Macro-dimensional supervision of large pension funds

The aim of this paper is to investigate how large private pension funds (LPFs) may influence the financial markets and the economy as a whole; what are the views of pension supervisors on the potential impact of LPFs and on transmission channels through which LPFs may interact with the financial markets; as well as what strategies and approaches the supervisors should adopt to address potential macro impacts that LPFs may make. This paper is based on the survey on private pension supervisors of 34 IOPS member jurisdictions. The survey results show that the pension supervisors generally agree that LPFs contribute to financial and economic stability. The supervisors recognized that the potential channels through which shocks from distress in LPFs may be transmitted to the financial system includes counterparty risk, investment concentration, and stop loss/fire sale channels. The supervisors also agreed that distress in LPFs may have an adverse influence on people’s confidence in the social system and the situation of retirees. To effectively supervise LPFs with potentially sizable economic and social impact, it is advisable for supervisors to regularly or occasionally analyse the macro and micro soundness of such funds. Setting clear definitions of LPFs can be helpful in identifying the subjects of the analysis. In order to properly supervise in macro-dimensional risks, supervisors may consider requiring that the LPFs show high standards in their regular micro-dimensional supervisory areas such as risk management, investment, governance, internal control, stress test and/or contingency plan. Also, a co-operation with other bodies such as the central bank and/or the Ministry of Finance can be an option in terms of monitoring the potential impact of LPFs on financial and economic stability. Supervisors’ views on whether or not to identify global or domestic systemically important pension funds are diverse and far from consensus, which calls for further study on quantitative evidence of pension funds’contribution to financial stability.