2006 PARIS

The Funding Principles for Pension Funds

Chairmen: Paul Thornton UK

André Laboul

Presenters: Juan Yermo

Fraser Low UK

Maarten Gelderman The Netherlands

1st June 2006 11:00 – 12:30

IOPSFraser Low

IACA - 1 June 2006

What is IOPS?

• An independent international body• 50 member and observer organisations• Organisations from 40 countries• Developed out of the INPRS – with IOPS

formally established in 2004• Focus on the setting of standards for

occupational pension supervision• Close relations with OECD Working Party on

Private Pensions – which has conducted research & policy analysis since 1999 and continues work on pension regulatory issues

Structure

• Executive committee:– John Ashcroft, UK - Chairman– Australia, Netherlands, Germany,

Jordan, China, Hungary, Italy, Kenya, Chile, Pakistan.

– Deals with all matters of principle and issues arising between meetings.

Structure

• Technical committee• Aerdt Houben, Netherlands,- Chairman• All members who wish participate• Develops principles, standards & good

practices on pension supervisory issues• Regulatory issues related to pension

supervision

Aims

• Serving as the standard-setting body on pension supervisory matters

• 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, including joint research and activities to improve statistical collection and analysis.

Key Projects

Risk-based supervision• Joint with World Bank – first project designed to

provide a comprehensive source of information on the motivations, practices and outcomes of risk-based methods used by private pension supervisors.

• World Bank case studies on Australia, Netherlands, Denmark, Chile, Mexico

• IOPS case studies on South Africa, Croatia, Kenya, UK, Germany.

Principles of Private Pension Supervision

• Approved by Governing Membership

• Consultation document published 15 December 2005 available for comment

• Open for consultation until 31 May 2006

Principles of Private Pension Supervision

Principle 1: ObjectiveNational Laws should assign clear and explicit

objectives to pension supervisory authoritiesPrinciple 2: IndependencePension supervisory authorities should have operational

independencePrinciple 3: Adequate ResourcesPension supervisory authorities require adequate

financial, human and other resourcesPrinciple 4: Adequate PowersPension Supervisory authorities should be endowed

with the necessary investigatory and enforcement power to fulfil functionsand achieve their objectives

Principles of Private Pension SupervisionPrinciple 5: Risk OrientationPension supervision should seek to mitigate the greatest

potential risks to the pension systemPrinciple 6: Proportionality + ConsistencyPension supervisory authorities should ensure that

investigatory and enforcement requirements are proportional to the risks being mitigated and that their actions are consistent

Principle 7:Consultation + CooperationPension supervisory authorities should consult with the

bodies they are overseeing and cooperate with other supervisory authorities

Principle 8: ConfidentialityPension supervisory authorities should treat confidential

information appropriately

Principles of Private Pension Supervision

Principle 9: Transparency

Pension supervisory authorities should conduct their operations in a transparent manner

Principle 10: Governance

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

Current Projects- Risk Based Supervision

• Membership – World Bank, Australia, Germany. Netherlands, Pakistan, UK.

• Core elements of a risk-based approach to pension supervision

• Strategic planning• Best use of scarce resources

Cross border issues world wide

• Membership – Spain, Netherlands, UK• Potential problems and possible

solutions where supervision extends beyond the home state.

Utilisation of Offshore IT

• Membership – Turkey• Investigating and analysing the most

effective IT methods for supervising off site private pension systems.

Supervisory education, outreach & communication, including training of trustees

• Membership – Kenya, Ireland, South Africa, UK and World Bank.

Database of supervisory structures

• Membership – Mexico and Italy.• Building a comprehensive database

covering pension and supervisory systems in member countries – collaborating closely with the ISSA

Guidelines on compliance with the licensing of pension funds

• Membership – Australia and Germany working jointly with OECD.

• Setting minimum entry requirements for pension funds in countries where licensing prevails.

Conference Schedule

First Annual General Meeting held December 2005:• Bylaws amended• Principles approved• New Executive Committee elected

2005 Regional conference held in Bangkok:• 12 Asian countries represented• 100 global delegates in total

2006 Conference

• Regional events continued with Santiago, Chile conference in March

• Well attended• Concentrated on defined

contribution schemes• Used Chilean experience as a model.

Future Meetings

• July 5th Geneva, SwitzerlandIOPS Committee Meetings

• November 5-8th Istanbul, TurkeyOECD/ IOPS Pensions Global Forum + IOPS committee meetings + AGM

• 21-23 March 2007, Amsterdam, The NetherlandsIOPS Committee meetings + DNB sponsored International Pensions Conference

Influence

• Improving the profile of occupational pensions across the world

• IOPS website – www.iopsweb.org

• Source of material for governments and EU Commission, and CEIOPS.

Cooperation with other organisations

Partnership agreements • OECD• ISSAAssociate Members and Observers• IMF• World Bank• AIOS / CEIOPS• IAA• IAIS

Future developments

• Working agreement with the International Association of Insurance Supervisors

• Website enhancement.

Pension fund regulation in the Netherlands,

background and implications

Maarten Gelderman, DNB

Outline

• The Dutch pension sector

• The Financial Assessment Framework

• Some implications for the actuarial profession

The crisis that isn’t? Approximations only

2002 2003 2004 2005

Total

Buffer shortfall

Not fully covered

Current state

• Approximately 1000 funds

• Average coverage ratio: > 130%

• Average coverage ratio for shortfall funds: >125%

• Lessons– Transparency improves understanding– One million flies can be wrong…

Financial Assessment Framework

• 97,5% Solvency Standard for Nominal Pension Obligations

• Risk sensitive buffers (full balance sheet approach)

• Standardised approach and/or internal modelling

• Mark to market (or model)

Nominal coverage and real expectations

0

10

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90

100

100 110 120 130 140 150 160

A2

A4

Nominal coverage and real “certainty” (95%)

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90

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100 110 120 130 140 150 160

A2

A4

Advantages and disadvantages

• Risk sensitivity (some call this volatility!)

• Complexity

• Means of communication

• Risk perverse incentives (reduced, but not eliminated)

Some implications for the actuarial profession

• Be prepared to validate solvency and valuation models

• Excellent starting position, but:– Better be approximately right than exactly

wrong– Familiarity with products is key– Increase financial markets knowledge

Any questions?