Peter Clarke discusses Barnett Waddingham’s survey on pension risks
Pension scheme trustees will be very aware that the responsibility for the security and payment of members' benefits sits firmly on their shoulders and, to ensure the best possible outcomes for members, a wide range of potential risks need to be managed and monitored.
In order to manage the risks, trustees are asked to identify the key risks that may affect their scheme and, on an ongoing basis, to consider what new risks may be relevant. They are also asked to have the proper internal controls in place to manage the risks.
This led to Barnett Waddingham running a survey to identify top perceived pension risks and how they are being managed.
Out of the 121 respondents to the survey, 24% represented five or more schemes (with just over 25% categorised as independent or professional trustees). Some 93% of responses represented schemes with at least some defined benefits with the majority of those, 69%, being closed to both new entrants and future accrual.
Where the respondent represented a defined contribution scheme, the majority, at 60% were in respect of a master trust. This reflects the trend towards consolidation in line with government and regulator guidance.
Scheme sizes varied from under £20m to over £5bn, with the majority of schemes in the range from £20m to £250m.
The range of responses provided a wide sample of opinions across a number of schemes, each of which will have very different outlooks on potential risks and how they can be managed. The approach taken to managing risks will be dependent on the level of resourcing and the budgets available to meet the advisory costs involved.
The available budget and resource will also influence the approach towards governance, with larger schemes increasingly looking at outsourcing the trustee secretary role and including executive support (a chief operating officer or equivalent role) within the scope of the outsourced services.
Smaller schemes may need more assistance with meeting the more day-to-day governance responsibilities. This is often arranged via a fixed services agreement in place to either support or provide secretariat services.
Economic uncertainty is a key concern of trustees
What were the current, key perceived risks?
When we asked about the top risks affecting schemes in 2020, participants were overwhelmingly concerned with the economic conditions and uncertainty. The top risk facing schemes was felt to be investment performance and market volatility, followed by weakening covenant, visibility of covenant and the potential for employer failure. Further lockdowns, Covid-19 and economic uncertainty were also high on the list for a majority of schemes.
In other areas, such as governance and management, the relationship with employers and changes in regulations were identified as the risks of greatest concern, followed by having the resources needed to govern the scheme, and keeping up to date with trustee knowledge and training.
Incomplete or inaccurate data was felt to be the biggest scheme administration risk. Data protection, cyber-security and loss or theft of personal data were next, closely followed by operational failure.
Those running pension schemes were less concerned overall about member and communication risks. The highest perceived risk in this area was a lack of appreciation or understanding of benefits.
How are these risks being managed and what potential changes could trustees make to improve the position for their schemes?
Most schemes have a relatively simple risk management framework in place. Typically this involves a simple risk register with impact and probability scoring, and details of any mitigation or internal controls in place. This is reviewed on a quarterly or half-yearly basis. However, it is possible that the responses given may not fully disclose some of the additional work undertaken - for example, some schemes may have audit and risk sub-committees in place.
We are seeing a trend for our clients towards more detailed approaches including:
• reviewing documented policies - typically data breach response plans, cyber-security incident response, and business continuity policies;
• the use of dedicated risk management software and risk dashboards;
• stress testing exercises using quantative assessments and stochastic modelling;
• more frequent investment meetings; and
• data cleansing exercises.
A number of relatively mature schemes are also considering their endgame strategy and potential buy-in and buyout opportunities.
Some larger clients are also looking at, or extending, an outsourced chief operating officer role or outsourced secretariat arrangements to manage day-to-day business. This frees up time to enable the trustees to focus on strategy and risk management.
Barnett Waddingham offers a full range of pension scheme governance services to both ongoing clients and those who would like assistance with a particular project. We would be happy to tell you more.
Peter Clarke APMI ACII is senior pension management consultant at Barnett Waddingham