Italy: The Actuary’s role in the IORP Directive and in welfare
As has already happened in other sectors, the figure of the Actuary, with the advent of IORP2 and the recent Covip resolution on the theme, has taken on an increasingly significant role not only because now the setting is risk-based in all types of Pension Funds, but also and above all because the actuarial approach has long gone far beyond the resolution of strictly technical issues, although necessary and important, but it moves at 360 degrees and beyond.
Meanwhile, both the presence of the Risk Manager and the Actuarial Function, independent Key Functions that must respond to the Board of Directors, represents a significant leap in quality that allows the Actuary who covers these roles to enter fully into the Pension Fund Governance process, where for a long time now it has already entered, for example, already present in some Board of Directors, in some cases assuming the role of Director or Manager, occupying the role of Finance Function and, in the Defined Benefit Funds, certifying the amount of the technical provisions.
But there is much more:
The Actuary, also based on these multiple experiences, has begun to work in the internal audit, another independent Key Function. Naturally, let’s not forget the most typical aspects of actuarial activity such as annuities and the related gender issue, the evaluation of additional insurance coverage, usually risk-bearing, such as death, disability, LTC, Dread Disease etc…, but also the definition of forecast budgets in the start-up phase, the financial advisor, even taking an interest in compliance and policy definition.
The time has also come for Pension Funds to read their activities with a broader view, also looking concretely at welfare, both corporate and individual, a sector in which Actuaries can make a significant contribution not only in technical terms, but also in the structuring of welfare plans by identifying the gaps and the actual needs, also on a quantitative level, and finding, in an optimizing and gradual way, the ideal solutions to fill these gaps, also setting the necessary priorities in the welfare itself.
It is evident, there are many issues ranging from social welfare to assistance, from health to finance that require a technical-economic professionalism, and not only that, which the actuarial profession is fully capable of satisfying. Our Professional Firm has always been fully involved in all these problems and themes, which it also follows at university level and on a scientific level, with its over 35 units, not only actuaries but also mathematicians and economists, it provides all the knowledge and experience at the service of welfare in general and of the social security area in particular.
IORP2 Risks and opportunities – demographics and long term
The risk management system, one of the most important innovations introduced by the IORP2, whose responsibility falls on a fundamental Function, represents an essential point in the strategic process of each Pension Fund.
The legislation specifies a minimum list of risks that must be considered, leaving autonomy in the choices of evaluation metrics, in a highly heterogeneous universe: diversity in time horizon, available data, experience in understanding the sources of risk, with an impact also in the choice of depth of analysis and relative periodicity of checks.
For example, the difference between financial risks and legal risks is clear; the former must be dealt with promptly in a rapidly evolving context, with all types of data available. The others appear less variable, without the need for close checks.
It is therefore necessary – once again – to appeal to common sense, to a principle of substance and proportionality. The goal is not to comply with the legislation, not even to draw up the most detailed mapping possible, nor to create sophisticated models to impress who knows who. The goal is to create added value, awareness, and essential support to the Board of Directors in the strategic planning of the short, medium, and long term.
So, how can we fail to underline that the main risk to be monitored – not explicitly stated in the legislation – is the risk of failing the long-term pension objective? Adequacy and sustainability, the watchwords. Therefore, with acknowledgment to the COVIP resolutions of March 2012, the opportunity to create a close link between pension objectives, financial strategies and risk management is evident. The well-known analysis of welfare needs, at the basis of the even more well-known investment policy document, the starting point for defining strategic asset allocations, can become an essential element of the prospective risk management analysis, possibly carried out with the support of a subject expert outsider.
The assessment – current, deterministic, stochastic, prospective – of the probability of achieving the welfare objectives, the real raison d’être of a pension fund, should therefore be an integral part of risk management analysis, in which financial, actuarial, welfare and mathematics knowledges meet in a moment of constructive dialogue to define, analyse, edify, predict. All with the aim of providing adequate tools to plan optimal long-term strategies, so that the IORP2 regulation can be truly a moment of opportunity and growth of the entire pension system.
