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CSSPP/DNB INTERNATIONAL SEMINAR JUNE 9 – JUNE 11 2010. Supervision on Pension Funds Experience from Romania and The Netherlands . Supervision on pension funds. Introduction to the seminar Adina Dragomir/Leendert van Driel Bucharest, Romania June 9 to June 11, 2010.

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CSSPP/DNB INTERNATIONAL SEMINAR

JUNE 9 – JUNE 11 2010

Supervision on Pension Funds

Experience from Romania and The Netherlands


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Supervision on pension funds

Introduction to the seminar

Adina Dragomir/Leendert van Driel

Bucharest, Romania

June 9 to June 11, 2010


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Supervision on Pension Funds

  • Objective of seminar

  • Introduction of participants


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Wednesday, June 9

09.00 Welcome and Introduction (Adina Dragomir/Leendert van Driel)

09.15 Review and summary of DNB seminar 2009(David Schelhaas/Leendert van Driel)

10.15 Morning coffee break

10.45 Review and summary of DNB seminar 2009 (2)

12.30 Lunch

Programme Seminar


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Wednesday, June 9

14.00 IOPS Principles of Pension Supervision (Rick Hoogendoorn)

15.30 Break

16.00 Pension Fund Supervision in Romania

17.00 End of day programme

18.30 Dinner

Programme Seminar


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Thursday, June 10

09.00 Pension Fund Governance: OECD Guidelines (Rick Hoogendoorn/David Schelhaas)

10.15 Morning coffee break

10.45 Risk Management (Paulus Dijkstra)

11.30 First Round of Investment Game (Paulus Dijkstra/David Schelhaas)

12.30 Lunch

Programme seminar


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Thursday, June 10

14.00 Investigation into investments of pension funds during credit crisis (Paulus Dijkstra)

14.45 Afternoon coffee break

15.15 Supervision in practice (Leendert van Driel/David Schelhaas)

16.00 Second Round of Investment Game (Paulus Dijkstra/David Schelhaas)

17.00 End of day programme

18.30 Dinner

Programme seminar


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Friday, June 11

09.00 Council of Europe position in respect of pension rights (Sixto Molina)

10.00 Morning coffee break

10.15 Final round of Investment Game (Paulus Dijkstra/David Schelhaas)

11.30 Seminar evaluation (Leendert van Driel/David Schelhaas)

12.30 Lunch

14.00 End of seminar

Programme seminar


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Summary

1. Pensions in the Netherlands

2. FIRM and FAF

3. Dealing with the crisis in Holland

4. Dealing with the crisis in Europe

5. Financial crisis and the impact on pensions in Europe

Review seminar 2009


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Pensions in the Netherlands

Apeldoorn

  • The Netherlands:

  • Pension system

  • Pension supervision

10


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Main Features Dutch pension system

  • Private

  • Capital-funded

  • Voluntary

  • Insurers only

  • Individual

3rd Pillar

2nd Pillar

1st Pillar

  • Private

  • Capital-funded

  • Employment-related

  • Premium paid by employer/ee

  • “Voluntary”

  • Pension funds ánd insurers

  • Collective

  • State

  • PAYG

  • Premiums via income taxes

  • All citizens

  • Mandatory

11


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Main Features Dutch pension system

  • Private

  • Capital-funded

  • Voluntary

  • Insurers only

  • Individual

Self-employed; Others: “the icing on the cake”

3rd Pillar

2nd Pillar

1st Pillar

pension premiums are tax-deductable

pension funds are autonomous; no link with sponsoring company

  • Private

  • Capital-funded

  • Employment-related

  • Premium paid by employer/ee

  • “Voluntary”

  • Pension funds ánd insurers

  • Collective

(1) Company (2) professional (3) multi-employer industry-wide pension funds

flat rate “AOW” for all Dutch citizens

  • State

  • PAYG

  • Premiums via income taxes

  • All citizens

  • Mandatory


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Pensions in the Netherlands

Figures 2008 second pillar

  • Company funds number 526/participants 850.000

  • Industrywide funds number 91/participants 5.048.000

  • Occupational funds number 13/participants 44.000

  • Total assets Euro 688 billion/1,25 x GDP

  • Insurance companies 22.000 pension schemes/ 834.000 participants

    Total number of employees in the Netherlands: 7.200.000


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Participation in pension schemes

  • Netherlands

  • - Indirect system: participation is mandatory through

  • collective agreements between employers and

  • employees

  • - Economic motives: level playing field, cost

  • efficiency

  • - Social motives: further reducing room for non-

  • participation

  • - What about self-employed?

  • Elsewhere

  • - Only 11 out of 30 OECD countries have mandatory private pension schemes

  • - These countries show a high participation compared to

  • countries with voluntary private pension schemes


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Funded pension schemes in OECD

Funded private mandatory pension schemes in OECD

Source: Pensions at a Glance, Public Policies across OECD Countries, OECD Publishing 2005


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Why mandatory participation?

  • Behavioral pitfalls

  • Lack of self-control: inertia and procrastination

  • Hyperbolic discounting and myopia

  • Framing

  • - Inconsistent preferences

  • Financial (il)literacy

  • Reduce negative external effects; poverty

  • Cost efficiency


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Conclusions

  • International comparison indicates that compulsion is attended by higher participation

  • Empirical evidence shows that Dutch pension savers too are prone to behavioral pitfalls

  • On balance the public seems to be aware of this, given the dominant preference for a mandatory system with high certainty and limited autonomy


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Conclusions

  • Is our current pension system optimal?

  • Overall, our pension system performs well vis-à-vis that in other industrial countries, but….

  • Issue requires a broader analysis from different angles

  • Broad spectrum from fully mandatory system to full autonomy; introducing more autonomy while at the same time preventing people from making major mistakes could be the way forward

  • How to improve pensions for the self-employed?


