Information Sources and Building Risk Indicators

Nzomo Mutuku, Manager, Research & Development

Retirement Benefits Authority, Kenya

Contents

• Information Sources• Building Risk Indicators• Kenya Risk Scores

Risk Factors In KenyaInherent Risk

Investment risk

Insurance risk

Non-financial risk

Management and control

Trustee oversight

Operations and Control

Independent review

Capital Support

The Fund

The Employer

Sources of Information - Kenya Periodic Scheme Returns

Registration Documents Annual Accounts Investment returns – six months Contribution returns – quarterly Investment Policy – Tri -annual Actuarial Valuations Tri - annual for DB Schemes only

On site inspections

Third Party reports – Interim administrators

Interrogatories and scheme self assessment

Mandatory exception reports – whistle blowing required

Supervisory Organisation: Information SourcesType of Source Examples in Kenya Availability

Existing databases and documents provided for no-supervisory purposes

Industry Surveys and analyses (employer)

Low

Mandatory Exception Reports

Member complaintsService provider alerts

Medium

Information from on-site inspections

Inspection reports Low

Work commissioned by third parties

Inspection reportsInterim Administration reports

Low

Reports from entities to the supervisor

Annual AccountsInvestment returnsContribution returns Investment Policy Actuarial ValuationsInterrogatories

High

BUILDING RISK INDICATORS

RBA RISK INDICATORSRisk Factor

Inherent risk Management and control

Capital support

RiskIndicators

1. Investment risk•Investment Policy•Investment returns•Risk Measures2. Insurance risk•insurance risk insured•capacity to handle non-insured risk

3. Non-financial risk•simple plan provisions and procedures•transparent outsourcing•capacity to handle greater complexity

1. Trustee oversight•self-assessment•fit and proper criteria•lines of responsibility2.Operations and Control •Interrogatories•filing & contribution record•Number & resolution of complaints•expenses3. Independent review•use of independent professionals•reports without qualifications

1. The Fund• Funding /

solvency ratio• Deficit

recovery plan• Actuarial basis• Rates of

return2. The Employer• Timely

remittances• DB actuarial

assumptions• DC

communication to members

• Industry shape

Step 1:Risk Assessment

• Each risk indicators is assessed on a point scale:• From Zero (very low risk) • To 1 (extreme risk)

• Compute Overall Risk Score(ORS) by weighting each area:

• ORS = I + M +C

DC SCHEME

Inherent Risk W S WS Management and control W S WS Capital support W S WS

Investment risk 25% 0 X Trustee oversight 20% 0 X Fund 0% 0 X

Insurance risk 10% 0 X Operations and control 15% 0 XEmployer sponsor 10% 0 X

Non-financial risk 10% 0 X Independent review 10% 0 X     0  

I M C

DB SCHEME

Inherent Risk W S WSManagement and control W S WS Capital support W S WS

Investment risk 15% 0 X Trustee oversight 10% 0 X Fund 25% 0 X

Insurance risk 15% 0 X Operations and control 10% 0 X Employer sponsor 10% 0 X

Non-financial risk 5% 0 X Independent review 10% 0 X        I M C

Step 2:Risk Weighting

Step 3: Deriving Scheme Risk Level Overall Risk Score(ORS) taken to fourth power to obtain the risk

probability index to obtain the probability of failure of a scheme

Assign the risk probability index of scheme to a risk level as per table below:

Risk Probability Index = (ORS)4

Overall Risk Score Risk probability index Risk levelLess than 0.5 <= 0.06 0

0.5 – 1.5 Above 0.06 to 5 11.5 – 2.5 Above 5 to 39 22.5 – 3.5 Above 39 to 140 33.5 – 4 Above 140 to 256 4

Basis of calculation is that probability of failure does not increase in a linear fashion,

but increases exponentially . 4th power simplification of

exponential formula

Basis of calculation is that probability of failure does not increase in a linear fashion,

but increases exponentially . 4th power simplification of

exponential formula

Step 4 : Supervisory Response

11

Risk Level

Classification

Supervisory Response

0 Green No Action

1 Light Amber Monitoring - regular filing, close monitoring until normalized

2 Dark Amber Intensive Monitoring - questions to scheme administrators, intensive monitoring

3 Red Recovery Plan - recovery plan to be filed, approval and close monitoring of plan

4 Ultra Red Intervention - includes demands for additional funding, reduced benefits, interim administration, or closing the scheme

Risk Score as at March, 2011, 647 Schemes

12

0

50

100

150

200

250

300

Risk Level 0-Green Risk Level 1-Light Amber Risk Level 2-Dark Amber Risk Level 3-Red Risk Level 4-Ultra red

45%43%

8%

3%2%

Thank You

Asante

www.rba.go.ke