Wtp Transition: Importance of the Compliance Function

When a regulator publishes a good practice, it is not merely a suggestion. Typically, the description is more general and not directly tied to a legal standard. However, in practice, these publications often become a normative framework within supervisory practices, setting the minimum standard for fulfilling an open norm.

Recently, DNB provided guidance twice through a ‘good practice’: one concerning the role of the risk management function in the Wtp and the other on the compliance function.

Involvement of Risk Management in Wtp Transition

In the good practice ‘The Key Role of Risk Management during the Transition to the New Pension System’, DNB expects that the roles, tasks, and responsibilities of the key risk management function are defined in advance for the Wtp transition. DNB anticipates that this function will provide independent risk opinions at all decision-making milestones, which will be considered during decision-making, ensuring that the board justifies how these opinions are weighed.

DNB also sees a role for the key risk management function in reporting on the preparation and implementation of the Wtp transition. DNB expects the key function to comment on the periodic risk analysis. We advise that the decision-making process explicitly incorporates the advice of the key risk management function and clearly documents how this advice is weighed.

Documentation of Wtp Decision-Making

There may be valid reasons for not fully adopting the advice. It is important to document these considerations thoroughly. In practice, we observe that regulators value balanced decision-making highly. Demonstrably incorporating different perspectives in the decision-making process is beneficial.

Establishment of Compliance

A compliance function is not legally required for pension funds, nor are there specific requirements for it. Pension funds must comply with numerous legal requirements and maintain integrity in their operations. Establishing a compliance function can significantly contribute to this.

The good practice for the compliance function describes several effective practices for fulfilling this second-line role adequately. The publication highlights several key elements to ensure compliance with laws and regulations and to mitigate integrity risks.

Key elements include:

• The compliance function is independent (no combination of roles).
• A compliance charter is defined, and an annual plan is developed.
• Provides both solicited and unsolicited advice.
• Has direct access to the Board.
• Involved in the SIRA and incident handling.
• Responsible for raising awareness.

Involvement of Compliance in Wtp Transition

The AFM’s guidelines and further guidance on the communication plan emphasize the importance of involving the compliance function. AFM expects pension funds to have the compliance function review the communication plan to ensure it meets legal requirements and includes necessary messages.

Proportional Establishment

Establishing an independent compliance function for pension funds is challenging given their size. How can this function be appropriately and proportionately structured to manage costs while maintaining sufficient effectiveness?

The good practice suggests an external compliance officer as a solution. The advantage of an external compliance officer for pension funds is that they can operate independently and fulfill their role and responsibilities within agreed terms. External implementation can ensure both independence and expertise.

Would you like to know more about PG’s vision on compliance in pension funds and how the external compliance role is structured? Please reach out to us