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Contents

Apeldoorn

  • The Netherlands:

  • Pension system

  • Pension supervision


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Regulation

  • Regulation

  • - 1st pillar: Old Age Act (“AOW”)

  • - 2nd Pillar: Pensions Act (“PW”)

  • Regulator

  • - Ministry of Social Affairs: pensions

  • - Ministry of Finance: all other financial markets segments

  • Supervisor

  • - DNB: De Nederlandsche Bank

  • - AFM: Autoriteit Financiële Markten


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Supervision

  • In 2004 the Twin Peaks model was introduced

  • - prudential supervision of financial institutions by DNB

  • - supervisor for market conduct (“AFM”)

  • Cooperation between two ‘Peaks’ is essential

  • - potential for overlap/white spots

  • - covenant between DNB and AFM

  • Experiences

  • - more effective supervision

  • - better grip on financial stability risks

  • - substantial cost savings

21


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Supervisory approach

  • In practice:

  • Open discussions

  • Principle-based

  • Discretionary powers

  • Sanctioning only if dialogue fails

  • Focus on prudential supervision (funding and solvency)

  • Supervisory principles:

    • Principle-based / Prudent person in investments

    • Risk-oriented

    • Integrity

    • Transparent / ICT facilitated

  • Executive powers:

    • Quarterly and annual statements

    • Contractual agreements

    • Investment plan / strategy

    • Actuarial and business memorandum

    • Fit and proper test board & management

    • On-site inspections

  • Sanctions and redress:

    • Imposing a binding direction

    • Fines and penalties

    • Appointing interim managers / administrator

    • Replacing the Board


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Summary

1. Pensions in the Netherlands

2. FIRM and FAF

3. Dealing with the crisis in Holland

4. Dealing with the crisis in Europe

5. Financial crisis and the impact on pensions in Europe

Review seminar 2009


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Pension right

€ 1000,- when

retired

Pension fund


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Risk based supervision

  • Quantitative:Pension fund as a ´money factory´

  • Qualitative:Pension fund as a company

EUR 200 billion!


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FIRM: Financial Institutions Risk Management method

Intervention

Protect creditors and policy holders

Contribute to the integrity of the financial system

Overall objectives DNB


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FIRM

Financial Institutions Risk Management Method

Uniform methodology for risk analyses

Applicable for all institutions supervised

Standardized approach

Covers ‘all’ supervisory activities

Promotes objectiviness

Systematic

Smaller chance overlooking relevant information

Supports planning

Allows for allocation of scarce resources


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Risk and control assessment

Assessment of inherent risks and mitigating controls gives

insight into the overall risk profile of the supervised institutions

Inherent

risks

Net

risk

Inherent risks

mitigated by

controls

=

net risk

Mitigating

controls


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Four-point scale to assess risks and controls

Risk score

Control score

1 Low risk

2 Limited risk

3 Material risk

4 High risk

Unknown / Not applicable

1 Strong control

2 Satisfactory control

3 Unsatisfactory control

4 Weak control

Unknown / Not applicable

To identify

“white spots”»

Using default scores

for inherent risks


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Risk categories

Matching/interest rate risk

Market risk

Governance

Credit risk

Insurance risk

Business risk

Operational risk

Solvency management

Outsourcing risk

IT- risk

Integrity risk

Legal risk


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Risk based supervision

Outsourcing risk

Legal risk

Marketrisk

Insurance risk

Integrity risk


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Risks, some examples

  • ´Qualitative´:

  • Bad management (governance)

  • Lehman as transition manager (legal)

  • Real estate fraud (integrity)

  • `Madoff´ (outsourcing)

  • IT systems failing (IT)

  • Investments in weapons or child labor (integrity)

  • Employee taking money from the fund (integrity)


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Risks, some examples

Quantitative:

  • Underfunding (solvency management)

  • Great losses due to risky investments or credit crunch (market or credit)

  • Raise in obligations due to declining interest rates (matching)

  • People live ´too long´ (insurance)


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Quantitative risks:Financial Assessment Framework (FAF)

  • FAF is part of new Pension Law (2nd Pillar)

  • FAF objectives:Insight in the financial position of a pension fund

    Market value valuation of investments and liabilities

    Risk based approach

    Risk sensitive capital requirements

    Structured early intervention

    Analysis of availability and power of policy instruments in the long run


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Financial Assessment Framework

  • Market valuation

  • Full funding requirement

  • Cost-effective premium

  • Strict rules for premium rebates or contribution holidays

  • Risk based solvency requirements & recovery plans

  • Prudent person approach

    • No investment restrictions

    • Except for investments in the sponsoring company


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Financial Assessment FrameworkThree questions

Does the pension fund have sufficient:

  • 1. Assets to cover the liabilities?

    • Actual value (market-consistent)

    • Market rates, no fixed discount rate

  • 2. Surplus to cover risks?

    • Risk horizon of 1 year

    • confidence level 97,5%, ‘once in 40 years’

    • Test available solvency to required level in solvency test

  • 3. Flexible policy instruments to deal with long term risks?

    • Continuitiy analysis

    • Investment, premium and indexation policy


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1. Possible funding ratios(regulatory intervention levels)

127% *)

105%

100%


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Continuity Analysis

Goals from perspective of regulator/supervisor:

  • Investigate the balance between premium-, indexation- and investment policy

  • Incorporate a long-term perspective

  • Identify possible problems at an early stage

  • Bring forward the moment of intervention

  • Stimulating risk-awareness

  • Tribute to more transparency and communication




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Summary

  • Many risks regarding pension rights, both qualitative and quantitative

  • Supervision is risk based

  • FIRM tool for assessment risks and controls

  • Financial Assessment Framework for assessment and control of quantitative risks


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Summary

1. Pensions in the Netherlands

2. FIRM and FAF

3. Dealing with the crisis in Holland

4. Dealing with the crisis in Europe

5. Financial crisis and the impact on pensions in Europe

Review seminar 2009


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Agenda

  • Full funding requirement

  • Key developments in 2008

  • Security mechanisms in the Dutch system

  • Long term solutions


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Why full funding is important

  • Underfunding has a price

    • High and volatile recovery costs: prevention cheaper than cure

    • Uncertainty reduces consumption and increases savings

  • Funding contributes to confidence in pensions

    • Employees will be more confident that their pension will be there when they retire

    • Encourages labour mobility: facilitates transfer of accrued rights

  • Funding is a hedge for an ageing society

    • The ratio of retirees to workers is to double the next 30 years

    • Less opportunity to ‘pass on the bill’


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How is funding measured?

