The Pension Risk Management Framework

In recent years, the economic landscape for defined benefit (DB) pension schemes has evolved dramatically for the worse. Among the ongoing challenges are the continued weaknesses in equity markets, falling interest rates, inflation levels that persist despite a drop in economic activity, and ever-increasing life expectancy due to improving medical care, all of which have left pension schemes with large deficits. It is vital that pension schemes develop a framework to examine the assets and liabilities holistically and evaluate all of the risks that a scheme is facing, both together and separately. This paper will present Redington’s Pension Risk Management Framework (PRMF), an effective framework for trustees and sponsors to identify, measure, and understand risk and to respond to them effectively. The PRMF requires stakeholders to agree key objectives and constraints, ensures that these are realistic in light of the scheme’s risk budget, and provides clear “calls to action” when actual outcomes diverge from the planned path to full-funding.