Pension executives are increasing their use of risk and compliance software, in-house risk management personnel and risk consultants, a Pensions & Investments survey shows.
Likewise, the survey of pension plan sponsors also shows more time and money is being spent to help control risk.
But where plan sponsors are headed next with risk management is an open question, industry experts say.
Among the biggest risks plan sponsors cited in the survey were market risk, of course, as well as asset-liability mismatch risk and personnel risk.
"We're at a crossroads," said Michael McGlinn, senior vice president in the risk and performance services division of The Northern Trust, Chicago.
Pension plan sponsors want to do more in terms of controlling and managing risk, but they aren't sure what the next step will be, Mr. McGlinn said.
The survey results show 56% of respondents spend more time on risk management now than they did two years ago; 17% report spending less time.
The average increase in time spent on risk management was 24%, the survey shows.
Likewise, more money is being spent on risk management. Respondents on average said they are spending 53% more on risk management than they were two years ago, according to the survey.
James Lockhart, managing director for Net Risk Inc., Greenwich, Conn., said progress is being made in pension fund risk management practices, but "maybe it's going slower than I might expect."
And he said that with all of the different options available, and a lack of history to rely on, pension sponsors are formulating different approaches to the problem.
Indeed, the survey shows there have been increases in many different aspects of risk management.
About 25% of respondents reported the use of compliance software; only 8% said they used the software two years ago, the survey shows.
"That's got to be the first step," said Harris M. Lirtzman, director of risk oversight in New York City's bureau of asset management. Plan sponsors need to make sure that noncompliant securities and strategies don't get into portfolios, Mr. Lirtzman said.
The New York City bureau of asset management, which oversees the New York City Retirement Systems is one of the many pension managers adding to its risk management capabilities, and is in the process of adding a total plan risk measurement system (P&I, Feb. 23).
As part of that effort, New York City will use a compliance monitoring system offered by its custodian, Citibank NA, New York, and made by Decalog BV, a subsidiary of Oshap Technologies Ltd., Herzliya, Israel.
Another pension plan sponsor also will be adding compliance software to its risk management capabilities some time in 1998.
Halliburton Co., Dallas, will be using compliance software offered by State Street Bank & Trust Co., Boston, said Sharon Parkes, manager of trust investments for Halliburton.
She said Halliburton executives will enter the pension fund's investment guidelines into State Street's system, which then will produce exception reports -- listings of trades or positions outside of investment guidelines -- on a monthly basis. Eventually, the system also will offer real-time exception reporting, she said. While State Street's system is up and running, Halliburton isn't on it yet, she said.
New York City and Halliburton aren't alone in turning to their custodians and master trustees for much of the risk management work.
Many of the other survey respondents that are using compliance software also indicated they are relying on software offered by their custodian, with a number of banks in addition to State Street getting cited: Bank of New York and Bankers Trust Co., both in New York; Northern Trust; and Mellon Trust, Pittsburgh.
Custodians in general were cited in the survey by a large number of plan sponsors -- 83% -- as a risk management resource.
The Colorado Public Employees' Retirement Association, Denver, is using a risk management service offered by Northern Trust (P&I, April 20).
In addition to using Northern's compliance software, Colorado will work with Northern executives on performing customized risk analysis of the fund.
Investment risk management software use also is climbing, with 25% of respondents reporting they use it now, as opposed to 19% using it two years ago.
Plan sponsors also are increasing their reliance on consultants and investment managers for risk management tasks, the survey results indicate.
About 81% of respondents cited the use of consultants for risk management, compared with 73% that said they used them two years ago.
And 49% of survey respondents said they use investment managers for risk management, compared with 44% who said they relied on managers two years ago.
The methodology known as value at risk is still a hot topic, and use is growing among pension plan sponsors.
But in absolute terms, not a lot of plan sponsors are using VAR, according to the survey. About 10% of respondents now use value at risk in some form, as opposed to 7% who said they used it two years ago.
Value at risk is a statistical calculation that seeks to estimate the most an investment portfolio will lose in normal market circumstances within a given amount of confidence, say 95% of the time, and for a given period of time, say one week. Outside of that probability range, 5% of the time with a 95% confidence level, the expected losses could be greater.
Part of the reason VAR isn't widely used is because a standard for calculating it hasn't been adopted.
"Where we are with VAR is like the dark ages of accounting," before standards on matters such as capitalization of assets and amortization were adopted, said Tanya Styblo Beder, principal for Capital Markets Risk Advisors Inc., New York.
Use of VAR appears to be concentrated among a few larger investors, such as GE Investments, Stamford, Conn., and the Ontario Teachers' Pension Plan Board, North York, Ontario.
GE executives have started looking at loading its portfolios into a VAR-analysis model, said Steve Fierstein, senior financial analyst for GE.
GE, which uses Bankers Trust's RAROC 2020, will use VAR in three basic ways, initially.
VAR will be used to look at relative risks within portfolios and asset classes, he said.
Also, GE will look at the VAR of portfolios and asset classes over time, he said.
And then risk will be monitored relative to GE's various benchmarks.
Down the road, Mr. Fierstein said GE might move toward using VAR to calculate risk-adjusted returns.
Ontario Teachers recently began calculating value at risk on its entire fund, including less liquid investments like real estate, where pricing proxies are used (P&I, June 1).
Mr. Lirtzman of New York City said people are looking more closely at how VAR is calculated and used, in the wake of the collapse of markets in Asia.
Certain methods for calculating VAR might not have captured the risk of Asian markets prior to their recent collapse, he said.
Partly as a result of that, people in the industry are perhaps paying closer attention to some of the nuances of the different versions of calculating VAR, he said.
Also regarding Asia, Waite Rawls, chief risk officer for Ferrell Capital Management, Greenwich, Conn., said the situation in that region has heightened sensitivity to the currency risks in foreign portfolios.
Not surprisingly, market risk gets most of the attention of plan sponsors. In an open-ended question, 86% of respondents to the survey cited market risk as one of the top risks facing plan sponsors.
The second most-cited risk was personnel risk, which included personnel changes within the fund and at the fund's vendors, such as external money managers. Personnel risk was named by 27% of respondents.
The risk of there being an asset-liability mismatch was cited by 17% of respondents, counterparty risk and derivatives risk were both cited by 15%, and asset allocation-related risk was cited by 14%. Interest rate risk was by 12% of respondents.
The survey was sent out to more than 500 of the largest U.S. pension plan sponsors.
Fifty-nine responded: 28 corporate plans, 27 public plans, three Taft-Hartley plans, and one international government entity.
Seventeen of the respondents manage $10 billion or more; 24 manage $1 billion up to $10 billion; 13 manage $500 million up to $1 billion; and five manage less than $500 million.
The average amount of assets managed internally by the respondents was 8.2%.