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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