Comisión Nacional del Sistema de Ahorro para el Retiro

1. Session III: Risk Scoring Risk Scoring Thursday 8th September, 2011, Lima - Peru Comisión Nacional del Sistema de Ahorro para el Retiro

2. Risk Scoring In order to mitigate the greatest potential risk to the pension system… … and a the same time provide workers a comparative analysis among Pension Fund Administrators, CONSAR has been implementing a Unique Quality Index (QI) This index must incorporates the performance evaluation of different “action areas” of the Pension Fund Administrator (Operational activities, Customer Services and Workers’ orientation and the investment of the resources)

3. It is important to point out that the supervision is divided into two main areas: the operational activities and the investment of the resources 1 Operational activities • To move towards a risk-based supervision all processes previously regulated were freed. Supervision involves the monitoring of the following elements:

4. This “action area” is not part of the supervision but we consider that is important to incorporate it in the QI 2 Customer Services and Workers’ orientation

5. A score card is under development to rank Afores according to size and complexity of “Operational activities” and “Customer Services and Workers’ orientation” When available, the three scores will be integrated into a single one. Nevertheless, the supervision and record keeping of each “action area” will continue to be performed by different areas within the CONSAR Investment of the resources The third “action area” corresponds to: 3 Some important factors that are used to determine the risk assessment score are: Incidents in inspection acts. Investment diversification of the Pension Funds. Financial Services Innovation. Returns Average Ranking (Performance). Investment Term and AUM. Incidents registered by surveillance. Corporate Governance Evaluation. Back Office. Investments. Risks. Compliance Officer

6. Index Construction (cont.) Investment of the resources FACTORS: Incidents in inspection acts. Considers the number of incidents registered by the Financial Surveillance Area, it could be in an accounting areas, risk, delivery of recordings, comptroller or investment kind of incident. Investment diversification of the Pension Funds. Using a diversification index, it is possible to evaluate the exploitation of the Investment Regime. Financial Services Innovation. It assesses the areas in which the Pension Fund is authorized to operate, as it is described on the website of CONSAR, whether they are derivative instruments, international custodian, etc. Average Ranking (Performance). This category incorporates the ranking that the Pension Fund has kept in each of its Basic Pension Funds according to the Returns Net of Fees (RNF), which has been filtered to make it’s trend more stable. Investment Term and AUM Compares the assets under management’s weighted average TTM in respect of an investment horizon more suitable to the characteristics of the affiliate. Each item is specially treated in the assessment, regarding its nature. It is assigned a grade between 0 and 10 in order to incorporate them with the rest of the items.

7. Index Construction (cont.) Investment of the resources FACTORS: Incidents registered by surveillance. Considers the number of incidents registered by the daily financial surveillance of the Pension Fund. Corporate Governance Evaluation. Considers the frequency within the board holds sessions, the number of independent counselors, the technical capacity and moral integrity of the independent counselors, etc. Back Office. Considers the Valuation, Accounting Records, Financial Statements and Conciliations with BMV and Indeval. Investments Unit Considers the analysis prior to determining the investment strategy, the compliance to the investment strategy defined by the Committee, online alarms and position reports, regulatory compliance, infrastructure in general, trading and recording systems and qualified personnel. Risks Unit Evaluates the independence of the Risk Management Division, models and benchmarks for measuring and monitoring the various types of risk, valuation methodologies, reports, contingency planning and guarantee monitoring. Compliance Officer Evaluates the independence of the Legal Comptroller, the prevention of interest conflicts and misuse of privileged information, the depth of the reviews and follow-up of the observations from the auditors and CONSAR.

8. Pension supervision should seek to mitigate the greatest potential risk to the pension system. “ACTION AREA” • A score system is in place to rank Afores according to risk Investment of the resources “X COMPONENTS” “FACTORS” • At this stage the weights of each factor are the same • For many of these categories, the rating assignment is straightforward… Investment diversification Herfindahl index Oficial NET RETURN INDEX (Base 10 = Max) Returns (Average Ratings). 8

9. The skills and expertise judgment of individual supervisors (ANALYST) is the base to build efficient RISK SCORINGS COMPONENT Example: Investment Committee Minutes OCCURRENCE PROBABILITY ANALYST IMPACT

10. Formally ... Quality Index = by now Investment of the resources where ACTION AREA “ i ” Risk Score = where FACTOR “ j ” Subjective weights where COMPONENT “ n ”

11. If a weakness is identified and a recommendation is emitted and depending on the seriousness of the breach • POLICES • Functionaries and/or operators may be removed. • Investment authorizations in specific instruments may be revoked Even the license to operate may be revoked. • Legal action may be taken. • Meetings with members of the board. • More frequent reporting (information) requirements. • More frequent inspections. • Remedial program is required. • Formal recommendations. • Everyday conventional reviews. 11

12. QUALITY INDEX Additional pursued objectives • Having an action that provide workers a comparative analysis among Pension Fund Administrators in order to make them easier the election according their preference, in a conscious way. • Promote the improvement of the quality of services provided by the Pension Fund Administrator through the competition generated by this index. • Have an index to assess, to compare and to monitor the progress in the quality of services provided by the Pension Fund Administrator.

13. QUESTIONS 13

14. Session III: Risk Scoring Risk Scoring Thursday 8th September, 2011, Lima - Peru Comisión Nacional del Sistema de Ahorro para el Retiro