Extraordinary conditions and the role of the risk team and strategy managers

Welcome to the final blog series regarding financial risk management for pension plans in times of a crisis.

In this blog, we touch upon the final set of key challenges: Extraordinary economic and financial market conditions and the role the risk team and strategy managers play.

3. The role of the risk team and strategy managers

Risk teams and strategy managers have a vital role at pension funds in periods of crisis. The current crisis may require additional efforts on top of the current risk reporting processes which are in place. Ortec Finance places specific focus on the role of quantitative analysis for pension plans with existing Asset Liability Modelling (ALM) and risk management tools. To view best practices on this for Private Wealth Management, please see Ronald Janssen and Rutger de Wit’s blog.

During the initial phase of the crisis, management, boards, and multi-disciplinary crisis-teams rely on frequent and up to date information and projections of the Fund’s funding status and other key metrics. At this stage, instant market shock analysis is often used to accurately evaluate the impact of the most important risk drivers. What is the current funding level, and how severe is the impact if equities fall further in conjunction with declining interest rates? Or what is the impact if equities fall while yields rise? The daily changing situation requires a robust and consistent approach that benefits from appropriate calculation tools. It is important to generate these insights with up-to-date asset portfolio data and interest rate hedge ratios.

Secondly, it is relevant to start preparations for a revised one or two-year business plan. Point-in-time stochastic scenarios that include current market circumstances and realistic projections of risk and return, complemented by deterministic Coronavirus stress scenarios can provide valuable insights for this purpose. Important elements to incorporate are the expected length of social distancing measures, the impact and effectiveness fiscal and monetary policy measures, sentiment impact and limited liquidity. Scenario thinking aims to provide insight into the possible future situation of the fund. This facilitates board and management discussions about strategy, risk appetite and the assessment of policy alternatives.

Finally, as a long-term investor, it is crucial to evaluate the long-term strategy and the objectives in a new financial climate. The outbreak and related preventive measures will have a significant impact on the real economy. To this date (March 2020), it is still unclear how sizeable the consequences will be and how long the economy is going to be affected. Preventative measures may last for a few years and there are various spillover effects. The latter could be a reason to adjust the capital market risk and return assumptions, and revise the long-term pension policy framework and risk appetite through a long-term strategy review or ALM analysis.

Download the full article to learn more about the other 3 challenges that pension risk and strategy managers face at times of a crisis.

Download the full article