On 8 December 2015 the Pensions Regulator (Regulator) published guidance for Defined Benefit (DB) pension scheme trustees on Integrated Risk Management (IRM).
What is Integrated Risk Management?
IRM is a risk management tool which is designed to help identify and manage the risks associated with scheme funding. It provides trustees with a tool to help identify and manage the factors that affect the prospects of meeting the “scheme objective” (to pay benefits promised in accordance with scheme rules as and when they fall due and to have sufficient and appropriate assets to cover the scheme’s technical provisions).
The guidance aims to help trustees focus on the interaction between different risks to the scheme: employer covenant, investment and funding-related risks and builds on principles established in the Regulator’s DB funding code and the employer covenant guidance.
Key benefits of IRM
The Regulator has identified the main benefits of IRM as being:
- Risk identification: To identify, prioritise and quantify the material risks to the “scheme objective” and assess their inter-relationships
- Better decision making: Greater trustee and employer understanding of the material risks to the “scheme objective”
- Collaboration: Open and constructive dialogue between the trustees and the employer about the material risks to each other strategies
- Proportionality: A focus on the most important risks helping trustees to adopt a proportionate approach to risk assessment, contingency planning and monitoring of material risks
- Efficiency: Effective use of trustees’, employer’s and advisers’ time
- Risk management: Having plans in place to monitor and manage the material scheme risks to allow swifter reactions to events should problems arise
- Transparency; easier explanation of decisions to third parties
Five key steps
To assist the trustees in putting in place an IRM framework, the guidance takes the trustees through five key steps:
Initial considerations for putting an IRM framework in place
- Risk identification and the initial risk assessment
- Risk management and contingency planning
- Documenting the IRM framework and the decisions reached
- Risk monitoring
Each of the 5 steps is supplemented with practical examples.
Once these steps have been completed trustees should have an IRM framework which is appropriate for their scheme. There is no “one size fits all” formula. It will be determined by and proportionate to the trustees “scheme objective” and the employer’s objectives in light of their needs and circumstances. The Regulator has stated the trustees should consider introducing IRM wherever the scheme lies within its actuarial cycle – there is no need to wait until the next valuation is due.
Feedback from the pensions industry has generally been positive. The concepts outlined in the guidance are not new but are designed to provide practical help to trustees enabling them to assess and monitor funding risks in a way that is appropriate relative to the size of their scheme.
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