DB Sweet dreams

Posted on: 6th February 2012

Taking control of risk management will help trustees to sleep at night advises Maralyn Thomas, Castle Pension Trustees

In a nutshell
  • trustees are increasingly expected to become proficient in risk management
  • TPR expects all trustees to document the risks to their schemes and have procedures for managing them
  • this is one area where a well qualified, experienced professional trustee can help.


Pension scheme trustees are not expected to become experts. And yet, more and more, they are having to become proficient in risk management, which is now a regular item on trustee meeting agendas. And, in the present circumstances, this is not surprising.
According to the Pensions Regulator (TPR), one of the key tasks for this year is to identify the potential risks facing trustees and their schemes and to develop a risk register. From its published statements, it is clear that TPR expects all trustees to document the risks and to have formal procedures in place for managing those risks.

Much has been written in recent months about risk management and the options for pension schemes in addressing risk reduction. But it has tended to focus on the narrow area of investment risk and the threats posed, for example, by longevity, inflation and interest rate risk.

But, in fact, the risks facing pension schemes are much more wide-ranging than that. TPR, for instance, has said that the risks cover a broad range of functions, including operational, financial, funding, regulatory and compliance processes. They therefore relate to the totality of a scheme’s operations, not just its investments).

The key risks

So what are the key risks facing trustees and their pension schemes?

In its Code of Practice No. 9, TPR lists, under two main headings (People and Processes), what it considers to be the key risks.


Under this heading, there is only one item listed: a lack of knowledge and understanding.

There may be only one item listed, but it is of crucial importance. It reflects the focus on ensuring that trustees understand their duties and responsibilities under the law and that they gain the skills necessary to run their pension schemes well. TPR has referred to the obligation to establish and operate adequate internal controls, which are aimed at ensuring that the scheme is administered and managed in accordance with:

  • the scheme rules
  • the requirements of the law and
  • TPR’s standards as expressed in its Code of Practice.


Under this heading, six items are listed:

  1. Conflicts of interest
  2. Ineffective relations with advisers
  3. Poor record keeping
  4. Deterioration in the employer(s) covenant
  5. Investment risk and
  6. Ineffective retirement processes.

While this list is not exhaustive, TPR says that these risks represent the priority areas which challenge most pension schemes. It also says that these are also particular areas where improvements in trustee governance are needed.

TPR has said that a failure to comply with the legal obligation to establish and operate adequate internal controls is a breach of the law and could result in regulatory intervention. So it expects trustees to address the key risks facing their schemes, in order of priority, over a reasonable period of time.

Outsourced activities

The risks to be identified and managed in this way include any outsourced activities, for example record keeping and administration. TPR says that trustees need to be able to show that any outsourced activities are being adequately controlled and managed.

This is because the trustees are still legally responsible for those activities, even though they have been outsourced.

It is quite common now for a number of services, such as the maintenance of books and records, the calculation of benefits, the reconciliation of investment holdings and bank accounts, and the provision of reports for trustee meetings, to be provided to a scheme from one source. TPR says that, in this situation, the trustees will need reassurance that the risks associated with a lack of segregation of duties are adequately controlled and managed by the service provider.

It suggests, for example, that the key controls operated by the service provider should include peer review of calculations and reconciliations, as well as clear mandates for banking and investment, eg authorisation procedures, and that trustees should verify both the existence and the effectiveness of these controls.

Assessing the risks

The guidance suggests that, broadly, risk assessment should be carried out in four stages:

  1. identification of risk
  2. evaluation of risk – assessing its potential impact
  3. managing risk and
  4. effective monitoring of controls.

It is clear that trustees will need to use their judgment when deciding which of the identified risks need to be addressed first, and how. What is clear is that TPR expects all pension schemes to have formal, documented procedures in place for managing these risks.


Of course, this cannot be a one off, tick box exercise. It has to be an ongoing process. So pension schemes will need to keep reviewing the position to make sure that their risk management system is still operating effectively. For instance, is it detecting and helping to prevent any errors in the existing scheme operations; and will it help to mitigate any new risks, including any significant changes to or affecting the scheme? Pension schemes will also need to find the time to continuously monitor their risk management strategy and action plan and to keep reviewing their progress against it.

TPR says that it expects all trustees to manage the key risks facing their schemes efficiently and effectively, to have a clear understanding of the key controls in place and to document these. This, it says, will help to formalise the risk management procedures and, importantly, to provide the trustees with a central reference point for future trustee meetings. So, clearly, risk management will now need to be a regular agenda item at each trustee meeting.

Good governance

TPR points out that good governance generally depends very much on the behaviour and culture of the trustee board and the employer and that reliance is placed on the capabilities of trustees.

TPR’s view is that the legal obligation to implement adequate internal controls is wide reaching and covers a broad range of governance functions, including  operational, financial, funding, regulatory and compliance processes and risk; and that the need to establish adequate internal controls, therefore, relates to the totality of the scheme’s operations.

The proposition is that good scheme governance leads to effective decision making and to a well run pension scheme. However, identifying the key risks, assessing and quantifying them and then continuously monitoring progress against mitigating these risks can involve a considerable amount of extra work for the pension scheme and will require the trustees to have very good technical and governance skills. And, clearly, someone will need to have overall responsibility for ensuring that the scheme embraces the required standards of practice.

Saving time, trouble and money

Most pension scheme trustees are already doing the best they can, within the time and resources available to them, to keep their technical skills up to date and to run their pension schemes well – and also to comply with all the legal and regulatory requirements, which, unfortunately, are constantly changing. Most trustees, and indeed employers, are also aware that a well run pension scheme can save time, trouble and money for all concerned.

This is one area where a well qualified, experienced professional trustee can help to ensure that the trustee board has the correct mix of people, skills and experience to carry out its role effectively. They can also use their skills and experience to make sure that the scheme governance process is much more efficient and effective and that the key risks are effectively identified and addressed.

The best professional trustees have worked in pensions for many years, so have extensive pensions and business experience, much of it gained at a very senior level. They have a relevant professional qualification, such as actuarial or legal, and they are very experienced trustees. A good professional trustee is a bit like a non-executive director, bringing their expertise and a wider perspective from having been involved with a number of pension schemes and therefore having extensive industry experience. Adding their knowledge and experience to that of the existing trustee board can quickly improve the governance process.

Of course, a common concern of many employers is that their pension scheme is already costing much more than had been anticipated. However, the appointment of a good professional trustee should not be seen as an additional cost. On the contrary, it should be seen as a means of speeding up the journey to that all important goal of a well run pension scheme and to addressing the key risks facing it – because the purpose of running a pension scheme well is to save time, trouble and money for all concerned.

So, provided that you choose your professional trustee carefully, this appointment could be the faster route to a well run pension scheme, to time and money saved and to a better night’s sleep for all concerned.

Featured in the Feburary issue of Pensions World