1. Guidance on Integrated Risk Management Lynda Whitney, John Coulthard, Tim Giles, Aidan O’Mahony 21 January 2016

2. Background to Integrated Risk Management (IRM)
To Follow
Funding Code
Covenant Guidance
IRM Guidance
Investment Guidance
July 2014
Guidance on how to meet statutory funding requirements. Set out importance of IRM.
August 2015
Guidance on how to assess employer covenant.
December 2015
Practical help on what IRM may look like.

3. What is IRM?

4. What’s in the new IRM guidance?
What’s in it?
45 pages
Over 80 key principles/questions for trustees and/or employer to consider
17 examples of what good IRM may look like
A five step process
What’s not?
No one set formula
IRM is a risk management tool that helps trustees identify and manage the factors that affect the prospects of meeting the scheme objective “ ”

5. What is the benefit for me?
Better decision making
Focus on most important risks
Be able to act quicker
Discuss risk capacities/appetites
Better security for
members
Lower chance of nasty surprises for employer
Expect to either lead to lower long-term costs for employer or lower risks to
scheme objective
Help avoid concentration of risks
Investments
Scenarios
Better balance between employer and members
Collaborative working
Balance between risk and returns
Fit in best with employer’s growth plans

6. How should you approach this?
Step 1: Putting an IRM framework in place
Discover
Explore express and implied beliefs covering funding, investment, and covenant
Discuss objectives, and understanding of risk
No one set formula for what IRM should look like
Get advisers to work well with each other
Opportunity to review governance structures
Step 2: Assess key risk areas, assess risks together, assess risk capacity/appetite
Understand risk interdependence and sensitivities
Help prioritise risks
Develop
Create common understanding of risks
Look for levers that can control risks while remaining on path to financial objectives
Step 3: Manage risk and contingency plans
Action now and in the future
May not be possible for all risks to be managed
Do not miss opportunities
Deliver
Decide what you can do now and how
Agree what would lead to change in approach
Step 4: Document decisions
Review
Step 5: Monitor scheme risk
Monitor situation to allow timely response to changing circumstances
A structured approach makes seemingly unanswerable questions approachable

7. Holistic balance sheet

8. IRM and Covenant Issues
Employer Balance Sheet
Employer Debt
Employer other liabilities
Employer Equity
Employer Assets
Scheme Holistic Balance Sheet
Scheme long- term funding goal
Scheme assets
Expected returns
Future contributions
Risk
Covenant Reliance =
Trustee Risk Appetite?
Employer Risk Capacity and Risk Appetite
Employer Risk Capacity ???
Employer Risk Appetite ???
Employer Profits and Cash Flow
Profits
Cash Flow
Free

9. Scenarios

10. Risk factors
Non-Market
Interest-rates
Market
Inflation

11. – Agree what would make it urgent
Prioritising actions
Urgent
Not urgent
Important Do
– Do it now!
Decide
– Agree what would make it urgent
Not Important
Delegate
– Who can do it for you?
Discard
– Eliminate it!
So you’ve made the decisions on what to invest and what not to invest in. Sadly not the end of the decision making process though.
What order do you tackle those decisions in?
The picture on the slide effectively shows an Eisenhower matrix. The idea is to classify the actions you need to take into the matrix via their level of importance and urgency. A simple idea but one that can be highly effective. We’ve all been there with to do lists – what is your natural tendency to tackle first – generally the easiest right? It’s a very natural behavioural leaning but could be an entirely unimportant and non urgent task. Classifying your decisions in this way can help overcome those biases and focus your time first on the areas that will have the largest impact.
You also need to think about HOW to implement. Advisory, Directive, Fiduciary, Delegated – there is undoubtedly a lot of jargon and different terminology in the industry. I think the important take away there though is the presence of CHOICE.
Just like the decision of whether to invest in hedge funds or otherwise, the decision on how to implement will be affected by your views and beliefs. And again to ensure your decisions aren’t subject to biases, it is helpful to test those views. What are the cost and time implications, and how do they fit in with your desired way of working. We believe really strongly here there is no one size fits all approach – and that is why we are implementation neutral. If we look at the way our clients implement their strategies we see a full spectrum of different methods.
So.. I hope you’ve found that overview of how we help our client make decisions interesting.
I’m now going to pass over the Tim M who will look at two practical and often fairly emotive investment ideas so you can see that process in action.

12. Key Messages from IRM guidance
Consider risks together, and prioritise them
Take “risk mitigation” actions if better strategy available or if objectives not appropriate for risk appetite or risk capacity
Develop contingency plans for main risk factors
Work collaboratively
Trustees and Employer
Actuarial, Investment and Covenant advisors
Initial investment in time will be repaid as framework used
Better decision making
Focus on most important risks
Makes decisions easier to explain e.g to the Pensions Regulator

13. Questions How useful (to trustees) is this new guidance? A Very useful
B Useful
C Not very useful
D unhelpful
How likely is it that employers will engage with trustees about IRM?
A Very likely
B Likely
C Not very likely
D Very unlikely

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