Office of the Superintendent of Financial Institutions
May 13, 2021
Thank you very much to Ric [Marrero, ACPM CEO] and the Association of Canadian Pension Management for inviting me to speak today.
As Superintendent of Financial Institutions, my job is primarily to worry—to worry about what could go wrong.
That’s why we at OSFI focus so much of our effort on proactive measures to prevent or mitigate the financial harm from possible shocks affecting the financial sector. And fortunately, those measures have served us well through the very turbulent times of the COVID-19 pandemic.
Now, being proactive does not imply an ability to predict the future. As I sometimes say, I’m in the prevention business, not the prediction business.
What OSFI does is to use its legislative authority to ensure that the organizations we supervise understand and properly manage the risks they face now, and could reasonably face in the future. In short, we focus on preventing financial harm to pension plan members by promoting sound risk management and planning.
In keeping with that, we expect pension plans to implement measures that foster resilience to risk, including properly diversified and prudent investment portfolios, strategies for dealing with longevity risk and demographic changes, and robust business continuity plans and defenses against cyber-risk.
You have asked me here today to give my perspective on some very big themes—perfectly understandable, given the year we’ve had. I’m happy to do this, informed by my role as Superintendent of Financial Institutions and by OSFI’s mandate.
Let’s start by taking a high-level look at risk management as practiced by pension plans today. We see many defined benefit (or DB) pension plans expanding their range of investments and adopting more complex investment approaches.
Of course, an important driver of this trend is the persistent low interest rate environment. And this trend has been reinforced by the deepening of private markets, the growing use of complex techniques and the greater availability of so-called alternative investment vehicles.
This increased complexity means that investment risk management practices are in the spotlight too—as they should and must be, in order for plan administrators to fulfil the legislative obligations and fiduciary duty that they owe to plan members.
We believe that a greater focus on prudent management of investment risk can help raise the bar for risk management in the pension sector and better prepare it for future shocks and adverse events.
That’s why, over the last year, OSFI has examined pension plan investments using the expertise of our Private Pension Plans Division, as well as some of our staff who are usually involved in supervising banks and insurance companies. We’ve found real value in bringing a broader range of perspectives and experiences to bear on our work on pensions.
We are currently working on regulatory guidance for pension plans on investment risk management and risk governance that will reflect what we learned through this review and collaboration. I hope and expect that we’ll have more to share with you about this work later this year.
Now, let’s get a bit more granular, and look at climate-related risks more specifically. In case it needs saying, OSFI’s role vis-a-vis climate risk matches our role for any other form of risk in pension plans: to ensure the security of members’ benefits by administering the legislation designed to achieve that goal.
In that spirit, in January of this year we issued a discussion paper on climate-related risks in the financial sector. We outlined our preliminary ideas on how federally regulated financial institutions and pension plans should look at climate risk, and encouraged others to share theirs.
For pension plans, the focus is very much on how climate risk, including the transition risk that arises as we move to a lower-carbon economy, could affect pension plans’ investment portfolios. Any climate risk guidance for pension plans put forward by OSFI will be developed with this context in mind.
Critical to that context is plan administrators’ fiduciary duty to invest assets prudently and in the best interests of members. And we believe that considering climate risks that could materially affect an investment risks and returns is fully consistent with that fiduciary duty.
My view is that for pension plans, transition risks will be the most relevant form of climate risk. These risks stem from the largely policy-driven changes that will accompany and promote the move to a low or zero greenhouse-gas economy. That said, even in the face of these risks, the use of passive investment strategies may still be appropriate for pension plans in some circumstances.
Another issue that we are working on relates to the choice and design of employer-sponsored pension plans. We tend to focus on defined benefit plans as a prudential regulator, because the legislation that we administer places extensive requirements on defined benefit, or DB, plans.
But we recognize that Canadians who don’t participate in DB plans are just as deserving of a sound structure to support their retirement as anyone else. And we are well aware that virtually all the growth in registered pension plan membership in recent years has been in defined contribution, or DC, plans.
That’s why OSFI and the Financial Services Regulatory Authority of Ontario (FSRA) established a special purpose technical advisory committee to look at improving outcomes for members of defined contribution plans last December. We are examining options for addressing key risks for DC plans, reducing the regulatory burden associated with DC plans, and developing an updated approach to regulating DC plans.
Given that most members of the advisory committee agreed that DC plans provide better member outcomes for retirement savings than non-registered options such as group RRSPs, OSFI and FSRA are considering whether there are things we can do within our mandates to improve the situation for DC plans and make them more attractive to members and employers alike.
Further information on this committee as well as meeting summaries to date are available at the Pension Plans section of OSFI’s website.
In preparing for today’s event, I was asked to consider what parting words I might have for the pension industry. It brought to mind the advice I was given when I first became Superintendent of Financial Institutions, and sought out the counsel of those who’d served in the role before me.
One former Superintendent advised me that “something” would undoubtedly happen during my term. I wouldn’t know what that “something” would be, nor would I get much if any warning before it arrived.
I offer you the same advice: “something” will happen, something that you will feel that you couldn’t reasonably have predicted.
You won’t know what that event will be—its exact form or magnitude will be a mystery until you are in the thick of it. But what you can do is be prepared. Take appropriate action now to mitigate the risks and potential harm from “the unknown”. Model different scenarios to try to understand more about what
might happen. And implement sound practices and policies to ensure continuity of your operations and protection of members’ benefits.