GLOBAL - Tackling weak links such as herding and poor integration across key functions could help pension funds prevent falling into the trap of further ‘predictable surprises', suggests pension expert Keith Ambachtsheer.
In the March edition of his famous monthly letter, Ambachtsheer discusses his views on effective decision-making to prevent so-called predictable surprises - extreme negative impact events that were predictable, and predicted, before-the-fact, such as the subprime crisis.
According to the consultant, pension funds struggle to make decision during periods of uncertainty while a number of re-occurring weaknesses, such as a lack of creative thinking within a fund, a tendency to react to events rather than manage them dynamically, unfocused result measurement and insufficient or inadequate human resources, often prevent funds from reaching "management effectiveness".
Other reasons "why predictable surprises are often not nipped in the bud before they unleash their destructive forces", are agency-driven misalignments of interest, which should be neutralised, while reward and risk should be symmetrically distributed, says Ambachtsheer.
Also, pension funds should ask more "hard questions" regarding liability-hedging, risk-optimising, risk measurement and management, and the expected or required excess return.
"Finally, there is the issue of mustering collective action initiatives against common predictable surprise threats," he concludes, arguing there needs to be more constructive collective action among pension funds.
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