  • Funding ratio = market value assets / market value liabilities

  • Assets = all assets at free disposal of the pension scheme

  • Liabilities = all non-discretionairy liabilities (accrued benefit obligations) discounted at the current term structure of interest rates


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Possible deficits

  • Solvency deficit

    • Funding ratio is above 105% but

    • Below the required level (127% for the average pension scheme)

    • Long-term recovery plan (max 15 years)

  • Funding deficit

    • Funding ratio is below 105%

    • Short-term recovery plan (max 3 years)


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Key developments in 2008

  • The MSCI World total return index decreased by 37%

    • Solvency test is based upon a 25% decrease

  • Overall, the interest rate term structure dropped by 140 basis points

    • Solvency test is based upon a 100 basis points decrease

    • Intra year swings even bigger



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How to safeguard pension liabilities in a defined benefit environment

  • Security mechanisms in the Dutch system

    • Regulatory own funds

    • Increases in the contractual contributions

    • One-off sponsor commitments

    • Adjustments in investment policy

    • Reduction of future indexation

  • If all security mechanisms are exhausted

    • Accrued pension rights can be reduced

  • Note: there is no pension guarantee fund in the Netherlands

    • Like the PBGC in the US or the PPF in the UK


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Supervisory dilemma environment

  • Prevent unnecessary reduction of accrued pension benefits and cause social disorder

    …versus…

  • Delay emergency measures for too long and let the situation develop from bad to worse


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Who provides the nominal pension guarantee, and is there a fair compensation for providing it? With the guarantors’ agreement?

Conditional indexation is an option to reduce the real value of the pension. What if there is no inflation?

If the funded ratio declines towards 105%, either contributions must be raised, or risk and hence higher return prospects must be removed from the balance sheet. Both are particularly unfair to young workers (especially in an aging society)

Problems associated with current system

Problem #1

Problem #2

Problem #3


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Long term solutions fair compensation for providing it? With the guarantors’ agreement?

  • Volatility in funding ratios seems to be underestimated

  • Existing policy instruments have relatively low risk absorption capacity

  • Is the Dutch pension system in need for higher regulatory own funds?


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Reduction of balance sheet volatility can be accomplished by fair compensation for providing it? With the guarantors’ agreement?

  • Investing in matching assets

    • Consider a pension scheme as a risk management vehicle

  • Creating alternative liabilities

    • Consider a pension scheme as an life-cycle saving and investing vehicle

  • Combination of the above


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Matching assets fair compensation for providing it? With the guarantors’ agreement?

  • Pension schemes can lay off risk in the international capital market by funding pensions with corresponding assets

  • A key purpose of funding is to diversify risks over international markets

  • Possible issue is the low liquidity in inflation let alone wage-indexed products


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Conclusion fair compensation for providing it? With the guarantors’ agreement?

  • In both cases, at a macro level the pension sector can do with lower solvency requirements

  • In the first solution, matching assets allow for lower regulatory own funds

  • In second solution, the youth bear the residual risks of the guarantees given provided to the elderly


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Summary fair compensation for providing it? With the guarantors’ agreement?

1. Pensions in the Netherlands

2. FIRM and FAF

3. Dealing with the crisis in Holland

4. Dealing with the crisis in Europe

5. Financial crisis and the impact on pensions in Europe

Review seminar 2009


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Agenda fair compensation for providing it? With the guarantors’ agreement?

  • Effects of the crisis on different systems

  • Responses to the crisis

  • Possible effects of the crisis


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Effects of the crisis fair compensation for providing it? With the guarantors’ agreement?

Asset side of the balance sheet

  • Decreasing value of equities

  • Increasing value of fixed income products (caused by decreasing market interest rate)

    Liabilities side of the balance sheet

  • Increasing liabilities (caused by decreasing market interest rate)


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Effects on different systems fair compensation for providing it? With the guarantors’ agreement?

Pay-as-you-go system

  • Pensions in payment untouched

  • Indirect effect through lower purchasing power?

    Funded system

  • Lower capital

  • Lower interest rates when converting capital into annuity


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Effects on funded systems fair compensation for providing it? With the guarantors’ agreement?

Defined Benefit

  • No change to benefits

  • Pension in payment continue as planned (for now)

  • Recovery takes time and/or money (pro-cyclical)

  • Direct loss of purchasing power for pensioners when indexation is conditional


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Effects on funded systems fair compensation for providing it? With the guarantors’ agreement?

Defined Contribution

  • Direct effect on new pensioners (lower than expected pension annuities)

    • No possibility for recovery

  • No direct effect on active members


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Reduction of effects through system choices fair compensation for providing it? With the guarantors’ agreement?

Defined benefit

  • Adequate buffers (NL?)

  • Quantitative restrictions

    • Limitations to equity investments

    • Limitations to foreign investments

    • Limitations on securitised products (DE)

  • Technical provisions

    • Fixed discount rate (ES, DE)

    • Expected return on investment (UK-funds, IE)

    • Corporate bond yield curve (UK-employers)

  • Positive effect of currency risk (UK)


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Reduction of effects through system choices fair compensation for providing it? With the guarantors’ agreement?

Defined contribution

  • Effects only for people reaching retirement age during crisis

  • Young DC-systems (RO, SK, etc)

  • Life-cycling


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Dutch response to the crisis fair compensation for providing it? With the guarantors’ agreement?

Defined benefit

  • In ‘normal’ market conditions the maximum recovery period is 3 years once the minimum funding level of 105% is breached

  • Given the exceptional circumstances, the minister of Social Affairs has decided to extend this period to 5 years

  • The recovery period for a solvency deficit remains at 15 years


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Dutch response to the crisis fair compensation for providing it? With the guarantors’ agreement?

Defined benefit (2)

  • Recovery plan must contain measures how to get back to the minimum funding level of 105% within 5 years

    • If all other measures fail, reduction of accrued benefits might be neccessary

  • Reduction of benefits no earlier than April 1st, 2012

    • Result of discussions over total crisis management package between government and social partners


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Dutch response to the crisis fair compensation for providing it? With the guarantors’ agreement?

Defined contribution

  • In ‘normal’ market conditions, a life-time annuity must be bought at retirement

  • Given the exceptional circumstances, the minister of Social Affairs has decided to allow a capital segmentation

  • This is a temporary measure, for those who retire before 2014


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Dutch response to the crisis fair compensation for providing it? With the guarantors’ agreement?

Defined contribution (2)

  • Capital segmentation:

    • Step 1: what would be the life-time annuity under current market conditions?

    • Step 2: accrual of that benefit for 5 years

    • Step 3: the rest of the pension capital remains invested and (hopefully) profits from market recovery

  • If ´satisfied´ with current market circumstances, the remaining pension capital can be used to buy a deferred life-time annuity (following on the temporary annuity).


