Rock crisis highlights issues for pension trustees

Jan 28, 2008

NORTHERN Rock has provided a stark example of what can happen when individuals lose confidence in a financial institution. The run on the bank was stopped when significant guarantees were put in place by the government and there are lessons to be learned. Trustees of pensions schemes need to be on their guard.

What is the link between Northern Rock and pensions?
The Pensions Action Group has made a direct link between Northern Rock and pension schemes by demanding that the support given to its savers should also be given to members of defined benefit pension schemes who have suffered reductions in their pensions due to the wind-up of schemes in deficit.

How does this affect pension scheme trustees?
Trustees of pension schemes must understand the risks that they are exposed to in the operation of their scheme and put in place procedures and controls to manage those risks.

This is not to suggest that pension schemes will either experience such a catastrophic event as Northern Rock or that all risks should be avoided.

Risks need to be managed and good risk management is an essential part of being a trustee. Managing risks will help trustees make more informed decisions about the allocation of limited resources and direct management time to the areas which require more attention.

What steps can trustees take to minimise risk?
A well designed review of risks impacting the pension scheme from the perspective of the trustees should help to identify key risk areas and facilitate prevention of these risks impacting on scheme objectives.

At Baker Tilly, we believe that a one-size-fits-all approach to establishing risk is less effective than a bespoke session involving most or all of the trustees and the pension managers.

What else should trustees consider?
One of the biggest problems faced by Northern Rock was that individual savers lost confidence in the ability of the bank to honour its commitments.

A lack of confidence in pension schemes is often cited as a reason for individuals not to join their employer’s scheme or to make any proper provision for their retirement.

It is, therefore, essential for trustees to develop and implement communication plans that set out the actions that the trustees have taken to ensure compliance with the law.

It should also highlight the trustees’ approach to risk and governance. Transparency and openness are key to gaining the confidence of members and potential members.

Confidence in the pension scheme should also extend to the employer. A well run pension scheme in which the members have confidence will enhance morale and give a greater appreciation of the investment being made by the employer.

For more information or assistance regarding scheme governance and risk management, telephone 01908 687800, e-mail or visit

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