IOPS TOOLKIT RISK-BASED
SUPERIVSION
INTRODUCTION TO RISK-BASED SUPERVISION
Taliya Cikoja – IOPS Secretariat
www.iopsweb.org
What is Risk-based Supervision?
 A structured approach focusing on identifying potential risks faced by pension
funds and assessing the financial and operational factors in place to manage and
mitigate those risks
 Objectives of RBS
 Direct limited supervisory resources towards institutions that poses the
greatest threat
 Supervisory resources and attention will follow identified risks in a forward
looking fashion – identifying where problems are likely to occur
 Advantages of RBS
 Maximises the use of scare supervisory resources
 Significant problems will be identified in forward looking and timely fashion and
will be remedied effectively
 Encourages pension funds to minimise their risk exposures to receive less
attention by the supervisory authority
 Adaptable to different market situations, pension systems and supervisory
philosophies
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Applying risk-based supervision
 Can be applied in many different ways
 Quantitative measures of risk vs. qualitative judgement of risk
management
 Risk-scores for each entity vs. analysis of risks systemic to pension
system
 Identify weak areas within a supervised entity vs. which institutions
amongst thousands may pose the greatest threat
 Elements common to all RBS systems
 Determine objectives of supervisory authority + greatest risks to these
 Assess hazard or adverse events + likelihood of these occurring
 Assign scores and / or ranks to firms or activities based on assessments
 Link supervisory, inspection and enforcement resources to the risk
scores assigned to individual firms or system-wide issues
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Combine ‘rules’ and ‘risk’ based approach
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Risk-based supervision for pensions
The Basic Risk Management Architecture
For the Institution
For the Supervisor

Risk management strategies

Board committees

Risk management functions in
the managerial structure

Internal controls

Reporting responsibilities

Regulations, including minimum
risk management standards

Risk-based solvency rules

Risk scoring model guiding
supervision actions

Internal organisation of the agency,
with specialist risk units
Market Discipline
The contributions of the actuary, auditor, fund members, rating companies,
and market analysts to sound risk management
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Risk-based Supervision DB vs DC
The structure of pension funds presents differing risk perspectives
RBS for DB
RBS for DC
 Capital support from
 Capital support not an issue
sponsor – soundness of plan
sponsor
 Solvency and funding key
issues
 Assessment of asset /
liability mismatch
- individual members bear
risk
 Focus on risk-management
systems
 Member disclosure,
investment returns and
pension fund costs
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Why adopt Risk-based supervision?
 To improve supervisory effectiveness and efficiency
 To address internal organisational concerns
 To adapt to changes in the overseen industry
 To gain legitimacy following supervisory failure
 To meet requirements imposed by legislation
 To adapt to the changing nature of financial risks themselves,
as these become more complex and - with the growth of DC
pension systems - are increasingly transferred to individuals
 To provide pension funds with value-added feedback resulting
in more effective management of significant risks.
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Risk-based Supervision Process
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Challenges to introducing RBS
 Combining simplicity with complexity
 Knowledge and data
 Ensuring that assessments of firms are forward looking
 Going beyond the individual firm in assessing risk
 Structure and operation of internal risk governance processes
 Changing the culture to embed the risk based approach across
the whole organization
 Managing blame
 Making resources follow risks
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Lessons Learnt
 Adaptation of Models - consult widely and adapt carefully/ build flexibility for
upgrades, pilot test
 Application of Models – know weaknesses / consider ‘tail risk’/ use in
conjunction with supervisory judgment
 Data Collection – use existing where possible / power to collect additional /
plan scope and scale / collect electronically
 Reorganisation of the Supervisory Authority – allow plenty of time to adapt
 Staff – on-going train for all on philosophy as well as process
 Industry – explain new approach and what is expected of them
 Powers – make sure supervisory authority has necessary and flexible powers
 Risk-based solvency – apply flexibly in volatile conditions / counter-cyclical
 Systemic risk – build in macroeconomic and systemic risks into analysis
 Think in terms of achievability – target resources for maximum impact
 It is worth doing!
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IOPS Toolkit for Risk-based Supervision
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