Risk Management for Pension Committees
There, in black and white
Nb Bulletin, Vol. 12 N. 4, January 2009
Effective December 13, 2007, all pension committees subject to the Supplemental Pension Plans Act must adopt internal by-laws that include a risk management section. But what does risk management really mean and what are the implications? Who is at risk?
First of all, the goal is not to eliminate all risks but to identify and measure risks to reduce their potential impact.
The best way to do this is through an analysis of the different aspects of risk management. A great deal has been written on this subject and there are several risk analysis methods. However, not all pension plans are exposed to the same risks and they do not assume risks at the same time. There is no match for a customized analysis.
The current economic crisis makes it easier to understand what a risk is and, more importantly, to understand its potential impacts.
Pension plans and their committees face different risks that can be categorized as follows:
- operational risks: risks that must be managed on a day-by-day basis (e.g.: risks linked to benefits administration and communications);
- strategic risks: risks that have an impact on the plan's long-term performance (e.g.: risks linked to decisions made by the sponsor);
- financial risks: risks associated with plan funding (e.g.: investment-related risks);
- catastrophic risks: risks resulting from outside elements that typically have significant consequences (e.g.: fiduciary risks facing pension committees).
We developed an analysis regarding risk management in 4 stages which results in a personalized report.
The first step in a customized analysis consists of identifying risks. Using relevant plan information and information from discussions with plan stakeholders, a list of potential risks is identified. Next, these risks must be quantified.
The second step in the analysis focuses on the most important and influential risks. Identifying the most problematic situations and focusing efforts to reduce their occurrences and minimize their impacts is critical. A chart depicting the likelihood of occurrence or the financial health or status of the plan would allow for the positioning and illustration of all identified risks. It would also provide an overview of all risks to which the plan is exposed. In addition, the chart can delineate changes over time with the assignment of a variability rating to each risk.
In the following example, the least desirable zone would be the one with the highest likelihood of occurrence and the highest consequence.
Example of chart:
The third step consists of determining the acceptable level of risk. Each risk can be tolerated to varying degrees based on the threat that it represents. A position must be taken with respect to each risk and, in collaboration with the stakeholders designated by the committee, the risks to control and the control frequency must be assessed.
The final step involves identifying control and monitoring measures. This step is crucial because the committee will base its actions on these conclusions. Appropriate measures must be established for each risk.
Your pension committee may be very sensitive to certain risks. For this reason, we recommend that you assess your situation and conduct a customized analysis as necessary. The solutions will reflect good practices to adopt and, as a result, your pension committee will be less at the mercy of the risks that it assumes.
Please feel free to contact us for additional information.
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