On the Record: What to say about risk
Nina Roehrbein speaks with Theodore Economou, chief executive at the CERN Pension Fund in Switzerland; Marinos Gialeli, general manager at the Hotel Employees Provident Fund in Cyprus; and Richard McIndoe, head of pensions at the Strathclyde Pension Fund in the UK about how they report risk to trustees.
CERN Pension Fund
• Invested assets: CHF3.8bn (€3.2bn)
• Members: 6,845
• DB scheme
• Established: 1956
• Funding level: 64.1% (open fund basis)
We provide extensive information on two levels – the investment committee and the board. This happens on a quarterly basis at the board level, and at every meeting of the investment committee.
We provide information on the fund’s three objectives – the risk level, the return and the efficiency, with which we convert risk to return.
These objectives correspond to our investment mandate, which is to reach to the actuarial return target with the least possible risk at all times.
We start the process with the definition of a risk limit, which defines the acceptable potential loss that the fund can incur each year. It currently stands at -8%, defined as 5% CVaR. We have put in place an independent reporting system in which an external risk consultant monitors the risk profile of the fund and reports to the investment committee.
In-house we monitor risk daily. We use our custodian’s product and custody data to provide projections of risk and create a daily risk profile. We also look at drawdowns, volatility, and stress tests.
In our reporting, we strive for a balance between comprehensibility and detail. A clear and simple snapshot allows us to see whether the fund is compliant with its mandate. It shows the fund’s performance against the three-dimensional matrix of objectives. For each one of the three elements, risk, return and efficiency, we also produce a series of reports that are updated on a monthly basis. We are in the process of developing an iPad application for our trustees to access this information.
We use overlays to manage risk exposures. At the fund level, these overlays are implemented in-house. We have several asymmetric return mandates where the managers use overlays in order to manage downside risk.
More than half of the investment committee is composed of investment professionals, which is why any trustee training takes the form of a review of our internal control system and associated procedures where everything we do is documented. The training means that every committee member is familiar with documents such as the statement of investment principles and investment policy, risk management process, and guidelines.
We started implementing this risk management process in January 2011. It has already paid off and the main topic for our investment committee is now the efficiency with which we control and use risk.
Hotel Employees Provident Fund
• Invested assets: €284m
• Members: 12,860
• Defined contribution
• Established: 1968
Our trustees are regularly kept abreast of the fund’s performance as well as risk.
Every fortnight we give them a breakdown of our investments and their returns. Every month we have a board meeting in which we discuss the portfolio’s performance and risk management and subsequently pass the information resulting from that on to our trustees. Both of these reports are produced in-house.
In addition, our consultant Aon Hewitt produces a monitoring report on performance and risk management for the trustees each quarter.
Our trustees are also updated on any local or global economic issues we periodically discuss with our fund managers and consultant.
We strive for an even balance between comprehensibility and detail in the information we provide for our trustees. The fortnightly reports are more comprehensive in nature, while the quarterly ones are more detailed. Of course, if our trustees ask for more details we are happy to provide those too.
We believe that by sharing more detailed and frequent information about our portfolio’s investments, we reduce a lot of its risk. It is always better for trustees to make a well-informed decision rather than having to decide without knowing certain details, even if it just seems like a small risk because those can turn out to be of much bigger scale.
In 2009, for instance, as soon as it was announced that Greece was hiding its debt we liquidated all of our Cypriot and Greek equity exposure. It was a minor decision initially but it turned out to be of much bigger importance. By taking immediate action, we avoided much bigger problems later on.
In the last four years, the frequency of our trustee reporting has increased on the back of the global economic problems and the particularly difficult situation in Cyprus due to its close relations with Greece. This had led to better decision making.
We have a segregated committee which is responsible for all aspects of our operations plus the investments. We communicate almost daily via phone or email to update ourselves even about the smallest of details.
With the help of our investment consultant, we provide regular training for our trustees, particularly on the newer, more complex asset classes such as infrastructure, absolute return and hedge funds in which we started to invest in recent years.
Strathclyde Pension Fund
Head of pensions
• Invested assets: £11.6bn (€14.4bn)
• Members: 191,000
• DB public authority scheme
• Funding level: 97% (formal), 83% (real position)
• Established: 1975
Like most pension funds, we have always provided far more performance information than risk information to our trustees.
As recently as five years back, almost no risk information was provided to them at all. However, today we provide a fair amount of risk information, although any information on performance still outweighs the amount provided on risk.
The introduction of risk information has improved the conversations we have with our trustees about return. Previously we talked about it in isolation when really it should be almost a risk-return equation.
The change in the information we provide was partly due to the financial crisis and partly due to the availability of the information. Until recently, in terms of technology, actuaries were only able to do a full valuation once every three years. Today they can issue either quarterly or even daily updates.
It is also about governance. Since the early 2000s we have been improving our governance in many ways and at one point we looked at what we put in front of trustees and realised that it was very one-sided. To a certain extent they have also been demanding more of that type of information.
All the information is provided quarterly. The asset managers, of course, produce their own reports. But we check, collate and interpret some of their information, essentially producing an in-house report, which we pass to the trustees.
Most of the risk numbers we look at are actuarial, and for our actuarial or risk reports we use consultants because we do not have the capacity to produce those in-house. But we receive risk statistics from a few sources and today reports from our global custodian and investment managers, for example, also include some risk figures.
We could get more risk numbers if we wanted them. But usually there is a limit to the types of analysis we need. And for the trustees we want to look at information provision from a higher level rather than drill down the details. The investment managers will examine risk in more detail than we do.
Our trustees undergo an in-depth induction training and then each quarterly meeting starts with a briefing or training session, delivered by one of the investment managers. We do not have a separate investment and risk committee but an investment panel that also looks at risk.