The Pensions Regulator publishes guidance on integrating risk management
Tuesday 8 December 2015
The Pensions Regulator today published new guidance for defined benefit (DB) scheme trustees on the development and implementation of an integrated framework for managing risk.
Integrated risk management (IRM) helps scheme trustees to assess, prioritise and manage the employer covenant, investment and funding risks. It enables them to engage with the sponsoring employer to develop a common understanding of the relationships between these risks in order to maintain a balance of risk which is sustainable for both the scheme and employer.
The new regulatory guidance on integrated risk management is not prescriptive. It provides practical help on what a proportionate and integrated approach to risk management might look like and how trustees can use it as part of their plans for meeting their scheme’s funding objectives.
Andrew Warwick-Thompson, Executive Director, Regulatory Policy, at The Pensions Regulator, said: "IRM is about more than merely understanding risks. It concerns managing them. Our guidance sets out how trustees and employers should be thinking about risks materialising and how to manage their possible impact. It should be seen as a valuable tool for both employers and trustees to agree a sustainable plan for the delivery of promised member benefits.
"Last month we published research on the skills and competencies of trustees and we have started an open debate with industry about what a 21st Century trustee should look like.
"Our role is to provide trustees, who are operating in a challenging economic environment, with practical and accessible information. Our IRM guidance is another example of our commitment to helping trustees to improve their knowledge and understanding. Trustees have told us that this is an area in which they would particularly value further specific guidance and we have responded."
A commitment to IRM can result in the following benefits:
- Better decision making resulting from greater trustee and employer understanding of risks.
- Better working relationships between trustees and employers because of open and constructive dialogue.
- More effective risk assessment, contingency planning and monitoring arrangements resulting from an evidence-based focus on the most important risks.
- Greater efficiency due to more effective use of trustee, employer and adviser resources.
- Today’s publication is the latest in a series of guides for trustees of DB occupational pension schemes to help them apply the DB funding code of practice. One of the code’s main principles is that trustees should adopt an integrated approach to risk management. In August we published good practice guidance on how to assess and monitor an employer’s covenant, the employer’s legal obligation and financial ability to support their scheme.
- The DB landscape consists of 5,945 schemes with a combined membership of 11 million people and assets of £1,298.3 billion.
- Our IRM guidance takes trustees through the five important steps associated with effective IRM:
A. Initial considerations for putting an IRM framework in place
There is no one set formula for what IRM should look like. It will be determined by, and be proportionate to, trustee and employer objectives, needs and circumstances.
B. Risk identification and the initial risk assessment
Trustees should first examine the scheme’s current position and risks. This should reflect the trustees’ objectives and the funding and investment strategies already in place and the employer’s covenant. IRM risk assessment is then developed from this point.
C. Risk management and contingency plans
An analysis of the current position and possible reasonable alternatives enables trustees and the employer to know whether they are comfortable with current investment and funding strategies or if these should be modified straight away. Contingency planning will then enable action to be taken swiftly to reduce or manage risk levels acceptably.
D. Documenting decisions
The great benefit for trustees in recording their thinking and decisions is that this should distil matters down to a series of key points so that they retain a clear overview on what is important and why. A better understanding of risks leads to better decisions.
E. Risk monitoring
Planning and monitoring should be proportionate. The frequency and depth of review and the trustees’ response to it depends on a scheme’s circumstances and their risk assessment. As a minimum, trustees should consider conducting high level monitoring at least once a year.
- To explore key issues on the effective operation of trustee boards in more depth, the regulator is undertaking more qualitative research and analysis, focusing on areas such as the structures and processes that promote the effective operation of trustee boards, particularly on the role of the chair, and the best way to deploy training and support tools to achieve effective trusteeship across schemes of all sizes and benefit structures.
- Next year the regulator will set out what it believes an effective 21st Century trustee looks like and what it will do to further support trustees.
- The Pensions Regulator is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).