OSFI review of pension investments

The first goal in OSFI’s 2021-22 Departmental Plan is to improve the preparedness and resilience of federally regulated financial institutions (FRFIs) and pension plans to financial risk. This goal applies to both normal conditions and during the next financial stress event. To support this goal, OSFI’s key objectives for 2021-22 as they relate to pension plans include

• improving the consistency, accuracy and timeliness of risk assessments by OSFI and making our intervention more effective; and
• applying a more risk-based and principles-based approach to regulation and supervision.

According to the Departmental Plan, success in this goal will be characterized by pension plans having effective governance and risk management practices that keep pace with existing and emerging risks and that support the early detection of issues, among other things.

An important part of the work that OSFI and its Private Pension Plans Division (PPPD) are advancing to address this goal is to implement the recommendations stemming from our recently completed review of how we supervise defined benefit pension plan investments. This review looked at existing PPPD investment guidance, our supervisory approach and practices and the investment information that we collect through regular pension plan filings.

The PPPD team also engaged with pension investment consultants to understand their perspectives relating to current pension investment trends and potential sources of emerging risk. Finally, PPPD surveyed and had follow-up discussions with selected plans of different sizes and with different investment approaches to learn more about their investment processes, procedures and beliefs, as well as their investment risk management practices.

PPPD staff worked closely with OSFI supervisors of FRFIs to evaluate how their knowledge and perspective from supervising banks and insurance companies could help identify ways of improving PPPD’s own supervisory approach and regulatory guidance on pension plan investment risk management.

The review has enabled OSFI to develop a broad perspective on the general nature and level of inherent pension investment risks, and insights into the nature and quality of risk management. An analysis of findings has identified areas where additional OSFI guidance can help promote more robust investment risk management practices among the pension plans OSFI regulates.

PPPD intends to issue a discussion paper in late autumn 2021 that will propose a broad range of principles-based regulatory expectations relating to investment risk management practices. Because they will be principles-based, the proposed regulatory expectations will be both scalable and proportional, meaning that they can be adapted to reflect the relative complexity of different pension plans’ investment approaches and strategies.

The discussion paper will set out proposed directions for future PPPD regulatory guidance and expectations, and seek stakeholders’ input. PPPD will then consider that input before developing and releasing final guidance on investment risk management practices for pension plans.