Pension funds need better risk management

A survey of some of the largest institutional investors in the world indicated serious deficiencies in their risk management systems and identified stress testing as a critical risk tool in the future.

The survey of over 30 of the world’s largest pension plans and asset managers revealed that 73% of pension plans and 26% of asset managers do not currently run stress tests.

Additionally less than one-fifth of corporate pension plans have a Chief Risk Officer function, revealed the research.

Private real estate, timber, foreign bonds, hedge funds, convertible bonds, structured products, derivatives and asset-backed securities are the key assets generally not covered by risk systems, said the survey.

Meanwhile, participants recognised that enhancements were needed in their risk architecture and the seniority of risk professionals.

Respondents emphasised that in the aftermath of the 2008 crisis, stress testing at the enterprise level is required to manage potential large market disruptions. A better understanding of liquidity risk and its impact on the market is needed, they said.

The majority of participants said they would put more focus on stress testing in the future. One asset manager acknowledged that stress testing should be like "crash-testing for cars."

Commenting on the findings, Remy Briand, managing director and Global Head of Index and Applied Research at MSCI Barra, who conducted the survey, said, "Institutional investors recognize the need to invest more in risk management processes: not just in new systems and models, but also in the seniority of risk professionals. Many institutions are already re-defining the risk function, as risk management becomes more integrated with the investment decision process.”