Heightened concerns over portfolio risk caused by the coronavirus pandemic may be the final push U.S. public pension plans need to take a more hands-on approach in their risk management process.
While U.S. pension funds have historically been more reliant on investment consultants for risk management, these plans "are realizing in a world where you are stuck at home, it's really prudent to have your own technological capabilities that can give you a real-time understanding of where your fund is and where it's going," said Ashby Monk, executive and research director of the Global Projects Center at Stanford University.
Over the past five years, asset owners in Australia, Canada and Europe, for instance, have all undertaken massive projects to insource data and analytics as it pertains to risk management of their investment portfolios, Mr. Monk said. In comparison, "the U.S. pension space is a little behind," he noted.
"In America, the endowments don't rely on the consultants as much as the pension plans and this is where you are seeing a wave of 'technologizing'… The last wave would be the U.S. pension plans, starting probably now," Mr. Monk added.
Mr. Monk co-authored the book, "The Technologized Investor: Innovation through Reorientation," with Global Projects Center research engineer Dane Rook, which highlights how long-term investors can use technology to better understand risk and the long-term behavior of assets.
"Being a long-term investor is not an excuse for (not) having a real-time understanding of your liquidity profile, your unfunded commitments, your pacing, your cash flows and so on. For instance, to avoid breaking through certain asset allocation thresholds, sometimes these long-term investors do need to move quickly to rebalance in volatile markets. And they simply can't wait for their consultants and calendars to align in order to do this," Mr. Monk said.
Laurie Martin, CIO of the $37.7 billion Connecticut Retirement Plans & Trust Funds, which consists of six state pension funds and nine state trust funds, said in an email that U.S. pension plans should have had risk management technology in place prior to the pandemic. But she believes "this will prompt those that did not have this capability to adopt it."
She confirmed that CRPTF internally oversees portfolio risk through third-party risk management technology.
"As fiduciaries of plan assets, public pension plans must understand all the risks that impact the assets and liabilities of the plan," she said. CRPTF uses third-party software to analyze risk across its portfolio "with security level detail," and also uses the technology to stress test the portfolio for various scenarios, such as interest rate changes, currency fluctuations and significant equity market fluctuations, she added.
"Additionally, we receive reports from our consultants and external money managers with regard to capital market assumptions and asset class correlations; among other reports. We also use third-party software to monitor the pension liability risk. This system allows us to analyze the impact of actual results vs. actuarial assumptions prior to the formal valuation reports being prepared. We can model different investment returns out into the future to assess the impact on the funded status of the plan," Ms. Martin said.