Wednesday 22 October 2014

Emerging Regulatory Risks: the Case of Pensions Legislation

This year’s announcement of the UK Government Budget includes the decision to end the compulsory annuitisation at age 75. 

Apparently, the announcement took the UK insurance industry by surprise, which in itself is surprising since the 2010 Coalition agreement included a rather blunt statement on the subject: “We will end the rules requiring compulsory annuitisation at 75.” I am sure that this statement may have been considered at the time and briefings to senior management would have been issued, etc.  Yet how could the recent Budget announcement have been a surprise to the insurance industry?

There is another, more recent, policy announcement about government policy on pensions, which might follow a similar pattern.  The Liberal Democrats published in early September a pre-manifesto entitled A Stronger Economy and a Fairer Society which includes the following objective: “Establish a review to consider the case for, and practical implications of, introducing a single rate of tax relief for pensions, which would be designed to be simpler and fairer and which would be set more generously than the current 20% basic rate relief.”

Commentators have already picked up that the “simpler and fairer” rate will be something less than the current 40% rate relief (see, for example, Ian King’s column in The Times on 15 September).  I am sure that briefing papers to senior management may already have been issued.  Some insurance companies may even be looking to assess the quantitative impact of the possible changes in tax relief.  However, this issue will remain a live issue for several years and may surprise the industry, depending on the outcome of the 2015 elections.   

From an ERM perspective, there is a simpler question.  How can you manage the emerging risk from regulatory and policy development which have a long lead time? 

The answer is to design and implement a system that captures emerging risks over time and enables their continuing assessment.  

Here are some key points to consider as part of this design:
  • Have you simplified the system as much as possible to ensure that it has more chance of being implemented and used?
  • What processes would you put in place to ensure that the regulatory emerging risks are re-assessed at regular intervals?
  • How would you identify a person / function / business that would take action if the risk crystallises?
  • How would you integrate emerging risk with the wider risk reporting?
  • Would you consider contingency planning, including analysis and scoping changes in products or systems?

As ever, the challenge will be implementing and embedding.  However, these cases illustrate that there is a combination of high impacts and long lead times that can only be managed in a systematic manner to reduce the likelihood of surprises.

If you work in financial services, I would be keen to hear your thoughts about this article.  If you don’t, I would be keen to know if these lessons resonate with your experience. 

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