Computer technology has not taken hold as a major part of risk management at pension plan sponsors, although the use of systems in managing a portfolio's risk is growing among some plans.
Many plan sponsors, wary of taking unexpected losses, have pulled back from their use of exotic securities and derivatives, lessening their need for technological monitoring, industry participants say.
They are limiting derivatives use in their plans to more plain-vanilla instruments, and relying on custodians, consultants and traditional means of reporting.
The decision to not invest heavily in technology is reinforced by the relatively high cost of traditional risk management systems, which come out of the banking and securities dealer industry.
But looking ahead, technology might become more affordable, and more applicable to pension sponsors' specific risk management needs.
Plan sponsors "range from very sophisticated to seat-of-the-pants, no software," said Mark B. Garman, president of Financial Engineering Associates Inc., Berkeley, Calif.
Despite a movement to increase risk management oversight, led by several larger pension plan sponsors, the pension investment community hasn't really gotten to the point of adding systems and software.
Paul Green, strategic marketing manager for BARRA, a Berkeley, Calif.-based consulting firm, said the general trend among pension plan sponsors is to retreat from using derivatives, rather than add software capabilities.
The next useful step for plan sponsors and investment managers would be to work basic derivatives investments into existing risk systems, Mr. Green said.
"I'd say over half of (plan sponsors) don't have risk management systems at all," said Laurie S. Adami, executive vice president with Capital Management Sciences, Los Angeles, a fixed-income consulting firm.
She said regulators have pushed other institutional investors, like banks and insurance companies, to move more quickly in instituting total portfolio risk systems.
There's more of a tradition of using technology at investment firms, Mr. Garman of FEA said. But at pension funds, as well as in corporate treasury offices, there is less money spent on systems. Those operations are viewed as a cost center, and technology costs money, he said.
Similarly, Jack Hansen, principal and director of equity investments with The Clifton Group, a Minneapolis-based money manager specializing in derivatives management, said he has not seen a big movement into technology-based risk management systems.
He has seen a lot of effort put into the revising of investment policy guidelines, and increased communication, verbal and written, between money managers and their clients he said. Larger plan sponsors, who generally are the most sophisticated, are adopting technology, he said.
One reason technology hasn't been embraced by plan sponsors is cost. Many of the systems are oriented to a large-volume trading atmosphere, and don't take into account some of the important aspects of pension investing.
"It's been very hard for pension funds to afford them," said Ron Dembo, president of Algorithmics, a risk-management systems firm based in Toronto.
Pension funds have shown very little interest in the portfolio-wide systems Algorithmics historically offered, Mr. Dembo said.
Algorithmics' typical client is a large bank, corporation or governmental entity, which has very different needs from a pension plan sponsor.
While benchmarking is essential to the pension fund industry, it is practically meaningless to trading firms, said Mr. Dembo said.
So popular risk measures, such as value-at-risk, don't take benchmarking and other things into account, Mr. Dembo said. (VAR generally attempts to identify the potential loss that would occur at a company or in a portfolio under a given change in market conditions).
To try to fill a gap it sees in the market, Algorithmics recently introduced a World Wide Web-based system, called RiskBrowser, that might be more in plan sponsors' price range, he said. The system allows investors to use the Web to link with system, gaining access to risk measures and analysis.
FEA offers lower priced products that are add-ins for spreadsheets, with costs starting around $1,000, Mr. Garman said.
Theoretics Inc., Salt Lake City software firm, also is targeting pension funds and money managers with its risk management system. Richard Sparks, marketing director, said their system, which doesn't include back office functions, costs $25,000 per year, but is comparable to systems that cost hundreds of thousands of dollars.
Others also anticipate the market for software will grow, as providers better meet plan sponsor needs, and as plan sponsors become more sophisticated.
Technology use will rise as executives at pension plan sponsors become more technology savvy, said Rhoda Woo, director of marketing for fixed-income consultant Global Advanced Technology, New York.
Many plan sponsors still come from the pre-computer era, while those entering the field are extremely versed in using technology, she said.
A transition eventually will occur, she said. She noted the same situation, but to a lesser degree, exists among the investment management firms.
Technology firms are starting to jump into the market.
Todd Petzel, chief investment officer for The Common Fund, which manages mainly endowment assets, said: "There's a lot of competition coming on line, and prices will be coming down."
Plan sponsors and similar investors recognize a need for better use of systems in risk management, it's becoming a matter of matching up that need with the appropriate technology, he said.
Fund custodians, as well, are getting involved by improving their systems to include better controls.
The Common Fund is a beta-site tester for a risk monitoring system at Mellon Trust, Pittsburgh, that would red-flag possible violations of investment guidelines.
The Northern Trust Co., Chicago, is putting together a system that would offer real time monitoring of derivatives overlay managers for the Teachers Retirement System of Illinois, Springfield.
