Risk management, controls and contingency plans

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  • Risk management, controls and contingency plans

    The Pensions Act 2004 has been amended, requiring Trustees to operate an Effective System of Governance (ESoG), including Internal Controls. To evidence an ESoG, TPRs new single code is expected to confirm that trustees, irrespective of the number of scheme members, should:

    • provide for sound and prudent management of activities
    • include an adequate and transparent organisational structure with a clear allocation and appropriate segregation of responsibilities
    • include an effective system for ensuring transmission of information
    • include an effective internal control system
    • ensure continuity and regularity in the performance of the scheme’s activities, including the development of contingency plans
    • include consideration of environmental, social and governance factors related to investment assets in investment decisions, and
    • ensure that the system of governance is subject to regular internal review

    As well as undertaking an ORA, schemes with 100 or more members must include three key functions within the EsoG to improve the Integrated Risk Management (IRM) framework in assessing the overall risk in the scheme.

    • The ‘Risk Management Function’ should assess all the risks faced by the scheme and define acceptable parameters for each, with appropriate controls and contingency plans.
    • The ‘Internal Evaluation Function’ internally evaluates the adequacy and effectiveness of the system of governance.
    • The ‘Actuarial Function’ – already a familiar aspect of defined benefit pension schemes and the ‘function’ can be one person.

    The risk management function may be a sub-committee of the trustees, or an independent body.

    The internal evaluation function will undertake an effective evaluation of a pension schemes management and oversight. However, this evaluation does not need to be led by a certified financial professional or be independently audited.

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