Turnbull and Pension Scheme Risk

1
Turnbull and Pension Scheme Risk
2
David Jones

• Audit Director
• Ernst Young , Reading

3
Outline

• Turnbull recommendations
• Effect on pension scheme trustees
• Scheme risks
• Monitoring of risks

4
Turnbull Recommendations

• Issued in 1999
• Aimed at listed companies
• Internal controls and risk management

5
Objectives of Turnbull

• Internal controls embedded in processes
• Application on individual entity basis

6
Application of Turnbull

• Risk based approach by management
• Sound system of internal control
• Review of effectiveness
• Part of normal management process
• Not a separate exercise

7
Trustees current climate

• Increased focus on governance
• Increased focus on accountability (Myners)
• Increased interest of employer
• Variable awareness and understanding of trustees

8
Pension fund landscape
Trustees
Actuary
Employer
Pension Fund
Investment Advisor
Pension Manager
Fund Managers/ Custodian
Administrator
9
Risks as Trustee to the Pension Fund
Do you know whether investment risk management
across fund managers is effective, especially for
high risk instruments?
Do you believe that the main risks affecting the
pension fund are known?
How confident are you that the demographics of
the fund are aligned to investment strategy?
Are you confident that all the third parties have
a structured knowledge of the risks they have to
manage and their priority?
How do you currently obtain comfort that risks
are being managed?
Are you confident that membership data is robust?
Do you know that controls over the accuracy and
validity of benefit payments are effective?
Are you confident that counterparty risk is
monitored effectively?
10
What should the Trustees be doing

• Understand key risks and how managed
• Identify key risks, where no ownership, and
  develop actions
• Identify risks where no independent source of
  assurance as to effectiveness of controls
• Identify how risks are managed by third party
  providers

11
Process Overview
Increasing Trustee clarity over risks and how
they are managed
1
2
3
4
Identify gaps and actions to close gaps
Analysis and prioritisation of key risks and
identify ownership
Identify how risks are managed and existing
sources of assurance
Identification of key risks

• Determine which risks are not being managed
  effectively and identify risks where existing
  sources of assurance are inadequate
• Develop actions to improve risk management going
  forward
• Agree future risk management activity

• Through discussions with the risk owner identify
  how key risks are currently being managed
• Identify sources of assurance over the
  effectiveness of the controls in place to manage
  the risks (e.g. FRAG 21, compliance or audit
  reviews)

• Identify the root cause of key risks
• Prioritise the risks according to the potential
  impact likelihood of the risk materialising
• Identify owners for key risks

• Establish the most significant risks
• Identify areas of particular Trustee concern

Practical Actions to Manage Key Scheme Risks
12
Areas to consider

• Trusteeship
• Administration
• Investments
• Actuarial matters
• Corporate changes

13
Trusteeship

• Trustee appointment and training
• Agendas and meetings
• Decision making
• Advisers and delegates
• Employers covenant

14
Administration

• Record keeping
• Payment of benefits
• Pensioners
• Systems
• Receipt of contributions and other income

15
Investments

• Appointment of managers
• Custody of assets
• Investment principles
• Matching assets and liabilities
• Investment restrictions

16
Actuarial matters

• Appointment of actuary
• Terms of reference
• Data maintenance
• Obtaining actuarial advice where necessary and on
  a timely basis

17
Corporate changes

• Acquisitions and disposals by the employer
• Transfer values
• Asset transfers
• Surplus / deficit treatment
• Alignment of benefits
• Communication to members

18
Points to consider

• What risks are acceptable to bear
• Likelihood of risks materialising
• Ability to reduce impact and incidence of risks
  that do materialise
• Costs of operating controls relative to the
  benefits from managing the risks

19
Effective monitoring

• Review of reports on internal control
  outsourced activities
• Annual assessment

20
Review of reports

• Significant risks how have they been
  identified, evaluated and managed
• Effectiveness of internal control reports of
  any failings or weaknesses
• Prompt action to remedy failings
• More extensive monitoring required

21
Annual assessment

• Changes since last assessment
• Scope and quality of ongoing monitoring of risks
• Extent and frequency of communication of the
  results of monitoring
• Incidence of significant failings or weaknesses
  and impact