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International Network of Pension Regulators and

Supervisors

World Bank-OECD-INPRS

Conference on Contractual Savings

Wednesday, 1 May 2002

Presentation by OECD/INPRS Secretariat

Andre Laboul

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Antecedents

• OECD activities in ageing populations and retirement

- work in the early 90’s

-1997 report on “private pensions: regulatory policies”

-1998: ministerial report on maintaining prosperity in an ageing society

-1999: creation of the Working party on private pensions, with observers from various international organisations: ISSA,AIOS,IAIS,IMF,WB, AIOS

-1999-now: data collection, taxonomy, policy analysis on various issues: e.g investment, governance, ….

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Antecedents

• 1998 Ministerial report on maintaining prosperity :

- retirement income should be provided by a mix of tax-and-transfer systems, funded systems, private savings and earnings

- development of advance-funded pension systems should go hand-in-hand with that of a strengthening of the financial market infrastructure and the establishment of a modern and effective regulatory framework for private pensions

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Antecedents

• Three key objectives:

- protection of the rights of the beneficiaries

- soundness of pension funds

- stability of the system

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Antecedents

• OECD standards-setting activities in private pensions– 1997: first set of Recommendations on regulation of

occupational schemes– 1998 : Ministerial report: Maintaining Prosperity in an

Aging Society: 1997 set endorsed– 1999: Working Group on Private Pensions established – 2000: based on 1998 recommendations, 15 principles

for the regulation of private occupational pension schemes

– 2001: Ministerial mandate to develop further principles; endorsement of the 15 principles by the INPRS

– 2002: draft new guidelines on governance of pension funds; template for assessing the principles

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Antecedents• nature of OECD work in pensions:

- principles are non-binding, recommend “universal” prudential principles, but don’t prescribe any specific institutional “model”

- policy analysis is “à la carte”, not a “set menu”;recipient countries are invited to implement prudential principles but with the modalities which are the most adapted to the country specificities.

- promotion of policy dialogue and co-operation with other countries through the Centre for Co-operation with Non Members

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….INPRS is created• International nature of work and principles

developed and willingness to associate non-members in data collection, research and standards setting activities

• Led to initiative to create larger-than-OECD Network of Pension Regulators and Supervisors

– created in Prague in 2000 at the occasion of the OECD forum on private pensions; endorsement of terms of reference;

– First conference in Sofia in 2001: endorsement of the 15 principles and of a draft p.o.w

– Intention to become International Association

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INPRS: today

• More than 130 regulatory and supervisory authorities

• from over than 60 countries world-wide• including 12 international organisations• regional networks• research activities and a new Journal• a new website: www.inprs.org

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Objectives of the INPRS • Promotion of well regulated private pension

systems as complements to public schemes; • Promotion of Policy dialogue and information

exchange• Promotion of the recognition of principles and

best practices • Assistance to member authorities in developing

regulatory and supervisory frameworks• co-operation with other international bodies

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Structure and Activities

• Activities are conducted under guidance of the Technical Committee

• Close conjunction and synergy with the OECD Working Party on Private Pensions

• Cooperation with ISSA, IAIS, AIOS, WB, IMF, EU

• Secretariat is based in the OECD Headquarters in Paris

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Activities

• Exchange of information and policy dialogue

• --between pensions regulators and supervisors

• --with inputs from industry and research Community

• --at the world-wide level• --through meetings, website, publications

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Activities

• at regional level – Central and Eastern Europe Network (Budapest

venue with EWMI/USAID); extensive technical assistance program

– Special Baltic programme– AIOS: co-ordinate INPRS activities in Latin

America– Setting up of the Asian Network in Korea in 2002;

initial meeting in Beijing in Fall, 2001– Consideration for similar Network in Africa

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Activities

• Supported by research and data collection activities

• Taxonomy (and Glossary)• Regulatory Database, with International

Social Security Association in Geneva

• Statistics • Analytical work on investment, governance

and supervisory techniques

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Activities• Analysis benefiting from work developed by the

OECD Working Party on private pensions, other international organisations but also

• Affiliated Research Network – designed to be a liaison with academic community; organise conferences.

• Associated (new) Journal of Pension Economics and Finance (www.pensions-journal.com)

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Activities

Promotion and recognition of principles• Endorsement of the 15 principles• Contribute to, and be associated with, further

development of pensions regulatory and supervisory principles,

• elaborate guidelines for operational supervisory and regulatory activities

• Financial Sector Assessment Program (FSAP) (also see IMF website)

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Financial Sector Assessment Program • Financial Sector Assessment Program

– Managed by IMF with World Bank assistance; – FSAP reports: stability/vulnerability analysis;

reform/development needs and detailed assessment of observance of financial standards

• financial standards assessed, including --- IMF Code of good practices on transparency in monetary and financial policies

-Basle principles for banking supervision, IAIS principles for insurance supervision, IOSCO principles for securities regulation, OECD principles for corporate governance

• What about pensions?

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INPRS/OECD Role in FSAP

• WB and IMF use (but not yet formally assess) OECD/ INPRS 15 Principles for FSAP reviews.

• Invited that evaluative criteria be developed along lines of IAIS, IOSCO, etc.– Work in progress by INPRS and OECD; ongoing work

to develop assessment criteria in:• licensing• disclosure• Investment • governance• Supervision• funding

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PRINCIPLES FOR THE REGULATION OF PRIVATE OCCUPATIONAL

PENSION SCHEMES

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Adequate regulatory framework

Principle N°1: An adequate regulatory framework for private pensions should be enforced in a comprehensive, dynamic and flexible way (taking into account the complexity of the schemes) in order to ensure the protection of pensions plans beneficiaries, the soundness of pensions funds and the stability of the economy as a whole. This framework should however not provide excessive burden on pensions markets, institutions, or employers.

