Introduction to IOPS Toolkit
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Transcript Introduction to IOPS Toolkit
IOPS TOOLKIT RISK-BASED
SUPERIVSION
INTRODUCTION TO RISK-BASED SUPERVISION
Taliya Cikoja – IOPS Secretariat
www.iopsweb.org
What is Risk-based Supervision?
A structured approach focusing on identifying potential risks faced by pension
funds and assessing the financial and operational factors in place to manage and
mitigate those risks
Objectives of RBS
Direct limited supervisory resources towards institutions that poses the
greatest threat
Supervisory resources and attention will follow identified risks in a forward
looking fashion – identifying where problems are likely to occur
Advantages of RBS
Maximises the use of scare supervisory resources
Significant problems will be identified in forward looking and timely fashion and
will be remedied effectively
Encourages pension funds to minimise their risk exposures to receive less
attention by the supervisory authority
Adaptable to different market situations, pension systems and supervisory
philosophies
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Applying risk-based supervision
Can be applied in many different ways
Quantitative measures of risk vs. qualitative judgement of risk
management
Risk-scores for each entity vs. analysis of risks systemic to pension
system
Identify weak areas within a supervised entity vs. which institutions
amongst thousands may pose the greatest threat
Elements common to all RBS systems
Determine objectives of supervisory authority + greatest risks to these
Assess hazard or adverse events + likelihood of these occurring
Assign scores and / or ranks to firms or activities based on assessments
Link supervisory, inspection and enforcement resources to the risk
scores assigned to individual firms or system-wide issues
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Combine ‘rules’ and ‘risk’ based approach
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Risk-based supervision for pensions
The Basic Risk Management Architecture
For the Institution
For the Supervisor
Risk management strategies
Board committees
Risk management functions in
the managerial structure
Internal controls
Reporting responsibilities
Regulations, including minimum
risk management standards
Risk-based solvency rules
Risk scoring model guiding
supervision actions
Internal organisation of the agency,
with specialist risk units
Market Discipline
The contributions of the actuary, auditor, fund members, rating companies,
and market analysts to sound risk management
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Risk-based Supervision DB vs DC
The structure of pension funds presents differing risk perspectives
RBS for DB
RBS for DC
Capital support from
Capital support not an issue
sponsor – soundness of plan
sponsor
Solvency and funding key
issues
Assessment of asset /
liability mismatch
- individual members bear
risk
Focus on risk-management
systems
Member disclosure,
investment returns and
pension fund costs
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Why adopt Risk-based supervision?
To improve supervisory effectiveness and efficiency
To address internal organisational concerns
To adapt to changes in the overseen industry
To gain legitimacy following supervisory failure
To meet requirements imposed by legislation
To adapt to the changing nature of financial risks themselves,
as these become more complex and - with the growth of DC
pension systems - are increasingly transferred to individuals
To provide pension funds with value-added feedback resulting
in more effective management of significant risks.
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Risk-based Supervision Process
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Challenges to introducing RBS
Combining simplicity with complexity
Knowledge and data
Ensuring that assessments of firms are forward looking
Going beyond the individual firm in assessing risk
Structure and operation of internal risk governance processes
Changing the culture to embed the risk based approach across
the whole organization
Managing blame
Making resources follow risks
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Lessons Learnt
Adaptation of Models - consult widely and adapt carefully/ build flexibility for
upgrades, pilot test
Application of Models – know weaknesses / consider ‘tail risk’/ use in
conjunction with supervisory judgment
Data Collection – use existing where possible / power to collect additional /
plan scope and scale / collect electronically
Reorganisation of the Supervisory Authority – allow plenty of time to adapt
Staff – on-going train for all on philosophy as well as process
Industry – explain new approach and what is expected of them
Powers – make sure supervisory authority has necessary and flexible powers
Risk-based solvency – apply flexibly in volatile conditions / counter-cyclical
Systemic risk – build in macroeconomic and systemic risks into analysis
Think in terms of achievability – target resources for maximum impact
It is worth doing!
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IOPS Toolkit for Risk-based Supervision
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