funding ratio in percentage points
y-as: percent of pension funds
High degree of optimism
- 163 -
Of all funds with a recovery plan 13% used return assumptions that were unacceptable. These funds account for 64% of the total value of liabilities. 55 %of funds used acceptable return assumptions.
4,0%
4,5%
5,0%
5,5%
6,0%
6,5%
7,0%
7,5%
4,5% 5,0% 5,5% 6,0% 6,5% 7,0%
Maximaal rendement volgens DNB vastgestelde grenzen
Ren
dem
ent g
ehan
teer
d do
or b
estu
ur
Onacceptabel rendement
Acceptabel rendement
High degree of optimism on::
•Return expectations•Premium increases•Suppletions•'bad weather' scenarios
This generally leads to more risky asset mixes
Buffers and valuations
Zakelijke waarden Omvang schok FTK
Realisatie indices
Credit spread 10 jrs punt
Omvang schok FTK
Realisatie indices
Mature markets -25% -40% A+ 40% 249%Emerging markets -35% -52% A/A- 40% 162%Private equity * -30% -62% BBB 40% 496%Indirect vastgoed -25% -46% euro financial t.o.v. swap
Direct vastgoed** -15% 3% Curve dalingOmvang schok FTK
Realisatie indices
Commodities -30% -46% 23% 27%
* DJPE index **ROZ/IPD index gemiddeld over curve
Price declines where extreme; magnitude of shocks larger than presumed in required buffers
Not all risks are accounted for:Liquidity risks,Refinancing risks Concentration risks,Risks of active management
Standard approach is alwaysapplied
Valuation of assetsSometimes problematic
Implementation investment policy
Implementation losses due to active management, rebalancing, impact rerfinancing- en liquidity risks.
Explicit and implicit forms of leverage due to use of derivaten, securities lending, direct borrowing and product with embedded leverage
(Indirect) exposure to counterparty risks
Assumption that riskprofile is determined by strategic exposures is less and less relevant
7,0%
12,7%
28,7% 29,6%
11,5%
5,7%1,9% 1,3% 1,3% 0,3%
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
<1,00 <1,25 <1,50 <1,75 <2,00 <2,25 <2,50 <2,75 <3,00 =3,00
Losses due to implementation € 20,5 bln
x-as: factor (decrease funding ratio / RC)y-as: percentage pensionfunds
Governance• CONTROL
Strong tendency towards active investment risks and innovative investments.
Board is vulnerable for creative ideas.
Loss of direct control in cases of outsourcing not compensated by additional control measures.
Information provisioninsufficientto enable adequate steering of risk profile.
Countervailing powers are not organised to arrive at balanced decision making.
RISK MANAGEMENT
Magnitude of Investment risks is generally underestimated.
Role and importance of adequate risk control underestimated.
Risk identification and analysis underdeveloped.
Independence adequate weight of risk control function in the organisation not adequately safeguarded.
Supervision in practice
David Schelhaas/Leendert van Driel
Bucharest, Romania
June 10, 2010
Supervision in practice
Life cycle of a pension fund
Stages in the life cycle of a pension fund • Setting up of a pension fund
• Legal requirements and documents
• Regular meeting with board
• Inspection of a fund
• Winding up of a fund
Supervision in practice
Setting up of a pension fund• Legal requirement:
• Within 3 months submission of articles of association• Within 3 months submission of regulations of the fund
• Submission of Actuarial and Technical Business Memorandum (abtn)• Abtn should outline:
• Accrual and funding of pension benefits• Composition and valuation of fund´s assets and liabilities• Management and internal control• Assets and liability matching• Buffer capital
• Submission of funding agreement between employer and fund
Supervision in practice
Regular supervision is based on risk analysis.
• Following sources of information are used:• Articles of association and funding agreement• Actuarial and Technical Business Memorandum• Periodic returns and annual accounts• Quarterly reports• Reports requested on ad hoc basis
• Main objective is determination of present and future solvency of the fund• Assessment of annual returns is partly automated. Information is read into a
database and the system indicates when assessment is needed
Supervision in practice
Regular supervision
Main objective of consultation
To determine and ensure that pension funds are:
• Financially sound
• Well organised and controlled
• Meet legal requirement
• PPL = cash value of expected future benefits
• Funding ratio = investments/PPL
KEY QUESTIONS
• How to determine the value of pension liabilities
• Size of buffer
• Measures in case of deficit
Supervision in practice
Assets Liabilities
Investments Provision Pension Liabilities (PPL)Reserve/buffer
Supervision in practice
The frequency of consultation depends on factors
as the size and risk profile of the fund
Risk profile depends in general on
• Insured plan vs. own risk
• Self administered vs. outsourced
Supervision in practice
Consultation is done through:
• Periodical meetings (once every 1,5 years)
• Special investigation
In general consultation is done by a supervisor and
a business analist. If deemed necessary, they are
supported by a supervisor specialist.
Supervision in practice
Periodical meetings
A periodical meeting :
• Takes one to two days
• Is on location
Supervision in practice
Periodical meetings – continued
In preparing a meeting, the following steps are taken:
1. Set a meeting date.
2. Request meeting notes of board meetings and participant meetings over
the last 2 years.
3. Business analist scans the available information at DNB,
(i.e. meeting notes, fund profile, FIRM, plan rules, articles of association, actuarial and technical business
memorandum, funding agreement, annual report, management letters of auditor and actuary, annual DNB
statements, quarterly investment reports, etc.)
Supervision in practice
Periodical meetings – continued
4. Business analyst drafts a report of preliminary findings including an
update of the fund profile.
5. Report and fund profile are discussed with supervisor.
6. An agenda is set and sent to the fund.
Supervision in practice
• Periodical meetings – continued
During a meeting DNB will need to have access to
all local documents, procedures, etc.
Consultation can be with board of directors,
management of the fund, auditor, actuary
administrator, investment manager, etc.
Supervision in practice
Periodical meetings – continued
The actual meeting day(s)
• Start with a short mutual introduction including focussing on any actual developments
of the fund.
• Based on preparation perform a (quick) scan of available local documents and
procedures.
• Based on agenda (and new findings)have a meeting with the board, administrator,
actuary, auditor, etc.
• Set concluding remarks and follow-up activities.
Supervision in practice
Periodical meetings – continued.
After the meeting:
• Findings, concluding remarks and follow-up activities arre confirmed
in writing by DNB (TRIM)
• Follow-up activities are placed on the agenda (TOETSY)
• FIRM and fund profile are updated
Supervision in practice
TOOLS
• Toetsy - Workflow management
• TRIM - Digital archives
• FIRM - Risk analysis
Supervision in practice
Group transfer of benefits• This can for example happen when a part of a company is sold• The fund that is transferring must inform DNB about:
• Number of participants to be transferred• Size of the benefits to be transferred• Institution where benefits will be transferred to• Financial consequenses for the fund• Intended transferral date
Supervision in practice
Winding up of a fund
Board of the pension fund decides about termination of the fund. Following information must be submitted to DNB:
• Minutes of meeting where decision has been taken• Liquidation report of accountant• Information about spending of possible surplus• Method of information of parties involved• Agreement with new pension executive