Communicating risk to trustees
Over 90% of participants in this month’s Off The Record survey said their fund had an investment committee, while 38% also had a risk committee. Around 28% additionally had other committee structures, such as for pensions, audit, and administration.
Half of respondents provided specialist risk training for trustees, while two-thirds provided access to specialist risk reporting. A UK fund stated: “We supply updates such as funding level quarterly to the full pension fund panel.”
Two-thirds of respondents stated that trustees received specialist risk reporting. Just over half of respondents provided detailed reporting on risk management quarterly, while 40% did so monthly.
Regarding the range and type of information they provide, a Swiss fund said: “We focus on asset valuation, counterparty and concentration risks,” while a Dutch fund supplied “detailed reports on liability risk, investment risk and specific asset categories, like innovative investments and real estate”. A Norwegian fund provided information on “duration of liabilities/swaps, delta of put-positions, scenarios for coverage ratios, TE assets versus liabilities, risk of assets, risk attribution, [and] performance and effectiveness of hedging strategies.”
Some types of risk were not considered important to trustees at all, including operational or systems-related risk and administrative risk; only one respondent regarded sponsor-related risk as important to trustees. Moreover, some reported a mismatch between the importance of some risks to trustees and the amount of attention they receive in reports. While asset-related investment risk is well-balanced, five respondents said that macroeconomic and business-cycle risk took most attention in reporting and only one listed it as most important to trustees. In total, 68% listed liability and ALM risks as most important to trustees but only 44% as taking the most attention in reports.
A UK fund commented on the balance it strikes between detail and comprehensibility of information: “We offer all reports to all participants, but some read and/or comprehend better than others. There is a healthy tension between advisers, who tend to provide too much detail, and decision-makers who seek clarity and high-level summaries of both perceived risks and opportunities.”
A Dutch fund added: “The investment committee gets more detailed information. The others, a comprehensive overview and quarterly a somewhat more detailed report.”
Some 94% believed reducing risk to a VaR number is a dangerous simplification. A Dutch fund said: “Risk should be assessed in multiple dimensions, because risk is an ex-ante concept instead of a measurement of ex-post VaR calculation.”
An Italian fund said: “VaR is an indicator that could be heavily influenced by short-term market volatility. We must also look to cyclical risk and long-term risk.” A Danish fund, while not explicitly backing a single VaR number, did remark that it was best to “keep it simple”.
Respondents were divided as to whether funds had changed their level/frequency of reporting in recent years. A Swiss fund said: “We have developed risk management further following the financial crisis, with the set-up of semi-annual investment risk reports.” A Dutch fund stated that it had not, but added: “The risk reports get more attention nowadays. If they [had] paid attention to the reports earlier, perhaps the damage to the coverage ratio would have been less.”