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Trustees are increasingly being advised to learn from the army and use scenario planning to understand risk and improve their reaction in a downside event, but are they following this advice?
From a sponsor event to a sudden shock to the economy, scenario analysis can help trustees prepare and keep their cool when an event does occur.
Covenant advisory Lincoln Pensions argues that scenario thinking can be used to adopt integrated risk management, helping to prepare for different funding and covenant scenarios.
For Dinesh Visavadia, a director at professional trustee company ITS, scenario planning is a good improvement on value at risk. “It brings to life the conditions that trustees are familiar with,” he says.
While high inflation or fast and slow GDP growth are typically understood, the value at risk analysis is a statistical model – it says if things happen, but “it is not obvious what the good and bad scenarios look like and when they are likely to occur in practice”, he points out.
Scenario planning can help trustees to understand and manage risks. “I use this increasingly in my schemes, and it was particularly useful for one of my schemes where the VAR analysis was being questioned by the company,” he says.
Value of risk registers ‘questionable’ without testing
But while its adoption might be growing slowly but surely, scenario planning – or crisis management – is still in its infancy among UK pension funds, finds Bart Heenk, managing director at consuling firm Avida International, who notes that the practice is “fairly common” among the larger Dutch pension schemes.
“We have done a fair number of crisis management exercises with the Dutch schemes and have just started doing them with a couple of UK schemes,” says Heenk.
The key benefits of such crisis management exercises are that they expose weaknesses in risk management. “Everyone has risk registers these days, but very few of them are actually tested and without testing, they are just paper exercises and their value is therefore questionable,” he believes.
While a plan as such will not prove very useful in a time of crisis, the process of planning will have been, he says. “What counts is having tested your plan, so you know you have the right skills in your crisis team, that people are able to operate as one team, that you don’t overlook crucial aspects like communication with the stakeholders,” Heenk believes.
An added benefit is that simulating a crisis accelerates team-building for the trustee board, which can otherwise be difficult to achieve, he says: "Quite often trustee boards meet only four to six times a year, and this is not really often enough to build a well-oiled machine.”
Has your board taken part in a crisis management exercise?