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LCP launches new risk profiling tool LCP Sonar

18 September 2018

LCP Sonar puts a ‘Spotlight ON All Risks’

LCP’s new interactive profiling tool provides an overview of a scheme’s risk profile compared to other pension schemes, opening the door to clearer understanding of risk, more effective decisions and better outcomes for members.

This new risk management tool puts a Spotlight ON All Risks (SONAR), helping trustees to prioritise the management of different risks faced, based on scheme-specific data.

LCP Sonar benchmarks schemes by looking at financial data covering covenant, funding and investment risks, to see where they stack up compared to other pension schemes. Trustees can see the importance of considering a scheme’s risk profile as a whole, and understanding how these risks interact. It also highlights governance risk, with helpful actions in key governance areas to illustrate best practice.

The scheme data used for LCP Sonar has already shown us:

  • 40% have some sort of legally binding contingency plan in place,
  • 65% are currently in a negative cash flow position; and
  • on average 70% of funded liabilities are hedged.

Jill Ampleford, partner at LCP, said: “With risk management becoming ever more important for a well-run scheme, trustees need to understand the risks they run and respond with a clear plan on how to manage them. LCP Sonar supports engagement and leads to better understanding of the scheme, and ultimately better decisions and outcomes for members.”

As schemes come closer to maturity the sums at risk are greater, the time to make up any poor performance is reduced, and there may be an increased reliance on the employer covenant to plug any gaps. Each scheme has a unique set of circumstances and their approach to risk management should be designed to reflect this.

LCP Sonar opens the door to more practical discussions about risk. This may lead trustees to develop their own bespoke metrics and/or dashboard to track their risks, with actions agreed if certain triggers are met. It also prompts conversations on how schemes may fare in potential future scenarios and what their contingency plans should be.

This is also against a backdrop of increasing regulatory pressure from many sides to manage risk effectively. This includes the Pension Regulator and the expected upcoming IORP II requirements.

Ampleford adds, “Many of our clients have already taken steps to manage their risks effectively, but now is a good time to step back, take stock and consider whether more can be done to effectively manage pension risks. Preparation is key. When there is a bump in the road, and there have been plenty over the years, the amount of preparation will determine how far off course schemes are thrown.”