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

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.

What is IRM?

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 “ ”

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

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

Holistic balance sheet

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

Scenarios

Risk factors Non-Market Interest-rates Market Inflation

– 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.

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

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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