Consulting Actuaries

Integrated Risk Management – a new concept?

Royal London Consulting Actuaries

6 October 2014

The Pensions Regulator’s Code of Practice on DB Funding requires Trustees to consider the most significant risks to the pension scheme; namely

  • Employer covenant
  • Funding
  • Investment

These risks are closely related. One area should not be considered without reference to the impact on the others.  

The Defined Benefit (DB) Funding Code of Practice emphasises the concept of Integrated Risk Management. But what is it?

There is nothing revolutionary. The Regulator’s code simply aims to reflect the best practice that has evolved over recent years. Some trustees will already be taking the necessary actions, whilst others may wish to consider their understanding and approach in order to address any gaps. 

What is Integrated Risk Management?

It means thinking through the individual risks and how they interact when making decisions.    

  •  Does the investment strategy set by the Trustees take into account the strength of the Employer’s covenant? If the investment strategy does not deliver the desired results could the Employer support any increase in contributions? 

Example where investment strategy consistent with covenant

  • Do the Recovery Plan contributions reflect the strength of the Employer covenant and the long term investment strategy?  Where a strong Employer can afford to take a riskier investment strategy, he should have the resources to address a shortfall over a shorter period than a weak Employer.  
  • Do the actuarial valuation assumptions reflect the long term investment strategy and are they consistent with the strength of the Employer’s covenant?

Example where assumptions not consistent with covenant

Complex modelling is not necessary. Consideration of simple, proportionate “what if” scenarios can help the Trustees answer these questions.    

What do Trustees need to do?

Identifying, understanding and monitoring risks, as well as taking advantage of opportunities to mitigate unwanted risks, are all key to the success of any business. The same principles apply to the management of a pension scheme.

The Trustees should have in place a risk management framework which reflects the resources available and the size of the pension scheme relative to the business.

For many Trustees, the focus the Pensions Regulator is giving to integrated risk management will not change how they manage their pension scheme.  The Trustees should consider if they have any gaps in their risk management framework.    

For example:
  • Do the trustees understand the risks to which they are exposed and which ones are important?
  • Are the Trustees happy with the level of, and balance between, the various risks? If not, could they be reduced and what are the consequences?
  • How do the Trustees monitor the important risks?
  • Have the Trustees considered what actions they may take if certain events were to arise?

How can we help?

Royal London Consulting Actuaries can help in a number of ways. For example:

  • We can help Trustees identify and understand the key risks to their scheme.
  • We can undertake “what if” calculations to help the Trustees understand the relative impact on funding levels and contribution requirements if investments underperform or if consideration is being given to reducing investment risk.
  • We can monitor financial markets and the funding level so that the Trustees are aware of opportunities to take advantage of unexpected investment gains to reduce their investment risk.

If you would like to discuss these ideas further please contact us.