Monday, August 14, 2006


Pension Risk Rollercoaster



In "All risk and no reward?", Peter Davy describes the shift to a risk-based paradigm which, for some fiduciaries, is a brave new world. No longer likely to be encouraged to look at returns only, decision-makers will need to revisit "risk 101" fundamentals and then some. Enthusiasm about liability-driven investing is one good sign. Evaluating pension issues in the context of corporate strategy is thought to be another step in the right direction.

Somewhat surprisingly, a survey taken of mostly UK FTSE-listed firms by Mercer Human Resource Consulting and the Association of Corporate Treasurers ("ACT") indicates a low use of derivatives. ACT technical officer Martin O'Donovan suggests that trustees are dubious about "more complex strategies" and prefer avoiding what they don't understand. (Our survey results reflect a greater willingness to use derivatives.)

This blog's author is quoted as saying that "if the renewed emphasis on risk management means anything, it is that fiduciaries must be able to justify their investment decisions" and that "process is everything". The issue of a fiduciary duty to hedge is something worth pondering. (Click here for a nice piece by attorney Randall Borkus on the topic.) If pension fiduciaries are arbitrarily restricting use of any financial instrument without due consideration of the benefits and advantages, are they acting properly? (Readers are reminded to contact legal professionals for advice about what constitutes proper fiduciary duty discharge.)

One thing is certain. The next few years are going to mean breath-taking changes for retirement plan professionals.

Are you ready?
posted by Susan Mangiero at 8/14/2006 09:24:00 PM