IOPS Principles
The IOPS principles, a cornerThe IOPS principles, a cornerstone in the pension sector, are designed to fortify the stability, security, and good governance of pension funds. They serve as a shield, protecting the interests of both pension fund members and beneficiaries, while upholding the values of transparency and confidentiality.
Private pension fund supervision involves entities providing retirement benefits and promoting participation in systems related to the structure and operation of pension funds.
Principle 1: Objectives
1.1 The pension supervisory authority’s principal strategic objectives should be clearly and publicly specified. They should focus on protecting pension members’ and beneficiaries’ interests. The 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 pension supervisor’s responsibilities should be clearly and objectively stated, with a clear mandate and specific duties assigned.
Principle 2: Independence
Independence is a cornerstone of effective pension fund supervision. The pension supervisory authority should operate free from political pressures and commercial interests, ensuring its decisions are based solely on the best interests of the pension sector.
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 (generally between 3-6 years), with subsequent reappointment allowed (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 enforcement and sanction powers, should be overruled only by judicial decisions, including tribunals with relevant powers, or by parliamentary process.
Principle 3: Adequate Resources
For effective supervision, pension supervisory authorities should be granted adequate staff and resource access. This ensures they have the necessary tools to conduct proportionate, effective, and independent supervision.
3.2 The pension supervisory authority should have a sufficient budget 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 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 to avoid conflicts of interest. If required, the pension supervisory authority must be able to act 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. Adequate 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 plans 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 be able to conduct a full investigation when a problem is suspected or observed, obliging funds and other relevant parties (such as asset managers, custodians, and auditors) to make documents and information available. Necessary powers include imposing 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, direct management, revoke licenses, and refer matters for criminal prosecution. In some cases, powers may include the ability to issue binding regulations.
4.5 The pension supervisory authority should have clear and well-defined strategic supervisory goals for using intervention, enforcement, and sanction powers. They should clearly establish 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; 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 behavior 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 specific 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 Pension supervisory authorities should adopt a risk-based approach and establish a suitable risk-assessment methodology to use their resources efficiently.
The shift towards risk-based supervision is a journey, not a sudden leap. It can be embraced gradually, blending this approach with more traditional rules-based supervision as the supervisory authority and pension industry cultivate 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 interpretation and exercise of supervisory powers is required. This framework 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 and 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 concerning 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 necessary, they should be designed carefully and focused on obtaining information regarding the main risks to which the pension supervisory authority is concerned.
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), as well as the net risk of relevant individual entities 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 funds 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 risk assessment results undertaken by the pension supervisory authority and its actions (for example, through 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 into consideration, and unnecessary pro-cyclical behavior should be avoided.
6.2 The extent of supervisory demands placed on pension funds or plans and associated parties being supervised should be per 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, as well as, 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 a supervisory authority should have to ensure 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 risks and the associated intervention measures). Appropriate documentation, advice, 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, to 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 the circumstances of each case. Supervisors should have well-documented procedures (for example, documentation, training, peer review, specialist team reviews, and/or senior oversight) to ensure that similar decisions are made in similar circumstances and that these decisions are made 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, the conduct of business supervisors) nationally and internationally (mainly where cross-border pensions are involved) and 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) and fostering proactive preventative measures (e.g., tackling financial crime).
7.3 Pension supervisory authorities should ensure that intensified coordination between financial sectors and internationally occurs when necessary, 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 the law permits (with fines or even prison sentences imposed for breaches). Internal codes of confidentiality should bind staff 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 adequate data protection.
8.3 The supervisory authority should publish its policy on treating confidential information. According to the nature of the pension system, a suitable balance should be struck between the conduct of business supervision (where disclosure can be used to influence the behavior of the supervised community), prudential supervision (where confidentiality is essential to protect the interests of particular supervised entities), and system integrity.
8.4 The pension supervisor should keep non-public information confidential and maintain appropriate safeguards for protecting it when requested by the providing authority.
8.5 If the supervisory authority is unsure of the status of the information, it should treat it as confidential if not publicly available or check the status with the provider.
8.6 If the providing authority agrees, the receiving 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 Mechanisms should exist to protect confidential information when staff transfers between the supervisory authority and the private sector.
8.8 Third parties to whom the pension supervisory authority has outsourced supervisory tasks should be subject to the exact confidentiality requirements as the authority’s staff.
Principle 9: Transparency
9.1 Pension supervisory authorities should adopt clear, transparent, consistent supervisory processes. The rules and procedures of the pension supervisory authority and updates thereof should be published. The pension supervisory authority should generally operate in a transparent environment. It should provide and publish a regular report—at least annually and promptly—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 ensure that the mandate and functions of the pension supervisory authority cannot be changed on an ad hoc basis.
9.3 Where appropriate, the supervisory authority should make the broad outlines of any supervisory response framework (such as an enforcement pyramid)12 so supervised entities cannot unexpectedly well understand its actions.
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 regularly provide and publish clear and accurate information for the pension industry and the general public, such as the financial situation of the pension fund industry and observations on significant 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 confidentiality rules may be particularly relevant.
Principle 10: Governance
10.1 Supervisory authorities should establish and operate sound governance practices 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 manageable size. The remuneration of the authority’s senior executives 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 risk and performance management processes. A code of conduct should be established and enforced for 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 resources. 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 documented procedures for decision-making, with processes for referring decisions up to the appropriate level of seniority, reviewing and reporting decisions.
10.6 For interventions with profound impact, there should be some separation between those within the authority proposing interventions and those taking the final decision, so a review process balances the scope for emergency action.
10.7 As part of good governance practices, pension supervisory authorities should monitor their performance using various measures.
10.8 Pension supervisory authorities should be accountable for their general conduct and activity through accountability arrangements, which will vary according to specific country circumstances and may include accountability to a range of bodies, from parliament or the head of state and the Ministry of Finance to the members and beneficiaries of pension funds or plans.
Related sites
- Organization for Economic Co-operation and Development
- International Organisation Of Pension Supervisors
