Do You Have Something to Say About Pension Risk and Governance?
Two motivations account for the existence of www.pensionriskmatters.com: a desire to inform and facilitate a meaningful dialogue about pension risk and governance issues, especially at a time when so many changes are taking place around the world. Based on the insightful and encouraging comments we've received from blog readers, we seem to be on the right track. Thank you everyone!
We'd like to make the blog more interactive and are therefore inviting readers to comment. We'll publish the comments at least once a month and hopefully more often.
Here are a few suggested topics. We'll add more along the way.
If you are so inclined, simply send your comments to pension@bvallc.com. If you prefer to remain anonymous, please state such so we know not to publish your name. If you want others to contact you, please include an email address in your comments.(We reserve the right to edit but we will try to preserve the essence of your comments.)
1. What do you think is the difference between asset-liability management and liability-driven investing and why do you think so few pension funds are employing these techniques (though the trend points towards increased use)?
2. Do fiduciaries have a duty to hedge market risk?
3. Should fiduciaries be required to have X number of years of investment education and experience in order to serve?
Some answers to your question! Hope more people will reply!1- I think people did not care about liabilities as they were taken care of by high asset returns (with lots of pension holidays!). Then came the new millenium and a stack of bad news (low returns, longer longevity, need to ultimately buyout and more regulation!). I think it has taken time to come around ALM and LDI because actuaries have been "not so good" at promoting them and to be fair, they are relatively complex issues for Trustees, and even for financially literate people. But the truth is that it is just common sense to invest in line with your liabilities; and by the way it does not mean that you cannot invest in agressive products like equities. ALM should be seen as a global framework within which one can manage its asset and liabilities in a consistent and interdependent fashion. For me LDI is just what its name says, let: letting your liabilities driving your asset strategy and, at a minimum, be aware of the risks that are involved. LDI can mean a lot of things, andI think it is wrong to refer to it as only using swaps to match disbursement. Finally, I think Swaps (and other innovative financial instruments generally refered as derivatives) are great as they provide an opportunity to cashflow match expected disbursements (please note the word "expected"...) while leaving you the opportunity to achieve additional returns by investing the underlying pool of assets inmore aggressive assets.2-I think fiduciaries have no duty other than serve the best interest of the plan beneficiaries, whatever it may mean...3-I think it would be better if consultants were better at simplifying their language. Although in practice it is useful to have a few very financially litterate trustees to prevent abuse and facilitate communications accross teh various parties involved.