Integrating oversight of banks, insurers, and pension sector puts regulator in good stead to prepare for clouds ahead
The uncertainty and volatility of the past few years can make meeting long-term expectations challenging for regulators and those in the pension and benefits sector. As the regulator responsible for overseeing around 1,200 federal private pension plans, we always need to find the right balance of protecting beneficiaries and allowing plan administrators to make informed and reasonable decisions. We have a shared obligation to the best interests of members and beneficiaries.
The Office of the Superintendent of Financial Institutions (OSFI) has been intentional in speaking about the risks on the horizon for the financial sector and the pension sector is not immune given how closely linked these risks are to the performance and management of pension plans.
Integrated Regulator
With more volatile, complex, inter- related, and existential risks impacting the financial system, we all need to make a choice. We could stay the course and take our chances with these risks, or we can adapt ourselves with agility to do what we can to achieve the same level of confidence in a system that we have enjoyed. OSFI has a history of not being complacent and our choice is clear – we’ve chosen to adapt and have already begun our transformation.
Through a more transparent approach we have repositioned our institution and structured our organization to reflect the challenges that we see on the horizon. This includes integrating pension supervision within the broader supervision sector that includes oversight of banks and insurers. While the needs and profiles of the institutions and pension plans differ, the shared understanding and management of the risks will benefit from this integration. We recently released our first Annual Risk Outlook to share our views on the clear and present risks to financial sector resilience. We see the benefit of enhanced transparency through open and frank dialogue as a path to producing more efficient and effective regulatory and supervisory outcomes. Our goal with these efforts is to enhance resilience of the institutions and pension plans we oversee and the public’s confidence in Canada’s financial system.
Our outlook describes seven key risks and our regulatory and supervisory actions to address them in the coming year. Regulators, institutions, and pension plans all have an opportunity and where risks demand change, there is an obligation to adapt practices to preserve individual resilience. While scope of risks and the pace of change can be daunting, our man- date guides our focus.
There are fewer, if any, more existential risks than climate change. Climate change can drive more traditional risks, including investment (e.g. credit and market) risks. Taking action to understand and mitigate these risks is necessary if we wish to continue to have a safe and sound financial system.
Our previous work with the Bank of Canada shows the potential economic disruption of a disorderly transition to a low-carbon economy if we delay our actions. Looking at Box 3 of that report is a clear call to action for those connected to the financial sector.
The risks we all face will only be mitigated if we pursue actions together. Plan administrators, employers, standard setters, and even pension plan members are considering actions now that will determine the speed and direction of how well-prepared and resilient they will be in the future.
OSFI’s planned work and actions in the coming year include broadening engagement with partners inside and outside of the traditional financial industry both in Canada and abroad. For example, OSFI is a member of the Canadian Association of Pension Supervisory Authorities (CAPSA) whose mandate is to facilitate an efficient and effective pension regulatory system in Canada. It develops practical solutions and guidance to further the co-ordination and harmonization of pension regulatory principles across Canada. Given that all pension plans are exposed to the same risks, OSFI supports guidance for risk management approaches that are more effectively delivered in a collaborative way, through CAPSA. This results in a more secure, harmonious, national approach to pension risk management practices and supervision.
Develop Guidelines
OSFI participates on several CAPSA committees, including work on environmental, social, and governance (ESG) considerations; cybersecurity; and leverage. This work helps develop guidelines that improve pension plan administration and support pension plan administrators in meeting their fiduciary duty, while enhancing the protection of pension plan members across Canada. CAPSA is expecting to launch draft guidance for consultation in the areas of ESG, cybersecurity, and leverage in the late spring.
On March 17, OSFI released a consultation paper on pension investment risk management for consultation. The paper introduces principles for the management of investment risk that OSFI believes are relevant for federally regulated pension plans. Stakeholder feedback received during the consultation period will inform the development of OSFI or CAPSA guidance.
What we are all striving to achieve is a way to manage risks successfully so that we can meet our obligations, whether we are plan administrators, plan sponsors, or regulators. Our forward-looking approach, revised structure, and transparent plans are an invitation to contribute to a future that we can rely on.
Tamara Demos is the Managing Director of the Private Pension Plans Division at the Office of the Superintendent of Financial Institutions.