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Appropriate regulation of financial markets

Principle N°2: A productive, diversified investment of retirement savings which spreads risk requires well-functioning capital markets and financial institutions. The development of advance-funded pension systems should go hand-in-hand with a strengthening of the financial market infrastructure and regulatory framework (including the development of new financial instruments and new markets such as inflation-indexed markets and the improved functioning of retirement annuity markets).

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Rights of the beneficiariesPrinciple N°3: Non-discriminatory access should be granted to private pensions schemes. Regulation should aim at avoiding exclusions based on age, salary, gender, period of service, terms of employment, part-time employment, and civil status It should also promote the protection of vested rights and proper entitlement process, as regard to contributions from both employees and employers. Policies for indexation should be encouraged. Portability of pensions rights is essential when professional mobility is promoted. Mechanisms for the protection of beneficiaries in case of early departure, especially when membership is not voluntary, should be encouraged.

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Adequacy of the private schemes

Principle N°4: Proper assessment of adequacy of private schemes (risks, benefits, coverage) should be promoted, especially when these schemes play a public role, through substitution or substantial complementary function to public schemes and when they are mandatory. Adequacy should be evaluated taking into account the various sources of retirement income (tax-and-transfer systems, advance-funded systems, private savings and earnings).

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Regulatory system and separation

Principle N°5: An institutional and functional system of adequate legal, accounting, technical, financial, and managerial criteria should apply to pensions funds and plans, jointly or separately, but without excessive administrative burden. The pension fund must be legally separated from the sponsor (or at least such separation must be irrevocably guaranteed through appropriate mechanisms).

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Funding

Principle N°6: Private schemes should be funded. While full-funding exists in principle for defined contribution plans, other types of plans should be subject to minimum funding rules or other mechanisms to ensure adequate funding of pension liabilities. Rules based on winding-up approach (e.g. ABO, PBO) may be promoted as a minimum level to complement the on-going approach. Flexibility can be allowed for temporary limited under-funding under restricted circumstances. Consideration should be given to the development of adequate but flexible requirements for minimum capital/guarantee in pension funds,-- taking account of the long term nature of their liabilities. Tax and prudential regulations should encourage a prudent level of funding. Private unfunded pay-as-you-go schemes at individual company level (i.e. overheads schemes) should be prohibited.

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Calculation Techniques

Principles N°7: Appropriate calculation methods for asset valuation and liabilities funding, including actuarial techniques and amortisation rules must be set up and based on transparent and comparable standards. Increased reliance on modern and effective risk management, industry-wide risk management standards for pension funds and other institutions involved in the provision of retirement income should be promoted. The development of asset liability management techniques should be given proper consideration.

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Supervisory structures

Principle N°8: Effective supervision of pension funds and plans must be set-up and focus on legal compliance, financial control, actuarial examination and supervision of managers. Appropriate supervisory bodies, properly staffed and funded, should be established in order to conduct when relevant off and on site supervision, at least for some categories of funds and in particular when problems are reported. Supervisory bodies should be endowed with appropriate regulatory and supervisory powers over individual plans, in order to prevent miss-selling cases arising from irregularities in the distribution and expenses methods.

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Self-supervision

Principle N° 9: Self-regulation and self-supervision should be encouraged. The role of independent actuaries, custodian services and internal independent supervisory boards should be promoted within an appropriate regulatory framework.

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Fair competition

Principle N°10: Regulation should promote a level playing field between the different operators and take account of the usefulness of a functional approach. The fair competition should benefit to the consumers and allow for the development of adequate private pensions markets

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Investment

Principle N°11: Investment by pension funds should be adequately regulated (see selected principles for regulation of investments by insurance companies and pension funds in Annex). This includes the need for an integrated assets/liabilities approach, for both institutional and functional approaches, and the consideration of principles related to diversification, dispersion, and maturity and currency matching. Quantitative regulations, and prudent-person principles should be carefully assessed, having regard to both the security and profitability objectives of pension funds. Self-investment should be limited, unless appropriate safeguards exist. Liberalisation of investment abroad by pension funds should be promoted, subject to prudent management principles.

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Insurance mechanisms

Principle N°12: The need for insolvency insurance and/or other guarantee schemes has to be properly evaluated. These mechanisms may be recommended in some cases but in an adequate framework. Recourse to insurance mechanisms (group and reinsurance) may be promoted.

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Winding-up

Principle N°13: Proper winding-up mechanisms should be put in place. Arrangements (including, where necessary, priority creditors’ rights for pension funds) should be put in place to ensure that contributions owed to the fund by the employer are paid in the event of his insolvency, in accordance with national laws.

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Disclosure and education

Principle N°14: Appropriate disclosure and education should be promoted as regards respective costs and benefits characteristics of pensions schemes, especially where individual choice is offered. Beneficiaries should be educated on misuse of retirement benefits (in particular in case of lump sum) and adequate preservation of their rights. Disclosure of fees structure, plans performance and benefits modalities should be especially promoted in the case of pensions plans that offer individual choice.

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Corporate governance

Principle N°15: The corporate governance role and capacity of pension funds should be considered. This includes: the role of guidelines (statutory or voluntary) for governance activities; the impact of shareholder activism by pension funds on corporate behaviour; and the governance of pension funds themselves and the role of trustees.