State of Wisconsin Investment Board will begin to assess risk on an entity-wide perspective rather than assessing risk by separate operational area, the latest of a number of pension funds strengthening their risk management.
The Madison-based SWIB, which oversees $76 billion in assets, plans to create a risk unit function that is responsible for establishing and overseeing the centralized risk management process, according to a Wisconsin Legislative Audit Bureau report last month.
The new approach includes assessing risks associated with existing and future investment strategies, making sure staff incentive compensation is aligned with managing entity-wide risk activities, and identifying in regular reports to trustees the most significant risks, the individuals or groups responsible for managing those risks and what the board is doing to address them.
Among other funds bolstering their risk management:
• The $21.1 billion Iowa Public Employees' Retirement System, Des Moines, expects to make a decision next month in a search for its first risk-management consulting firm.
• The $215 billion California Public Employees' Retirement System, Sacramento, created the position of chief risk officer, overseeing the newly created office of enterprise risk management. It initiated a search this month for an executive recruiting firm to find candidates to fill the new position.
• The $147.5 billion Florida State Board of Administration, Tallahassee, in October began a search for firms providing risk models, one to embrace its entire holdings and one specifically for hedge funds. Earlier this year, it created the position of chief risk and compliance officer.
At the Wisconsin board, Vicki Hearing, public information officer, said trustees are still developing the new enterprise risk unit and are still ”outlining what's going to be done.”
“Risk management has always been what we have done,” but it was overseen separately by each operational unit, Ms. Hearing said. The new approach will embrace all the risk the board faces in its operations. As more investments require specialized skill, centralizing risk will help ensure proper oversight and communications on risk management responsibilities, she added.
SWIB officials seek to strengthen the board's risk management, in part, to prepare to implement a risk parity strategy that could ultimately leverage the $64.6 billion core fund by 20%, giving it an effective total allocation of 120%, and investing in its first hedge funds. The board approved both strategies last January but SWIB has focused since then on evaluating risks before making the risk parity and hedge fund allocations. In 2011, it expects to implement risk parity by hiring two managers and with an initial leverage of 4%, making the core fund's total allocation 104%. It also expects to make its first hedge fund hirings, for an initial total allocation of 2% of its core fund.
Iowa PERS issued an RFP in October for a risk management consulting firm.
Karl Koch, chief investment officer, said in an e-mail: “We are looking for a consulting firm that can facilitate an in-depth review and discussion on investment risks for board and staff and help us develop a better sense of the system's risk appetite and what strategies we could use for managing those investment risks.”
Among the services the Iowa system seeks are evaluating current investment risk management practices, developing an overall risk appetite statement, creating investment risk management policies and strategies, and possibly evaluating risk management analytical software.
Wilshire Associates, Iowa PERS' general investment consultant, endorsed the effort. To eliminate any perceptions of conflicts of interest, Wilshire won't submit a proposal in the search and will not assist in the selection process.
Iowa officials are evaluating proposals in the search, which closed Nov. 10, and could make a decision in January.