The Association of Canadian Pension Management is calling on the Office of the Superintendent of Financial Institutions to provide more detail on how pension plans can enhance their investment risk management strategies.
In an open letter responding to a consultation by the OSFI, Ric Marrero, chief executive officer of the ACPM, said while the paper draws on structures established by banks and insurance companies, the risks faced by pension plans are fundamentally different from those stand-alone institutions. He added the ACPM believes defined benefit pension plan sponsors currently undertake rigorous investment risk management.
“The nature of federal regulation of pension plans — including strict funding requirements — necessitates plans have robust governance and risk management practices. Plan sponsors are focused on providing sustainable plans over the long-term and guidance should leverage these practices.”
He noted the ACPM has already identified several key risk limits for pension plans, including funding and benefit security measures, such as going-concern or solvency ratios falling below certain levels; funding contributions or volatility exceeding certain levels or letter of credit limits being breached; and operational investment measures, such as asset mix limits, credit quality, leverage limits and liquidity risks.
While the paper focuses on investment risks in isolation, risk management should be viewed holistically, particularly as asset-liability mismatch risk is the biggest risk most DB pension plans face, said Marrero. “The only mention of this risk is in the reference to asset/liability modelling where the survey findings showed widespread application.”
And while the paper identified four areas where investment risk management practices could be strengthened and regulatory guidance enhanced, he said it doesn’t discuss the evidence on which those findings were constructed, nor does it outline what measures were taken, if shortcomings were identified for specific plans, using the current regulatory guidance. “Without further background, it is unclear what problem the paper is trying to solve. Having more background on the findings and their consequences could enhance our feedback.”