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Reflection on Integrated Risk Management

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By Adam Boyes | April 7, 2020

Not all schemes have comprehensive approaches to Integrated Risk Management in place – what have others achieved and what lessons might be learned from the first quarter of 2020?

My final LinkedIn post of 2019 read, “With IRM dashboards lighting up for Christmas, it’s no surprise that de-risking continues to be high on the wish list.” Although only a few months ago, much has happened already and there will be a lot to reflect on – particularly for defined benefit schemes that did not have clear dashboards in place or were not in a position to act quickly enough on their signals.

Trustees were first asked to prepare Integrated Risk Management (IRM) plans by the Pensions Regulator (tPR) through its July 2014 revision to the funding code of practice (albeit the concept was encouraged before, as a ‘complete financial management plan’ in its April 2012 funding statement). The basic idea is to understand the risks facing the scheme, check they are not outsized relative to the support available and put in place appropriate monitoring to trigger actions when the risks move outside a defined range – this means acting on upside as well as downside.

A basic element, that many (but not all) have implemented is upside de-risking triggers – these would have been being triggered for many schemes in late 2019 and early 2020 causing IRM dashboards to light up and signal action.

Triggers are not the whole story; for this to be most effective, schemes should have:

  • A long-term objective (separate from or embedded within the technical provisions)
  • Clear and appropriate de-risking triggers
  • Daily monitoring with e-alerts
  • A well-planned reaction process that enables rapid response

We’re aware of schemes that have all of these elements in place and who took out unnecessary risk swiftly before the market falls that we saw in March. However, there will be others who were not able to seize opportunities quickly enough because they were missing one of these elements.

The COVID-19 pandemic is the ultimate real-world test of IRM plans. What more severe and sudden an example of a realised risk simultaneously affecting funding, investment and covenant, across the universe of regulated schemes, could there be? Whilst nobody saw it coming (except perhaps Bill Gates who had given a warning five years earlier in his TED talk: The next outbreak? We're not ready), some schemes had arrangements in place that put them in a position of being better able to cope.

The effect on scheme funding levels has, for some, been extreme and instant. Whilst a minority of schemes has seen little or no change in funding level, a great many have seen a funding level deterioration of around 10%, with a small proportion witnessing falls of 20-30%. It will, though, take time for reliable views to emerge on the longer term effects and how funding assumptions should be updated – both financial (like discount rates and inflation) and demographic (like mortality) – all of which are influenced by both the pandemic itself and the enormous policy responses to battling it. Additionally, concerns about the stress on the scheme will be compounded by any stress on the sponsor – in some industries the pace and scale of that stress has been unlike anything seen before, so much so that tPR has had to implement a three-month grace period to give sponsors breathing space where it may be needed to survive.

All schemes could benefit from reflecting on the first quarter of 2020 to see whether there are lessons to learn and opportunities to tune up their approach to risk management.”

Adam Boyes
Head of Trustee Consulting

Beyond the basics of managing welcome upside surprises, an IRM framework can really deliver value to a scheme when it needs it most – as many do now – through including automatic, tangible actions on the downside. While for some schemes this may sound too ambitious it need not be. There are schemes of all sizes that have worked with us to engineer proportionate approaches, mutually acceptable to the sponsor and the trustees, that will help to get those schemes back on track in an agreed and measured way.

Timely, clear information and the ability to act quickly are key to managing risk effectively. Technology solutions like our Asset Liability Suite and services like OneDB can really make a difference with both aspects.

This pandemic is likely to shape future opinion about what good risk management for pension schemes looks like and it may make future scenario testing and contingency planning feel much less abstract. I expect it will also steel tPR’s view that ‘best practice’ IRM is an essential part of the journey towards having a low dependency on the employer in the long run.

The Pension Schemes Bill pushes schemes to have clearer long-term objectives and encourages trustees to reflect on lessons learned. All schemes could benefit from reflecting on the first quarter of 2020 to see whether there are lessons to learn and opportunities to tune up their approach to risk management.

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Adam Boyes
Head of Trustee Consulting

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