The Financial Services Regulatory Authority of Ontario is implementing a framework with core principals to help defined benefit pension plans avoid inappropriate risk-modelling strategies, said James Hoffner, the organization’s chief pension risk officer, during a conference on Monday.

“Pension plans aren’t banks, they’re not commercial enterprises that are going to go out of business. We’re not going to take a [bank] solvency approach to supervising these entities. Our lane is about their governance and risk management practices.”

The FSRA’s role isn’t to set investment strategy, nor is it to set risk appetite. “Our role is to assess whether the governance and risk management activities are appropriate and effective and meet the standard of care for those investments and risk appetites.”

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He referenced the Alberta Investment Management Corp.’s expansion of its volatility trading strategy that led to a $2.1 billion loss in 2020. “The problem was, at the time, the risk function had a legacy system that could not properly model the tail risk with this investment.”

While Hoffner noted the FSRA likely wouldn’t have been able to find deficiencies in the AIMCo’s model, he said an independent review process could have provided the regulator an informed view on risks and potential challenges. This process provides an opportunity for the FSRA to ask more specific questions about the timing of external reviews for investment models, the types of metrics it uses and which ones it relies on the most. It also allows them to have plans demonstrate their standards of care and risk management practices.

An open-door approach in which the FSRA seeks to engage with industry stakeholders on modern solutions for complicated problems can sometimes result in having to reassert their status as watchdog. “Each of these plans employs smart, hard-working people. Our job is to access and leverage that expertise.”

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