IOPS Principles
The International Organisation of
Pension Supervisors’ (IOPS) principles aim to strengthen the stability,
security, and good governance of pension funds, alongside protecting interests
of both pension fund members and beneficiaries.
The supervision of private pension
funds involves supervising entities providing retirement benefits and promoting
participation in systems related to the structure and operation of pension
funds.
Principle 1: Objectives
1.1 The principal strategic
objectives of the pension supervisory authority should be clearly and publicly
specified. They should include a focus on the protection of pension members and
beneficiaries’ interests. Objectives should also be directed towards the
stability and security of pension funds and plans, the sustainability of the
pension sector as a whole, the promotion of good governance and the
encouragement of pension provision.
1.2 The responsibilities of the
pension supervisor should be clearly and objectively stated, giving a clear
mandate and assigning specific duties.
Principle 2: Independence
2.1 The pension supervisory
authority should have operational independence from both political authorities
and commercial interference in the exercise of its functions and powers.
2.2 To ensure independence,
stability and autonomy are particularly required at the senior director level
of the pension supervisory authority. The nomination, appointment and removal
of the head of the pension supervisory authority should be done via explicit
procedures and transparent mechanisms. The head of the authority is usually
appointed for a fixed term (normally between 3-6 years) with subsequent
reappointment allowed (in order to retain skilled practitioners).
2.3 The pension supervisory
authority should also be funded in such a way as to ensure independence and
there should be a transparent budgetary process.
2.4 Supervisory acts, including
the use of enforcement and sanction powers, should be over-ruled only by
judicial decision, including tribunals with relevant powers, or by
parliamentary process.
Principle 3: Adequate Resources
3.1. Pension supervisory
authorities should be granted adequate staff and access to resources.
3.2 The pension supervisory
authority should have its own budget sufficient to enable it to conduct
proportionate, effective and independent supervision. Funding, in part or in
full, of the pension supervisory authority by supervised pension funds or plans
could be considered, provided independence is maintained. Where fees are
charged, the fee structure should be transparent.
3.3 The pension supervisory
authority should hire, train and maintain sufficient staff with high
professional standards and expertise, including appropriate standards of
confidentiality and disclosure .
3.4 The directors, head of the
authority and senior management should be suitably qualified, with sufficient
education, experience, capacity and reputation.
3.5 If its own capacities are
insufficient, or for other reasons deemed necessary, the pension supervisory
authority should have the authority to outsource supervisory tasks to third
parties (e.g. auditors, actuaries), or to second (‘borrow’) staff with
appropriate experience to work internally – though the supervisory authority
remains responsible for the supervisory process and decisions. Where pension
supervisory functions are outsourced to third parties, the pension supervisory
authority should be able to ensure they maintain the required level of
confidentiality, assess their competence, monitor their performance and ensure
their independence from the pension fund or any other related parties in order
to avoid conflicts of interest. If required, the pension supervisory authority
must have the ability to take actions against these third parties either
directly or through the appropriate professional body. Decision making and the
application of sanctions, within the scope of the pension supervisor, should
not be outsourced.
Principle 4: Adequate Powers
4.1. Pension supervisory
authorities should be legally empowered to undertake supervision and should be
granted adequate powers and the capacity to exercise these powers.
4.2 The pension supervisory
authority should have the power to conduct necessary supervisory functions,
according to the nature of the pension system being supervised. Effective
supervision of pension funds or plans should focus on legal compliance,
financial soundness and control, minimum capital requirements, investment
activity, good governance and integrity, actuarial examination, the supervision
of pension plan or fund managers, and the provision for adequate disclosure of
information to members. Powers should allow for relevant off-site and on-site
inspection.
4.3 Pension supervisory
authorities should have comprehensive investigatory and enforcement powers. The
legal framework that defines conditions and circumstances under which the
pension fund supervisor must intervene should be flexible enough to enable the
pension supervisor to undertake preventative, protective or punitive actions.
4.4 The pension supervisory
authority should have the power to conduct a full investigation when a problem
is suspected or observed, obliging funds and other relevant parties (such as
asset managers, custodians, auditors) to make documents and information
available. Necessary powers include the ability to impose corrective measures
and remedial actions if the authority’s orders are not carried out. The scope
of the powers may extend to the power to impose administrative sanctions such
as fines, to direct management, to revoke licences and to refer matters for
criminal prosecution. In some cases, powers may include the ability to issue
binding regulation.
4.5 The pension supervisory
authority should have clear and well-defined strategic supervisory goals for
the use of intervention, enforcement and sanction powers, clearly establishing
whether the goal of their action is preventative, protective or punitive and
use the appropriate tools and powers accordingly. The supervisory authority
should have a coherent, well thought-out policy for deciding on the mix of
supervisory tools adopted and the ability to adapt this approach to changing
circumstances.
4.6 A sufficient gradation of
powers is required to enable the supervisory authority to tailor its response
accordingly and sufficiently punitive powers are needed to enforce action.
