Identify, Assess, and Eliminate Pension Risk, Mercer Tells Boardrooms

Risk identification and risk management are the keys to resolving pension issues in the boardroom, investment consultant Mercer has found.

(January 10, 2011) — Risk assessment and management are the main focus points for corporate boardrooms evaluating and resolving pension schemes, according to a survey by Mercer.

The survey found that 65% of chief financial officers in the United States were concerned about the impact of the current and future global market uncertainty and volatility.

“Pension deficits and the impact upon the financial health of their organizations are a key concern in many boardrooms and C-suites, and the time to act is now. With such market volatility, plan sponsors need to be nimble to take advantage and put in place a robust risk management plan,” said Jonathan Barry, Partner in Mercer’s Retirement, Risk and Finance business, in a statement.

Mercer has identified the five most important pension risk management steps for US pension plan sponsors, which consist of the following:

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1) Review the plan’s funded status as part of your regular plan reporting. “Frequent funded status monitoring is the foundation for understanding the overall health of your plan,” said Richard McEvoy, Mercer Dynamic De-risking Solutions US Leader.

2) Understand the range of possible outcomes to which your pension plan exposes your organization.

3) Develop a formal de-risking plan. According to Mercer, sponsors should develop a roadmap to de-risk the plan that can be executed quickly as and when opportunities arise. See aiCIO’s Liability-Driven Investing Issue here.

4) Explore liability transfer strategies.

5) Review your governance structure and decision-making process. “It is important to focus both on strategy and execution and to ensure that internal obstacles do not get in the way when the time is right,” said Nick Davies of Mercer’s Investments business.

A November study by consulting firm Hymans Robertson predicted a record year for de-risking among UK schemes with deals potentially topping £9 billion. The consulting firm also found that more than £2 billion of pension fund liabilities was transferred in the third quarter of the year through buy-ins, buyouts — in which companies transfer their closed pension plans to insurance firms — and longevity swaps. Looking ahead, the firm noted that a large number of risk transfer deals are likely to close in the fourth quarter, making 2011 a record year for de-risking among UK pension plans with deals likely topping £9 billion. Meanwhile, Hymans Robertson found that longevity swaps have removed £9 billion of scheme liabilities since they took off in 2009. The £1.1 billion Turner & Newall buy-in with Legal & General, announced at the end of October, was the largest of its kind to date.

“A series of significant pension scheme risk transfer deals expected to close during the fourth quarter of 2011 look set to ensure that 2011 will be a record year for pension scheme buy-ins, buy-outs and longevity swaps; with deals potentially topping £9 billion of UK pension scheme liabilities during 2011 alone,” commented James Mullins, Partner and Head of Buy-out Solutions at Hymans Robertson, in a statement. “Pension schemes are increasingly viewing buy-in deals simply as an investment strategy decision, and one that looks particularly attractive in the current market. Many pension schemes are reviewing their Government gilt holdings, which provide quite a good match for pensioner liabilities, given the option to exchange some of their Government gilts for a buy-in policy, which provides a near perfect match for pensioner liabilities, and at a potentially lower cost. This pricing dynamic is one of the few positives for UK pension schemes following the market turmoil since the summer of 2011.”

Related article: “Report Defines the ‘Art of Risk Management'”

New Findings Question Value of Harvard, Other CIOs

Little if any research has been conducted on the value of chief investment officers -- measuring performance relative to their paychecks -- until now.  

(January 10, 2012) — Is Jane Mendillo, the chief investment officer of Harvard University’s endowment — the largest in the United States — paid in line with her performance?

Perhaps not, according to recent research.

A study by Charles Skorina, an executive search consultant, reveals that Mendillo’s value may not be as stellar as one would think. 

Skorina aimed to determine performance for pay by looking at the investment returns of CIOs over the most recent five years, computing how many basis points they earned per $100,000 of compensation, and then ranking them all by that measure of performance-for-pay. In Skorina’s latest newsletter, the study showed that Mendillo along with her popular CIO counterpart David Swensen of Yale University ranked highest on Skorina’s list when ranking purely by pay. Yet when ranking by performance-for-pay, the two CIO honchos stood at the bottom of the list — with Swensen in 46th place and Mendillo in 48th place, out of a total of 50 spots. 

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Skorina told aiCIO: “It’s logical when you think about it: their performance was pretty good relative to these other high-paid CIOs, but their pay was much higher. A moderate numerator over a big denominator gives you a low value.”

In theorizing about the reasons for Mendillo’s low performance-for-pay ranking, Skorina said that one of the potential reasons may be due to her relatively short tenure at the fund, totaling about three years. In addition, he noted that Harvard’s board consists of exceptionally “strong-willed people, and thus achieving consensus is often difficult.” 

While Skorina noted that at least some CIOs deserve their pay because they produce consistently better returns than their peers, he continued: “Talent, in the final analysis, is a commodity in the market like any other. Employers have limited resources; they want the best talent they can find, but at a price they’re willing to pay.” 

The key takeaway, according to Skorina, is the fact that it’s possible to hire a very good CIO for much less than Harvard and Yale are paying. John Hull at the Andrew W. Mellon Foundation, Srinivas Pulavarti at the University of Richmond, Seth Alexander at MIT, and James Hille at Texas Christian University make much less than Mendillo or Swensen in the period analyzed, and have had better returns. 

He added: “But these considerations don’t explain all the differences, and we don’t pretend to know what’s ‘fair’ or who should make how much. We’re just reporting some numbers we think are accurate and speculating about them just like everybody else.”

Some industry sources, however, express skepticism over Skorina’s research, highlighting his position as a headhunter while claiming that he would therefore benefit by greater CIO turnover. 

One endowment head, Jim Dunn, CIO at Wake Forest University, told aiCIO that value among investment heads should be placed on making good decisions along with avoiding bad decisions — and thus true talent should be measured in conjunction with risk-taking. “I’m the only CIO I know who gets paid on Sharpe ratio. Talent comes from not taking big bets, so risk-adjusted return is the driver here,” he said.  

He continued: “There is also a ‘ARod’ bias here. Like the Yankees, having the highest paid payroll doesn’t guarantee a world championship. Looking at the CIO in isolation would be short sighted and arrogant…there is no prize for first place. I have no intention of being the best CIO in the country, just the best CIO for Wake Forest.”

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