As more defined benefit schemes follow a derisking plan towards their end point, monitoring and managing risk grows ever more important.
Subcommittees overseeing specific risk areas such as investment and administration have become embedded into larger schemes, but there is now a move to centralise the wider oversight of risk. It is believed this integration creates more transparent and effective reporting lines.
The £4.7bn London Pensions Fund Authority established an overarching risk committee at the start of last year. This has allowed the scheme to focus both its executive and non-executive arms on specific threats, whether that be funding or covenant risk.
Comment: Focus and action the keys to success
Every time you think you have got to grips with regulatory requirements or thorny technical issues, new horrors pop out of thin air. Trustee meeting agendas are bursting at the seams.
Keeping trustee energy and enthusiasm up at meetings that now run for hours is not easy. Hence, the increasing use of subcommittees to get through trustee business.
A common subcommittee is one that focuses on the day-to-day management, quality and process side of a pension scheme. These tend to be called admin, audit, governance or risk committees – we’ll call it an admin committee for simplicity.
While vastly less sexy than an investment subcommittee, properly constituted and focused, the admin committee can significantly improve the way a trustee group governs its operations.
And it is not confined to defined benefit – defined contribution schemes can benefit from a risk committee given the adverse impact on member experience that can come from sloppy DC admin, poor communications and a breakdown in the interface between administrator and employer side HR and payroll.
As with any committee, if it turns into a bureaucratic, box-ticking, blame-apportioning, nit-picking talking shop, it will be of limited value.
But if the committee works in a way that opens up the workings of the scheme; establishes priorities and what can be realistically achieved; agrees plans, timelines and budgets; set success criteria and then works with the scheme’s advisers and suppliers to empower them to deliver; it can be transformational.
Steve Delo is CEO of Pan Governance
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“It’s enabled us to have quality time together to discuss them and discuss the risk management processes that we’ve identified,” says Susan Martin, CEO at the scheme, in a video interview with Pensions Expert.
Larger DB schemes are increasingly moving towards having an executive team to develop a risk management framework for subcommittees to follow, says Mark Hodgkinson, director at Muse Advisory.
“[There has been] a bit of a change over the past few years as to how many large pension funds are run," he says. “They have reduced their number of committees, but appointed a bigger executive team with greater powers of delegation, so the need for a committee is obviated."
This type of risk management structure instills the need for proper oversight and transparent reporting lines, he adds.
“You need opportunities to ensure that people have the space and time to think through what they’re doing and identify risks and establish whether those risks are adequately managed,” says Hodgkinson.
For defined benefit schemes working towards an ultimate financial goal, it is important to take an integrated covenant, funding and investment risk oversight approach, experts say.
Creating a funding and risk committee enables a scheme to consider these factors together, says John Belgrove, senior partner at Aon Hewitt.
“Funding level-based reporting has become quite common but what is less common is real-time, forensic levels of reporting,” says Belgrove.
Schemes should then be able to break down investment risks into interest, inflation and equity risks and then further into credit and longevity risk, he says.
Risk committees then need the delegated authority from the trustee board to act on risks they identify, Belgrove adds.
Managing DC risk
As auto-enrolment is rolled out and more DB schemes close to future accrual, the focus within defined contribution schemes on installing risk controls is expected to follow this lead.
“Increasingly as DC plans gain greater maturity it’ll cause people to start thinking about operational risk management much more carefully,” says Hodgkinson.
Near the end of 2012, Unilever set up a dedicated DC committee to oversee governance, communication and administration.
The £6.6bn fund’s previous structure comprised committees covering investment and funding, audit and risk, and operations and benefits.
The trustees felt DC governance sat across all of these committees rather than any one.
Achieving independent contract-based governance
The Office of Fair Trading recommended that the government set minimum governance standards for both trustee-based and contract-based schemes to adhere to, in its investigation into the DC workplace pensions market last year.
The report states: “We anticipate that auto-enrolment may see a growth in the number of employers in the market who do not have the resources to ensure that their employees will be protected by the ongoing scrutiny sometimes provided in larger firms by governance panels or the use of advisers.”
In the report, the Association of British Insurers and its members agree that all providers of contract-based and bundled schemes should set up independent governance committees, which will report value-for-money issues to the providers' board.
If the provider’s board does not act on these recommendations to the committee’s satisfaction then it may make the matter public, inform the employer and refer it to the appropriate regulator.
Roger Mattingly, director at PAN Trustees, says the company has had two insurers approach it to provide independent governance for its schemes.
“The only way for them to be totally independent is for appointments to be made by an independent board,” says Mattingly.
If members of the board are paid by the provider this can also compromise its independence, he adds.
Controlling risk in mastertrusts
The Institute of Chartered Accountants in England and Wales, in partnership with the Pensions Regulator, has produced a draft assurance framework for DC mastertrusts to demonstrate they are being governed to a high standard.
The framework identifies 43 control objectives that mastertrusts should demonstrate. These include a comprehensive and transparent governance framework with clear accountabilities, as well as accurate and timely administration.
Final guidance is expected to be delivered within the coming months and is designed to reassure employers shopping around for an auto-enrolment scheme.
