The opdu Report - Issue 13, November 2002

Overview
Risk Management for Trustees
Brian Holden MBE

For those involved in pensions, much of the current thought is, quite rightly, about rising pension costs and too much red tape, and the need to cut that red tape and help contain costs, making it easier for employers to provide and maintain occupational pensions. As a part of those deliberations, attention is being given to the role of trustees and recent events (e.g. Myners' Review, Pickering Report etc) have, once again, brought the duties and responsibilities of trustees into sharp focus. On a positive note, the recently published Trustee Code of Practice (which can be downloaded here) has already been referred to as a kind of 'trustee's job description' and has been acknowledged as a welcome piece of work and long overdue.

Over the years, it is unfortunate that the system of pension scheme governance has been referred to as 'lay trusteeship' because this has become almost wholly associated with ordinary scheme members having representation on trustee boards. Whilst this is a major plank of the Government's pensions policy, lay trustees also come from other sources. Trustees appointed by employers, and who may also occupy executive/board positions in the company, are also lay trustees.

For the vast majority of trustees, therefore, the role is a non-executive, non-technical and non-professional one. It goes without saying that trustees should not make decisions in areas with which they are not familiar. However, this familiarity should be with strategic concepts rather than minute detail. In my opinion, trustees most certainly cannot delegate the responsibility for risk management. Everything we do involves risks. Whilst you can seek to mitigate a risk, you cannot guarantee to remove the risk. At the strategic level, trustees should take steps to identify and seek to control the risks inherent in the pension scheme. All pension schemes have risks attached. These risks are real and no one can eliminate them. Trustees are acting on behalf of others and they must have an obligation to try to control risks wherever possible. But first of all, risks have to be identified before they can be managed. The risks facing trustees can be many and varied - e.g. financial, compliance, operational, strategic and so on.

However, it is possible for the risks facing trustees to be identified and trustees should be putting in place measured and appropriate controls to ensure that the risks are managed. As guardians of the scheme's, and other people's, assets it is entirely proper that trustees have well formulated risk management procedures. This approach, whilst involving a significant time commitment (of itself a risk!) does allow trustees to properly identify, control and manage risk, which will protect the members, the employer and the trustees.

The trustees should be responsible for the overall system of control of risk, but the management of that system can properly be the responsibility of the scheme management. Whilst trustees can be assisted in this wide-ranging and essential activity, the ownership of the risk management function is with the trustees, and it is from that source that full and active participation should be a priority. Believe me, you need have no fears that lay trustees cannot engage in the determination of sound systems of internal control!

The Government has promised a Green Paper before the end of the year. In the context of occupational pensions, I hope that we will be able to look at trusteeship as a united whole, and not in the piecemeal approach adopted by Myners and Pickering. How can we achieve the right balance between the trustees' supervisory function and the role of the professionals appointed to manage or advise the scheme? If we take 'familiar with the issues' to mean being conversant with the detail rather than being aware of the concepts, the Government is very close to creating a situation where the fund manager, the actuary, the consultant and the trustee are indistinguishable. This is hardly a very challenging environment. In reviewing the whole picture, the Government would do well to take heed that an increased awareness of the concepts should enable trustees to properly supervise the executive and professional functions by effective delegation which, if properly monitored, will lead to more accountability rather than less.