Pension Risk Matters

As a veteran risk manager, I was encouraged to read that risk management is starting to receive the attention that I've long advocated as mission critical. In "Risk becomes focus for trustees trying to rebound from crisis" (9/4/09), Pensions & Investments reporter Drew Carter writes that pension decision-makers are more than ready to confront the volatility beast. In particular, the goal now seems to be a choice between matching liabilities or "keeping many of the asset classes that burned them in the crisis." 

Risk management comes in many different forms. Ask a dozen retirement plan executives how they define risk and you are likely to get twelve different answers. In a way, that's part of the problem. For some, risk management might take the form of portfolio diversification via investing in absolute return strategies. For others, risk control could mean the creation of a dynamic hedging program. Which one is right?

Unfortunately, for those seeking a simple answer, there is no universal risk management panacea since every situation is different. Are there common best practices? Yes indeed and I could easily construct an optimal risk management program that embeds "must do" items versus "facts and circumstances" recommendations.

While I think we have a long way to go before risk management is front and center the way it should be, it is encouraging to know that risk is no longer a four-letter word, banished to the hinterlands of theory and geekdom. It would be grand if fiduciaries deemed effective risk management as a strategic advantage and not a burden. Good controls help to mitigate losses, sub-performance and lost opportunities. Robust risk management can also produce a goldmine of information that is otherwise unattainable unless one is carefully measuring what might go awry.