Docstoc
EXCLUSIVE OFFER FOR DOCSTOC USERS
Try the all-new QuickBooks Online for FREE.  No credit card required.

Supervision on pensionfunds

Document Sample
Supervision on pensionfunds Powered By Docstoc
					      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 break
15.15   Supervision in practice (Leendert van
        Driel/David Schelhaas)
16.00   Second Round of Investment Game
        (Paulus Dijkstra/David Schelhaas)
17.00   End of day programme
18.30   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   Lunch
14.00   End of seminar
     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
         Pensions in the Netherlands

                                       Apeldoorn
     The Netherlands:

     1. Pension system

     2. Pension supervision




10
     Main Features Dutch pension system
                  • Private
                  • Capital-funded
     3rd Pillar   • Voluntary
                  • Insurers only
                  • Individual
                  • Private
                  • Capital-funded
                  • Employment-related
                  • Premium paid by employer/ee
     2nd Pillar   • “Voluntary”
                  • Pension funds ánd insurers
                  • Collective
                  • State
                  • PAYG
                  • Premiums via income taxes
11
     1st Pillar   • All citizens
                  • Mandatory
  Main Features Dutch pension system
                      • Private
                      • Capital-funded                Self-employed;
   3rd Pillar         • Voluntary                     Others: “the
                      • Insurers only                 icing on the
                                                      cake”
pension premiums      • Individual
are tax-deductable    • Private                       pension funds are
                      • Capital-funded                autonomous; no link
                                                      with sponsoring
                      • Employment-related
                                                      company
                      • Premium paid by employer/ee
   2nd Pillar         • “Voluntary”                   (1) Company
                      • Pension funds ánd insurers    (2) professional
                      • Collective                    (3) multi-employer
flat rate “AOW” for                                   industry-wide
                      • State
all Dutch citizens                                    pension funds
                      • PAYG
                      • Premiums via income taxes
   1st Pillar         • All citizens
                      • Mandatory
  Pensions in the Netherlands
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
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                        Statutory                                 Compulsory through
compulsory through               compulsory through                        collective
employer                         employee                                  agreements
Australia                        Denmark                                   Denmark
Iceland                          Mexico                                    Netherlands
Switzerland                      Hungary                                   Sweden
                                 Poland
                                 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?
              Contents

                         Apeldoorn
The Netherlands:

1. Pension system

2. Pension supervision
                    Regulation

• 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
                              Supervision

• 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


21
                Supervisory approach

• Supervisory principles:                               In practice:
  –   Principle-based / Prudent person in investments
  –   Risk-oriented                                     • Open discussions
  –   Integrity
  –   Transparent / ICT facilitated                     • Principle-based
                                                        • Discretionary powers
• Executive powers:
  –   Quarterly and annual statements                   • Sanctioning only if
  –   Contractual agreements
  –   Investment plan / strategy                           dialogue fails
  –   Actuarial and business memorandum
  –   Fit and proper test board & management            • Focus on prudential
  –   On-site inspections
                                                           supervision
                                                           (funding and solvency)
• Sanctions and redress:
  –   Imposing a binding direction
  –   Fines and penalties
  –   Appointing interim managers / administrator
  –   Replacing the Board
     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,- when
             retired




                         Pension fund
Risk based supervision

                             EUR 200 billion!
• Quantitative:
 Pension fund as a ´money
 factory´

• Qualitative:
 Pension fund as a company
FIRM: Financial Institutions Risk
Management method



 Intervention        Judgement based on                     Planning
                      risk analysis FIRM

                                                               Control &
 Solvency         Liquidity               Integrity
                                                              Organisation



                  Protect creditors and policy holders
            Contribute to the integrity of the financial system
                                       Overall objectives
                                             DNB
                   FIRM


Financial Institutions Risk Management Method
      Uniform methodology for risk analyses
      Applicable for all institutions supervised
              Standardized approach
          Covers „all‟ supervisory activities
              Promotes objectiviness
                     Systematic
   Smaller chance overlooking relevant information
                 Supports planning
     Allows for allocation of scarce resources
      Risk and control assessment

  Assessment of inherent risks and mitigating controls gives
insight into the overall risk profile of the supervised institutions

                                                    Net
                                                    risk

                                                   Inherent risks
                                                    mitigated by
         Inherent                                    controls
                                                         =
           risks             Mitigating               net risk
                             controls
                 Four-point scale
           to assess risks and controls

    Risk score                             Control score

1       Low risk                      1         Strong control
2       Limited risk                  2         Satisfactory control
3       Material risk                 3         Unsatisfactory control
4       High risk                     4         Weak control

