IOPS Toolkit for Risk-based Supervision

Module 4: Risk Mitigation and Scoring

RBS Process

Risk MitigantsMain mitigating factors to be considered:

• Quality of governing board / trustees• Management controls• Compliance culture• Effectiveness of operational management• Adequacy of risk management systems• Adequacy of independent review• Role of administrator• Sponsor• Financial support

Risk Mitigants: APRA

Risk Matrix: OFSI Canada

Risk WeightingsThe following should be considered when establishing a methodology for weighting risk,

• Nature of the pension system

• The type of pension fund (i.e. DC, DB, Hybrid)

• Risk factors with measureable financial consequences

• Nature, scale and complexity of the supervised entity

• External environmental and market (systemic) factors

• Weightings changing over time

• Sensitivity tests or back testing to ensure accuracy and consistency

Risk Weightings: APRA

Probability• Conditional probability – characteristics historically known to

correlate with the occurrence of an event. Probability expressed as a function of the characteristics in a particular fund.

• Most RBS probability models are either additive or multiplicative, suggesting that risk characteristics are positively correlated.

• Some supervisors combine probability and impact of risk into a single score – i.e. probability of the risk leading to a significant to high impact. Assumption of high interdependence

Probability: APRA

Impact• Impact measures assist in determining the supervisory

oversight a fund will receive.

• Most authorities use size of the entity to capture the damage that would be inflicted if an adverse event occurred.

• Number of factors to determine ‘size’ – number of active or retired members, total assets, etc.

• Higher impact assigned to ‘systemically important funds’, although ‘systemic importance’ requires definition.

• Impact thresholds determined by level of protection in the system (e.g. guarantee schemes, sponsor backup, etc.)

Impact Measures - Example

Consistency of Scores• Risk scores need to be checked for accuracy and consistency.

• Central vs. Individual Judgement.

• ‘Pre-populating’ scores – useful in centre structuring the judgement of supervisors. Also captures external or systemic risks.

• Checking mechanisms – central checking to ensure consistency across a large number of supervisors, internal comparisons and validations, training, etc.

• Separate unit for the design and maintenance of the risk assessment system.

• Retrospective testing of risk assessment models to validate risk scores given.

Consistency of Scores

Thank You

Presentations of practical examples to follow