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Integrated risk management for defined benefit pension schemes: a practical guide

  • A. N. Hitchcox, C. Patel, C. J. Ramsey, E. L. Studd, L. T. Ma, M. B. Elliott and T. W. Keogh...
Abstract

The 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.

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Copyright
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Corresponding author
*Correspondence to: Marian Elliott, Deloitte Total Reward and Benefits Limited, Hill House, 1 Little New Street, London EC4A 3TR, UK. E-mail: marielliott@deloitte.co.uk
References
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Employer Covenant Working Group (2016). Principles of covenant assessment for scheme valuations, available at http://www.ecwg.co.uk/docs/ECWGPrinciples.pdf (accessed 12 June 2017).
Pension Protection Fund (PPF) (2014). Statement of investment principles, available at http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/SIP_July_2014.pdf (accessed 12 June 2017).
The Pensions Regulator (TPR) (2014). Code of practice on scheme funding (Code 03), available at http://www.thepensionsregulator.gov.uk/codes/code-funding-defined-benefits.aspx (accessed 12 June 2017).
The Pensions Regulator (TPR) (2015). Guidance on integrated risk management, available at http://www.thepensionsregulator.gov.uk/guidance/guidance-integrated-risk-management.aspx (accessed 12 June 2017).
Clarke, M.G. et al (2012). Financial management of the UK Pension Protection Fund, available at http://www.actuaries.org.uk/research-and-resources/documents/financial-management-uk-pensions-protection-fund (accessed 12 June 2017).
The Greatest Good for the Greatest Number: an examination of early intervention strategies for trustees and sponsoring employers of stressed defined benefit schemes (2015), available at http://www.pensions-institute.org/reports/GreatestGood.pdf (accessed 12 June 2017).
PLSA Interim report of DB Taskforce: identification of a number of long-term structural weaknesses in the make-up of the DB pensions sector, including size and scale, governance of schemes, fragmented value chain, and the broader legislative and regulatory framework (2016), available at http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0597-DB-Taskforce-Interim-Report.pdf (accessed 12 June 2017).
Estimation of the longer term loss of benefits for UK defined benefit scheme members: use of integrated risk modelling techniques to forecast the level and likelihood of future benefit losses for DB scheme members, available at http://gazellegroup.co.uk/Articles/Gazelle-Corporate-Finance-PLSA-Mousetrap-Study.pdf.
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British Actuarial Journal
  • ISSN: 1357-3217
  • EISSN: 2044-0456
  • URL: /core/journals/british-actuarial-journal
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