Unknown / Not applicable              Unknown / Not applicable

         To identify
       “white spots” »   Using default scores
                          for inherent risks
                   Risk categories


Matching/interest rate risk
Market risk
Credit risk                          Governance

Insurance risk
Business risk
Operational risk
Outsourcing risk                Solvency management
IT- risk
Integrity risk
Legal risk
Risk based supervision




                     Outsourcing risk
       Legal risk


            Insurance riskMarketrisk

    Integrity 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 Framework
    Three 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
                                                           127% *)
Solvency deficit
- Max recovery period 15 years     Capital requirement
*)   for a typical pension fund

                                                           105%
Funding deficit                      Minimal capital
-Max recovery period 3 year            requirement
                                                           100%

                                  Market value technical
                                        provision
          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
                           2,5% percentiel     mediaan        97,5 percentiel
                230%

                210%

                190%
dekkingsgraad




                170%

                150%

                130%

                110%

                90%
                       0           5         jaar        10                     15
´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

  Change                                                                          %
  15                                                                              160


  10                                                                              150


   5                                                                              140


   0                                                                              130


   -5                                                                             120


  -10                                                                             110
                  due to interest rates changes

  -15             due to investments results                                      100
                  Fundig ratio - right hand scale
  -20                                                                             90
        Q2 2007    Q3 2007     Q4 2007    Q1 2008   Q2 2008   Q3 2008   Q4 2008
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



Problem #1   •   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
Problem #2       real value of the pension. What if there is no
                 inflation?


             •   If the funded ratio declines towards 105%, either
Problem #3       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)
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
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




                                                                  70
Three pillars of a pension system




    • pay-as-you-    • funded         • funded
    go               • occupational   • individual
    • organised by   pension funds    savings
    government       • (semi-)        • voluntary
    • compulsory     compulsory




     1st pillar         2nd pillar       3rd pillar



                                                      71
First versus second/third pillar

First pillar                      Second pillar
• Financed by taxes/public        • Financed by private
   funds                            savings
• Demographics have strong        • Demographics have little
   impact                           impact
• Inflation has little impact     • Inflation has strong
• Financial markets have little     impact
   impact                         • Financial markets have
• Fiscal policy has strong          strong impact
   impact                         • Fiscal policy has little
                                    impact




                                                               72
Ageing and the dependency ratio




                                  73
Collective versus individual

Collective scheme           Individual scheme
• Low cost                  • High cost
• No conversion risk        • Conversion risk
• Little choice             • Adaptable to individual
• Professional management      preferences
                            • Behavorial finance
                               arguments




                                                        74
 An unprecedented shock


Stress testing with respect to one of APG
Group’s client funds


  Funding ratio Q2 2008                     143.2%

  Required funding ratio Q2 2008            121.9%



  Hypothetical funding ratio assuming a     112.3%
  correlation of 1 between shocks


  Realised funding ratio Q4 2008            103.7%

                                                     75
Funding ratio in perspective

Interest rate                  Funding ratio
                               Estimated

3.6%                           90%
(Swaprate end 2008)

4%                             95%
(Former fixed interest rate)

5%                             110%


6%                             126%



                                               76
The glass is half full…




                          77
Dutch lessons?

•   Automatic enrollment
•   Default asset mix
•   Low costs
•   Mitigation of conversion risk
•   Governance
•   Transparency and communication




                                     78
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
Concluding remarks
Policy 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?




                                             82
      IOPS PRINCIPLES OF PRIVATE
            PENSION SUPERVISION

                                        Rick Hoogendoorn

Seminar „Supervision on pension funds, experience from
                         Romania and the Netherlands‟

                                      June 9-11, 2010
Agenda


1. Introduction: How to use the Principles
2. OECD Core Principles of Occupational Pension Regulation
3. IOPS principles of pension supervision
    1.   The principle
    2.   The assessment questions
    3.   Applying the principle to the Netherlands
    4.   Pitfalls to this principle




                                                             84
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




                                                                        85
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

                                                                                 86
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,           IOPS-OECD Guidelines on the Licensing of

       pension funds and pension fund            Pension Entities

       management companies
                                                                                            87
OECD Core Principles on Occupational
Pension Regulation

#   Core Principle                             Corresponding guideline

3   Pension plan liabilities, funding rules,   OECD Guidelines on Funding and Benefit
    winding up and insurance                   Security

4   Asset Management                           OECD Guidelines on Pension Fund Asset
                                               Management

