DB risk assessment must be ‘objective’ as possible – Irish Regulator

Irish defined benefit (DB) trustees undertaking a financial risk assessment of their scheme must be as “objective” as possible, according to the country’s Pensions Regulator, Brendan Kennedy.

Speaking at the Irish Association of Pension Funds (IAPF) Governance Conference today, 1 December, Kennedy commented on the Pensions Authority’s DB risk measure, which was recently published.

Kennedy said that although DB schemes are too complicated to be summarised in a single number, the authority has published a standard risk measure and it expects trustees to include this in their financial assessment.

Explaining why the authority has chosen to do this, he said that the regulator recognises that many trustees and their advisers would like guidance from the authority about what degree of risk assessment the authority is looking for and what methodology they are favouring.

“We are also interested in how risk compares amongst schemes…it is useful to all of us to have a sense of how risk compares among DB schemes and a standardised risk measure is useful for this,” he added.

However, he stressed that there is no legal obligation for trustees to take any steps in response to their risk measure. On the risk assessment itself, he said: “Trustees must be as objective as possible and proper governance and processes will make this assessment as good as can be.”

“Every DB trustee is familiar with the funding standard and familiar with the obligations that arise when a scheme doesn’t meet the funding standard. However, the funding standard is not intended to be the basis of which trustees decide on the funding of their scheme. Rather what the trustees should be doing is making their funding decisions after examining a range of measures related to solvency, risk and sustainability.”

Kennedy said it is important to think about funding and risk at the same time. The main risks for DB schemes include longevity risk, investment risk and interest rate risk. However, he noted that for most Irish DB schemes, this financial risk is offset by the possibility that the sponsoring employer will, if needed, make additional financial contributions in the event that these risks come to pass.

“You can’t measure this employer support in the way you can measure the risks – the future employer support for most schemes depends on both the ability of the employer to support schemes but also the willingness…. It’s not possible to put a number on employer willingness.”

Therefore, he said the total financial risk is ultimately a matter of judgement rather than of calculation.

“What the authority expects trustees of DB schemes to do, is to put a value on the financial risk and then they should use this value, the result of these risk calculations, as the basis for engagement, with the sponsoring employer.

“The objective here is that the employer understands the likelihood of any support that may be sought and there should be a proper, open, and informed conversation between the employer and the trustees so that the trustees can make a judgement of how likely and how reliable such support will be if needed,” Kennedy stated.

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