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The Turnball Report
Running a pension scheme is a risky business...
No doubt most trustees of pension schemes are currently feeling that they are only too aware of the risks of running a pension scheme, particularly those who have some equity investment. However, the Turnbull Report covers wider business risks, as well as the obvious risks that trustees are facing on a daily basis.
Background
The Auditing Practices Board (part of the Consultative Committee of Accounting Bodies) set up a Committee of Corporate Governance to investigate the need for Companies to report on corporate governance issues in their accounts. They published the "Combined Code: Principles of Good Governance and Code of Best Practice", which covered, among other things, the need to carry out risk analyses.
To expand upon the risk analysis part of this, the Internal Control Working Party was set up (led by Nigel Turnbull) to give guidance to companies on how to comply with this aspect of the Combined Code. This working party published "Internal Control: Guidance for Directors on the Combined Code", more commonly known as the Turnbull Report.
Whilst the Turnbull Report does not specifically apply to pension plan accounts, it is considered best practice for trustees to consider the risks facing their scheme, and the auditors will like to see a statement about this in the scheme's accounts. This statement may currently be a general declaration such as:
The Turnbull Report recommends that companies should have in place a sound system of internal control to help minimise the risk of administrative inaccuracies. The Institute of Chartered Accountants have recommended that these controls should be extended to pension schemes. In the Scheme's case the management of this risk is a collective responsibility shared between the Trustees. The effectiveness of the internal controls and the risks themselves are reviewed and evaluated from time to time.
However a fuller consideration of the risks being taken is likely to give the Trustees and plan sponsors comfort. This could be achieved by working through the factors set out in the Turnbull Report as follows:
- the nature and extent of the risks facing the entity (i.e. the scheme);
- the extent and categories of risk which it regards as acceptable for the scheme to bear;
- the likelihood of the risks concerned materialising;
- the scheme's ability to reduce the incidence and impact on the business of risks that do materialise; and
- the costs of operating particular controls relative to the benefit thereby obtained in managing the related risks.
Application to Pension Schemes
Whilst the report is not designed specifically for pension schemes it has clear applications to them, and a number of our clients have asked us to produce a report covering the risks faced by the scheme to aid the trustees in analysing whether appropriate procedures are currently in place.
Risks we have identified cover a wide range of eventualities from the most obvious to some areas trustees had never properly considered before. Examples include:
- investment risks;
- mis-communication of benefits;
- inadequate passing on of knowledge;
- company insolvency;
- payroll errors;
- poorly judged or inappropriate actuarial assumptions.
The risks identified can then be judged on two criteria:
For example the magnitude of impact of "company insolvency" could be very "high", but this is only a major issue for the scheme if the chance of it happening is not remote, which would depend upon the specific circumstances of the employer in question.
The risks analysed might be categorised into 5 main areas of the scheme:
- Business risk - company;
- Business risk - trustees;
- Economic/political risk;
- Third parties (including administrators, investment managers, actuaries, lawyers, auditors);
- Benefits/experience.
Once the risks have been analysed in this way, the trustees can then demonstrate that they have considered the whole range of risks faced by the scheme, as recommended by the Turnbull Report, and also show that, where appropriate, measures are in place to limit the impact of such risks.
What to do next
If you would like any further details of how Barnett Waddingham can help you analyse the risks specific to your pension scheme, please contact your usual consultant.
Barnett Waddingham, September 2002.