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Possible effects? fair compensation for providing it? With the guarantors’ agreement?

Short-term effects

  • Reduction of benefits

  • Investing in liquid assets (with government guarantee)

    Long-term effects

  • Lower pensions promise, even with steady premiums

  • Shift from DB to DC?

  • Doubts on adequacy of DC-schemes

    • Closure of voluntary schemes (IT)

    • Return of mandatory schemes to the public system (SK)


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Summary fair compensation for providing it? With the guarantors’ agreement?

1. Pensions in the Netherlands

2. FIRM and FAF

3. Dealing with the crisis in Holland

4. Dealing with the crisis in Europe

5. Financial crisis and the impact on pensions in Europe

Review seminar 2009


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Agenda fair compensation for providing it? With the guarantors’ agreement?

Pension savings in the European Union

Consequences of the financial crisis

Are private pension savings a thing of the past?

The importance of pension plan design: lessons from the Dutch experience?

Concluding remarks: policy recommendations

Questions/discussion

70


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Three pillars of a pension system fair compensation for providing it? With the guarantors’ agreement?

  • pay-as-you-go

  • organised by government

  • compulsory

  • funded

  • occupational

  • pension funds

  • (semi-)

  • compulsory

  • funded

  • individual savings

  • voluntary

1st pillar

2nd pillar

3rd pillar

71


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First versus second/third pillar fair compensation for providing it? With the guarantors’ agreement?

First pillar

Financed by taxes/public funds

Demographics have strong impact

Inflation has little impact

Financial markets have little impact

Fiscal policy has strong impact

Second pillar

Financed by private savings

Demographics have little impact

Inflation has strong impact

Financial markets have strong impact

Fiscal policy has little impact

72


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Ageing and the dependency ratio fair compensation for providing it? With the guarantors’ agreement?

73


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Collective versus individual fair compensation for providing it? With the guarantors’ agreement?

Collective scheme

Low cost

No conversion risk

Little choice

Professional management

Individual scheme

High cost

Conversion risk

Adaptable to individual preferences

Behavorial finance arguments

74


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An unprecedented shock fair compensation for providing it? With the guarantors’ agreement?

Stress testing with respect to one of APG Group’s client funds

75


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Funding ratio in perspective fair compensation for providing it? With the guarantors’ agreement?

76


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The glass is half full… fair compensation for providing it? With the guarantors’ agreement?

77


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Dutch lessons? fair compensation for providing it? With the guarantors’ agreement?

Automatic enrollment

Default asset mix

Low costs

Mitigation of conversion risk

Governance

Transparency and communication

78


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Interesting for other Member States fair compensation for providing it? With the guarantors’ agreement?

  • Even though the Dutch system cannot be transferred one-on-one to the EU, the Dutch experience and expertise in this particular area appears to be of interest to other Member States

  • If an exportable Dutch pension product can be defined, which markets would potentially be fertile grounds for the Dutch pension system?

  •  Construction of the so-called transferability index

  • “the Dutch pension system” ≈ the pension deal as it is common in the Dutch second pillar, macro perspective; no distinction w.r.t. individual pension products

79


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Two important factors fair compensation for providing it? With the guarantors’ agreement?

  • Need for reforms

     Member States that have to move from PAYG to funded schemes are potentially interesting export markets

  • Characteristics

     Those countries that bear most similarities with the foundations of the Dutch pension system should be the ones most susceptible for it

80


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Analysis of the results fair compensation for providing it? With the guarantors’ agreement?

  • Belgium, Finland France, Germany, Ireland, Spain and the United Kingdom show highest transferability opportunities

  • For Estonia, Hungary, Poland and Slovakia transferability is lowest

  • Transferability for several countries could change in upcoming years

  • When considering the exportability of Dutch pension asset management as such, all countries in quadrant I, II and IV should be considered

  • For Member States with the largest need for reform (quadrants I and IV), two options for future development exist

81


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Concluding remarks fair compensation for providing it? With the guarantors’ agreement?Policy recommendations

Need for private pensions savings

in the EU has increased:

Higher estimates costs of ageing

Worse budgetary positions

Appropriate policy incentives

Automatic enrollment

Importance of pension plan design

Avoid pitfalls of traditional DC

Lessons to be learned from the Dutch?

82


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Rick Hoogendoorn fair compensation for providing it? With the guarantors’ agreement?

Seminar ‘Supervision on pension funds, experience from Romania and the Netherlands’

June 9-11, 2010

IOPS PRINCIPLES OF PRIVATE PENSION SUPERVISION


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Agenda fair compensation for providing it? With the guarantors’ agreement?

Introduction: How to use the Principles

OECD Core Principles of Occupational Pension Regulation

IOPS principles of pension supervision

The principle

The assessment questions

Applying the principle to the Netherlands

Pitfalls to this principle

84


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Introduction: How to use the principles fair compensation for providing it? With the guarantors’ agreement?

Methodology (1)

Provides a structured framework for assessing the extent to which regulation (OECD) / a pension supervisory authority (IOPS) complies with the letter and spirit of the Principles

Can be used for external or self-assessment

Also indicates type of evidence that may help to answer questions

Accountable to e.g. Parliament, members and beneficiaries

85


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Introduction: How to use the principles fair compensation for providing it? With the guarantors’ agreement?

Methodology (2)

Compliance is rated as:

Fully implemented: the Principle is implemented in all material respects

Broadly implemented: the Principle is implemented in all but 1 or 2 material respects and the exceptions do not significantly detract from the overall opinion.

Partly implemented: while a negative answer is given to some questions, the responses to the majority of the questions are consistent with compliance

Not implemented: there are major shortcomings against the principle

Not applicable: the Principle does not apply due to structural, legal or institutional features

86


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OECD Core Principles on Occupational Pension Regulation fair compensation for providing it? With the guarantors’ agreement?

The OECD Council has published 7 Core Principles on Occupational Pension Regulation. Various guidelines have been approved which develop specific core principles.

87


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OECD Core Principles on Occupational Pension Regulation fair compensation for providing it? With the guarantors’ agreement?

88


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

The International Organisation of Pension Supervisors (IOPS) was formed in 2004 as a world-wide forum for dialogue and the exchange of information as well as the standard setting organisation promoting good practices in pension fund supervision.

