The background:
Our client had always gained comfort from the fact that their scheme’s covenant support was strong. However, they were conscious that in the current environment of economic and political uncertainty this could change. They were also aware that their risk register was in need of an update and could more clearly reflect the latest guidance on integrated risk management from The Pensions Regulator (TPR). They asked us to help.
Our solution:
We recognised that the need to update the risk register came from a desire to manage risk more effectively. Therefore, instead of simply updating their existing document, we worked with the Trustees to reinvigorate their approach to risk management.
We started with an open session which helped the Trustees to understand where they were taking risks and how their key covenant, funding and investment risks interact.
From this overview, they could see that, as expected, their current covenant metrics were strong (ie low risk), but that they were higher risk in other areas. Whilst this balance of risks was comfortable now, if the covenant metrics weakened in the future then there could be cause for concern.
As a result, they wanted a more robust way of measuring any change in factors that may impact the strength of the covenant support over time. This need prompted further work on developing bespoke metrics relating to their sponsors’ financial strength and other specific risks and how these interact with the investment and funding risks within the scheme.
The results:
As well as a fresh and focussed risk register the Trustees now monitor tailored risk metrics. This monitoring is captured in an easily digestible dashboard which is updated frequently. The dashboard, which is both backward and forward-looking, helps them identify when they might need to change their investment strategy, reflect on their funding assumptions, or instigate a contingency plan. This has left the Trustees feeling more in control of their scheme and reassures them that they fully understand the risks they are taking and, critically, how the risks interact with each other.
This scheme has an actuarial valuation coming up and the work we’ve already done will influence the Trustees’ objectives and decision making and help make the process more efficient. This enables the Trustees to focus on their time on the key aspects of the valuation that will really make a difference to the scheme’s journey and reaching the Trustees’ long-term goals.
