Risk management for Master Trusts (Sponsored)

Rose Leonard, Head of Corporate Distribution and Customer Relationship Management and Director of the Zurich Ireland Master Trust, says managing people’s money is not a job to be taken lightly

At this point, many of the readers of this magazine understand what a Master Trust is. A Master Trust is, quite simply, one large pension scheme established under trust that any employer can join. The employers don’t have to be connected or related to one another in any way.

Most defined contribution (DC) pension schemes in Ireland are moving into Master Trusts this year. Thousands of schemes have already moved and most of the rest will move also. 

This is because a directive from Europe, called IORP II, which transposed into Irish law in 2021, sets out onerous requirements on all pension scheme trustees, including lay trustees or employers who act as trustees. 

The impact of that regulation means greater costs, resources, expertise and scrutiny of all pension schemes. Professional qualifications have to be attained by some members of the Board of Trustees. 

It also means that some new appointments have to be made by trustee boards, among them a Key Function Holder for Risk. In essence, the job of a trustee is not one to be taken lightly. 

The Pensions Authority will take a forward-looking risk-based approach to regulating schemes and all of us as trustees must step up to the higher standards required. We are responsible for safeguarding other people’s money. 

Duties and responsibilities of trustees for risk management

In this piece, we are focusing on just one piece of that regulation, the area of Risk Management.

Under the Pensions Act, one of the functions of the Regulator is to issue guidance on the duties and responsibilities of trustees of pension schemes and to issue codes of practice on specific aspects of their responsibilities like risk management (“The Pensions Authority – Code of Practice for trustees”).

It must also be pointed out that the code merely sets out minimum expectations and, as trustees, you may consider it appropriate to implement additional measures over and beyond what the code specifies depending on the size, nature, scale and complexity of your scheme.

So, let’s examine the law. What does the amended Pensions Act now say in relation to Risk Management?

Under the Pensions Act, trustee boards are now obliged to establish a Risk Management Function and to have a Risk Management System so that the risks that could impact on the pension scheme can be identified, measured, monitored, managed and be regularly reported to the trustees. 

The Risk Management System should be effective and well-integrated into the structure and decision-making processes. Risks should also be assessed from the perspective of pension scheme members and other beneficiaries. 

The Pensions Act specifically calls out some risks that must be covered as a minimum in relation to defined benefit schemes. These are wide-ranging and complex, and include items like underwriting and reserving, asset/liability management and insurance. 

The law cites specific risks which can also apply to DC schemes. Such risks cover investment, liquidity and environmental, social and governance, in addition to operational risks as a minimum.

The Pensions Authority is the regulator for pension schemes and it has issued helpful guidance. The Pensions Authority Code details the following areas: Risk Management Function; Risk Management Key Function Holder; Risk Management Policy; and Own Risk Assessment.

As part of the Internal Control Framework, the role of the Risk Key Function Holder is essential. The Risk Key Function Holder must be a fit and proper person with extensive knowledge of pensions law and tax law. They will work closely with the Internal Audit Key Function Holder.

The Risk Management Policy should set out the framework for identifying, measuring, monitoring, managing, mitigating and reporting risk. It should also enable the implementation of a comprehensive Risk Management Function.

In assessing risk, we need to look at controls, risk owners and mitigating actions. The Risk Assessment process should consider initial risk identification and assessment, as well as engagement with the trustees for robust consideration initially and on an ongoing basis. We also recommend annual risk assessment workshops with trustee participation.

Review, challenge, update and report

The Trustee Board must keep its Risk Management policy ‘live’. In other words, risk management needs to be part of your thinking every day as a trustee. 

The Board of Trustees and the Key Function Holder for Risk should be comfortable in challenging and supporting one another.

The Own Risk Assessment (ORA) is a process that aims to identify and assess material risks that threaten the achievement of the Master Trust’s objectives. 

This involves a comprehensive assessment of the overall position of the Master Trust, including the challenges and risks facing the Master Trust and risks to member benefits.

ORA will cover the risk that members’ expectations for scheme benefits will fail to be met, and will also assess the role member communications may play in mitigating risk.  

It will detail qualitative assessment of the Master Trust’s operational risks – e.g. assessment of the adequacy, accuracy and robustness of the system for maintaining benefit records, the handling of members communications and security of the administration system. 

ORA will also consider the potential impact of any decisions made by the Board that may have significantly altered risks to the Master Trust or to the benefits that its members and their beneficiaries may receive.

Our website zurichcorporate.ie has information that trustees and pension fund members need. In addition, Zurich uniquely puts a lot of emphasis on people as well as online technology. We believe that technology on its own is not sufficient when it comes to a person’s pension benefits. 

Different people have different requirements. Some are approaching retirement. Some are from outside Ireland and may only work with a company for a limited time. 

On a more concerning note, some may be worried about how they can maintain their pension payments while they are having difficulties paying next month’s rent. To cater for these diverse needs, we do a lot of one-to-one talks and group presentations.

In conclusion, I must re-iterate this point: managing people’s money is not a job to be taken lightly. Pension schemes help people plan for their future. That is a very onerous task and as trustees we must acknowledge the importance of this responsibility.

This article is sponsored by Zurich.