GLOBAL - Part of the current financial crisis is down to uniform risk management systems as they lead to pro-cyclical divestments, a former risk manager has told IPE.

The former risk manager - who did not want to be identified - now works as a manager for a German occupational retirement provider and told IPE while attending the aba conference in Stuttgart: "The better the risk management systems get, and they are getting better, the more people will be selling at the same time - this is bad for the capital markets and the economy."

He fears this could lead to companies focusing solely on working with debt, through the issuance of bonds in the future, rather than using equity because it is considered too volatile.

"As a risk manager I thought we only need to watch our own capital and sell when a certain market level is reached but I have changed my mind and now I see that this damages the economy," said the risk manager.

Fritz Janda, head of the Austrian pension fund federation FVPK, has a similar view but claimed "as soon as a larger group has the same risk management system it is useless anyway" because it leads to cyclical behaviour multiplying negative market effects.

In any case, Janda is convinced that volatility in the markets is here to stay, as he said: "We have to start living with the fact that volatility of around 5% will happen more frequently."

More professional risk management is being sought by retirement benefit providers not only in light of the financial crisis but in some cases also because of new regulatory requirements.

Germany is currently debating new risk management requirements which are designed to pre-empt some of the quantitative requirements under Solvency II without quantitative changes to the risk capital.

The so-called MaRisk will require insurers as well as second pillar pension vehicles to create new, more transparent, risk management systems.

However, KPMG's Clemens Frey suggested the creation of these systems should not be outsourced, and argued only parts of the process should be handed over to third parties.

"Risk management systems should be developed from within the company, as an integral part of the business," said Frey.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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