Risk remains a top issue

Over three-quarters of respondents to this month’s Off The Record survey stated that risk management had been raised as an agenda item on their board in the past 12 months. This was slightly lower than reported at the same time last year (85%), but still clearly shows its importance as an issue for pension funds.

For several respondents, this had meant looking at risk management across many areas affecting their fund. “All risk management activities, including policy, procedures, risk management systems, risk budget setting, [and] monitoring have been under review and changes have been made in some areas,” said an Icelandic fund. A Danish fund commented that risk management had been looked at in connection with “Solvency II, operational risk, governance, interest rate hedging, longevity risk, and many more [areas]”.

A UK fund added that risk management had been raised in relation to the “avoidance of over-exposure to [a] single asset class, [and the] possibility of using a structured product to control risk in certain markets”.

Almost a quarter of respondents (24%) stated their fund had stopped investing in certain asset classes as a result of a change in risk management policy. Some 52% said they had not, and 24% stated that, while they hadn’t stopped investing, some asset classes had come up for serious discussion. A Danish fund commented: “It depends on the constraints in the risk budget. For instance, investments in commodities and private equity are reduced.”

More than half of respondents (57%) were confident that the models used by their ALM adviser took into account current economic and financial market conditions. A third (33%) were only partially confident and 10% were not confident, as a UK fund explained: “We are in unique times - emergency UK base rates for over two years and continuing. Therefore, I can’t be confident that the modelling is accurate in identifying all the current economic drivers and relationships”.

Some 81% of respondents said that equity was currently a top-three significant risk factor in their fund’s investment portfolio. This was followed by 66% for interest rates, 43% for credit, 19% for small and mid caps, 14.5% for growth, and 5% each for commodities and liquidity.

Interest rates were the biggest liability risk factor for 33.5% of respondents, closely followed by 28.5% for inflation. Some 19% identified investment, 14.5% longevity, and 5% ‘other’. Administration was the most significant operational risk (cited by 55% of respondents), then counterparty (20%) and sponsor (5%). Some 20% identified other areas, such as regulation and outsourcing.

Almost a half of respondents (47.5%) said that they did not use any investment risk management software, while 33.5% said they used proprietary investment risk management software and 19% used non-proprietary investment risk management software, including a Croatian fund, which commented that it was “fast, easily changed [and] automated”.

Some 62% of respondents stated that they did not use ALM software, with a further 28.5% only using proprietary ALM software. Just 9.5% used non-proprietary software.
Respondents showed varying degrees of satisfaction regarding their risk management service providers. Actuarial consultants received the most positive evaluation, with 37% of respondents rating them highly. This was followed by 23.5% for investment consultants and 21.5% for risk management technology vendors, with investment banks and custodians both receiving a positive rating of just 16%.

Just 19% of respondents said that they had taken out insurance policies against extreme risk, such as guarantee contracts, option overlays or dedicated investment strategies. One Dutch fund commented that this was due to the “high market price”. However, another Dutch fund said it had taken out a policy to protect against “extreme mortality due to accidents”.


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