Both plans appear to be following the example of the $40.6 billion Virginia Retirement System, Richmond, said John Matwey, director of buy-side business at RiskMetrics Group, New York. VRS late last year announced plans to launch a single risk profile of its pension plan to help refine its risk budgeting (Pensions & Investments, Nov. 1). The profile would include positions held by all of its external money managers as well as its hedge funds. The goal is to be able to review the risk profile of the entire pension plan on a single risk platform, which will assist staff in refining risk budgeting processes.
Chris Hitchen, chief executive of Railways Pension Trustee Co. Ltd., which administers the Railpen plan, hopes the new process will lead to daily reports for plan sponsors on the funding and investment risk position of their pension plans.
Plan executives are working with RiskMetrics to set this system up.
Currently the Railpen trustees conduct risk assessments of their money managers' investment positions on a monthly basis.
"What is more difficult is keeping track of how the funding level can be affected by the investment markets," said Mr. Hitchen. "We do need a clear idea of the potential volatility of our investments as particular employers will have issues of how things are presented in their accounts," he added.
But the daily reporting would not affect the fund's long-term investment horizon, said Mr. Hitchen. Indeed, he is a disciple of the concept of long-term investment mandates and is working with a number of other U.K. pension plans to encourage the use of 10-year investment management mandates.
The move to more frequent reporting is driven in part by changes to U.K. accounting standards that require plan sponsors to report pension liabilities at market valuations in their company accounts, he said.
The BT pension plan hopes to revamp its risk and liability management systems by the summer, said Tony Watson, chief executive of the plan. The fund is working with Dutch investment consultant Ortec, Rotterdam, he added.
"What we are interested in is whether we can play out various scenarios more flexibly than we have done in the past," Mr. Watson said. This would enable the plan to use a more dynamic asset allocation and risk management policy than in the past, he added.
RiskMetrics is working with Railpen to produce weekly risk assessments and should in theory be able to produce daily measurements, but it is unclear how useful such short-term valuations might be, said Mr. Matwey.
He said the project was also an exercise to establish if there is a material difference in volatility between daily and weekly measurements.
Only a handful of pension plans worldwide have begun to explore ways to measure their liability and funding risk relative to their investment risk, he said.
"There has not been a focus on it as it has not been an area of concern, but with so many pension plans underfunded there must be some way to measure it," Mr. Matwey said.
"Very few pension plans have the capability of putting all the data into the system. That's why the science of a standard risk report for a pension plan and the relevance of value at risk to future liabilities is still not clear yet," he said.