4.7 Though not all powers may be
used ‘actively’, the supervisory authority should still have certain powers
either to use in exceptional circumstances – thereby avoiding what could be
time consuming delays in dealing with other supervisory authorities – or, by
acting as a deterrent, serving to modify the behaviour of supervised entities.
4.8 Pension supervisory
authorities should have the power to take exceptional measures, if needed, in
times of acute financial and economic difficulty and /or volatility (for
example increasing reporting requirements, strengthening stress tests, or
temporarily suspending certain regulatory or supervisory requirements which may
have a pro-cyclical, adverse impact on financial markets in the short-term).
Principle 5: Risk-based
Supervision
5.1 In order to use their
resources efficiently, pension supervisory authorities should adopt a
risk-based approach, and a suitable risk-assessment methodology should be
established.
5.2 The move towards risk-based
supervision can be undertaken gradually, combining this technique with more
traditional rules-based supervision as the supervisory authority and pension
industry develop the necessary expertise.
5.3 The introduction of
risk-based supervision should be seen as a movement along a continuum from one
extreme of complete reliance on a rules -based system to one where the emphasis
of supervision is a function or risk. Risk-based supervision does not mean
having no rules or compliance procedures.
5.4 A legal framework allowing
suitable discretion in terms of interpretation and exercise of supervisory
powers is required, which should also provide pension supervisory authorities
with the necessary powers to adopt a risk-based approach.
5.5 Staff reorganization and
training, in terms of the philosophy as well as the process of risk-based
supervision, should be undertaken as the transition to the new approach takes
place.
5.6 The Pension supervisory
authority should communicate its risk-based approach to the pension industry,
explaining what is expected of them – particularly in relation to
risk-management – via guidance notes and possibly providing training.
5.7 Risk-based supervision will
require different types of information, which the pension supervisory authority
should obtain from existing sources where possible. Where specific supervisory
returns are required they should be designed with care and focused on obtaining
information regarding the main risks which the pension supervisory authority is
concerned with.
5.8 Where quantitative risk
assessment tools are used, the models involved should be carefully designed and
their limitations fully understood.
5.9 Risk-scoring models should
reflect the risk-focus of the pension supervisory authority (which is driven by
its objectives and resources), and the net risk of relevant individual entity
and systemic risk factors. These factors should be suitably weighted according
to the nature of the pension system (including the size and number of pension
fund overseen), and a risk-score derived from the probability and impact of
their occurrence.
Principle 6: Proportionality and
Consistency
6.1 A logical connection should
be made between the results of the risk assessment undertaken by the pension
supervisory authority and its actions (for example through the use of a
supervisory response matrix).9 The remedial actions and if necessary sanctions
imposed by the pension supervisory authority should be proportional to the
amount of risk posed by the fund to its members and beneficiaries and the
pension system as a whole – taking into account the nature, scale, complexity
and seriousness of the potential compliance irregularities relating to the
relevant party – and should represent the most efficient use of supervisory
resources. 10 The long –term nature of pension funds should be taken in
consideration and unnecessary pro-cyclical behaviour should be avoided.
6.2 The extent of supervisory
demands placed on pension funds or plans and associated parties being
supervised should be in accordance with the value expected to be derived.
During the decision making process, a balance should be struck between the
potential benefits of the supervisory action and the costs and impact on
pension fund members and beneficiaries and, where appropriate, plan sponsors.
6.3 Once a problem is identified,
a clear and well-defined ‘due process’ should be followed. Due process
describes the checks and balances that a supervisory authority should have in
place to ensure that supervised entities are treated fairly, consistently and
transparently.
6.4 To ensure proportionality,
requirements should be set out in legislation, secondary regulation or detailed
industry guidance (outlining various circumstances and risk as well as the
associated intervention measures). Appropriate documentation, guidance and
examples should be regulated or provided to staff.
6.5 Subject to the availability
of regulatory and administrative powers and measures, the response should be
escalated appropriately to achieve the desired regulatory objectives. Depending
on the nature, scale and complexity of the problem detected, a graduated
response or exceptional measures should be adopted.
6.6 In fulfilling its supervisory
powers, the pension supervisory authority should give pension funds and plans
flexibility, where appropriate, in the way they achieve compliance with
regulatory requirements.
6.7 Supervisory decisions and intervention
should be consistent (both horizontally between pension funds and vertically
over time), taking appropriately into account circumstances of each individual
case. Supervisors should have well-documented procedures (for example,
documentation, training, peer review, specialist team reviews and/or senior
oversight) for ensuring that similar decisions are taken in similar
circumstances and that these decisions are taken on objective and unbiased
grounds.
Principle 7: Consultation and
Cooperation
7.1 The pension supervisory
authority should consult, as appropriate, with the pensions sector when
determining its approach to supervision.
7.2 The pension supervisory
authority should be empowered to exchange information with other relevant
supervisory authorities, subject to legal and confidentiality requirements.
This includes cooperation with other authorities or departments involved in
pension supervision (for example conduct of business supervisors) both
nationally and internationally (particularly where cross-border pensions are
involved), as well as with authorities supervising other relevant financial
institutions or markets and law enforcement agencies. Cooperation should be for
both efficiency purposes (avoiding overlaps and promoting economies of scale
and scope) as well as promoting pro-active preventative measures (e.g. tackling
financial crime).
