Camino a Santa Teresa # 1040 8o. piso, Col. Jardines en la MontañaDelegación Tlalpan, C.P. 14220, México D.F.

Tel. +52 (55) 3000-2608 y 3000-2548 www. consar.gob.mx

Comisión Nacional del Sistema de Ahorro para el Retiro

Session III: Risk Scoring

Risk Scoring

Thursday 8th September, 2011, Lima - Peru

In order to mitigate the greatest potential risk to the pension system…

Risk Scoring

… and a the same time provide workers a comparative analysis among Pension Fund Administrators,

CONSAR has been implementing a Unique Quality Index (QI)

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0 This index must incorporates the performance evaluation of different “action areas” of the Pension Fund Administrator (Operational activities, Customer Services and Workers’

orientation and the investment of the resources)

It is important to point out that the supervision is divided into two main areas: the operational activities and the investment of the resources

Operational activities To move towards a risk-based supervision all processes previously regulated were freed.

1

Supervision involves the monitoring of the following elements:

•Certification of applications•Opening of individual accounts•Reception and registration of data•Conformation of File

Registration and Switching

•Selection of AFORE who will participate•Reception and registration of data and to buy into shares •FeesAllocation of new

individual accounts

•Account statement•Fees•Client services•Updates on Personal Data

Account Record Keeping

•Reception and registration of dataCollection

•Transfers to fund pensions•Delivery of resources to workers (Certification of

applications)

Retirement

This “action area” is not part of the supervision but we consider that is important to incorporate it in the QI

Customer Services and Workers’ orientation2

•It would assess the quality of the service in each Pension Fund Call Center, perhaps, through a third party that would follow up the calls.Evaluation of the

Pension Funds Call Centers.

•It would penalize those cases in which the affiliates are channeled to CONSAR by the Pension Fund’s Administrator when solution is in their field of competence.Cases assigned to

CONSAR which are the responsibility of the

pension funds.

•It would capture the involvement of the pension fund for the creation of a financial culture and the in situ orientation for workers who require it.Involvement in events

for financial culture

A score card is under development to rank Afores according to size and complexity of “Operational activities” and “Customer Services and Workers’ orientation”

Investment of the resources3

When available, the three scores will be integrated into a single one. Nevertheless, the supervision and record keeping of each “action area” will continue to be performed by different areas within the CONSAR

The third “action area” corresponds to:

Some important factors that are used to determine the risk assessment score are:

1. Incidents in inspection acts.2. Investment diversification of the Pension

Funds.3. Financial Services Innovation.4. Returns Average Ranking (Performance).5. Investment Term and AUM.

6. Incidents registered by surveillance.7. Corporate Governance Evaluation.8. Back Office.9. Investments.10. Risks.11. Compliance Officer

Index Construction (cont.)

Each item is specially treated in the assessment, regarding its nature.It is assigned a grade between 0 and 10 in order to incorporate them with the rest of the items.

Investment of the resources FACTORS:1. Incidents in inspection acts.

Considers the number of incidents registered by the Financial Surveillance Area, it could be in an accounting areas, risk, delivery of recordings, comptroller or investment kind of incident.

2. Investment diversification of the Pension Funds.Using a diversification index, it is possible to evaluate the exploitation of the Investment Regime.

3. Financial Services Innovation.It assesses the areas in which the Pension Fund is authorized to operate, as it is described on the website of CONSAR, whether they are derivative instruments, international custodian, etc.

4. Average Ranking (Performance).This category incorporates the ranking that the Pension Fund has kept in each of its Basic Pension Funds according to the Returns Net of Fees (RNF), which has been filtered to make it’s trend more stable.

5. Investment Term and AUMCompares the assets under management’s weighted average TTM in respect of an investment horizon more suitable to the characteristics of the affiliate.

Investment of the resources FACTORS:6. Incidents registered by surveillance.

Considers the number of incidents registered by the daily financial surveillance of the Pension Fund.

7. Corporate Governance Evaluation.Considers the frequency within the board holds sessions, the number of independent counselors, the technical capacity and moral integrity of the independent counselors, etc.

8. Back Office.Considers the Valuation, Accounting Records, Financial Statements and Conciliations with BMV and Indeval.

9. Investments UnitConsiders the analysis prior to determining the investment strategy, the compliance to the investment strategy defined by the Committee, online alarms and position reports, regulatory compliance, infrastructure in general, trading and recording systems and qualified personnel.

10.Risks UnitEvaluates the independence of the Risk Management Division, models and benchmarks for measuring and monitoring the various types of risk, valuation methodologies, reports, contingency planning and guarantee monitoring.

11.Compliance OfficerEvaluates the independence of the Legal Comptroller, the prevention of interest conflicts and misuse of privileged information, the depth of the reviews and follow-up of the observations from the auditors and CONSAR.

Index Construction (cont.)

Pension supervision should seek to mitigate the greatest potential risk to the pension system.

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Investment of the resources

A score system is in place to rank Afores according to risk

For many of these categories, the rating assignment is straightforward… At this stage the weights of each factor are the same

Investment diversification

Herfindahl index

Returns (Average Ratings).

