19 those rated ‘restructure’ require strong enforcement action. The framework imposes a stronger analytical discipline to a still largely judgmental process and provides an audit trail to analyze and explain supervisory decisions and actions. It allows APRA to allocate more resources to institutions whose failure would have a greater impact on the financial system.

In the Netherlands in 2005, the Dutch National Bank (DNB) introduced an integrated method for analyzing risk for all financial institutions known as the Financial Institutions Risk analysis Method (FIRM) which replaced the earlier pension and insurance specific system known as MARS. Like Australia, supervision in the Netherlands is based on the ongoing process of information collection, consultations with the supervised entities and a structured approach to the assessment of risk and the manner in which those risks are managed. Under the FIRM model, the DNB takes into account the assessment of solvency outlined earlier and combines this with an evaluation of the pension entity, the risks to which it is exposed and the quality of the risk management procedures in place. Like Australia, the results of the risk assessment become the basis for decisions regarding the nature and intensity of supervisory action.

The FIRM model adopts a four-stage approach to building the risk assessment. In the first step a detailed profile of the pension fund is constructed. The second step identifies relevant management units and functions and assigns weights to these. Using this functional breakdown the third step evaluates gross risks and assigns a score to this assessment. In contrast to Australia, the Dutch system combines probability and impact into a single score within the system rather than assessing these separately, based on the view that the two elements are so closely related they should not be independently considered. The various types of risks identified in Australia and the Netherlands are very similar. The additional focus in the Netherlands on technical insurance and mismatch risks reflects the primarily DB nature of the pension system.

The fourth step in the Netherlands seeks to obtain an insight into the quality of risk controls for each risk category to derive a final value that represent the net risks of the pension fund. The aggregation of risks is based on a mathematical algorithm which puts emphasis on high risks and poor controls. The reports which form part of the FIRM model form a basis for the planning of supervision activities. The frequency of on-site inspections is determined largely by the risk profile of the fund. During an on-site inspection data are collected which allow the FIRM model to be updated and high risk areas which have been identified are examined closely.

Concurrent with the introduction of the VaR standards in 2002, the Mexican supervisory authority Consar has developed elements of a risk scoring model, in the form of early warning indicators for assessing operational and financial risks. The current methodology entails three risk factors – low, medium and high – and gives emphasis to irregularities detected during supervision activity. Reflecting the fact that Mexico operates a DC system it is not surprising that the main weaknesses identified relate to internal controls and the collection of contributions. Supervision strategies are focused on the most critical areas identified by the early warning system. However, Consar is in the process of incorporating other elements of risk into the VaR, such as credit risk, and assessing how it can make greater use of the VaR results for risk scoring.

Denmark has also developed elements of a risk scoring model, in the form of an internal rating system with three internal quality scores covering organization, procedures