Risk management continues to be one of the hottest topics in the pension industry for a number of reasons, including the uncertainty caused by the current geopolitical and economic climate and the September 2024 release of the Canadian Association of Pension Supervisory Authorities’ new guideline for risk management for plan administrators.
While pension plan administrators generally understand the importance of managing the risks in their plan, the risk guideline is a long document that includes a number of requirements. At the same time, pension plans are facing many risks while the Canadian pension environment is becoming increasingly complex with new risks emerging over time. All this can make pension risk management seem overwhelming.
Read: Expert panel: How will CAPSA’s risk management guideline impact pension plan administrators?
With this in mind, here are some suggested tips for pension plan administrators that may be struggling to decide how best to improve their plan’s risk management and address the requirements of the CAPSA’s risk guideline.
1. Pension risk management is a journey
Pension risk management is a journey and not a one-time exercise. Plan administrators will achieve a better outcome by initially focusing on addressing any material risk management gaps that may exist than by attempting to immediately create a perfect risk management framework. A plan’s risk management practices can and should be improved over time, so it’s important to avoid the temptation to strive for perfection at the outset.
2. Good governance is key
Good pension plan governance is a prerequisite for effective pension risk management. It’s impossible to create and implement a robust risk management framework when there are significant gaps with a plan’s governance practices, such as poor documentation or a lack of clarity of the roles and responsibilities associated with overseeing and running the pension plan. Addressing any significant governance gaps should be a key component of improving the risk management of a pension plan.
3. Your organization may already be doing many of the right things
An organization may already be doing many of the right things from a pension risk management perspective. For example, many administrators and sponsors have reduced the risks associated with the benefit promise in their plan through plan design changes, have changed their plan’s investment strategy to ensure plan assets are sufficiently diversified and that the plan is protected from excessive interest rate risk and have transferred risk to insurance companies through group annuity purchases.
Read: DB pension plan sponsors facing “bottleneck” in annuities market: expert
Plan administrators that have already taken actions to manage the risks in their plan likely have a solid foundation to build on. In this case, they can leverage the guidance contained in the risk guideline to ensure they have a robust risk management framework in place. A robust risk management framework facilitates a holistic and disciplined approach to risk management, which reduces the likelihood that one or more material risks to the plan will be missed.
4. Focus on the material risks
As mentioned above, a pension plan faces many risks, both current and emerging. An administrator should periodically identify and evaluate all plausible risks to their plan, which could include documenting the results of the review in a risk register. However, when it comes to managing and monitoring pension risks, plan administrators have limited resources and should therefore consider focusing most of their attention and resources on the risks that are most material to the plan.
5. Proportionality matters
Canada has a wide variety of pension plans, in terms of type, size and complexity. The risk guideline acknowledges this fact and includes the concept of proportionality, whereby plan administrators are encouraged to adapt their risk management practices to the specific circumstances of their plan, the types of risks that their plan faces and the nature of the plan administrator’s organization.
Plan administrators should keep the concept of proportionality in mind when designing and implementing their risk management framework. In other words, don’t make pension risk management more complicated than it needs to be.
6. The importance of buy-in and communications
Pension risk management requires the involvement and cooperation of a number of stakeholders, including the board of directors, representatives from finance, human resources and legal, as well as third-party providers. When designing and implementing a risk management framework, it’s important to seek input and buy-in from all key stakeholders.
Read: Alberta pension plan wins communications award for approachable, original website
Also, the administrator should clearly communicate to each stakeholder their role in ensuring that the risks to the plan are managed. All communications should be tailored to their audience. For some stakeholders, such as investment managers, communications may be detailed and technical. For other stakeholders, such as the board of directors, communications will likely be high level and strategic. A dashboard can be an effective tool to communicate key risk management concepts, including the results of monitoring key risks, at a high level.
Although pension risk management can appear complex and daunting, a practical and proportional risk management framework is achievable and can add significant value for all pension plans, no matter the type, size and complexity.
With the above considerations in mind, all pension plan administrators — whether or not they already have a robust risk management framework in place, are just beginning to focus on risk management or are somewhere in between — should be well equipped to continue on their risk management journey and thereby increase the likelihood of a positive outcome for the beneficiaries of their pension plan.
Read: Expert panel: Regulatory guidelines, geopolitical risk impacting pension plan sponsors in 2025