The actuary as guarantor of the good health of the Fund: IORP2
With the new IORP2 directive, the role of the actuary in pension funds has been strengthened by including, in addition to the figure of the risk manager, the actuarial function, which is fundamental for the analysis and management of the typical risks of the pension business.
Pension funds that directly cover biometric risks or guarantee an investment return or a certain level of benefits, are required to appoint an independent figure, internal or external, as the holder of the actuarial function.
This figure is in addition to the checks on the solvency of the fund provided for by decree 259/2012, which provides for the preparation of a technical balance sheet at least every three years, also establishing the methodology and criteria for choosing the framework of hypotheses under which to calculate the technical provisions.
The actuarial function is aimed at further strengthening the control system, through a second opinion on the choices made by the actuary who prepared the technical budget.
In fact, the actuarial function will have to ensure the adequacy of the methodologies and models used for the calculation of the technical provisions and the assumptions made for this purpose, as well as carry out an assessment of the sufficiency, accuracy and completeness of the data used for the calculation.
It will then have to certify the reliability and adequacy of the calculation of technical provisions and will have to contribute to the effective implementation of the risk management system and the overall internal control system.
This professionalism may also be of assistance to the Risk Management function for the determination, quantification and control of the demographic, economic and financial risks specific to the Fund and, in order to analyse the social security needs and build the investment policy of the fund. It will also collaborate with the fund finance office and with the risk management function, for setting the Asset Liability Management through the periodic preparation of the expected flows for contributions and social security outgoings, in order to check the achievement of the objective social security.
Due to all the evidence indicated so far it is believed that this function is also fundamental for defined contribution funds.
Finally, it should be noted that the role of the actuarial function must be exercised by an actuary enrolled in the professional register, or by a person who has adequate professional knowledge and experience. Obviously, these specialized professional figures are present in the C&A Actuarial Firm, with many years of experience in the preparation of the technical financial statements of the same, who are the best candidates to carry out this delicate task.
The role and importance of the IORP2 Advisor in the phase of adapting the Fund to current legislation
In the phase of adapting of the Negotiated and Pre-existing Pension Funds to the IORP2 Directive, emerged the need for the latter to contact a professional in the “insurance, financial and social security sector or in any case functional to the activity of the pension fund”, an IORP2 Advisor, which supports them not only in the documentary and structural adaptation to current legislation, but also on the decision-making aspects concerning, for example, the governance and organizational structure of the Fund.
Hence the need to consider the activity of the IORP2 Advisor not only of pure compliance, but as an added value for the Fund in the regulatory adaptation phase, in the sense that the consultant must not only have the task of verifying operational efficiency and the adequacy of the processes, assessing the consistency between the internal and regulatory provisions with the operating practice adopted by the Fund itself, but also to follow it in all the main decisions affecting it, carefully analysing, at a macro level, the reference market with the related risks and opportunities that arise before, at a micro level, the organizational and governance structure of the Fund, thus directing the management and control groups towards choices that have a certain impact on the continuation of the fund.
Therefore, each Fund should equip itself with a person who can carry out the activity of IORP2 Advisor also to facilitate the phase of adaptation of the Fund to current legislation, which is already complex in itself due to the numerous obligations required by current legislation, both in terms of operations (establishment of functions, definition of remuneration and outsourcing policies, preparation of an internal risk assessment) and of responsibility, involving investments and costs that are significant for its proper functioning.
The C&A Actuarial Firm currently covers this role in some Funds, supporting them in various phases, for example in the preparation of documentation, in the structuring of the agendas of the Boards of Directors relating to IORP2 issues, in changes to the governance structure of the Fund, also participating in the Board of Directors with the intention of providing support to the Presidency and the Management in the representation of the various issues to the Board.
For the Funds, acquiring an important strategic figure therefore represents an opportunity, as his skills are useful for various figures involved in the management of the Fund.