IOPS currently has around 60 members and observers representing approximately 50 countries and territories worldwide

89


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

The aims and purposes of IOPS are:

Serving as the standard-setting body on pension supervisory matters and regulating issues related to pension supervision

Promoting international co-operation on pension supervision

Providing a worldwide forum for policy dialogue and exchange of information on pension supervision

Participating in the work of relevant international bodies in the area of pensions

More information about IOPS can be found on: www.iopsweb.org

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Elements of the Dutch pension system fair compensation for providing it? With the guarantors’ agreement?

Element

Description

Separation

  • Pension assets are legally separated from the corporation in a trust

Mandatory

  • The Minister of Social Affairs may make participation in an industry wide pension scheme mandatory for the profession as a whole

Risk Sharing

  • Risks are shared within and across generations

  • Significant economies of scale through large pension providers

Efficient

Prudent person

  • The Pension Act imposes no investment restrictions, except for investments in the sponsor

91


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 1

National laws should assign clear and explicit objectives to pension supervisory authorities

Strategic objectives should be clear and public

Responsibilities of the pensions supervisor should give a clear mandate and assign specific duties

92


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Principle 1: Clear and Explicit Objectives fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Is there legislation providing for a pension supervisor?

Does the legislation set out objectives?

Are the objectives public and binding?

Does the legislation explicitly set out responsibilities and duties of the pension supervisor?

Does the supervisor explicitly set out its responsibilities and duties?

93


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Principle 1: Clear and Explicit Objectives fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 1 is fully implemented in the Netherlands. The supervisory objectives are clear and the supervisor has set out how it deals with these objectives. Rules are in the Pension Act and DNB has published a strategic ‘Vision on supervision’ for 2010 -2014. This document states the objectives, responsibilities and duties of DNB.

94


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Principle 1: Clear and Explicit Objectives fair compensation for providing it? With the guarantors’ agreement?

Pitfalls


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 2

Pension supervisory authorities should have operational independence

Autonomy in day-to-day operations and decision making

Funding to ensure independence

Appointment procedures transparent

Judicial review of supervisory actions

96


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Principle 2: Operational Independence fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Is the supervisory authority established as a body with operational independence?

What type of restrictions exist on the ability of the government to make directions to the supervisory authority?

Is there transparency in the process for appointing senior positions ?

Is there transparency in the process for terminating senior positions?

Are senior officers replaced when there is a change of government?

If funded by levies on supervised entities is there freedom from interference by these entities?

97


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Principle 2: Operational Independence fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 2 is broadly implemented in the Netherlands. DNB operates under full operational independence. A flaw in this respect might be the fact that DNB can be held liable in civil court actions.

98


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Principle 2: Operational Independence fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

99


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 3

Pension supervisory authorities require adequate financial, human and other resources

Able to conduct functions efficiently and independently

Funding to ensure independence

100


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Principle 3: Adequate Resources fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Is the budgetary timeframe long enough (e.g. 3 years) to provide stability in planning and recruitment?

Is the budget sufficient to enable the supervisory agency to meet its responsibility? (very subjective)

Does the agency have freedom in hiring with regard to staff numbers and salary?

Are senior staff appropriately qualified?

101


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Principle 3: Adequate Resources fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 3 is fully implemented in the Netherlands. DNB is able to (and has achieved to) hire adequate, experienced and expert staff. DNB is granted access to sufficient resources to enable it to properly perform its duties. Even so, the credit crisis proved that external shocks can seriously put pressure on the organization and its capacity.

102


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Principle 3: Adequate Resources fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

103


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 4

Pension supervisory authorities should be endowed with the necessary investigative and enforcement powers to fulfill their functions and achieve their objectives

Powers appropriate to the system being supervised

Powers appropriate to the manner of supervision e.g. appropriate investigatory and enforcement powers

104


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Principle 4: Adequate Powers fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Are the supervisor’s powers clearly established by its governing legislation?

Can the supervisor gain access to the information it needs?

Is there a licensing or registration process that enables the supervisory agency to obtain relevant information and to reject/amend/revoke the license/registration in the case of serious non-compliance ?

Can the supervisor enforce legislation relating to funding/capital adequacy, fitness and propriety?

Have there been difficulties in using available powers?

105


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Principle 4: Adequate Powers fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 4 is broadly implemented in the Netherlands. DNB has adequate powers to deal with pension funds breaching their legal obligations. DNB can also obtain any information it deems necessary, from any party at no cost. The only flaw with respect to this Principle is the limited direct access of DNB regarding third parties performing outsourced pension fund functions.

106


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Principle 4: Adequate Powers fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

107


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 5

Pension supervision should seek to mitigate the greatest potential risks to the pension system

Objectives of supervision should be risk-based

Allocate supervisory resources to highest risk areas

Pro-active approach to avoid problems before they occur

108


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Principle 5: Risk Orientation fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Are the supervisory authority’s objectives risk based rather than focusing on compliance?

Are resources of the authority allocated to the highest risk areas?

Do the supervisors consider both the probability and likely impact of potential risks?

Does the supervisor assess risks for each entity under supervision (for example by a risk scoring model)

109


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Principle 5: Risk Orientation fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 5 is fully implemented in the Netherlands. DNB uses a risk assessment approach for its supervision of pension funds. Both the risks and the risk control mechanisms are scored in the risk scoring model FIRM. Priorities in supervision d allocation of resources are based on aggregate and individual scoring in the FIRM system.

110


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Principle 5: Risk Orientation fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

111


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 6

Pension supervisory authorities should ensure that investigatory and enforcement requirements are proportional to the risks being mitigated and that their actions are consistent

Important to have the appropriate range of legal powers and tools

Similar cases dealt in similar manner

112


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Principle 6: Proportionality and Consistency fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Can the supervisory authority vary its activities according to the risks being addressed?

Does the supervisory have procedures for helping the choice of a proportionate response, such as an enforcement pyramid?

Does the supervisory allow entities appropriate flexibilty in deciding how to comply with legislation?

Are there processes in place to ensure consistency between actions where circumstances are similar?

113


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Principle 6: Proportionality and Consistency fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 6 is fully implemented in the Netherlands. DNB has attention for the proportionality and consistency of its actions towards pension funds. Proportionality is ensured through the use of the FIRM system and consistency through well-developed documentation systems.

