Risk On, Brain Power Up

Dealing with funding shortfalls will require greater risks, but many pension professionals are worried their funds don’t have the knowledge base needed.

Pension fund boards may lack knowledge of the risks to their portfolios even as they seek to take on more risk in search of greater returns, according to a State Street survey.

“Pension funds will need to develop their in-house risk expertise to assert greater control over increasing risk exposures.”More than a third (36%) of 400 pension professionals from around the world surveyed by the investor services giant said their funds had funding issues requiring greater risk-taking. However, of those people, less than half (43%) said their boards had a “high level of understanding of risks” to their funds. Just 29% of those whose funds were seeking to lower risk said their boards had sophisticated expertise.

“We examined pension funds’ capabilities across four distinct types of risk: investment, liquidity, longevity, and operational risk,” State Street wrote. “For each of these areas, only one-fifth of funds at most consider their risk management to be very effective.”

Large funds were generally better at risk management than small funds, the survey found, while public funds were better than their private sector counterparts.

“Pension funds will need to develop their in-house risk expertise to assert greater control over increasing risk exposures,” State Street said.

On top of in-house capabilities, the firm added that risk management support from third parties was “unlikely to diminish.” More than a quarter (27%) of respondents said they planned to increase the number of external consultants they use over the next three years, the survey found. 

“This support will be particularly important in areas where funds lack specialist expertise, or cannot afford to implement the required risk tools in-house,” State Street reported.

A significant proportion of respondents said their employers planned to change the process for recruiting new board members in order to improve their expertise. More than half (53%) of those funds seeking to increase portfolio risk said this was the case.

Barbara Creed, chair of the trustee board at the New York-based Church Pension Fund, told State Street’s researchers that her fund was “embarking on further education that will involve bringing in outside experts for informal gatherings with our trustees to talk about cutting-edge issues in investments, in pension plan design, and so on.”

Related: How to Erase Your Deficit in 15 Years & Pensions Should De-risk with Hedge Funds, Consultants Say

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