Risk abides, man changes his mind
Financial risks grow and subside with economic cycles but always remain. Human attitudes towards them also vary. Arguably they matter more and often change the most. Allianz Global Investors' first RiskMonitor survey, conducted in conjunction with IPE, paints a picture of pension funds' current attitudes to risk and how they are changing.
Some 10 years ago, European pension funds were advised to lengthen the duration of their fixed income portfolios to better match the payout profile of their liabilities. Later, many started to achieve liability matching synthetically through interest rate swaps.
Fast-forward to 2011 and the measurable trend has been to shorten the duration of fixed income portfolios as investors prepare for the inevitable rises in interest rates. A full 69.5% of the 148 investors and consultants polled in the first AGI RiskMonitor survey see interest rate rises as a considerable or a huge risk.
Clearly, many of these will benefit on the upside from a decrease in liabilities as interest rates edge up but the attitudes of the respondents reflect the increasing complexity and organisationally time consuming nature of pension fund risk management today.
Fear also abates slowly and other results are striking. An equity market crash was a major concern for 64.5% of respondents. Crucially, nearly three years on from the financial turmoil of autumn 2008, almost 50% of survey respondents see tail risks as a considerable or huge risk. Almost 30% still placed counterparty risk in the same categories and over 22% saw limited liquidity as a considerable or huge risk.
Nevertheless, concerns about liquidity squeezes and counterparty risk have subsided and are now a minor concern for a majority of investors. Interestingly, regulatory and governance risks were less of a concern to RiskMonitor respondents with a majority downplaying minor risk areas topics such as stricter regulation, rising reporting requirements and limited internal risk management capabilities.
But regulation is on the rise, not least with the proposed imposition of a harmonised pension solvency standard for European pension funds and the review of the IORP Directive.
In this issue, Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority, affirms that it is not the intention to apply Solvency II to pensions. There will be no "copy/paste" exercise, he says.
But Niels Kortleve of PGGM, and Barthold Kuipers and Wilfried Mulder of APG, argue that the imposition of a harmonised solvency regime on a heterogeneous group of pension funds across 27 EU member states is "neither necessary nor desirable".
In future RiskMonitor surveys we might expect to see a rise in the proportion of pension funds that see stricter regulation as a threat.