114


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Principle 6: Proportionality and Consistency fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

115


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 7

Pension supervisory authorities should consult with the bodies they are overseeing and cooperate with other supervisory authorities

Industry consultation assists to get ‘buy-in’

Information exchange with co-regulators at home and under cross-border arrangements promotes efficiency and supports preventive measures

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Principle 7: Consultation and Cooperation fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Does the supervisory authority consult with the pensions industry when determining strategic supervisory approaches?

Is the supervisory authority empowered to exchange information with equivalent oversees authority, subject to appropriate requirements?

117


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Principle 7: Consultation and Cooperation fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 7 is fully implemented in the Netherlands. DNB is open towards pension funds, pension fund associations, social partners and other supervisory authorities, within the limitations of its confidentiality requirements. This includes consultations with the pension sector when DNB is considering new regulation and regular meetings with these parties to discuss developments in the pension sector.

118


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 8

Pension supervisory authorities should treat confidential information appropriately

Only release if permitted by law

If in doubt, check first

Principle extends ‘down the line’

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Principle 8: Confidentiality fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Does the supervisory authority have a confidentiality policy which sets out the authority’s procedures to prevent inappropriately disclosure of non public information?

Are there mechanisms to prevent disclosure of confidential information by staff, including after they have left the supervisory authority?

120


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Principle 8: Confidentiality fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 8 is fully implemented in the Netherlands. The Pension Act sets high confidentiality standards, complemented with processes and rules to ensure that information on individual funds is not shared if the confidentiality of that information is not protected with the envisaged recipient.

121


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Principle 8: Confidentiality fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

122


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 9

Pension supervisory authorities should conduct their operations in a transparent manner

Adopts clear, transparent and consistent processes

Regularly reports on policy and performance

Subject to external review

Publishes industry information

123


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Principle 9: Transparency fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Does the supervisory authority publish its rules and procedures?

Is the supervisory authority subject to appropriate audit and reporting requirements (that do not compromise its independence)?

Does the supervisory authority publish an Annual Report explaining how it has (or has not) met its objectives?

Does the supervisory authority explain to individual supervised entities why it has taken particular actions?

124


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Principle 9: Transparency fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 9 is fully implemented in the Netherlands. DNB is transparent with regard to its supervisory processes. An example of this transparency is Open Book Supervision (on DNB’s website www.dnb.nl ), an information system that discloses regulations, policy rules, supervisory processes and Q&A’s.

125


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IOPS Principles of Pension Supervision fair compensation for providing it? With the guarantors’ agreement?

Principle 10

The supervisory authority should adhere to its own governance code and should be accountable

Controls, checks and balances

Code of conduct

Decisions are reviewable

Accountable to e.g. Parliament, members and beneficiaries

126


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Principle 10: Governance fair compensation for providing it? With the guarantors’ agreement?

Assessment questions

Does the supervisory authority have appropriate codified procedures for internal governance, and is compliance with these monitored and enforced?

Is there a code of conduct for all staff regarding gifts, hospitality etc and declaring conflicts of interest?

Is there independent review within the agency of decisions which have significant implications for the supervised entity?

Is there an appeals process against decisions?

Does the supervisory agency measure its performance against objectives and provide external stakeholders with the results?

127


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Principle 10: Governance fair compensation for providing it? With the guarantors’ agreement?

Assessing the Dutch supervisory system

Principle 10 is fully implemented in the Netherlands. DNB has established clear governance codes and due processes to be held accountable for its conduct and activity.

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Principle 10: Governance fair compensation for providing it? With the guarantors’ agreement?

Pitfalls

129


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Summary of IOPS Principles fair compensation for providing it? With the guarantors’ agreement?

1

2

3

4

5


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Summary of IOPS Principles fair compensation for providing it? With the guarantors’ agreement?

6

7

8

9

10


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Self-Assessment Results fair compensation for providing it? With the guarantors’ agreement?

132


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END fair compensation for providing it? With the guarantors’ agreement?

133


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David Schelhaas + Rick Hoogendoorn fair compensation for providing it? With the guarantors’ agreement?

Seminar ‘Supervision on pension funds, experience from Romania and the Netherlands’

June 9-11, 2010

PENSION FUND GOVERNANCE: OECD GUIDELINES


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Agenda fair compensation for providing it? With the guarantors’ agreement?

OECD Core Principles of Occupational Pension Regulation

OECD Guidelines on Pension Fund Governance

Governance in Practice

135


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OECD Guidelines for Pension Fund Governance fair compensation for providing it? With the guarantors’ agreement?

Governance structure

  • 8 guidelines about the structure of pension fund governance

Governance mechanisms

  • 3 guidelines about mechanisms that should enable boards to govern pension funds

136


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OECD Guidelines for Pension Fund Governance fair compensation for providing it? With the guarantors’ agreement?

Governance structure

1

  • Identification of responsibilities: there should be clear identification and separation of operational and oversight responsibilities

  • Governing body: every pension fund should have a governing body vested with the power to administer the pension fund.

2

  • Accountability: the governing body should be accountable to the pension plan members and beneficiaries, its supervisory board and the competent authorities.

3

4

  • Suitability: membership in the governing board should be subject to minimum suitability standards in order to ensure a high level of integrity, competence, experience and professionalism in the governance of the pension fund

137


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OECD Guidelines for Pension Fund Governance fair compensation for providing it? With the guarantors’ agreement?

Governance structure

5

  • Delegation and expert advice: the governing body may rely on the support of sub-committees and may delegate functions to internal staff or external providers

  • Auditor: an independent auditor should be appointed by the appropriate body to carry out a periodic audit consistent with the needs of the arrangement.

6

  • Actuary: an actuary should be appointed by the appropriate body for all defined benefit plans financed via pension funds.

7

8

  • Custodian: custody of the pension fund assets may be carried out by the pension entity, the financial institution that manages the pension fund or by the independent custodian.

138


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OECD Guidelines for Pension Fund Governance fair compensation for providing it? With the guarantors’ agreement?

Governance mechanisms

9

  • Risk-based internal controls: there should appropriate controls in place to ensure that all persons and entities with responsibilities act in accordance with objectives.

  • Reporting: reporting channels between all persons and entities involved in the governance should established.

10

  • Disclosure: the governing body should disclose relevant information to all parties involved.

11

139


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Governance in Practice fair compensation for providing it? With the guarantors’ agreement?

Liabilities

Pensions

Act

Finance Investments


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Governance in Practice fair compensation for providing it? With the guarantors’ agreement?