5   Rights of members and beneficiaries        OECD Guidelines for the Protection of Rights
    and adequacy of benefits                   of Members and Beneficiaries in
                                               Occupational Pension Plans

6   Governance                                 OECD Guidelines for Pension Fund
                                               Governance

7   Supervision                                IOPS Principles of Private Pension
                                               Supervision

                                                                                              88
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




                                                                     89
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

                                                                             90
Elements of the Dutch pension system

 Element                     Description


  Separation     • Pension assets are legally separated from the corporation in a trust


                 • The Minister of Social Affairs may make participation in an industry wide
  Mandatory
                   pension scheme mandatory for the profession as a whole



 Risk Sharing    • Risks are shared within and across generations




   Efficient     • Significant economies of scale through large pension providers


                 • The Pension Act imposes no investment restrictions, except for
Prudent person
                   investments in the sponsor


                                                                                               91
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




                                                                       92
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?




                                                                                         93
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.




                                                                                          94
Principle 1: Clear and Explicit
   Objectives



Pitfalls
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




                                                                   96
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?

                                                                                             97
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.




                                                                                         98
Principle 2: Operational Independence



Pitfalls




                                        99
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




                                                                   100
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?




                                                                                            101
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.




                                                                                          102
Principle 3: Adequate Resources



Pitfalls




                                  103
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




                                                                          104
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?




                                                                                           105
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.




                                                                                          106
Principle 4: Adequate Powers



Pitfalls




                               107
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




                                                                      108
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)




                                                                                         109
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.




                                                                                         110
Principle 5: Risk Orientation



Pitfalls




                                111
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




                                                                        112
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?



                                                                                           113
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.




                                                                                        114
Principle 6: Proportionality and
Consistency


Pitfalls




                                   115
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



                                                                      116
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?




                                                                                     117
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.




                                                                                           118
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‟




                                                                        119
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?




                                                                                       120
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.




                                                                                            121
Principle 8: Confidentiality



Pitfalls




                               122
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




                                                                       123
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?




                                                                                           124
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.




                                                                                        125
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




                                                                     126
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?




                                                                                              127
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.




                                                                                    128
Principle 10: Governance



Pitfalls




                           129
Summary of IOPS Principles




      Clear and Explicit
 1
         Objectives        National laws should assign clear and explicit objectives to supervisor


         Operational
 2                         Supervisor should have operational independence
        Independence


 3   Adequate Resources    Supervisor requires adequate financial, human and other resources


                           Supervisor should have the necessary investigatory and enforcement
 4    Adequate Powers
                           powers

                           Supervisor should seek to mitigate the greatest potential risks to the
 5     Risk Orientation
                           pension system
Summary of IOPS Principles




      Proportionality and   Supervisor should ensure that investigatory and enforcement
 6
         Consistency          requirements are proportional to the risks being mitigated


 7
       Consultation and     Supervisor should consult with the they oversee and cooperate with other
         Cooperation
                            supervisors

 8      Confidentiality
                            Supervisor should treat confidential information approprisate


 9
        Transparency        Supervisor should conduct its operations in a transparent manner


 10      Governance         Supervisor should adhere to its own governance code and should be
                            accountable
Self-Assessment Results




 Well Implemented        Medium Implemented   Poorly Implemented
 Principles              Principles           Principles

 1. Clear and Explicit   2. Operational       3. Adequate Resources
 Objectives              Independence

 4. Adequate Powers      9. Transparency      5. Risk Orientation
 7. Consultation and     10. Governance       6. Proportionality and
 Cooperation                                  Consistency
 8. Confidentiality




                                                                       132
END




      133
    PENSION FUND GOVERNANCE:
              OECD GUIDELINES

                          David Schelhaas + Rick Hoogendoorn

Seminar „Supervision on pension funds, experience from
                         Romania and the Netherlands‟

                                        June 9-11, 2010
Agenda


1. OECD Core Principles of Occupational Pension Regulation
2. OECD Guidelines on Pension Fund Governance
3. Governance in Practice




                                                             135
OECD Guidelines for Pension Fund
         Governance




 Governance structure  8 guidelines about the structure of pension fund governance




     Governance          3 guidelines about mechanisms that should enable boards to
     mechanisms           govern pension funds




                                                                                       136
OECD Guidelines for Pension Fund
Governance
                                        Governance structure

       • Identification of responsibilities: there should be clear identification and separation of
 1       operational and oversight responsibilities


       • Governing body: every pension fund should have a governing body vested with the
 2       power to administer the pension fund.


       • Accountability: the governing body should be accountable to the pension plan
 3       members and beneficiaries, its supervisory board and the competent authorities.

