INTRODUCTION

Canadian pension plans require innovative strategies to adapt to regulatory changes for long-term stability. This white paper explores how the CAPSA Guideline 10 along with the right analytical tools can enhance risk management, governance, and compliance for these plans.

CAPSA: Facilitating Efficient Pension Regulation

CAPSA Guideline No. 10 helps pension plan administrators manage risks effectively by establishing a governance structure that matches the plan’s complexity and size, and documenting risk appetite, tolerance, and limits. Administrators should identify and assess various risks, including investment, operational, and third-party risks. The guideline also emphasizes the need for processes to manage and monitor these risks, with regular reviews to ensure effectiveness.

Key areas of focus include managing risks related to outsourcing, cyber security, investment decisions, ESG (Environmental, Social, and Governance) issues, and leveraging investments. Risk management practices should be proportional to the plan’s size and complexity, allowing smaller plans to adopt simpler practices while larger plans may require more sophisticated approaches. Following these guidelines enhances the stability and security of pension plans, protecting the benefits of plan members.

Defining Risk Appetite and Tolerances

Many plan administrators will have an implicit understanding of their broad risk tolerance, and this will no doubt be reflected in operational decisions which have been made.  For example, peer review and sign-off for changes made to administration systems reflects a low risk tolerance to benefits being miscalculated.  CAPSA Guideline No. 10 improves this process by requiring an explicit statement of risk tolerance across the various risks faced by the plan.

Tolerance for Funding Level Fluctuations

The plan’s tolerance for fluctuations in funding level may be considered as a maximum amount of risk that the plan is willing to shoulder, perhaps with reference to a value-at-risk (VaR) metric over an appropriate timeframe.  Where plans put this form of metric in place, best practice suggests that the metric should be monitored frequently, with processes in place to make amendments to the plan investment strategy if tolerances look like they have been exceeded. 

Monitoring Risk – Leveraging Analytical Tools for Pension Plans

Regular monitoring of plan risks can be supported by improved analytical tools.  For example, PFaroe DB is a platform designed to deliver comprehensive valuations and risk analysis for pension plans. It integrates funding levels, assets, liabilities, and value-at-risk metrics, providing stakeholders with the insights necessary to make well-informed decisions. This tool enhances the ability to manage pension plans effectively by ensuring that all relevant financial data is consolidated and analyzed thoroughly.  Enhanced analytics systems such as PFaroe DB offer key benefits for pension plans who are seeking to comply with CAPSA Guideline No. 10:

1. Real-Time Risk Analysis: Allows pension plan administrators to test various scenarios and assumptions instantly. This feature helps in understanding the plan’s risk exposure and making informed decisions to mitigate potential risks.
2. Interactive Decision-Making: Fosters interactive decision-making by enabling meaningful interactions between trustees, sponsors, actuaries, and investment managers. This collaborative approach ensures that all stakeholders are aligned and can contribute to the strategic direction of the pension plan.
3. Efficiency and Productivity: Consolidates assets, liability, and risk information into a single platform, enhancing efficiency and productivity. This integration allows stakeholders to focus on strategic actions rather than spending time on data collection and reconciliation.
4. Comprehensive Valuations: Detailed valuations of pension plans, including funding levels, assets, liabilities, and VaR analysis. This comprehensive view helps in understanding the financial health of the pension plan and making necessary adjustments to ensure long-term sustainability.
5. Scenario Testing and Forecasting: Allows for extensive scenario testing and forecasting, enabling pension plan administrators to analyze the impact of various investment and funding strategies over time. This feature is crucial for planning and adapting to changing market conditions.
6. Asset Liability Management (ALM): The ALM module provides sophisticated tools for managing the balance between assets and liabilities. This module helps in optimizing asset allocations and constructing portfolios that align with the pension plan’s risk and return objectives.
7. Stress Testing: Allow pension plans to evaluate their resilience under various economic conditions. This feature helps in preparing for potential financial crises and ensuring the stability of the pension fund.
8. ESG Capabilities: Allows pension plans to visualize and manage their ESG profiles. This feature helps in aligning investment portfolios with ESG objectives and improving overall sustainability.
9. Customizable Metrics: Metrics include investment trigger notifications and detailed plan statistics on a daily basis. These metrics help in monitoring the performance of the pension plan and making timely adjustments to improve outcomes.