Oficial NET RETURN INDEX(Base 10 = Max)

1.Incidents in inspection

1.Investment diversification

3.Financial Services

Innovation.

4.Returns Average Ranking

(Performance).

5.Investment Term and AUM.

6.Incidents registered by surveillance.

7.Corporate Governance Evaluation.

8.Back Office. 9.Investments Unit 10.Risks Unit11.Compliance

Officer RISK SCORE

1 9.33 3.50 8.96 5.00 5.00 7.00 8.45 9.87 9.00 7.04 8.61 7.43 2 7.00 8.79 6.00 8.98 8.23 6.00 7.00 6.00 9.10 7.10 9.58 7.62 3 6.00 7.67 9.90 8.84 7.00 9.70 9.43 9.93 9.13 7.00 5.00 8.15 4 8.98 9.91 8.91 9.00 7.70 7.00 9.78 8.47 9.02 6.00 9.75 8.59 5 8.83 8.49 8.00 8.25 8.87 7.90 8.86 9.73 9.97 8.42 8.60 8.72 6 9.71 9.23 8.00 8.42 7.00 9.07 9.61 7.00 7.00 7.00 7.10 8.10 7 8.05 8.90 7.00 8.40 7.00 9.42 9.60 9.08 8.44 9.88 7.65 8.49 8 7.00 8.00 8.16 7.62 8.09 8.40 9.95 9.10 7.00 7.00 7.12 7.95 9 9.14 7.00 7.47 8.04 7.23 7.00 8.75 7.23 7.79 6.00 9.33 7.73

10 7.64 9.52 7.00 8.08 7.00 9.30 7.70 7.00 9.69 9.60 7.19 8.16 11 8.43 7.00 7.88 7.00 9.01 7.00 7.45 7.64 6.00 8.74 9.46 7.78 12 8.18 8.00 9.22 8.76 9.66 9.07 7.00 9.28 7.00 7.68 9.90 8.52 13 7.00 9.93 9.25 9.50 7.00 8.81 7.00 7.00 8.85 7.32 9.26 8.26 14 7.00 9.22 9.55 10.00 9.92 9.74 9.72 9.87 9.50 7.00 7.58 9.01

m 8.11 8.33 8.16 8.35 7.91 8.24 8.59 8.37 8.25 7.65 8.29 8.29

“ACTION AREA”

“FACTORS” “X COMPONENTS”

The skills and expertise judgment of individual supervisors (ANALYST) is the base to build efficient RISK SCORINGS

1.000 4.05 3.28 2.25 1.300.950 4.23 3.43 2.35 1.360.900 4.41 3.57 2.45 1.420.850 4.60 3.73 2.55 1.480.800 4.79 3.88 2.66 1.540.750 5.00 4.05 2.78 1.610.700 5.21 4.23 2.90 1.680.650 5.44 4.41 3.02 1.750.600 5.67 4.60 3.15 1.820.550 5.91 4.79 3.28 1.90

0.500 6.17 5.00 3.43 1.98

0.450 6.43 5.21 3.57 2.07

0.400 6.71 5.44 3.73 2.16

0.350 6.99 5.67 3.88 2.25

0.300 7.30 5.91 4.05 2.35

0.250 7.61 6.17 4.23 2.45

0.200 7.93 6.43 4.41 2.55

0.150 8.27 6.71 4.60 2.66

0.100 8.63 6.99 4.79 2.78

0.100 9.00 7.30 5.00 2.90Low Medium High Extreme

IMPACT

OC

CU

RR

ENC

E PR

OB

AB

ILIT

YCOMPONENT

ANALYST

Example:

Investment Committee Minutes

3

1iiiA Quality Index =

Formally ...

13 Investment of the resources

iARisk Score =

jj

FA

11

13 11

1ACTION AREA “ i ”

by now

jF FACTOR “ j ”

nC

where

where

nn

nj CwF *1

where COMPONENT “ n ”

Subjective weights

POLICES

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Functionaries and/or operators may be removed.

Investment authorizations in specific instruments may be revoked Even the license to operate may be revoked.

Legal action may be taken.

Meetings with members of the board.

More frequent reporting (information) requirements.

More frequent inspections.

Remedial program is required.

Formal recommendations.

Everyday conventional reviews.

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0

If a weakness is identified and a recommendation is emitted and depending on the seriousness of the breach

1. Having an action that provide workers a comparative analysis among Pension Fund Administrators in order to make them easier the election according their preference, in a conscious way.

2. Promote the improvement of the quality of services provided by the Pension Fund Administrator through the competition generated by this index.

QUALITY INDEXAdditional pursued objectives

3. Have an index to assess, to compare and to monitor the progress in the quality of services provided by the Pension Fund Administrator.

QUESTIONS

13

Camino a Santa Teresa # 1040 8o. piso, Col. Jardines en la MontañaDelegación Tlalpan, C.P. 14220, México D.F.

Tel. +52 (55) 3000-2608 y 3000-2548 www. consar.gob.mx

Comisión Nacional del Sistema de Ahorro para el Retiro

Session III: Risk Scoring

Risk Scoring

Thursday 8th September, 2011, Lima - Peru