IOPS Toolkit for Risk-based Supervision

1. IOPS Toolkit for Risk-based Supervision Module 4: Risk Mitigation and Scoring

2. RBS Process

4. Risk Mitigants Main mitigating factors to be considered: • Quality of governing board / trustees - Their understanding of responsibilities, their experience, competence & integrity, and any presence of conflict of interest. • Management controls - Management quality and structure, decision making process, strategic planning process and risk control attitude. • Compliance culture - Compliance with laws and regulations and involves assessment of the competence, integrity and independence of staff, as well as the pension fund’s information systems

5. Risk Mitigants • Effectiveness of operational management - Includes human resources policies, management of outsourced operations, pension fund organisational structure, group relationship, reporting lines and responsibility structure. • Adequacy of risk management systems - Quality of arrangements for identifying and measuring risk, setting limits, monitoring compliance and reporting. • Adequacy of independent review - Independence and competence of actuary, external auditor and internal auditor, and the quality of their reports.

6. Risk Mitigants • Role of administrator - The experience of the administrator and the quality of the services provided. • Sponsor - In Defined Benefit funds, the financial strength of the employer. • Financial support - This may refer to the level of reserves in a DB Fund (or DC), or financial support from a parent entity.

7. Risk Weightings The following should be considered when establishing a methodology for weighting risk, • Nature of the pension system • The type of pension fund (i.e. DC, DB, Hybrid) • Risk factors with measureable financial consequences • Nature, scale and complexity of the supervised entity • External environmental and market (systemic) factors • Weightings changing over time • Sensitivity tests or back testing to ensure accuracy and consistency

8. Probability • Conditional probability – characteristics historically known to correlate with the occurrence of an event. Probability expressed as a function of the characteristics in a particular fund. • Most RBS probability models are either additive or multiplicative, suggesting that risk characteristics are positively correlated. • Some supervisors combine probability and impact of risk into a single score – i.e. probability of the risk leading to a significant to high impact. Assumption of high interdependence

9. Probability: Financial Services Board

10. Impact • Impact measures assist in determining the supervisory oversight a fund will receive. • Most authorities use size of the entity to capture the damage that would be inflicted if an adverse event occurred. • Number of factors to determine ‘size’ – number of active or retired members, total assets, etc. • Higher impact assigned to ‘systemically important funds’, although ‘systemic importance’ requires definition. • Impact thresholds determined by level of protection in the system (e.g. guarantee schemes, sponsor backup, etc.)

11. Impact Measures - Example

12. Consistency of Scores • Risk scores need to be checked for accuracy and consistency. • Central vs. Individual Judgement. • ‘Pre-populating’ scores – useful in centre structuring the judgement of supervisors. Also captures external or systemic risks. • Checking mechanisms – central checking to ensure consistency across a large number of supervisors, internal comparisons and validations, training, etc. • Separate unit for the design and maintenance of the risk assessment system. • Retrospective testing of risk assessment models to validate risk scores given.

13. Consistency of Scores

14. Thank You Presentations of practical examples to follow