The purpose of prudential supervision is to ensure the soundness of financial undertakings and to contribute to the stability of the financial sector. At the time of its establishment and when administering pension schemes a pension fund must fulfil various statutory requirements designed to promote its financial soundness. These are known as prudential requirements and they include:
Prudent business operations
A financial undertaking or pension fund that has its seat in the Caribbean Netherlands must organise its business operations in such a way as to ensure that they are carried out in a prudent fashion.
In this sense it is important for each institution to be clear about whether its business processes are organised in a prudent manner. This means that the risks must be identified and that sufficient management measures must have been put in place. Examples are the frameworks, guidelines, accounting procedures, the division of duties and so forth. Internal control is the process by which a reasonable degree of certainty is obtained about the attainment of the organisation’s objectives.
Prudent business operations require in any event:
- a clear and adequate organisational structure;
- a clear and adequate division of duties, powers and responsibilities;
- properly defined rights and obligations;
- clear lines of reporting;
- an adequate system for information provision and communication.
The effectiveness of the organisational structure and of the procedures and measures must also be assessed internally and independently. This is not the same for everyone – here the principle of proportionality applies. The business operations must be geared to the nature, scale, risks and complexity of the activities of the pension fund.
The content of the actuarial and technical business report
The actuarial and technical business report (ABTN) defines the basic criteria underlying the (financial) policy of a pension fund. The preparation of such a report is an obligation under the BES Pensions Act.
The purpose of the report is to ensure the transparency of the pension fund’s actuarial and technical business policy. The report is therefore in the nature of a business plan designed to provide information about the overall operation of the fund. For the pension fund the need to produce report obliges it to acquaint itself with all interconnected aspects of the business operations, funding policy and risks. And for DNB the actuarial and technical business report is a source of comprehensive information and a key document in exercising supervision.
The actuarial and technical business report in any event includes a description of how the following matters are dealt with:
- the contents of the pension scheme administration agreement;
- the manner in which the policy on prudent and sound business operations is implemented;
- the granting of conditional supplements;
- the financial assessment framework;
- a declaration of investment principles and a description of the management mechanisms.
Further rules have been adopted for most of the above provisions. If the risks have been transferred or reinsured, the descriptions can be limited by referring to the provisions on this subject in the relevant agreements.
A pension fund must operate in accordance with the policy recorded in the actuarial and technical business report (section 10 (1) BES Pensions Act). The board of the pension fund should immediately notify DNB of any changes to the actuarial and technical business report (section 10 (2) BES Pensions Act).