EUROPE - Pension fund officials say the unexpected investment risks suffered by many European pension funds in the last two years has forced many executive boards to completely rethink their priorities, the sources of their investments and the way they conduct business.

Speakers for a risk management discussion at this year's IPE Seminar and Awards, held in Dublin last week, said whereas pension funds would in the past have concentrated on the visible risks to a pension scheme, the damage created by previously ignored issues such as volatility in the bonds markets has pushed many schemes to question whether they ought to be investing in other investment vehicles.

For example, Per Appelgren, chief investment officer at Länsförsäkringar Liv in Sweden, which last week won two prizes at the IPE Awards, noted the lack of depth in the Swedish long-bond market is something that Swedish pension funds have been grappling with for years but has now resulted in the necessity to seek other, albeit expensive, proxies for Swedish long bonds, such as euroswaps.

He argued, in practice, this allowed Länsförsäkringar to boost performance, having been down 13% in Q3 2008 but bouncing back to neutral by the end of the year, he said.

At the same time, Edward von Gelderen, deputy CIO of ING Investment Management, said the organisation had itself moved away from a product-based strategy focused on market or credit risk but has had to broaden its focus to consider liquidity and counterparty risk as well as redemption and reputational risk equally important.

"We changed our structure from the traditional equity/fixed income divide to a series of boutiques that focus on specialised asset classes because we feel that the market is too complex not to be a specialist," said von Gelderen.

At the same time, Gerhard Scheuenstuhl of German consultancy Risklab, said the way it now deals with its pension fund clients is to look to make the investment concept into a clear process.

"We see the board of a pension fund as a pilot of plane, i.e. they have to know the strategy, where they are going, how they are going to reach the destination as well as know at all times where you are," he said.

Risklab believes pension funds should have a clearly defined LDI policy, risk transparency and active risk management in order to control risk and avoid the black swans of last year, according to Scheuenstuhl.
And while a larger pension fund can gain advantages, smaller funds can also use the same concepts and although it may be slightly more difficult it is possible, he argued.

"Fiduciary management can be a solution for smaller funds where they buy a package which deals with all the complex tasks," he concluded.

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