Rating Criteria for Retirement Funds

Rating Criteria for Retirement Funds

Starting a retirement fund is a smart move towards securing financial stability for the future. By setting aside a portion of income over a long period of time, individuals can take advantage of tax benefits while saving for retirement.

Credit ratings are becoming increasingly important for investors, and this trend is starting to emerge in the context of pensions. Credit ratings are opinions provided by rating agencies regarding the creditworthiness of individual transactions, financial instruments and sponsoring entities.

Unlike financial institutions, which are typically subject to formal regulation for public interest, in many other countries occupational pensions are generally not regulated, particularly when it comes to solvency. This is because the primary objective of a non-financial institution is not to provide financial services. Additionally, long-term savings arrangements such as pensions are limited to a company’s workforce and not available to the public at large.

However, since occupational pension schemes are associated with credit-related obligations across a wide range of entities, credit assessment is crucial. Failure within the chain of obligation can lead to potential losses and undermine trust in the overall system. The chain of obligation includes employers, scheme trustees, scheme beneficiaries, pension actuaries, borrowers, equity issuers, investment counterparties, asset managers and custodians.

Aside from the assets within the pension fund and the associated investment income, the main source of credit strength is the sponsor’s contributions. Therefore, it is expected that the credit rating of a pension fund will closely follow that of its sponsor. This is because the sponsor’s strength reflects the solvency and contribution rate to the pension fund, as well as other commercial factors. The sponsor’s rating also indicates the certainty of future contributions, and the calculation of the minimum funding rate should reflect both the credit strength of the pension fund and the sponsor.

Although the security of possession scheme assets is usually not a significant issue with retirement funds, the unexpected failure of asset managers can pose an operational risk. Therefore, independent assessment of asset management competence, both qualitatively and quantitatively, is essential.

It is worth noting that credit assessments and ratings of retirement funds are essential and useful. Although assessment does not directly reduce risk, it can increase awareness of uncertainties and lead to the adoption of more efficient alternatives and solutions.



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