New guidance published to help DB pension scheme trustees manage funding risks

It has published "non-prescriptive" guidance designed to help trustees develop and implement an integrated risk management (IRM) framework. The document is the latest in a series of guides to help DB trustees apply the regulator's DB funding code of practice, which itself encourages trustees to adopt an integrated approach to risk management.

"IRM is about more than merely understanding risks – it concerns managing them," said Andrew Warwick-Thompson, executive director of regulatory policy at the Pensions Regulator.

"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," he said.

However, pensions expert Robin Ellison of Pinsent Masons, the law firm behind Out-Law.com, said that much of what was set out in the document was "common sense".

“In practice, most trustees are guided through such risks as there are - such as longevity, investment performance, political risk, regulatory risk - by their advisers, so they don’t necessarily need to understand the theory behind integrated risk management," he said. "Risk is a legal issue. Trustees should consider with their legal advisers what is appropriate for their schemes in the light of this guidance.”

The regulator published its code of practice on DB scheme funding last year, to coincide with the introduction of its new statutory objective to minimise any adverse impact on the employer's sustainable growth. Its new approach is based on encouraging trustees to manage the risks that influence the scheme's chances of being able to pay its benefits in full in an integrated way, rather than using discrete triggers such as recovery plan lengths or discount rates to trigger regulatory intervention.

The new guidance describes IRM as a framework which helps trustees assess, prioritise and manage the three main risks to scheme sustainability: the employer covenant, investment and funding risks. IRM allows trustees to work together with sponsoring employers, enabling them to develop a common understanding of the relationship between these risks and maintain a sustainable balance, the regulator said.

According to the regulator, setting up an effective IRM framework requires five steps: preliminary considerations; risk identification and initial risk assessment; ongoing risk management and contingency plans; documenting decisions; and risk monitoring. There is "no one set formula" for what an IRM should look like, as this should be determined by and proportionate to the objectives, needs and circumstances of the particular scheme's trustees and sponsoring employer, it said.

Risk assessment processes should be developed by reference to the scheme's current position and risks, and reflect the funding and investment strategies already in place and the employer's covenant, according to the guidance. This process will help trustees and employers to establish whether they are comfortable with the current level of risk or whether the existing strategies should be modified straight away. Planning and monitoring should be proportionate to the individual scheme's circumstances and the results of the risk assessment, but trustees should consider conducting "high-level monitoring" at least once a year, according to the guidance.