Liabilities

Management

Pensions

Act

Finance Investments


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Supervisory strategy 2010 fair compensation for providing it? With the guarantors’ agreement?- 2014

  • Supra institutionalbenchmarkingthematic investigations

  • Conduct and culture


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Supervisory themes 2010 fair compensation for providing it? With the guarantors’ agreement?

  • Pension Fund Governance

  • Follow up investment investigations

  • Financial structure

  • Outsourcing

  • Quality of provided data

  • Evaluation of recovery plans


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Pension Fund Governance fair compensation for providing it? With the guarantors’ agreement?

  • Decision making process

  • Transparency

  • Consistency

  • Balanced representation of interests


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Pension fund governance fair compensation for providing it? With the guarantors’ agreement?Decision making processes

  • Selection process of advisors

  • Financial agreement

  • Self assessment process of the board

  • Internal supervision


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END fair compensation for providing it? With the guarantors’ agreement?

146


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Risk management for investments fair compensation for providing it? With the guarantors’ agreement?

Paulus Dijkstra

Reinsurance and Asset & Liability Management department

June 10 2010


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Agenda fair compensation for providing it? With the guarantors’ agreement?

  • Supervision and risk management

  • Levels of risk management

  • A simple case

  • Sources of complexity

  • Example


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Supervision and risk management fair compensation for providing it? With the guarantors’ agreement?

  • Risk management central part of governance

  • Prime focus of supervision: Assessing quality and independence of risk management function

  • Risk management not only technical:

    • Tone at the top

    • countervailing power on all levels


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Levels of risk management fair compensation for providing it? With the guarantors’ agreement?

Board level

Financial setup:

  • Premium policy

  • Indexation policy

  • SAA

ALM

Consultants

Aggregated

performance

and risk reports

Investment

Advisory Cie

Board Staff/Investment Cie

Mandates to asset managers

Performance

and risk reports

Asset

Manager

Asset

Manager

Asset

Manager


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Supervision and risk management fair compensation for providing it? With the guarantors’ agreement?

  • Our pension fund law is principle-based:

  • Boards should behave as prudent person

  • Business environment should be controlled and integer

  • In practice: Balance between complexity of investments and robustness of risk control

  • No one size fits all!


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A simple case fair compensation for providing it? With the guarantors’ agreement?

  • Investment mandate in liquid asset class with:

  • Clearly defined market index as benchmark:

    • Communicates strategic risk-return preferences

    • Broadly defines desired portfolio composition

    • Yardstick for measuring market and active performance

  • Limited degrees of freedom for active positions

    • No ‘out of benchmark’ positions

    • No (non-linear) derivatives (including embedded options)

    • Limits on concentration risks

    • Effective limits on active risk exposures (e.g. duration bands, tracking error)

  • Risk management: ex post checking of compliance with guidelines and restrictions


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Signs of complexity fair compensation for providing it? With the guarantors’ agreement?

  • Broadly defined investment universe, more room for ‘new ideas’

  • Significant use of derivatives (especially option-like)

  • Higher risk asset classes

  • Illiquid asset classes

  • Alternative asset classes

  • Asset classes that involve underlying cash investments (e.g. commodities)

  • Risk management much more proactive:

  • Continuous monitoring of actual portfolio composition

  • Identification of type and form of risk exposures

  • Frequent assessment of adequacy of risk measures and methodologies

  • Challenging of choices made by asset managers


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Alternative asset classes fair compensation for providing it? With the guarantors’ agreement?

  • Issues that complicate risk management:

  • Lack of suitable benchmarks to

    • Guide composition of actual portfolio

    • Distinguish between market performance and active performance

  • Lack of transparency of portfolio and risk composition

  • Fee schedules encourage high risk taking

  • Higher levels of leverage

  • Illiquidity hides true risk profile (smoothing)


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Example: Fiduciary management fair compensation for providing it? With the guarantors’ agreement?

  • Common division of roles and responsibilities:

  • Board determines strategic asset allocation

  • FM responsible for implementation of SAA

  • Goal:

  • FM outperforms strategic benchmarks ...

  • … within a preset budget for active management risk

  • Remuneration:

  • FM gets base fee plus performance related fee


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Example: Fiduciary management fair compensation for providing it? With the guarantors’ agreement?

  • Services outsourced to FM:

  • Selection of active managers

  • Risk control of active management risks

  • Potential conflicts of interest:

  • Investment mandates managed by FM

  • Performance related fees and risk management responsibilities


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Example: Fiduciary management fair compensation for providing it? With the guarantors’ agreement?


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De Nederlandsche Bank fair compensation for providing it? With the guarantors’ agreement?Investigation into investments of pension funds

Paulus Dijkstra

Reinsurance and Asset & Liability Management department

June 10 2010


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Investigation into investments fair compensation for providing it? With the guarantors’ agreement?

  • Presented findings are based on:

  • Sectorwide analysis of quarterly and yearly standard reporting and recovery plans.

  • Experiences of regular supervision (among which a quick scan on active management).

  • In-depth investigations into investments of 10 pension funds


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Overall picture fair compensation for providing it? With the guarantors’ agreement?

  • Total loss of reserves of pension sector in 2008 was: € 219 bln, roughly for 60% caused by decreasing asset values and for 40% due to increasing value of liability

  • Losses attributable to severity of crisis, strategic exposures of pension funds and additional losses in implementation of these strategies

  • Loss due to implementation around € 20 bln

  • Risks of investments generally underestimated

  • Boards not always in control

  • Risk management function generally not robust enough


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Strategic investment policy fair compensation for providing it? With the guarantors’ agreement?

There is a strong relationship between required capital (RC) and losses as a percentage of initial funding ratio.

However, there is a large degree of dispersion around this relationship

x-as: required capital in percentage of liabilitiesy-as:decraese in funding ratio as a percentage of initial funding ratio


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Decrease in funding ratios fair compensation for providing it? With the guarantors’ agreement?

Impact crisis and strategic choices not easily separable, but ….

Some questionable strategies:

  • A large number of funds lost more than 60 percentage points of funding ratio (more than twice the required capital of a standard pension fund).

  • Some funds even lost more than 100 percentage points

  • A large number of funds had a fairly aggressive asset mix, even when funds where closed for new participants

  • A number of funds in liquididation maintained their original market and interest rate risks.

x-as: decrease in funding ratio in percentage pointsy-as: percent of pension funds


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High degree of optimism fair compensation for providing it? With the guarantors’ agreement?

