Information Sources and Building Risk Indicators Nzomo Mutuku, Manager, Research & Development Retirement Benefits Authority, Kenya

Contents Information Sources Building Risk Indicators Kenya Risk Scores

Risk Factors In Kenya Inherent Risk Investment risk Insurance risk Non-financial risk Management and control Trustee oversight Operations and Control Independent review Capital Support The Fund The Employer

Sources of Information - Kenya n Periodic Scheme Returns  Registration Documents  Annual Accounts  Investment returns – six months  Contribution returns – quarterly  Investment Policy – Tri -annual  Actuarial Valuations Tri - annual for DB Schemes only n On site inspections n Third Party reports – Interim administrators n Interrogatories and scheme self assessment n Mandatory exception reports – whistle blowing required

Supervisory Organisation: Information Sources Type of SourceExamples in KenyaAvailability Existing databases and documents provided for no- supervisory purposes Industry Surveys and analyses (employer) Low Mandatory Exception Reports Member complaints Service provider alerts Medium Information from on- site inspections Inspection reportsLow Work commissioned by third parties Inspection reports Interim Administration reports Low Reports from entities to the supervisor Annual Accounts Investment returns Contribution returns Investment Policy Actuarial Valuations Interrogatories High

BUILDING RISK INDICATORS Step 4 : Supervisory Response Map the risk to the appropriate supervisory strategy(stance) Step 2 & 3: Derive Scheme Risk Level Collate the risk score for each parameter to obtain the risk level of the scheme & then weight apropriately Step 1: Risk Assessment Review the scheme information and assign a score for each risk parameter

RBA RISK INDICATORS Risk Factor Inherent riskManagement and controlCapital support Risk Indicators 1. Investment risk Investment Policy Investment returns Risk Measures 2. Insurance risk insurance risk insured capacity to handle non- insured risk 3. Non-financial risk simple plan provisions and procedures transparent outsourcing capacity to handle greater complexity 1. Trustee oversight self-assessment fit and proper criteria lines of responsibility 2.Operations and Control Interrogatories filing & contribution record Number & resolution of complaints expenses 3. Independent review use of independent professionals reports without qualifications 1.The Fund Funding / solvency ratio Deficit recovery plan Actuarial basis Rates of return 2. The Employer Timely remittances DB actuarial assumptions DC communicatio n to members Industry shape

Step 1:Risk Assessment Each risk indicators is assessed on a point scale: From Zero (very low risk) To 1 (extreme risk) Compute Overall Risk Score(ORS) by weighting each area: ORS = I + M +C

DC SCHEME Inherent RiskWSWSManagement and controlWSWSCapital supportWSWS Investment risk25%0XTrustee oversight20%0XFund0%0X Insurance risk10%0XOperations and control15%0X Employer sponsor10%0X Non-financial risk10%0XIndependent review10%0X 0 IMC DB SCHEME Inherent RiskWSWS Management and controlWSWSCapital supportWSWS Investment risk15%0XTrustee oversight10%0XFund25%0X Insurance risk15%0XOperations and control10%0XEmployer sponsor10%0X Non-financial risk5%0XIndependent review10%0X IMC Step 2:Risk Weighting

Step 3: Deriving Scheme Risk Level nOverall Risk Score(ORS) taken to fourth power to obtain the risk probability index to obtain the probability of failure of a scheme nAssign the risk probability index of scheme to a risk level as per table below: Risk Probability Index = (ORS) 4 Overall Risk ScoreRisk probability indexRisk level Less than 0.5<= – 1.5Above 0.06 to – 2.5Above 5 to – 3.5Above 39 to – 4Above 140 to 2564 Basis of calculation is that probability of failure does not increase in a linear fashion, but increases exponentially. 4 th power simplification of exponential formula

Step 4 : Supervisory Response 11 Risk LevelClassificationSupervisory Response 0GreenNo Action 1Light AmberMonitoring - regular filing, close monitoring until normalized 2Dark AmberIntensive Monitoring - questions to scheme administrators, intensive monitoring 3RedRecovery Plan - recovery plan to be filed, approval and close monitoring of plan 4Ultra RedIntervention - includes demands for additional funding, reduced benefits, interim administration, or closing the scheme

Risk Score as at March, 2011, 647 Schemes 12

Thank You Asante