Protecting members' interests (Sponsored)

Jun 03, 2020
The increased emphasis on governance and risk management is good news for pension scheme members, according to Zurich’s Rose Leonard.

The unprecedented market tumult caused by the COVID-19 pandemic has served as a timely reminder of the need for high standards of governance and risk management in pension schemes. “There has been a lot of emphasis on these things, both from the regulators here in Ireland as well as from Europe and internationally,” says Rose Leonard, Head of Corporate Distribution and CRM at Zurich.

“Even in normal circumstances, good governance and risk management drives better outcomes for scheme members and improves value for money,” she adds. “If you think about the situation which arose as a result of COVID-19, nobody could ever have anticipated it. Even three months ago, noone thought it would have such a big impact on schemes and trustees.”

This crisis has brought the role of trustees into sharp focus. “Pension scheme trustees mind other people’s money, the same as a financial institution,” Rose notes. “They have to ask themselves what they should be doing at the moment.”

The short answer is everything that a financial institution would do. “They should be looking at business continuity planning and examining their governing documents to see if they are allowed to operate remotely. Trustees can outsource most functions like administration and investment management, but they cannot outsource responsibility.”
It is not only their own ability to operate in a remote environment that should concern them. “They have to make sure that their investment managers can conduct their business remotely and that the administrators can pay benefits to members. They also need to pay attention to the strength of the employer covenant to pay contributions.”

That last point is of growing importance as more and more companies feel the strain of the recession brought on by the pandemic. “At Zurich, we have received enquiries about suspending contribution payments, but that is more of a question of the contracts of employment of the scheme members rather than the scheme’s governing documents.”

When it comes to employers who are availing of the COVID-19 Temporary Wage Subsidy Scheme, the subsidy is not subject to PAYE when it is paid, but it is not a tax-free payment either. Trustees and employers will have to decide how they are going to treat it for pension purposes. They should refer to their pension providers for direction in this sort of situation.

Extreme volatility in financial markets has been another product of the pandemic. “The market collapsed early on, but a lot of the losses have been made up since then,” Rose notes. “This highlights the importance of trustees talking to their investment managers. One thing we would caution against is making hasty market decisions in response to short-term market turbulence. A lot of defined contribution schemes are in default life-styling strategies in any case, and this will have protected members approaching retirement from recent falls in the market.”

The impact of the COVID-19 pandemic, however catastrophic, will be temporary. Directive (EU) 2016/2341, on the other hand, is likely to be with us for very many years.

Otherwise known as the directive on the activities and supervision of institutions for occupational retirement provision or IORPs (IORP II), it came into force in the EU on 12 January 2017. It was due to be transposed into national law in Ireland by 13 January 2019 but was delayed because of Brexit and other factors.

The main provisions in IORP II relate to governance, investment, risk management, member communication, as well as strengthening supervisory powers. The directive requires that all pension schemes should have an “effective system of governance which provides for sound and prudent management of their activities”.

This includes risk management and internal audit. Schemes will have to appoint individuals or firms to undertake these roles formally. The directive also sets out “fit and proper” requirements which people must fulfil to be involved in the running of pension schemes. For trustees, their qualifications, knowledge, and experience should be adequate to enable prudent management of the scheme.

Schemes will be required to carry out and document their own risk assessment at least every three years. Trustees will also have to include consideration of environmental, social, and governance (ESG) factors related to investment assets in investment decisions. Furthermore, the statement of investment principles must contain details of how the investment policy takes ESG factors into account.

“IORP II recognises schemes as financial institutions in themselves,” Rose adds. “And that has very wide-ranging implications. The directive will harmonise the governance and regulation of schemes across Europe. It is also driving awareness and enhancement of governance. It brought in the concept of own risk assessment.”

Zurich is already prepared for these requirements and has developed proprietary tools and processes to support trustees in meeting them. For example, Zurich assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling (TRP) process, which allows the company to identify and evaluate the probability and severity of any given risk scenario. “This allows us to develop, implement, and monitor improvements,” says Rose.

Also, Zurich has put in place a rigorous investment management process, which includes multiple layers of oversight and monitoring by regulators, internal auditors, external auditors, external counter-parties and custodians, the Zurich Group (parent) and the Zurich Board.

The directive also includes significant member disclosure requirements. Key changes include an obligation to provide an annual statement to all members, including deferred and pensioner members and, for defined contribution schemes, the provision of investment performance information going back five years. “Trustees will have to look at current member communications and what changes need to be made in light of the directive,” says Rose.

The COVID-19 pandemic and the imminent transposition into Irish law of the IORP II Directive will make it more important than ever for pension scheme trustees to have access to investment managers and scheme administrators who can offer the very highest standards of risk management and governance, she concludes.

“Trustees will have to ensure that they meet all the requirements of IORP II,” Rose says. “This is important not only from a compliance perspective, but it will also ensure better outcomes for members.”

For more information, visit Zurich Life Assurance plc is regulated by the Central Bank of Ireland.

(This article is sponsored by Zurich.)