Supervision of Supervision of Private Pension Private Pension

Systems with a Large Systems with a Large Number of FundsNumber of Funds

Richard HinzRichard Hinz

U.S. Department of LaborU.S. Department of Labor

April 2002April 2002

Basic Functions of Basic Functions of Regulation & SupervisionRegulation & Supervision

• Rules Defining the Structure Rules Defining the Structure and Organization of Fundsand Organization of Funds

• Requirements for the Requirements for the Operation of FundsOperation of Funds

• Authority for Supervision, Authority for Supervision, Sanctions & Remedial ActionSanctions & Remedial Action

Structure of Pension FundsStructure of Pension Funds

• Licensing of Fund Licensing of Fund OperatorsOperators

• Governance of FundsGovernance of Funds• Capital and ReservesCapital and Reserves• Segregation of AssetsSegregation of Assets• Custody of AssetsCustody of Assets

Operation of Pension FundsOperation of Pension Funds

• Investment GuidelinesInvestment Guidelines• External Audit RequirementExternal Audit Requirement• Reporting and DisclosureReporting and Disclosure• Limits on Fees and ExpensesLimits on Fees and Expenses• GuaranteesGuarantees

Characteristics of Characteristics of EnvironmentEnvironment

• Occupational based arrangementsOccupational based arrangements• Voluntary system with high degree of Voluntary system with high degree of

flexibility and variationflexibility and variation• Substantial tax incentivesSubstantial tax incentives• Minimal entry barriersMinimal entry barriers• Procedural (prudent person) frameworkProcedural (prudent person) framework• Highly developed and regulated financial Highly developed and regulated financial

marketsmarkets• Multiple levels of financial intermediationMultiple levels of financial intermediation

Basic Strategies Basic Strategies Associated with Large Associated with Large

Numbers of FundsNumbers of Funds• Reliance on deterrenceReliance on deterrence• Leverage limited resourcesLeverage limited resources• Focused Agenda - Strategic Case Focused Agenda - Strategic Case

SelectionSelection• Voluntary Compliance & AssistanceVoluntary Compliance & Assistance• Mandatory Indemnification/InsuranceMandatory Indemnification/Insurance• Outcome oriented measurement and Outcome oriented measurement and

evaluationevaluation

Credible DeterrenceCredible Deterrence

• Comprehensive Reporting StructureComprehensive Reporting Structure– Periodic Financial and Operating ReportsPeriodic Financial and Operating Reports– Individual Accounts Balance and BenefitsIndividual Accounts Balance and Benefits– Public Disclosure of ReportsPublic Disclosure of Reports– Reporting Enforcement ProgramReporting Enforcement Program– Automation of Reported Data Automation of Reported Data

• Consistent Application of SanctionsConsistent Application of Sanctions• Publicize Enforcement ActionsPublicize Enforcement Actions

Leverage Limit ResourcesLeverage Limit Resources

• Cooperative/Referral Arrangements With Cooperative/Referral Arrangements With Other Authorities (Banks, Insurance, Other Authorities (Banks, Insurance, Securities Markets)Securities Markets)

• Focus on Major Service Providers/Financial Focus on Major Service Providers/Financial Institutions to Multiply Access to FundsInstitutions to Multiply Access to Funds

• Utilize Independent Auditors to Identify Utilize Independent Auditors to Identify Potential ProblemsPotential Problems

• Facilitate Public Access to Supervisor to Facilitate Public Access to Supervisor to Enhance Case Identification and SelectionEnhance Case Identification and Selection

Strategic Agenda SettingStrategic Agenda Setting

• Annual Identification of Major IssuesAnnual Identification of Major Issues• Rotating Focus Specific Issues to Rotating Focus Specific Issues to

Maximize ImpactMaximize Impact• Coordinate Agenda With Regulatory Coordinate Agenda With Regulatory

Issues and Broader Market ConditionsIssues and Broader Market Conditions

Technical Assistance & Technical Assistance & EducationEducation

• Outreach and Technical Assistance Outreach and Technical Assistance to Prevent Violations of Standardsto Prevent Violations of Standards– Publications and Seminars Publications and Seminars – Internet Based ResourcesInternet Based Resources

• Strategic Partnerships With Strategic Partnerships With Relevant Industry GroupsRelevant Industry Groups

• Participant Education of RightsParticipant Education of Rights

Voluntary ComplianceVoluntary Compliance

• Structured Program of Voluntary Structured Program of Voluntary Agreements/SettlementsAgreements/Settlements

• Incentives for Self Correction of Incentives for Self Correction of ViolationsViolations– Relief from Monetary PenaltiesRelief from Monetary Penalties– Waiver of Admission of Violations in Waiver of Admission of Violations in

Specifically Defined Circumstances Specifically Defined Circumstances

• Cohesive Program to Publicize Imposition Cohesive Program to Publicize Imposition of Sanctionsof Sanctions

Indemnification and Indemnification and InsuranceInsurance

• Mandatory Bonding or Mandatory Bonding or Prudential/Fiduciary InsurancePrudential/Fiduciary Insurance

• Required Involvement and Liability Required Involvement and Liability for Custodians and Auditorsfor Custodians and Auditors

• Knowing Participation and Joint Knowing Participation and Joint liability Standardsliability Standards

• Access to “Deep Pockets”Access to “Deep Pockets”

Outcome Measurement & Outcome Measurement & EvaluationEvaluation

• Outcome Rather Than Process Oriented Outcome Rather Than Process Oriented Performance ObjectivesPerformance Objectives

• Integrated Strategic Planning and Integrated Strategic Planning and Outcome EvaluationOutcome Evaluation

• Sampling and Inferential Methods to Sampling and Inferential Methods to Establish Baseline & Intervention ImpactsEstablish Baseline & Intervention Impacts

• Alignment of Management Evaluation and Alignment of Management Evaluation and Incentives With Strategic Objectives Incentives With Strategic Objectives

Some Formidable Some Formidable ChallengesChallenges

• Political Acceptance Of the Inability Political Acceptance Of the Inability To Address All ViolationsTo Address All Violations

• Resource Rationing DecisionsResource Rationing Decisions• Sustaining Strategic ObjectivesSustaining Strategic Objectives• Policy Consistency Over TimePolicy Consistency Over Time• Reconciling Conflicts With Other Reconciling Conflicts With Other

Regulated SectorsRegulated Sectors