Good risk management means understanding your priorities, matching the right skills to the right tasks and creating an inclusive culture says Sue Austen, partner at Aon.
Good governance should be woven into the fabric of pension scheme risk management. With an increasingly complex range of challenges facing trustees and pension managers, defined benefit (DB) and defined contribution (DC) schemes need to be able to recognise the risks that have the biggest potential impact on them. This should then form the basis for future work planning, skills needs and decision-making.
Risk prioritisation is a clear theme running through the findings from Aon’s Global Pension Risk Survey 2023/24, which surveyed trustees, pension managers and sponsors from 204 UK DB schemes of different sizes and sectors in the second quarter of 2023.
Every board will have its own unique strengths and areas for improvement. However, there are a number of key steps that all schemes can follow to make sure they are able to govern their scheme as effectively as possible.
Create a work plan to identify goals and manage risks
To manage their vast range of work, from regulatory burden to investment risk and member engagement, trustees need to have a clear long-term plan of their scheme’s future direction, goals, resource needs and timelines. But…
…stay agile
circumstances such as investment market conditions and emerging risks can change overnight, and schemes’ plans will also need to be able to adapt in response.
Identify skills and knowledge gaps
With a clear work plan and vision, trustees can identify the future skills they need on their board and spot current gaps. This exercise should also highlight projects where trustees will need external expertise, so that they can plan ahead in terms of timing and budget.
Review board composition
Diversity of thought leads to better board decision-making, which is essential to good governance. Different ways of thinking and a diverse range of experience become particularly important when trustees are under pressure to make complex, time-sensitive decisions. Unconscious bias can creep in at those times when it is more important than ever to explore problems from different perspectives. Diversity of board composition is also a focus for The Pensions Regulator (TPR), which brought out guidance on Equality Diversity and Inclusion (EDI) in March 2023 and recently reported the results of its 2023 survey on Trustee Diversity and Inclusion.
Pleasingly, Aon’s Global Pension Risk Survey 2023/24 found that over 40 percent of boards have already started to look at board composition with EDI in mind, with a further 30 percent planning on doing so within the next 12 months. This is higher than TPR’s survey indicates, where only around a third of schemes had taken or planned action to create a more diverse trustee board.
EDI Activities in the Next 12 Months
Source: 2023/24 Global Pension Risk Survey – UK Findings
Involve member perspectives
Trustees from different backgrounds, including people who represent the scheme’s membership, will be able to see issues from different perspectives. If a board only includes senior managers, it can be difficult to make sure member priorities are included in decision-making and that can affect member engagement. It is encouraging to see that 60 percent of respondents to our Global Risk Survey are either already addressing member engagement or intend to do so in the next year.
Develop a trustee EDI policy
Creating an EDI policy shows commitment to board diversity for the long term. A policy does not have to be all-encompassing from the start – it might just start with some basic principles such as trustee recruitment, that can be expanded over time. Larger schemes are leading the way in developing EDI policies, with 30 percent of schemes with over £1 billion in assets having a policy, compared to 21 percent of schemes overall. (Aon Global Pension Risk Survey 2023/24)
Create an inclusive environment
The advantages of diverse perspectives quickly filter into all areas of decision-making, but to feel the full benefits of diversity, trustee boards also need to be inclusive. That means strong chairing skills are key to make sure everyone’s voice is heard and to create an environment where all feel valued. If trustees have carried out the basics of creating a work plan, reviewing board skills and improving diversity, inclusivity should follow as the contribution that each individual will make is clear. This is an area TPR’s survey considered and again, around a third of trustee boards had taken some action or were planning activities to improve inclusivity on their boards.
Think about EDI more broadly
Beyond board composition and decision-making, there are also other, wider EDI-related issues that affect pension schemes. The impact of GMP equalisation, gender pension gaps, investment beliefs and alignment between the scheme’s and sponsor’s views on EDI are all also part of the wider picture. In practice, EDI should not be seen as a topic on its own – it should be embedded into business as usual activity in the same way risk management is built into decision-making.
Addressing all these ideas will not provide an overnight fix, but every trustee board should agree their own next steps to embed EDI in their scheme’s governance practices. That will ultimately improve the way that risks are prioritised and managed within your scheme, improve decision-making and lead to better outcomes for your membership.
You can download a copy of Aon’s Global Pension Risk Survey 2023/24 at www.aon.com/GPRS2023.