Happy (slightly belated) 3rd birthday IORP II! It’s now over 3 years since IORP II landed in the Irish pensions industry, bringing with it a lot of challenges and opportunities for those involved in pension scheme management. After initial reservations and frustrations with certain requirements being placed on schemes (I don't think I've ever heard or said the word "proportionality" so many times), we are beginning to see things settling down into somewhat of a new normal state. Stakeholders have likely adapted to a dynamic they are comfortable with (for the time being at least), in particular regarding the increased focus and structures required for more formal risk management practices which are predominantly being facilitated by actuaries appointed to risk management Key Function Holder (“KFH”) roles.
The value of this ERM-style approach will have its supporters and its critics (any actuaries now practising as a risk KFH will have experienced this first hand over the last few years). The pensions industry has been slower to adopt ERM practices than the wider corporate world where the path is more well-trodden with CROs and large risk departments in place in many companies and the benefits of embedding ERM may not be immediately apparent.
In the past, large corporate failings have been the catalyst to bring about changes and appreciation of the benefits of an ERM approach. Taking a non-pensions example, the Boeing 737 Max crashes in 2019 and 2020 (and resulting controversies)[1] were largely attributed to the Board's tendency to concentrate on revenue in lieu of other areas of risk. This may sound somewhat familiar to the significant focus traditionally placed on pension scheme investment returns which have tended to dominate trustee meetings, often to the detriment of other areas which may be given reduced airtime or get unexpectedly deferred to a later date.
Thankfully, the majority of pension schemes will be able to report having managed to operate relatively unscathed to date having largely adopted the above mentioned 'traditional' approach and can thus question the perceived benefits of ERM. Recent 'closer-to-home' experiences should, however, highlight the benefit of good ERM. Examples such as the UK LDI crisis[2] (investment governance shortcomings), various cyber-attack incidents[3] and the implications of governance and control failures at Board level which have been receiving a lot of media attention of late, all spring to mind. Actuaries, regardless of whether they are appointed in an actuarial, investment, risk management or trustee role, will be called upon to help pension schemes through these types of challenges, preferably in a pre-emptive / non-reactive way as much as possible.
Does having a risk KFH and a holistic, structured risk management framework in place mean pension schemes will be immune to risk……unfortunately not. However, will it enable more thorough and comprehensive advice being provided to stakeholders and ensure schemes are better equipped to deal with what may be thrown at them…..ERM advocates would say yes! Do stakeholders and actuaries want to run the risk of being at the helm if their scheme becomes a Boeing-esque example for the Irish pensions industry?
Author – Emmet McCabe FSAI CERA
Note - The SAI's ERM committee are currently considering ways we can assist with awareness and knowledge of emerging risks that impact the various practice areas where members provide actuarial analysis and advice. If you have any comments or suggestions in this regard, feel free to reach out to myself or a member of the committee.
The opinions expressed in this blog are solely those of the author and do not necessarily represent the views or opinions of the Society of Actuaries in Ireland, the Enterprise Risk Management Committee, or the author’s employer. The information provided herein is for informational purposes only and should not be considered as professional advice. Readers are encouraged to seek independent professional advice for their specific circumstances.
[1] https://hbr.org/2021/06/what-corporate-boards-can-learn-from-boeings-mi…
[2] https://rpia.ca/market-insights/in-the-media/looking-under-the-hood-of-…
[3] https://www.theguardian.com/media/article/2024/may/29/data-breach-expos…