High degree of optimism on::

  • Return expectations

  • Premium increases

  • Suppletions

  • 'bad weather' scenarios

  • This generally leads to more risky asset mixes

Of all funds with a recovery plan 13% used return assumptions that were unacceptable. These funds account for 64% of the total value of liabilities.

55 %of funds used acceptable return assumptions.

- 163 -


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Buffers and valuations fair compensation for providing it? With the guarantors’ agreement?

Price declines where extreme; magnitude of shocks larger than presumed in required buffers

Not all risks are accounted

for:

Liquidity risks,

Refinancing risks

Concentration risks,

Risks of active management

Standard approach is always

applied

Valuation of assets

Sometimes problematic


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Implementation investment policy fair compensation for providing it? With the guarantors’ agreement?

Losses due to implementation € 20,5 bln

Implementation losses due to active management, rebalancing, impact rerfinancing- en liquidity risks.

Explicit and implicit forms of leverage due to use of derivaten, securities lending, direct borrowing and product with embedded leverage

(Indirect) exposure to counterparty risks

Assumption that riskprofile is determined by strategic exposures is less and less relevant

x-as: factor (decrease funding ratio / RC)y-as: percentage pensionfunds


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Governance fair compensation for providing it? With the guarantors’ agreement?

  • CONTROL

  • Strong tendency towards active investment risks and innovative investments.

  • Board is vulnerable for creative ideas.

  • Loss of direct control in cases of outsourcing not compensated by additional control measures.

  • Information provisioninsufficientto enable adequate steering of risk profile.

  • Countervailing powers are not organised to arrive at balanced decision making.

  • RISK MANAGEMENT

  • Magnitude of Investment risks is generally underestimated.

  • Role and importance of adequate risk control underestimated.

  • Risk identification and analysis underdeveloped.

  • Independence adequate weight of risk control function in the organisation not adequately safeguarded.


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

David Schelhaas/Leendert van Driel

Bucharest, Romania

June 10, 2010


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Life cycle of a pension fund

Stages in the life cycle of a pension fund

  • Setting up of a pension fund

  • Legal requirements and documents

  • Regular meeting with board

  • Inspection of a fund

  • Winding up of a fund


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Setting up of a pension fund

  • Legal requirement:

    • Within 3 months submission of articles of association

    • Within 3 months submission of regulations of the fund

  • Submission of Actuarial and Technical Business Memorandum (abtn)

  • Abtn should outline:

    • Accrual and funding of pension benefits

    • Composition and valuation of fund´s assets and liabilities

    • Management and internal control

    • Assets and liability matching

    • Buffer capital

  • Submission of funding agreement between employer and fund


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Regular supervision is based on risk analysis.

  • Following sources of information are used:

    • Articles of association and funding agreement

    • Actuarial and Technical Business Memorandum

    • Periodic returns and annual accounts

    • Quarterly reports

    • Reports requested on ad hoc basis

  • Main objective is determination of present and future solvency of the fund

  • Assessment of annual returns is partly automated. Information is read into a database and the system indicates when assessment is needed


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Regular supervision

Main objective of consultation

To determine and ensure that pension funds are:

  • Financially sound

  • Well organised and controlled

  • Meet legal requirement


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Liabilities

Assets

Investments

Provision Pension Liabilities (PPL)

Reserve/buffer

  • PPL = cash value of expected future benefits

  • Funding ratio = investments/PPL

    KEY QUESTIONS

  • How to determine the value of pension liabilities

  • Size of buffer

  • Measures in case of deficit


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

The frequency of consultation depends on factors

as the size and risk profile of the fund

Risk profile depends in general on

  • Insured plan vs. own risk

  • Self administered vs. outsourced


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Consultation is done through:

  • Periodical meetings (once every 1,5 years)

  • Special investigation

    In general consultation is done by a supervisor and

    a business analist. If deemed necessary, they are

    supported by a supervisor specialist.


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Periodical meetings

A periodical meeting :

  • Takes one to two days

  • Is on location


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Periodical meetings – continued

In preparing a meeting, the following steps are taken:

  • Set a meeting date.

  • Request meeting notes of board meetings and participant meetings over the last 2 years.

  • Business analist scans the available information at DNB,(i.e. meeting notes, fund profile, FIRM, plan rules, articles of association, actuarial and technical business memorandum, funding agreement, annual report, management letters of auditor and actuary, annual DNB statements, quarterly investment reports, etc.)


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Periodical meetings – continued

  • Business analyst drafts a report of preliminary findings including an update of the fund profile.

  • Report and fund profile are discussed with supervisor.

  • An agenda is set and sent to the fund.


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

  • Periodical meetings – continued

    During a meeting DNB will need to have access to

    all local documents, procedures, etc.

    Consultation can be with board of directors,

    management of the fund, auditor, actuary

    administrator, investment manager, etc.


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Periodical meetings – continued

The actual meeting day(s)

  • Start with a short mutual introduction including focussing on any actual developments of the fund.

  • Based on preparation perform a (quick) scan of available local documents and procedures.

  • Based on agenda (and new findings)have a meeting with the board, administrator, actuary, auditor, etc.

  • Set concluding remarks and follow-up activities.


Supervision in practice180 l.jpg
Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Periodical meetings – continued.

After the meeting:

  • Findings, concluding remarks and follow-up activities arre confirmed in writing by DNB (TRIM)

  • Follow-up activities are placed on the agenda (TOETSY)

  • FIRM and fund profile are updated


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

TOOLS

  • Toetsy - Workflow management

  • TRIM - Digital archives

  • FIRM - Risk analysis


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Group transfer of benefits

  • This can for example happen when a part of a company is sold

  • The fund that is transferring must inform DNB about:

    • Number of participants to be transferred

    • Size of the benefits to be transferred

    • Institution where benefits will be transferred to

    • Financial consequenses for the fund

    • Intended transferral date


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Supervision in practice fair compensation for providing it? With the guarantors’ agreement?

Winding up of a fund

Board of the pension fund decides about termination of the fund. Following information must be submitted to DNB:

  • Minutes of meeting where decision has been taken

  • Liquidation report of accountant

  • Information about spending of possible surplus

  • Method of information of parties involved

  • Agreement with new pension executive