Response to the Pensions Authority consultation on financial management guidelines for defined benefit schemes

In July 2014, the Pensions Authority issued a consultation on Financial Management Guidelines of defined benefit pension schemes. The consultation paper can be viewed here.

The Society submitted a consultation response on 30 September. In the response, we welcome the publication of these guidelines which we see as a positive development. Defined benefit pension schemes have experienced a tumultuous time over the last decade or so and many lessons have been learnt. The publication of these guidelines will greatly assist those schemes that have survived in putting measures in place that will enable trustees to better understand the risks to which their schemes are exposed to and to better manage those risks.

In some areas the proposed guidance is necessarily high level and principle based. However, we believe that in other areas trustees might benefit from greater direction and detail.

The most important points set out in the response are as follows:

(i) There should be a holistic approach to financial management of defined benefit pension schemes, encompassing (among other things) funding, investment, sponsor covenant, insurance arrangements and operational risk.
(ii) Risk management tools such as the risk matrix should be part of a triennial cycle of financial management including actuarial funding reports and investment reviews.
(iii) The strategic asset allocation is possibly the most important investment-related decision and should be allocated a corresponding amount of time and attention.
(iv) Proper risk management will require legal and investment advice in addition to actuarial funding advice.
(v) Trustees will need guidance in improving their level of risk management and the more supporting material is available from the Pensions Authority, the better the outcomes are likely to be.

Full details of the Society’s response is available here