(May 18, 2012) — Company bosses should implement business-management techniques to help control their pension fund risk and make better investment decisions, a study has claimed.
Enterprise Risk Management (ERM), which has usually been implemented to run companies more efficiently, should be applied to management of the associated pension fund, actuaries at Hymans Robertson have said.
In the latest edition of Placard, the magazine for the Association of Consulting Actuaries, Jon Hatchett, David Bowie and Nick Forrester wrote: “While actuaries have been helping pension schemes manage elements of their risk for decades, ERM provides a conceptual framework that can help inform the crucial management decisions in a consistent, transparent and effective way.”
The trio continued: “This framework is helpful in advising both trustees, whose governance has come under greater scrutiny, and sponsors where defined benefit pension schemes are increasingly viewed as financial risks rather than employee benefits.”
Advantages of using this technique, according to Hymans Robertson, include being able to identify objectives and constraints, recognise, analyse, mitigate, and monitor risks and improve overall decision-making.
“Since any analysis is about the future, and so is ultimately subjective, ERM is as much art as it is science. Yet ERM can also reduce the costs of running a scheme, by allocating time and energy proportionately to the impact they can make, and reducing the need for fire-fighting,” they said.
The technique, in Hymans Robertson’s view, could help companies running pension funds to think about what they wanted to achieve and avoid, and what might stop them from doing so.
The group said businesses should remember that not all risk was necessarily bad and taking risk may represent the only way to have any prospect of achieving their objectives.
“The key is to make sure that these risks are well managed, and their potential consequence on the various constraints understood, without losing sight of the overall objective. The management process helps schemes assess which risks are likely to be rewarded, articulates for what reason the risks are being taken and ensures the scheme is not inadvertently over-exposed to particular risks or a particular scenario unfolding,” they said.
In their view, ERM offered pension funds a way of “thinking about what they want to achieve and want to avoid, what might stop them from delivering those successes, gathering the pertinent information coherently, analysing possible outcomes consistently and then implementing practical decisions. “
The ERM approach could help businesses link common sense with relevant analysis and effective governance arrangements to produce ‘dramatically improved decision-making’, which was ‘faster, more consistent and with an audit trail’, Hymans Robertson said.