What’s at the end of the IRM rainbow?
By Felix Mantz, Cardano Advisory
The concept of Integrated Risk Management (IRM) has been used by the pensions industry for a number of years now, but practical applications of it remain elusive. Common “IRM solutions” deliver single-number answers, or base important decisions on overly-simplified and abstract analysis. The reality, however, is always much more complex.
IRM can’t be captured by a product or project – it is a mindset, an approach to decision-making.
Our view is that IRM is an approach that centres on taking a holistic view when making decisions – this is materially more difficult than making smaller decisions in isolation but, when coupled with strong governance, should lead to better results for members. Trustee knowledge and understanding is essential for this to work in practice, something that training tools like the award-winning PensionSim are aiming to tackle.
But there is one thing to remember when adopting a risk-centric approach in decision making – a viable sponsor is key. Let’s use demographic risk as an example: if members live longer than expected, schemes can use a combination of sponsor contributions or investment returns to fund the shortfall. Obviously, funding is only possible if the sponsor remains viable, but even relying on investment returns requires risk taking, which, in turn, must be underwritten by the sponsor.
Given that few sponsors can provide covenant visibility over the entire life of a pension scheme, planning towards a long-term funding target, with negligible remaining reliance on the covenant, is, therefore, the natural conclusion of most schemes’ IRM journey. To find out how this can be achieved in practice and how IRM can be applied to other common situations along the way (for example, what do you do when things don’t go to plan?)