OSFI Summarizes Responses to its Pension Investment Risk Management Consultation Paper

Type of publication: Letter
Date: October 13, 2022
To: Federally Regulated Pension Plan Administrators and Pension Industry Stakeholders

On March 17, 2022, OSFI released a consultation paper entitled Pension Investment Risk Management. In this consultation paper, OSFI sought feedback on principles and regulatory expectations for the management of investment risk relevant for federally regulated pension plans.

OSFI received feedback on its consultation paper from 20 respondents, including plan administrators, industry and professional associations and interested organizations. OSFI thanks those who submitted comments.

Summary of Feedback to the Consultation Paper

Respondents provided valuable feedback on the four areas targeted by the consultation paper: independent risk oversight function, risk appetite and risk limits, comprehensive portfolio and risk reporting, and enhanced valuation policies and processes.

There was general agreement that any new OSFI guidance be principles-based. It was noted that some of the solutions identified may be overly prescriptive, particularly for smaller pension plans. In addition, certain respondents indicated that, in their view, pension plans are already managing risk well with existing governance structures, while others were supportive of the approaches outlined in the consultation paper.

Respondents broadly expressed support for the concept of proportionality in addressing investment risk. However, many respondents were concerned that the approaches proposed in the consultation paper may be too burdensome for most pension plans. Further, respondents raised concerns that smaller plans would have difficulty achieving the same degree of risk oversight independence as larger plans, and that this was not accounted for in the consultation paper. Respondents viewed the potential increase in administrative burden as a disincentive to establishing or maintaining defined benefit pension plans.

Finally, respondents requested that any new OSFI guidance align with the expectations in other Canadian jurisdictions, where they exist, or that it be included as part of one of the Canadian Association of Pension Supervisory Authorities’ (CAPSA) initiatives on risk management.

The attached Annex includes a brief summary of key messages provided by respondents for each of the four areas identified in the consultation paper.

Next Steps

OSFI will collaborate with CAPSA’s Risk Management Guideline Committee to develop guidance on setting principles for the management of investment risk. The Committee will consider the feedback received from this consultation paper, on a non-attributed basis. There will be further opportunity to comment before CAPSA publishes finalized guidance. OSFI will assess the need for additional guidance thereafter.

Annex: Brief Summary of Respondent Feedback

Independent Risk Oversight

Many respondents supported the segregation of duties or the outsourcing of risk management as an effective means of achieving a meaningful degree of independence. However, they would prefer a regulatory approach that is adaptable to each plan’s individual circumstances. They indicated that:

  • Risk oversight functions for pension plans vary depending on the value of the assets under management and the complexity of the investment strategy;
  • Independence of the risk oversight function can be achieved in a variety of ways and the segregation of duties is most important;
  • A separate risk officer may not be appropriate for smaller or mid-sized plans; and
  • In some cases, it would be better for risk to be considered by the plan’s investment decision-makers while in other cases, third-party service providers are better equipped to assess the risk.

Risk Appetite and Risk Limits

Many respondents expressed support for setting risk limits and for governing documents to include a risk appetite statement in writing. They indicated that:

  • There is value in risk management tools, including asset-liability modeling and stress testing;
  • Risk limits are plan-specific, and vary in accordance with its investment strategy, risk appetite and applicable regulatory requirements; and
  • Risk limits should be flexible or take the form of ranges, and administrators would undertake further review before taking action when a risk approaches or exceeds its limit.  

Comprehensive Portfolio and Risk Reporting

Respondents indicated that while controls will depend on the size and complexity of the plan, they generally supported regular reporting on risk metrics and exposures, external audits, and asset-liability studies as effective controls. They indicated that:

  • The due diligence process is critical to defining the scope of portfolio and risk reporting when outsourcing risk management operations or hiring an external investment manager; and
  • A robust due diligence process enables a plan administrator to understand the information provided by the third party and to ensure that the reporting is comprehensive.

Enhanced Valuation Policies and Processes

Respondents agreed that valuation policies and processes were important, however not all agreed on the frequency of audits and secondary valuations. They indicated that:

  • Larger plans are already doing much of what was proposed in the consultation paper with respect to valuations;
  • Smaller plans generally assess their valuation processes as part of the due diligence process when selecting a third-party service provider;
  • Annual audits, either internal or external, could be done on an ongoing basis to evaluate the plan’s alternative asset valuations;
  • It may be impractical for plans to obtain secondary valuations for alternative assets because alternative assets are difficult to value in periods of market uncertainty and expert valuations can be costly; and
  • It is more important to ensure that the valuation process is consistent and reliable, than to obtain secondary valuations.