7.3 Pension supervisory
authorities should ensure that intensified, coordination between financial
sectors and internationally takes place when necessary and particularly during
periods of economic difficulty and financial system volatility, though
confidentiality requirements should be met.
Principle 8: Confidentiality
8.1 The pension supervisor should
only release confidential information if permitted by law (with fines or even
prison sentences imposed for breaches). Staff should be bound by internal codes
of confidentiality, -also after leaving the authority.
8.2 IT systems used by
supervisors should include limited access restrictions to protect
confidentiality and special care should be taken regarding the security of the
supervisory authority’s database for reasons of effective data protection.
8.3 The supervisory authority
should publish its policy on how confidential information will be treated. A
suitable balance should be struck between conduct of business supervision
(where disclosure can be used to influence the behavior of the supervised
community), prudential supervision (where confidentiality is important to
protect the interests of particular supervised entities), and system integrity,
according to the nature of the pension system.
8.4 The pension supervisor, in
regard to non-public information, should, when requested by the providing
authority, keep information confidential and maintain appropriate safeguards
for the protection of confidential information within its possession.
8.5 Where unsure of the status of
the information, the supervisory authority should treat it as confidential if
not publicly available or should check the status with the provider.
8.6 Only if agreed by the
providing authority, the receiving supervisory authority may pass on
confidential information to other supervisory bodies or law enforcement
agencies provided they have legitimate supervisory interests and equivalent
confidentiality protection standards.
8.7 Where staff transfer between
the supervisory authority and the private sector, mechanisms should exist to
ensure the protection of confidential information.
8.8 Third parties to whom the
pension supervisory authority has outsourced supervisory tasks should be
subject to the same confidentiality requirements as the staff of the pension
supervisory authority itself.
Principle 9: Transparency
9.1 Pension supervisory
authorities should adopt clear, transparent and consistent supervisory
processes. The rules and procedures of the pension supervisory authority, and
updates thereof, should be published. The pensions supervisory authority should
generally operate in a transparent environment and should provide and publish a
regular report – at least annually and in a timely manner – on the conduct of
its policy, explaining its objectives and describing its performance in
pursuing those objectives.
9.2 The pension supervisory
authority should be subject to regular audit and reporting requirements which
allow for the assessment of how well the authority is fulfilling its
responsibilities and ensuring the mandate and functions of the pension
supervisory authority cannot be changed on an ad hoc basis.
9.3 Where appropriate, the broad
outlines of any supervisory response framework (such as an enforcement
pyramid)12 should be made public by the supervisory authority, so that its
actions are well understood by supervised entities and not unexpected.
9.4 When directing or replacing
the management of pension funds or plans pension supervisory authorities should
explain and give due notice of the reasons for the supervisory action.
9.5 A transparent information
disclosure mechanism and timely publication of intervention and sanction
decisions, where appropriate, should be in place, subject to relevant
confidentiality requirements.
9.6 Pension supervisory
authorities should provide and publish clear and accurate information for the
pension industry and the general public on a regular basis – such as the
financial situation of the pension fund industry and observations on major
developments in the pension sector. Disclosure will generally be on an
aggregate basis, but could also be on individual pension funds, in which case
the rules of confidentiality may be particularly relevant.
Principle 10: Governance
10.1 Supervisory authorities
should establish and operate sound governance practices in order to maintain
credibility and moral authority to promulgate good practices in the entities
under their supervision.
10.2 Pension supervisory
authorities should be overseen by a governing board of a manageable size. The
remuneration of the senior executives of the authority may be published for
transparency.
10.3 The pension supervisory
authority should establish and adhere to a governance code, outlining suitable
internal controls, checks and balances, and effective processes for risk and
performance management. A code of conduct should be established and enforced in
relation to all staff members.
10.4 An internal audit should be
considered good practice for pension supervisory authorities, which reviews the
consistency and transparency of the decision making process, the effectiveness
of risk management practices and the efficiency and propriety in the use of
resource. These internal audits should be carried out as part of the legal and
functional oversight of the supervisory authorities and their findings should
be presented to the governing board, overseeing (parent) ministry or other
statutory authority.
10.5 There should be clearly
documented procedures for decision-making, with processes for referring
decisions up to the appropriate level of seniority, reviewing and documenting
decisions.
10.6 For interventions with
serious impact there should be some separation between those within the
authority proposing interventions and those taking the final decision, so the
scope for emergency action is balanced by a review process.
10.7 As part of good governance
practices, pension supervisory authorities should monitor their own performance
using a range of measures.
10.8 Pension supervisory
authorities should be clearly accountable for their general conduct and
activity through accountability arrangements, which will vary according to
specific country circumstances and which may include accountability to a range
of bodies, from parliament or head of state, Ministry of Finance to the members
and beneficiaries of pension funds or plans.
10.9
Pension supervisory authorities should be subject to an external audit by a
state or independent audit institution.