       • Suitability: membership in the governing board should be subject to minimum
 4       suitability standards in order to ensure a high level of integrity, competence,
         experience and professionalism in the governance of the pension fund




                                                                                              137
OECD Guidelines for Pension Fund
Governance
                                       Governance structure

       • Delegation and expert advice: the governing body may rely on the support of sub-
 5       committees and may delegate functions to internal staff or external providers


       • Auditor: an independent auditor should be appointed by the appropriate body to
 6       carry out a periodic audit consistent with the needs of the arrangement.


       • Actuary: an actuary should be appointed by the appropriate body for all defined
 7       benefit plans financed via pension funds.


       • Custodian: custody of the pension fund assets may be carried out by the pension
 8       entity, the financial institution that manages the pension fund or by the independent
         custodian.




                                                                                           138
OECD Guidelines for Pension Fund
Governance
                                      Governance mechanisms

       • Risk-based internal controls: there should appropriate controls in place to ensure
 9       that all persons and entities with responsibilities act in accordance with objectives.


       • Reporting: reporting channels between all persons and entities involved in the
10       governance should established.


       • Disclosure: the governing body should disclose relevant information to all parties
 11      involved.




                                                                                             139
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 governance
Decision making processes


• Selection process of advisors


• Financial agreement


• Self assessment process of the board


• Internal supervision
END




      146
 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 level
                           Financial setup:
     ALM                   Premium policy
  Consultants             Indexation policy
                                SAA                     Aggregated
                                                         performance
                                                         and risk reports
 Investment
 Advisory Cie         Board Staff/Investment Cie
                      Mandates to asset managers

                                                             Performance
                                                             and risk reports



                 Asset         Asset            Asset
                Manager       Manager          Manager
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

Active Risk Budget

    Asset class           Mandates          AUM (mln)   Target TE (bp)   Realized TE 60 days   Excess return ytd (bp)

      Equity               Europe               8            700                1140                   -100
                            Japan              16            400                 860                    -20
                           Global               3            600                1400                   -975
                        US small cap           20            500                 925                   -325
                       Global small cap        23            500                 950                   -890
                            EM 1               14            550                 550                    -50
                            EM 2               17            600                1600                    315
                            Total              101           220                 525                   -261

   Fixed Income
                       Euro govt AAA           54            200                 850                   -2310
                       Global IG credit        38            200                 530                    -210
                     Emerging market govt      28            250                1325                    -890
                           US HY               13            250                 250                     600
                         Europe HY              7            250                 250                     215
                            Total              140           110                 415                   -1060

    Real estate          Global listed         20            350                490                    -285

    Commodities             GSCI               25            300                950                    -855

       GTAA                                    25            140                180                     -88

    Hedge funds          FM product            60            500                                       -1500

       Total                                   371           130                260                   -792,55
De Nederlandsche Bank
Investigation into investments of pension funds




      Paulus Dijkstra
      Reinsurance and Asset & Liability Management department
      June 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
 0
1%
 Strategic investment policy
 0%
                                                                     There is a strong relationship between required
   0%        1%
              0        2%
                        0         0
                                 3%        4%
                                            0         5%
                                                       0   6%
                                                            0   0
                                                                7%   capital (RC) and losses as a percentage of initial
-1 %
  0                                                                  funding ratio.
-2 %
  0                                                                  However, there is a large degree of dispersion
                                                                     around this relationship
  0
-3 %


  0
-4 %


  0
-5 %


  0
-6 %


  0
-7 %

x-as: required capital in percentage of liabilities
y-as:decraese in funding ratio as a percentage of
initial funding ratio
 Impact crisis and strategic ratios
 Decrease in funding choices not
  easily separable, but ….
                                                                                Some questionable strategies:
    0
    4%
                                                                                • A large number of funds lost more than
    3%
    5                                                                           60 percentage points of funding ratio
                                                                                (more than twice the required capital of a
    0
    3%
                                                                                standard pension fund).
                                                                                • Some funds even lost more than 100
    5
    2%


    2%
    0                                                                           percentage points
                              4 %
                             3 ,7
    1%
    5                                                                           • A large number of funds had a fairly
                                    2 ,0
                                     4 %                                        aggressive asset mix, even when funds
    0
    1%
                                                                                where closed for new participants
                       3 %
                      1 ,0
                                            0 %
                                           1 ,4
                                                                                • A number of funds in liquididation
     5%
                 ,8
                5 %                                ,2
                                                  5 %
           ,6
          2 %                                            ,6  ,3  ,0  ,0  ,3
                                                        1 % 1 % 0 % 1 % 0 %
     0%                                                                         maintained their original market and
           1% <0
          <0       3%
               2% <0          4% <0
                             <0   5% <0
                                      6%           7% <0
                                                  <0       9% < 0 % < 1% =1 %
                                                       8% <0   10    10   10
                                                                                interest rate risks.
x-as: decrease in funding ratio in percentage points
y-as: percent of pension funds
High degree of optimism
                                     7,5%
                                                Onacceptabel
                                                 rendement
                                     7,0%
                                                                                                                              High degree of optimism on::
 Rendement gehanteerd door bestuur




