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Integrated risk management

Integrated risk management (IRM) is an approach that you can use to identify, manage and monitor risks that can affect the funding objectives for your defined benefit pension scheme.

Key points

  • Effective IRM can have a number of benefits.
  • Your approach to IRM should depend on the circumstances of the scheme and the employer.
  • Use a step-by-step approach to setting up an IRM framework.

What is integrated risk management?

IRM is a risk management approach that can help you to identify, manage and monitor the factors that affect the prospects of meeting your scheme's funding objectives.

The output of your IRM approach should inform discussions with the employer and the decisions you make relating to your strategy for meeting your objectives.

IRM involves examining how employer covenant, investment and funding risks relate to and are affected by each other. It also considers what to do if risks materialise.

Benefits of integrated risk management

IRM forms an important part of good scheme governance. Its benefits include:

  • improved decision-making due to better understanding of risks
  • open discussion between trustees and employers on the risks to each other’s objectives and strategies
  • increased focus on the most important risks
  • better preparation if problems occur
  • improved use of time and resources

Step-by-step approach

Most schemes should be able to apply most of the following steps.

Step 1: Initial planning

Decide what sort of IRM approach is proportionate for your scheme. You should consider the trustees’ scheme funding objective and the employer’s objectives, and the circumstances surrounding both the scheme and the employer.

You can introduce IRM at any point – you don’t have to wait until the next time you value your scheme.

You should be able to build on any existing risk assessment and management processes you have in place.

You need to decide:

  • who co-ordinates the process
  • how the trustees and the employer work together
  • how the trustees enable advisers to work together
  • what decision-making and reporting processes you need

Step 2: Identify risks and initial risk assessment

You should start by analysing the scheme’s current risks – take advice where you need to. This includes risks associated with three elements:

  • assumptions used to calculate the scheme’s liabilities and any recovery plan in place
  • investment strategy and statement of investment principles
  • employer’s ability to support the scheme now and in the future

IRM examines how the significant risks for each element impact on the other two. This may lead to you identifying further risks.

You should usually start with the employer covenant to determine the extent to which it can underwrite the risks to which the scheme is exposed.

Once you’ve assessed each element against the other two you should consider the findings for all three elements together. This should give you the information you need to discuss delivering the overall strategy with the employer including the level of risk that the scheme and employer can support and are willing to accept.

Identifying risks shouldn’t be a one-off exercise. You should repeat the exercise at intervals that are appropriate for the size and circumstances of the scheme. The contingency plans and risk monitoring that you put in place should help you decide how often.

Step 3: Manage risk and develop contingency plans

You may need to work with the employer to manage risk – both now and in the future.

If your scheme is currently above the level of risk that the trustees or employer are willing to accept, you should look at ways to address this. Consider whether the employer covenant can be strengthened or whether your funding and investment strategies need to be revised.

You should also develop contingency plans so that you understand:

  • how you’ll know if risks have risen above the level you or the employer are willing to accept, eg indicators to monitor risk
  • what actions you can take to manage risk
  • what effect these actions would have and whether they’re sufficient to manage risk to an acceptable level

Step 4: Document the IRM framework and decisions

You should clearly document your IRM framework. Use existing documents where possible, eg monitoring and contingency plans contained within the recovery plan.

You should also document the decisions that trustees make. Focus on the main points including what decisions were made and why.

Step 5: Monitor risks

You should regularly monitor how significant risks develop as situations can change quickly and substantially. Regular monitoring enables you to respond quickly to emerging risks and to take advantage of opportunities to lock in improvements.

The frequency should depend on how significant risks are and on scheme resources. As a minimum you should consider carrying out high-level monitoring at least once a year. You should increase the frequency if risks approach the limit of what the trustees and employer are willing to accept.

In many cases it should be possible for you to base the monitoring on information already being produced. For example, you could mainly base employer covenant monitoring on information in the employer’s management accounts.

Your advisers should be able to help you choose risk indicators and triggers for action that are suitable for your scheme.

Risk assessment methods

There are a variety of methods you can use to carry out risk assessments including:

  • stress testing
  • scenario testing
  • scenario projections
  • stochastic modelling
  • reverse stress testing

You should decide what is reasonable and proportionate for your scheme.

IRM guide and checklist

Our IRM quick guide and checklist, aimed at smaller schemes who may have limited resources, highlight how you could benefit from integrated risk management and how to get started. These resources should be used alongside the full IRM guidance.
IRM quick guide PDF 127KB , 4 pages
How to get started with integrated risk management and how your scheme could benefit from it.
IRM checklist PDF 89KB , 3 pages
Help meet your main objectives as a trustee by applying an integrated risk management approach to your scheme.

Detailed guidance