OREANDA-NEWS. On 4 July 2016, the Bank of Russia issued Ordinance No. 4060-U ‘On Requirements for Organisation of the Non-governmental Pension Fund Risk Management System’ (hereinafter, the Ordinance).

The Ordinance specifies requirements for the organisation of the non-governmental pension fund (hereinafter, the Fund) risk management system. In connection with these risks, the Fund shall implement certain measures which include the development of internal documentation, identification of risks and their management (with setting risk limits among other things), risk measurement and assessment, risk control and corrective actions.

The Ordinance defines the risk as a would-be event or several events which if occurred with due consideration to its/their probability of occurrence and impact might create conditions when the Fund is unable to fulfill its obligations before the members and the insured to the full extent and in a timely manner.

While revealing risks, the Fund shall consider available information that cover market risks, credit risks, operational risks, liquidity risks, stress test findings and the Fund’s activity results. Identified risks are included in the risk register which is subject to review by the Fund when necessary but no less than once a year with risk identification results taken into account.

Within the risk management procedure the Fund shall select a management company, determine a list of assets where such management company can invest in, and also a volume of pension savings and pension reserves transferred into trust management of a certain management company, assess the efficiency of management of pension savings and pension reserves and take action after assessment is complete. Management of pension savings and pension reserves (this includes the selection of a management company and a credit organisation to open the Fund’s accounts) shall be carried out exclusively in the interests of the insured and Fund’s members respectively.

The Fund’s internal documents which regulate the process of managing pension savings and pensions reserves shall among other things indicate the assets where the said funds can be placed into, assets’ target return, their target structure, risk limits, the procedure for identifying risk limit violations and corrective measures.

By decision-making the Fund shall have and take into consideration information that affected and/or might affect asset acquiring or selling. Such information should include aims of acquiring each asset, its key financial indicators and expected return, expediency of acquiring each asset against alternate options for investing funds into similar assets with comparable risks, and the time limit for owning each asset.

To measure total risk assumed the Fund shall perform stress tests to assess assets adequacy in order to be able to fulfill its obligations in full and in a timely manner. The Fund shall conduct such stress tests in the event the assets’ composition and structure and Fund’s obligations are changed (or such change is planned), or when the market environment undergoes drastic shocks, but no less than once a quarter.

The Ordinance sets requirements for the procedure of running stress tests and for the contents of stress test scenarios, as well as for the procedure of using stress test results.

The Fund shall be considered to have failed a stress test if it predicts the non-ability of the Fund to fulfill its obligations on a daily basis within the scenario period. Should this be the case, the Fund shall develop, send to the Bank of Russia and implement a plan of measures aimed at meeting assets adequacy.