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The opdu Report - Issue 18, May 2005 Bulletin Board Hands up anyone who has a full understanding of the pension system and current legislation regulating occupational pension schemes. If you don’t, the critics tell us that it is probably because the last Government (because when you read this, we will have just elected a new one) created more pension regulations than any of the 16 administrations in the previous 76 years! Following the introduction of the Pensions Act 2004, there are already calls that the regulatory system must be simplified if, amongst other things, trustees are to be given a chance of successfully discharging their duties and responsibilities. Nevertheless, trustees must act now to ensure that they will be able to demonstrate that they have achieved an appropriate standard of care in the performance of their duties. This can be accomplished if trustees are given adequate time and resources to assist them in acquiring the required level of knowledge and understanding necesary for the proper supervision and governance of their schemes. We now have a new Pensions Regulator focusing some of its activities on the key risks to members’ benefits. Therefore, in order to decide what regulatory activity to take (if any), the Regulator will first need to identify and, where possible, anticipate the risks in pension schemes. From the Regulator’s point of view, there are two elements in assessing risk to a pension scheme – the likelihood of an event occurring that affects the security of members’ benefits and the impact of that event should it occur. The Regulator has indicated that it will establish a close relationship with the trustees of schemes where it assesses that, even if there is a low likelihood of a risk to members’ benefits, the potential impact of the risk would be very high. Schemes that are lower risk will attract less regulatory intervention. A proactive and risk-based approach is, of course, not just the domain of the Regulator. As regulation is becoming increasingly focused on risk control, so trustees need to have an understanding of the risks involved and a system of internal controls that allows them to control and monitor these risks and take appropriate action. From the trustees’ perspective, it is necessary to monitor their overall supervision of the scheme and to consider risks under a broad range of headings, e.g. financial, operational, regulatory and reputational. In short, trustees should be involved in the development and review of their scheme’s risk management programme by setting objectives, identifying potential risks and monitoring appropriate controls. Governance is one of the underlying issues in pensions today. Through better governance we improve our decision making and that has to be better for the members. Through better governance we also manage risk and that is at the very foundation of restoring confidence in occupational pensions. At a time when the accountability of trustees is increasing rapidly, they must be prepared and equipped with a scheme specific and user-friendly system to provide access to the information they need, the ability to review and improve standards and the reassurance that the scheme is being well run. Adopting a proactive approach to risk identification and management is an important part of the current trustee role. The critics are right on one point at least; the new regulatory environment will require trustees to demonstrate compliance with the requirements and provide assurance that they are sufficiently knowledgeable to fulfil their roles which, in turn, will mean more work for trustees. But trustees who are sufficiently proactive enough to go through this process will reap the benefits of a real understanding of the risks involved and be better for it. The Challenge The Pensions Act 2004 imposes a duty upon trustees and directors of trustee companies to be conversant with their own scheme documents and to have “knowledge and understanding” of funding and investment principles. In addition, trustees and trustee directors must also have knowledge and understanding of the law relating to pensions and trusts. Codes of Practice are being issued to give practical guidance on the levels of knowledge, training, experience and qualifications that trustees will be required to attain. The Solution trustee risk management (trm) is holding a series of interactive trustee workshops in conjunction with The Pensions Regulator to assist “knowledge and understanding” in the new regulatory/legislative environment. The programme: The Pensions Regulator will outline the new regulatory approach and the implications for trustees; Sacker & Partners will review the legal implications for trustees; ITM Ltd will illustrate the importance of controlling standards of administration and the quality of data; trm will put risk management for trustees in perspective; Standard & Poor’s will review the importance of trustees understanding the strength of the employer’s covenant in view of the debt–like nature of a pension scheme deficit; EPIC Investment Consulting will give guidance on ensuring the Investment Committee is properly resourced; a discussion session will follow. These workshops provide an opportunity for trustees and pension managers to develop practical measures for compliance. Register here to receive details on forthcoming workshops. |
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