Strategic Risk Management and Risk Monitoring for Pension Funds
01 May 2012
The worldwide credit crisis has also led to financial problems for pension funds. In a large number of countries, there are doubts about the sustainability of the pension system. In the Netherlands, in addition to the cost of longevity, pension funds were hit hard by dropping investment returns and low interest rates. Mid 2010, the average funding ratio for Dutch pension funds was 100%. Of all Dutch pension funds, around 65% was underfunded (that is, had a funding ratio below 105%). Weighted with the number of participants, these underfunded pension funds represent 88% of the Dutch market1. As a consequence, pension premiums are raised, and pension rights cannot be indexed and in the near future even have to be lowered. The public illusion of a guaranteed pension is shattered. The current crisis reemphasizes the necessity of a well founded strategic risk management that focuses on funded ratio risk, rather than on implementation risk. In this paper we describe our methodology on how strategic risk management of a pension funds should ideally be organized.