Abstract
AbstractThe Working Party has developed some practical hints and tips for those developing integrated risk management (IRM) plans for UK defined benefit pension schemes in the context of the requirements of the Pensions Regulator. Four case studies are presented to illustrate its conclusions, which are encapsulated in the ten commandments for effective IRM. IRM is the consideration of investment, funding and covenant issues, and how these interact. Its purpose should be to aid decision making and so should have a clear outcome in mind. It should be a continuous process and should form part of everyday trustee governance – it is not simply a one-off exercise. Whilst most Trustees and advisors consider funding issues when setting their investment strategy and vice versa, fewer fully integrate covenant into their decision-making process. However, covenant underpins all risk taken in a pension scheme and so needs to form a regular part of trustee discussions and analysis by advisors.
Highlights
Integrated risk management for defined benefit pension schemes understand this volatility and to consider what they would do if their strategy does not proceed as expected
The background to the work was the publication by the Pensions Regulator (TPR) of their revised code of practice on scheme funding (Code 03) (TPR, 2014), which introduced a formal requirement for integrated risk management (IRM) as part of the scheme-funding process
Collaboration: In discussing the case studies, it was clear to the Working Party that the collaboration of all parties is essential for the success of the project, especially the engagement of the sponsor
Summary
In discussing the case studies, it was clear to the Working Party that the collaboration of all parties is essential for the success of the project, especially the engagement of the sponsor. To the extent the final formal valuation results differ (due say to use of more accurate or updated data), the differences fall to be treated as part of experience for the valuation (if small) or as issues rising from subsequent monitoring under the agreed IRM framework (if large). Whilst superficially this approach may sit uncomfortably with the valuation legislation, many schemes have found suitable workarounds which meet the spirit of the legislation, are supported by legal advisers, and do not lead to concern from the Regulator. Additional insight to understand and manage the impact of pension scheme leverage on the business, as well as the opportunity to develop solutions which are more likely to be mutually acceptable
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