Pension funds could be more exposed to risk than the executives in charge of the funds realize, a new survey shows.
The survey indicates pension oversight committees and boards have shifted attention away from improving risk management and controls. As a result, they might be underestimating the risks in their funds.
The risk management practices survey of more than 300 pension executives was conducted through face-to-face interviews by RogersCasey & Associates, Darien, Conn., and its parent, BARRA Inc., Berkeley, Calif.
"It is by far the most ambitious (risk) survey of plan sponsors. That in itself makes this a must read," said Jon Lukomnik, deputy comptroller of the City of New York, in reference to the survey results.
Brian Singer, partner with Brinson Partners, Chicago, said the survey is a nice follow to the Risk Standards Working Group release earlier this year.
The survey will give plan sponsors a better idea as to where the industry is at in terms of risk management, he said.
The consultants received help in constructing the survey from pension executives and money managers, including: GTE Investment Management Corp., Stamford, Conn.; Eastman Kodak Co., Rochester, N.Y.; IBM Corp., Stamford, Conn.; General Motors Investment Management Co., New York; the New York City Retirement Funds; and US WEST Investment Management Co., Englewood, Colo.
Monitoring tools lacking
Respondents also noted that while they probably will bear most of the responsibility if something goes wrong, they aren't getting the resources to monitor risk management properly from pension oversight committees and boards.
Yet the pension fund managers themselves want leading-edge methods and technology to manage risk in an increasingly complex investment environment.
The survey also found risk management is playing a bigger role in manager searches.
But the relative lack of risk management controls beyond a pension fund's risk management policies and guidelines was the survey's biggest surprise.
"There's a real complacency (about risk management) that may be the enemy," said Christine England, managing director of research for BARRA Strategic Consulting.
More than half of those surveyed haven't assigned risk monitoring to a specific person or persons, survey results show, although 97% have a written policy or guidelines on risk management.
In addition, the survey results show two-thirds of pension executives do not have, or are uncertain if they have, policies that detail specific action if risk management policies or procedures are not met.
And less than half said their board of directors or trustees have been provided with a copy of their risk management procedures.
Guidelines under scrutiny
Ms. England said there was a flurry of activity to re-examine and re-evaluate risk guidelines and controls following the big investment losses at places like Orange County, Calif., and the old Barings P.L.C., London.
But since then, many view their work as done, and the focus on risk management has lessened, she said.
"I agree with the overall conclusion that complacency is a precursor . . . to bad things happening," Mr. Lukomnik said.
He said the study will be useful for plan sponsors that try to apply the results when assessing their specific fund.
Given an appearance of complacency, BARRA executives said it was surprising to find 84% of sponsors believe their funds are adequately protected by their investment policies.
The survey shows pension officials relying much more heavily on consultants and in-house risk management professionals than they are their investment committee, legal counsel or board of directors.
Ms. England said the accountability chain is leaving pension executives particularly vulnerable to market losses.
"Market risk is the No. 1 risk they felt exposed to," she said.
"At the end of the day, who's going to be responsible" if something goes wrong, she asked. Pension executives appear to feel they will be, she said.
Sponsors were most confident with their ability to manage fiduciary risk, with 87% reporting confidence. Credit and counterparty risk was rated lowest, with only 55% expressing confidence, the survey results show.
BARRA notes there appears to be a mismatch between sponsor needs and resources.
Only 11% had a dedicated budget for risk management, and the average number of people devoted to risk management at a pension fund was 1.5 people.
Twelve percent of those interviewed expected to increase their risk management staffing in the coming year.
More to go to risk management
Spending on risk management is expected to climb at 30% of the funds, while 16% of executives surveyed expect to increase spending on risk management research and information.
But despite the relatively small increases expected in spending, virtually all pension executives surveyed expressed a need for better risk management capabilities, BARRA said.
Agree with survey results
Desmond Mac Intyre, director-risk management for General Motors Investment Management Corp., New York, said he agrees with the survey's general conclusion that plan sponsors and managers need to address risk from an enterprise-wide view.
"It's not about generating a VAR number, it's about generating a consistent framework" for examining risks, he said.
Over 70% of respondents already use at least one analytical software package, ranging from basic spreadsheets to high-end risk systems, Ms. England said.
The degree to which risk analyses are used: 61% use sensitivity analysis; 45% use downside risk; 43% use probability of shortfall (which is a statistical attempt to gauge the likelihood of relative underperformance); 37% use stress testing; 33% use back testing; and 27% use value at risk.
Risk management stronghold
One area in which the use of risk management has taken hold is in manager selection, Ms. England said.
"Risk management competency has moved to the forefront," she said. Not only do external managers have to display risk management skills, but so do consultants, such as RogersCasey, that might be assisting in manager selection, she said.
She said risk management sections now are included in requests for proposals.
Meanwhile, those pension executives doing a job of managing risk have one common thread: They are "dedicating the dollars" needed, Ms. England said.
She said generally the larger sponsors are the ones with the resources to put systems in place and add personnel.