FI flags potential risk control issues
SWEDEN - Swedish occupational pension funds generally have no large holdings of complex financial instruments, although in a few cases the Finansinspektionen (FI) has highlighted possible deficiencies in related risk control functions.
Following an earlier investigations by the Swedish Financial Supervisory Authority suggesting occupational pension funds were placing more investments in “complicated financial instruments”, the FI issued a questionnaire to around 13 occupational schemes with funds of between SEK 700m (€62m) to SEK 30bn (€2.7bn) to identify the scale of the investment and fund management.
The findings of the survey - which covered investments such as hedge funds, private equity, structured products, options, inflation swaps and credit default swaps (CDS) - revealed the majority of the pension funds have no exposure to the most complex products.
Figures suggested exposure to these “complicated financial instruments” was between 0-43% of managed assets - an average of 15% - while 10 schemes did invest in hedge funds at an average exposure of 9%.
As a result the report stated: “Occupational pension funds predominantly have no large holdings or concentrations of complicated financial instruments. On the whole, the occupational pension funds’ management of this type of holding appears to be satisfactory”.
However the survey responses did raise some issues relating to the schemes’ ability to “verify and evaluate” external asset managers, as some pension funds have a small risk control function while the person in charge of risk management may be relatively inexperienced.
Findings showed the risk management systems adopted by pension schemes ranged from “sophisticated asset management systems” to Excel spreadsheets to no systems at all.
It highlighted the majority of the schemes “outsource all or large portions of their capital to external asset managers” and in some cases pension funds rely on external managers with no internal processes, while others outsource the entire capital but retain their own asset management system.
In the report the FI noted the investigation “has raised new issues regarding the occupational pension funds’ order placement expertise as well as their ability to verify and evaluate external asset managers”.
It pointed out the order placement expertise is the pension funds’ ability to specify how they want the external asset managers to manage the capital - such as level of risk-taking, reporting requirements and specifying limits.
But it warned when schemes outsource the asset management they can lose some control so “you have to know exactly how you want the external management to manage the assets, what information you want back from them and how you should evaluate their performance”.
Instead, the findings showed “not only are the personnel in a few funds inexperienced, in a few cases the risk control function is quite small as well”, so the FI confirmed it intends to “follow-up” on the few pension funds where the survey responses “raised additional issues or may indicate deficiencies in their organisation”.
In particular it suggested the focus would be on “whether a small and perhaps inexperienced risk control function has sufficient control of the risks and the external administrators”, and revealed the follow-up would generally take the form of on-site visits.
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