There must be a “specific and conscious decision to allocate financial risk. Without that decision, no pension fund can beat the benchmark and get the return which we all seek,” says Thijs Coenen at ABP.
“Risk is key to investment. In our view the risk allocation process is the most important assumption when examining investment strategy,” he adds. “As one implements such a strategy one is developing risk allocation too. Consequently we try to develop a top-down process on financial risk, not exactly a novel approach among managers. However, we also believe it is vitally important to budget risk in practice, not just in theory.”
Coenen believes it is vital to decide what level of risk a fund can stand, inside a liability framework. This involves total risk, but also levels of active risk. “To maximise income it is important to allocate the total risk budget to active risk segments, and to do so efficiently,” he says. “That active risk may be a sector bet or a country bet.”
The concept of risk budgeting must be understood from the CEO down to the most junior portfolio manager, says Coenen. “The concept has to be implemented through the management structure, and here there is a danger that there will be a breakdown. Creating an efficient process is the challenge.”
Here Coenen is talking about a different kind of risk management, operational risk management. “This is a relatively new concept and not understood by many funds. The aim is to limit the impact of negative events within our operation, identifying the balance between our company goals, risk, and management.”
Coenen’s explanation of this process was a major part of the ABP submission.
Michel Meijs adds, “Although we understand that we have not (yet) had too great a number of competitors, ABP considers it an honour to be awarded the country prize. Of course, as it is the first year for the IPE award, no doubt competition will grow in the years to come. In fact, we are looking forward to that. We think the IPE award is a great initiative that deserves to become a desirable trophy. The IPE awards recognise progress in the pension industry. As such the very prize itself stands for that progress.
“Pension funds can learn a lot from each other. The IPE award can set the level of proficiency of the fund’s ambitions within the possibilities each fund has.”

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