Hello, I’m Paul Chilcott, a policy lead here at The Pensions Regulator.
We’ve published some new guidance for trustees and employers to help them adopt an integrated risk management approach when developing their scheme funding plans, as highlighted in our Code of practice No 3: 'Funding Defined Benefits'.
What is an integrated risk management approach?
Integrated risk management (or 'IRM') helps trustees to identify and manage the employer covenant, investment and funding risks to meet their scheme funding objective.
If the three fundamental risks to DB schemes are illustrated as a triangle with employer covenant, investment and funding risks at each corner, each edge of the triangle examines the relationship between two risks bilaterally. For example, the right edge examines the relationship between employer covenant and funding risks. IRM is then represented by a surrounding circle that encompasses all these risks together.
The new guidance aims to do the following:
- Firstly, it sets out a step by step approach to implementing an IRM framework.
- It also provides practical help, with several scenarios and examples to help bring the guidance to life and enable you to make comparisons with your own scheme.
It’s important to note that even if you’ve already adopted an IRM framework, this guidance will act as a useful mechanism to assess your own scheme’s approach.
What should the IRM approach look like?
There is no set formula for what an IRM approach should look like. Any approach will need to be proportionate to the scheme and employer circumstances.
However, IRM works best when trustees and employers work closely together. This helps them develop an understanding of each other’s risk capacity and appetite, and makes it more likely that a funding agreement can be achieved.
What’s in it for your scheme?
A successful IRM framework can result in:
- more robust decision-making due to a better understanding and management of risks that affect scheme funding
- better and more collaborative relationships between trustees and employers, and
- transparent and well documented decisions, which are useful for the trustees, the employer and third parties
You should consider introducing IRM wherever the scheme lies within its actuarial valuation cycle. It doesn’t have to wait until the next valuation is due.
You may also find some other material on our website useful:
- Code of practice 3: Funding defined benefits
- Code of practice 9: Internal controls
- and our Guidance on assessing and monitoring the employer covenant
I hope you’ve found this useful – please visit our website for more information and to read the guidance.