Supervision models: Trends in pension fund supervision John Ashcroft FIAP Pensions Seminar May 28-29, 2008 Lima, PERU john@ashcroft6.fsnet.co.uk

Trends in pension fund supervision The International Organisation of Pension Supervisors (IOPS). Diversity of pension systems and supervisors. Common principles of supervision. Drivers for change in pension supervision. Four key trends. Conclusions.

The International Organisation of Pension Supervisors (IOPS) Founded in July 2004. Over 50 members (from Australia to Zambia). Work programme driven by the members. Meets three times a year. OECD provides the Secretariat on contract. First regional seminar in Senegal, February 2008. Focus on principles, guidelines and good practices. “Country research” on website. Database of pension systems and supervisory structures being developed. Close links with OECD WPPP, IAIS, IAA, World Bank and ISSA.

IOPS outputs Principles of private pension supervision (Dec 2006). Working Papers (August 2007). Integrating supervision – pros and cons. Supervisory education, outreach and communications Utilisation of IT in off-site supervision Experience and challenges in introducing risk-based supervision OECD/ IOPS Report: Licensing of pension entities in private pensions systems (Nov 2007) and Guidelines on this topic (May 2008) Good practices in risk management of alternative investments by pension funds (Feb 2008).

IOPS projects in progress or just starting Information Requirements for DC pension beneficiaries (2 phases). Supervisory Oversight of Pension Fund Governance. Review of Supervisory Systems. Costs and Fees: An International Comparison. Comparative Information and Pricing of Annuity Products. Starting during 2008 Guidelines on the Use of Intervention, Sanctions and Enforcement Powers. IOPS 'Toolkit' for Risk-based Supervision. Governance of Pension Supervisory Authorities and Performance Indicators for Pension Supervisory Authorities. Mortality Tables Information.

Diversity in pensions and their supervision Mandatory vs voluntary vs top-up. DB, DC, hybrid or any combination. Different legal forms for the pension funds. Number and sizes of schemes vary enormously. Three models of supervision: Structural Fiduciary Insurance-style Risk or rules based orientations.

IOPS principles of private pension supervision Objectives. Independence. Adequate resources . Adequate powers. Risk orientation. Proportionality and consistency. Consultation and co-operation. Confidentiality. Transparency. Governance.

Drivers for change in pensions supervision The ageing society. Move towards mandatory private pension provision. Increased commercialisation and globalisation of the pensions industry. New types of product and risk, e.g alternative investments. Concerns about burdens on business. The development of modern approaches to regulation more generally, especially risk-based regulation.

Four key trends Increasing supervisory integration. Moves towards a risk-based orientation. Concern about effective communication with pension fund members. Greater focus on governance.

Supervisory integration Part of a general trend in financial services supervision. Pros: economies of scale, accumulation of expertise and avoidance of arbitrage. Risks: lack of focus, inappropriate harmonisation. Integration more consistent with pensions as a financial services product rather than a form of (privatised) social welfare. No right or wrong answer. Harmonisation also occurring across national boundaries.

Drivers of the moves towards risk-based orientation Changes in supervisory structure. Avoiding distortions between different financial sectors. Resolving the mismatch between the large number of funds and the limited supply of supervisory resources (people and powers). Fund failures. Adverse market conditions. Concern about incomplete compliance with conduct rules and poor governance, particularly among small and medium-sized funds. Desire to target improvement of internal risk-management and governance of pension funds.

Risk-based means different things to different supervisors Applying quantitative techniques to the evaluation of the risks posed by pension funds so as to inform strategic supervisory responses. Varying explicitly the scope and intensity of supervision of individual funds according to the level of risk which each is estimated to pose. Enabling a proactive approach to pre-empt problems. Making choices transparent so that members or fiduciaries understand the risks involved. Supporting a public stance that supervisory action will not prevent all risks materialising.

Emphasis on communication with pension fund members Particularly important (for State) where provision mandatory or quasi-mandatory. Poor understanding is a big risk for DC and elements of DB provision (e.g indexation). Important of well informed member choices. IOPS working on guidelines for DC. Examples of initiatives. Moves to principle-based legislation. SCOMP in Chile. Dutch presentation of conditional indexation (the boat picture – next slide).

The Dutch indexation label

A greater focus on governance Principles-based and risk-based supervision places greater emphasis on role of the fiduciaries. Recognition that capabilities of fiduciaries vary. Four key responses: Risk-based models include governance factors. Raise the bar through licensing (e.g Australia). Improve education of fiduciaries (e.g UK/Kenya). Establish self-regulatory governance codes (e.g Netherlands). Service providers increasingly under scrutiny. IOPS working on guidelines.

Conclusions Despite the variety of supervisory models there are some key common principles and trends. Approaches adopted by different sectors are increasingly appearing in pensions. There may be an increasing recognition that prudential supervision is not enough in the pensions context. The IOPS has an increasingly important role in sharing and encouraging good practices in areas to which less attention has hitherto been paid.