In Pillar 1, we discussed the importance of establishing a framework that clearly sets out your long-term funding target, your time horizon for getting there and the amount of risk you are prepared to take along the way.
In Pillar 2, we will now look at how to work within – and make the best of – this framework, by building the right portfolio to achieve these goals and taking all decisions in the context of your funding objectives.
Make the most of your hard work
While most schemes have a funding objective in place, many are not getting the full value and clarity from the strategic targets and constraints they spent time and energy creating.
We find the best way to keep these front of mind, is by articulating both scheme funding goals and constraints in a simple framework with quantified parameters that measure the objective.
Rather than something you consider only at special occasions, your funding objective should be the driver of every decision you take when managing the scheme. So, at every meeting, trustees should monitor these parameters and use the whole framework to evaluate each decision.
The reason for employing this simple framework is that decisions which may seem to not carry much weight individually, collectively mount up.
If trustees make choices in good faith, but these choices are out of line with their framework and objectives, they may soon realise that they have wandered off course and need to take fundamental (and often expensive) corrective action.
Consistently making decisions against a set of parameters that support your long-term objective means they are much more likely to come together over time to create your desired outcome. It will also help explain and validate your decisions to both internal and external stakeholders – including the regulator.
Too many good ideas may be bad for you
Over the course of their tenure, trustees receive huge amounts of information from different sources at different times, which can make it difficult to see the big picture. An idea or strategy may look promising, but it might not work for you – and could do more harm than good.
Keeping your long-term strategy at the core of your decision-making will enable you to evaluate whether the good idea is actually good for your scheme. With this in mind, your risk management framework needs to be shared with all your advisors, so that they can deliver their advice explicitly against the impact it has on meeting your objectives.