Plan sponsors should beware of bad PR and regulatory changes in addition to investment risk, according to a new white paper published this month by Bank of New York and endorsed by Nobel laureate Harry Markowitz. According to the white paper, which surveyed 76 pension plan sponsors and non-profit funds, 91% of plan sponsors still consider investment risk the most important type of risk, but they dedicate an average of 40% of their time to focusing on operational and political risk. Additionally, 80% of respondents said they would dedicate more time to focusing on operational and political risk.
Respondents also identified two main types of operational risk: headline risk, the risk of exposure to a negative news story; and service-level risk, the risk that outside vendors of a pension plan do not deliver the type of service expected of them.
Respondents were also wary of the amount of regulatory changes that have taken effect since 2000, such as Sarbanes-Oxley, the USA Patriot Act and Basel II, which recommends that financial institutions institute capital requirements to hedge against the risk of operational loss. In addition, 36% of respondents said they measure political risk in some way, although the paper recommended that plan sponsors study macroeconomic trends to get a sense of future political risk.
Debra Baker, a managing director of the global risk services group at Bank of New York, said some of the increased scrutiny of political and operational risk stems from the fact that they have become intertwined. "For example, hedge funds represents the biggest area of growth since the late 1990s," she said. "A lot of the participants that we spoke to said when they hire a hedge fund, there is investment risk, but there's also operation risk because of the lack of transparency."
