MENA Workshop on Private Pension Supervision 1-2 March 2011, Amman Ross Jones IOPS President

1. SUPERVISING DC PENSION SYSTEMS MENA Workshop on Private Pension Supervision 1-2 March 2011, Amman Ross Jones IOPS President

2. Difference DB /DC Supervision • Inherent risks are the same in DB/ DC pensions… … who bears them is the key difference • Individuals are responsible for DC risks … …but their understanding is low… … which is the problem that lies behind all DC issues • Transparency is therefore the 1st control mechanism… …but low levels of understanding means that it can only partially work • Other control mechanism are therefore needed… …which to use depends on the nature of the pension system

3. Transparency and Education Mechanisms • Information disclosure requirements • OECD guidelines • IAIS stress how as well as what is disclosed is important • Some countries prescribe precise format of documents (Chile, Italy, Mexico, Slovakia) • Others how information should be disclosed (e.g. net of charges/ frequency of reporting / risk or volatility as well as returns) • Some authorities approve key documents prior to publication (Bulgaria, Hong Kong, Slovakia) • Some check for compliance after (e.g. Turkey) • Supervisors themselves can provide comparative information (e.g. Chile, Hong Kong) • Others play a role in educating members (e.g. Ireland)

4. DC Specific Risks and controls • Investment Risk • Risk-management systems • Risk limitation measures • Target outcomes • High cost • Cost control • Operational Risk • Risk-management systems • Accumulation to Decumulation Phase • Managing the transition to pension-payment phase

5. Investment Risk ControlRisk-management Systems • Risk-management systems • Some supervisory authorities lay out detailed requirements (e.g. Mexico) • Others more general guidance (e.g. UK, Australia) • OECD guidance • Management Oversight & Culture • Strategy & Risk Assessment • Control Systems • Information, Reporting & Communication • Statement of Investment Principles is a key part of risk-management

6. Investment Risk ControlRisk Limitation Measures • Quantitative Investment Limits • Life-cycle Funds • Risk limits (VaR)

7. Investment Risk Control Target Outcomes • Guarantees • Absolute (e.g. Belgium, mandatory funds Romania) • Relative (e.g. Poland) • Replacement Rate Targets

8. Cost Control

9. Cost Control • Improve Transparency • Specified structure (e.g. Italy, Mexico) • Supervisory authority comparisons (e.g. Hong Kong, Spain) • Fee Caps (e.g. Israel, Eastern Europe, UK stakeholder fund) • Not unreasonable test (e.g. New Zealand, USA) • Control mechanisms • Allocate members to lowest cost provider (e.g. Chile) • Restrict switching (e.g. Colombia, Bulgaria, Estonia) • License low cost providers (e.g. Macedonia, Bolivia) • Centralized/ collective services (e.g. Poland, Mexico)

10. Operational Risk Control • Operational risks require focus in different countries: • Fund transfers (Israel) • Record keeping (UK) • IT (Nigeria) • Data integrity (Australia) • Conflicts of interest with providers (Chile) • Contribution collection (Hong Kong) • Risk management systems at pension funds 1st line of defence • Outsourcing risk particular issue for DC funds • Pension supervisory authority may oversee contractors… • Or coordinate with other authorities… • Or require pension fund to check the systems of their contractors

11. Accumulation to Decumulation Phase • Require certain type of product (indexed life annuity) • Timing risk via flexibility when purchase • Assistance chose between types of product or annuity

12. Supervisory Tools • Nature of the pension system determines choice of control mechanism • Control mechanisms used determine supervisory approach

13. Supervising DC in Australia • Overview of superannuation (pension) system • Supervisory structure • Risk control mechanisms • Supervisory tools

14. Nature of the pension system - Australia • 1st Pillar – means-tested, approx 25% average wage • 2nd Pillar – mandatory 9% wage/salary paid by employer to superannuation (pension) fund • 3rd Pillar – voluntary additional contributions paid by employer and/or employee • Trust-based and largely DC • No guarantees, no cost controls, no quant limits • Developed financial markets - private sector providers • Many functions outsourced, eg custody, investment, administration • Approx 1/3 pension assets are in self-managed funds, balance in prudentially regulated funds

15. Regulatory structure - Australia • “Twin Peaks” model” • Prudential regulator – APRA • Market conduct and disclosure – ASIC • Self-managed funds regulated by ATO • Interests of trustees fully aligned with interests of members • therefore not prudentially regulated

16. Risk control mechanisms - Australia • Prudent person approach • “Fit & proper” – directors & management of trustee entity • Fund risk management framework must be in place • Governance and decision-making processes • Investment • Outsourcing arrangements • Legislative change • Fraud/theft • Market mechanisms • Choice of fund

17. Supervisory tools – Australia (1) • In the prudentially regulated sector, use many of the tools shown earlier for both Pension Systems A and B • Licensing of trustee entities • Registration of funds and • Reporting: (comprehensive but less intensively than in some systems discussed earlier) • Quarterly and annual reporting • Supports on-site supervision • Source for statistical analysis and publications

18. Supervisory tools – Australia (2) • Risk-based approach to supervision • Publication of guidance as to our expectations • Intensive on-site visits on maximum 2-year cycle • More frequent depending on risk rating • Risk rating is a function of probability of failure and impact of failure • Audit and actuarial requirements • Range of enforcement powers: suasion (to modify risky behaviour) through to removal from industry • Impending reforms

19. Thank you