The High Level Design for Risk-Based Supervision John Ashcroft 4/30/2019 Support to the Agency for Supervision of Fully Funded Pension Insurance (MAPAS)

Why risk-based supervision? 4/30/2019 Many reasons internationally Reducing the most serious risks Less attention on lesser risks More reliance on governance, control and risk management at supervised entities Forward rather than backward looking Flexible and dynamic

Moving up the levels 4/30/2019 The intention of relying more on risk management is consistent with a more general move of supervisory focus up the levels of control and governance, which is so intrinsic to RBS it is not explicitly mentioned. In this diagram, the negative events are what the supervisor wishes to avoid. They can be caused by process failures or incorrect policy choices. For process failures, the supervisor can choose to undertake its checks at several different levels. Compliance-based supervision looks directly at the transactions that could cause negative events. Moving up a level shifts the focus to the internal control procedures intended to prevent transactional mistakes. Going up another level focuses on those functions within the company that provide assurance that internal control processes are working effectively, which includes risk management. The highest level focus is on the way that the managing board satisfies itself that these functions are working effectively. It is commonly only at this level that policy errors can be detected, that is where board decisions are properly implemented but are harmful policies. For instance, if the investment strategy does not optimise risk/return trade-offs, the results will be sub-optimal however well the implementation of the strategy is controlled. That said, high quality risk management may have a role in identifying the adverse consequences of erroneous policies. This indicates why, of all the functions of the pension company, risk management is the most deserving of supervisory attention.

The five pillars of RBS 4/30/2019

Focusing on risk (based on the UK model) 4/30/2019 Impact This diagram illustrates how the UK supervisor responds to different types of risk. Risk with a high impact and probability require a highly interventionist approach with specialist teams keeping in a close contact with pension funds identified as being highly expose. Where impact is high but probability low (top left) a proactive approach is used to spot and react quickly to a wide range of sources of information on potential risks. Where impact is low but probability is high, routine actions, using generic staff, are taken where the risk becomes apparent or an informational campaign is launched back up with selective inspections. (‘One and done’ is a response where supervisory staff tell the pension fund what to do to remedy the problem without follow-up). For low risks, education of pension fund fiduciaries suffices. The Trustee Toolkit is an on-line educational tool for pension fund trustees. Probability

Highest inherent risks in Macedonia 4/30/2019 Duration and inflation risk (investment strategies) Investment trading discipline Market volatility at retirement Potential impact of multi-funds Fees Member/public understanding

What the project is covering 4/30/2019

Implications for MAPAS 4/30/2019 Greater focus on: Investment related risks Multi-fund implementation Governance and risk management Member and public awareness and understanding Continued focus on: Pushing down fees Staff skills and training Less focus on: Individual transactions and detailed rules Functions that are already or better undertaken by pension companies and custodians

Implications for pension companies and custodians 4/30/2019 Pension companies and custodians should be the front-line supervisors Higher expectations on: investment strategy and process governance, control, and risk management being able to demonstrate how directors know that risk is being effectively managed Less detailed checking but more serious consequences if significant control failures found Pressure on pension fund fees to continue Partnership to improve understanding and awareness

Thank you very much... *The content of this publication is the sole responsibility of BNB in consortium with Emeklilik Gözetim Merkezi and Hacettepe University and can in no way be taken to reflect the views of the European Union 4/30/2019