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Simplifying Integrated Risk Management

Why is everyone trying to over-complicate Integrated Risk Management?

Andrew Penketh, Partner, Head of Pension Funds
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Integrated Risk Management (IRM), put simply, is a process which supports Trustees to holistically manage their pension risks.

The concept was introduced by the Pensions Regulator (TPR), to provide Trustees with guidance as to how they could more effectively manage the risks associated with ensuring adequate funding levels for their pension arrangements.

Similarly to the guidance note provided by TPR regarding employer covenant provision, there is no legal requirement for Trustees to conduct an IRM exercise. However, there is an expectation that some form of IRM analysis will be seen as ‘best practice’.

For many Trustees whose pension arrangements have established risk management programmes, there should (in theory) be minimal additional work. There may perhaps be more comprehensive documentation of discussions/decision making around assessing multiple risk events, and more time spent considering how these multiple risk events should be monitored in future, but that should be it.

For others, however, IRM may be the catalyst which encourages them to take a more detailed approach to pension risk management.

What is Integrated Risk Management?

TPR has incorporated a number of corporate risk management techniques (including enterprise-wide risk management, the need to develop a risk philosophy and identifying value-added risk solutions) into the UK environment, with the end product being IRM. Specifically, it has identified three activities which have the greatest impact on a Defined Benefit (DB) pension arrangement’s funding position:

  • the employer covenant assessment
  • determination of the funding position
  • investment strategy.
  • integrated-risk-management info graphic

    Each of these activities have a number of risks associated with them (e.g. strength of covenant, appropriateness of actuarial assumptions, under-performing investment managers etc.). Historically, Trustees have been diligent in assessing specific individual risks associated with each activity in isolation (and reflecting this in their Risk Registers). IRM, however, takes this work one step further and asks Trustees to consider topics such as:

    • the cumulative impact of multiple risks arising from certain events (‘risk contagion’)
    • the assessment and mitigation of risks relating to the inter-connectivity between differing risks/activities (e.g. what will be the cumulative impact if a global recession happens tomorrow?)
    • the need for more scenario and contingency planning and the development of ‘trigger events’ which reflect the Trustees’ appetite for risk
    • greater clarity of roles and responsibilities for all key stakeholders (including advisors)
    • effective risk monitoring, including regular reviews to check monitoring is taking place
    • documentation showing key decision-making in the context of a pension scheme’s long term strategy and its Trustees’ risk philosophy.

    IRM does not need new technology or complex solutions, it just needs Trustees to find the time to logically and objectively think about the risks their pension scheme is facing, and to then agree how these risks will be managed going forward.

    The diagram above briefly describes the five step process we believe all Trustees should consider when it comes to implementing an IRM strategy.

    Moving forward

    We think IRM is definitely the way forward for Trustees, but we would advocate:

    • applying IRM principles to all pension risks (e.g. good governance, quality administration etc.)
    • recognising that this is not a one-off exercise but it should be embedded within a pension scheme’s risk management programme going forward.

    Contact us

    Andrew Penketh
    Andrew Penketh
    Head of Pension Funds