Office of the Superintendent of Financial Institutions Bureau du surintendant des institutions financières Risk-Based Supervision of Private Pension Plans Diana Nedvidek Contractual Savings Conference Washington D.C. April 29, 2002

2 Agenda Part I Background Part II Risk Assessment System to Supervision - Risk-Based Approach

3 OSFI’s Mission Statement To safeguard policyholders, depositors, and pension plan members from undue loss by administering a regulatory framework that contributes to public confidence in a competitive financial system.

4 OSFI Act In pursuing these objectives, OSFI strives to protect rights and interests of plan members and recognizes that administrators are responsible for management of plans and that plans can experience difficulties leading to loss of benefits.

5 Federally Regulated Financial Institutions Banks and other Deposit-Taking Institutions Life Insurance Companies Property and Casualty Insurance Companies Pension Plans - Private Pension Plans Division (PPPD)

6 1,200 plans (8% of all RPP in Canada) - 30% defined benefit - 64% defined contribution - 6% combination 600,000 members (11% RPP members) $93 billion in assets (20% RPP assets) Overview of PPPD

7 Federally Regulated Private Pension Plans Plan Sponsors include: - Private companies - Crown corporations - Federations - Associations - First Nations

8 Federally Regulated Private Pension Plans Banks Telecommunication companies Shipping, navigation Interprovincial & international transportation Undertakings in the North Undertakings for the general advantage of Canada such as uranium mining First Nations

9 Pension Legislation OSFI Act Pension Benefits Standards Act (PBSA) Pension Benefits Standards Regulations (PBSR) Guidelines Directives OSFI policies

10 Part II Risk Assessment System

11 PPPD’s Mandate Supervise federally regulated private pension plan. Rely on plan administrators and consultants for good governance and prudent management of their pension plan. Respect the voluntary nature of pension plans and the need for plan administrators to take reasonable risks.

12 Determine if plans are in sound financial condition and that they comply with provisions of the federal legislation, OSFI policies and guidelines. Inform plan administrators of situations that require attention and ensure they take appropriate action. PPPD’s Mandate

13 Purpose… Identify plans that exhibit prudential concerns or risks to member benefits. Put in place an action plan with the administrators to address specific risks and concerns. Allocate OSFI resources. Risk Assessment System

14 C = Contributions A = Assets M = Management E = Employer R = Regulatory A = Actuarial Risk-Based Approach

15 Each component of the CAMERA system is based on a two level risk assessment: Level I: Early Warning Tests (EWTs) - computer generated based on - Annual Information Return - Annual Financial Statements - Actuarial Valuation Report Level II: Subjective - In-Depth Review of the Information Filed - Examination Findings

16 C = Contributions Timely Remittance Contribution Holidays in Excess of Surplus Negotiated Contributions (NC) Sufficiency of Contributions for NC plans Adequacy of Reported Contributions Outstanding Contributions

17 C = Contributions Level I  sub-components Level II Assessment of computer generated information Results of the most recent examination findings = Rating for Contributions

18 A = Assets Rate of Return - most recent return - three-year average Asset composition mix - % equity - % real estate - % bonds - % other assets

19 M = Management Records/Data Qualified Financial Statements Lateness of Filing Cooperation with Regulator, member/retiree complaints, lack of disclosure, conflict of interest

20 E = Employer Membership Level Membership Trend Variation in Normal Cost per Member Weak Sponsor or Industry Business Activity

21 R = Regulatory Compliance Priorities on Terminations Outstanding Documents Outstanding Valuation Report Disclosure to Members, OSFI, or Administrator

22 A = Actuarial Qualified Valuation Report Solvency Ratio < 1 Retirees’ Share of Liability Others Share of Liability Valuation Report Asset Ratio

23 Overall Rating (C + A + M + E + R + A) (Solvency Ratio)²

24 Staging Stage 0No problems/Normal activities Stage 1Early Warning Stage 2Risk to financial viability or solvency Stage 3 Future financial viability in serious doubt Stage 4Non-viability/Insolvency Imminent

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