                                     6,5%
                                                                                                                              •Return expectations
                                     6,0%
                                                                                                                              •Premium increases
                                                                                                                              •Suppletions
                                     5,5%                                                                                     •'bad weather' scenarios

                                     5,0%
                                                                                                                              This generally leads to more
                                                                                                                              risky asset mixes
                                     4,5%
                                                                                                      Acceptabel
                                                                                                      rendement
                                     4,0%
                                         4,5%          5,0%           5,5%           6,0%            6,5%              7,0%
                                                       Maximaal rendement volgens DNB vastgestelde grenzen




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.



                                                                                                             - 163 -
 Buffers and valuations
Price declines where extreme; magnitude
of shocks larger than presumed in required       Not all risks are accounted
                                                 for:
buffers                               Liquidity risks,
Ze ead O n Ria C ise O n Ria
alk ae mg esi
 kj w n v
  i  r   a     l e r t p d mg esi
              at    d a
                   e r      va   at
                                  l e Refinancing risks
       so T i d s 1rpt so T i d s
       c k Kn e
        hF    i
              c     j u
                   0s n    hF    c
                                 i
                           c k Kn e   Concentration risks,
Mea t
a m s
 tr re
 u k       % -0 A
          -5
          2      4 +
                  %           4% 2% Risks of active management
                               0    9
                                    4
 mn re
  e m s
   g
Eri ga tk     3%
              -5     -2 A
                     5 /-
                      %  A             0
                                       4% 1%2
                                            6
 ra q *
 i eu
  v   t
P t eiy       3%
              -0     -2 B
                     6 B
                      %B               0
                                       4    9
                                            6
                                        % 4% Standard approach       is always
nevt e
  i t s d
  r
Idca o g      -5
              2%     4 ui n .v a
                      %o c o s p
                         r n a
                     -6 e f ai lt .. w
                                  O n Ria
                                   mg esi
                                     v
                                     a   at
                                          l e  applied
ievt e*
rc s d
     g
D t a o*      1%
              -5      3 C e l g so T i d s
                      %r dn c k Kn e
                        u a
                          v i       hF   c
                                         i
o oe
 mi d
Cmi st        3%
              -0     -6
                     4%                3
                                       2% 2 7% Valuation of assets
* J id
 D nx
  P e
   E         R/ nx
            * O De
            * Z id
               I
               P            e
                        g i d or u
                        edl v cv
                         m d e re                Sometimes problematic
Implementation investment policy
Losses due to implementation € 20,5 bln

3 ,0
 5 %                                                                      Implementation losses due to active
                                                                          management, rebalancing, impact
3 ,0
 0 %                                                                      rerfinancing- en liquidity risks.

 5 %
2 ,0

                                                                          Explicit and implicit forms of leverage due
 0 %
2 ,0
                                                                          to use of derivaten, securities lending,
                                                                          direct borrowing and product with
 5 %
1 ,0
                       8 % 9 %
                      2 ,7 2 ,6                                           embedded leverage
 0 %
1 ,0

               2 %
              1 ,7                   1 ,5
                                      1 %                                 (Indirect) exposure to counterparty risks
  ,0
 5 %
        ,0
       7 %                                   ,7
                                            5 %
                                                   ,9  ,3  ,3  ,3
                                                  1 % 1 % 1 % 0 %
  ,0
 0 %
         1 0 1 5
        < ,0 < ,2       1 0  1 5
                       < ,5 < ,7      < ,0 < ,2
                                       2 0 2 5     2 0 2 5
                                                  < ,5 < ,7    3 0 3 0
                                                              < ,0 = ,0
                                                                          Assumption that riskprofile is determined
 x-as: factor (decrease funding ratio /
 RC)                                                                      by strategic exposures is less and less
 y-as: percentage pensionfunds                                            relevant
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
             Supervision in practice
Assets                                 Liabilities
Investments                           Provision Pension Liabilities (PPL)
                                      Reserve/buffer


 •   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


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

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:85
posted:10/3/2010
language:English
pages:183