Demand for Risk Professionals Persists Amid Calls for Return to Fundamentals
As pension plans witness the credit crunch undermine equity prices and alternative assets (like private equity and hedge funds), the U.S. assistant secretary for financial markets has urged plan sponsors to return to the fundamentals of investment management. Meanwhile, amid the volatility, Merrill Lynch has announced the development of a new U.S. Pension Index series that tracks pension liabilities. Pension fiduciaries, responsible for making informed investing decisions, must understand enough about risk controls and risk drivers to know if he or she is assuming too much risk. Now, recent changes in market performance and regulatory oversight have led pension decision-makers to revisit their performance, strategic and risk objectives. Executive recruiting fim A.E. Feldman says strong demand persists for professionals with expertise in valuation and risk management.
The Treasury’s Assistant Secretary for Financial Markets, Anthony Ryan, says pension fund managers, facing many new complex and opaque investment vehicles, need to pay as much attention to risk management as they do pursuing higher returns. According to the report by Thomson Financial, Ryan says, Given the characteristics of many of the strategies and securities defining our markets today, fiduciaries must return to some of the fundamentals of investment management. Ryan adds that the people responsible for the assets of millions of workers and retirees must make risk management more than ’some part-time responsibility.’ He says pension fiduciaries have a fundamental obligation to conduct due diligence on their new investments and to demand clear information on the structure, reporting, risks and other factors of new financial strategies especially in times of market uncertainty.
Meanwhile, amid the market volatility, Merrill Lynch has offered a new U.S. Pension Index series that tracks pension liabilities. Merrill says the indexes will help plan sponsors monitor how well their investment strategies are performing in relation to changes in their liabilities. Merrill is providing indexes for four different employee populations average, young, mature and retired. They will be based on sample pension plan liability data compiled by Mercer, a global provider of consulting, outsourcing and investment services. According to Asghar Alam, leader of Mercer’s retirement business in the Americas, “An increasing number of sponsors are using liability driven investing strategies in their pension plans in order to manage the risk to the plan’s funded status. These new indices can helpplan sponsorsreview the performance of these strategies.”
A pension’s funded status equals plan assets minus projected benefit obligation. The benefit obligation is a series of payments that must be made to retirees in the future. Actuaries must do their best to make estimates about retiree populations, salary increases and other contributing factors in order to discount the future stream of estimated payments into a single current value. According to the Pension Protection Act of 2006, a plan less than 80% funded and projected to have a funding deficiency within seven years is considered seriously endangered.
Going forward, pension fund decision-makers must ensure that their due diligence is rock solid. A.E. Feldman reports a surge in valuation jobsand risk manager jobsbecause of the critical necessity to have these people in place. In addition to pensions, consulting firms are also going to see increased demand for risk managers for secondary validation of existing models for valuation and risk measurement. A.E. Feldman adds that candidates with traditional credit backgrounds will probably have the upper hand.
