Survey: US Public Pensions Skimp on Risk Management Staffs

(October 18, 2010) — US public pension funds have the smallest risk-management staffs, according to a study from the Rotman International Centre for Pension Management at the University of Toronto.

The study of 58 pension funds with combined assets of almost $2 trillion, titled “How Pension Funds Management Investment Risks: A Global Survey,” showed that when compared to funds globally, US public funds have the smallest staffs dedicated to risk management, even taking into account fund size. The study included responses from 12 US corporate plans, 12 US public plans, four Canadian corporate funds, and 14 Canadian public plans. Seven pension plans were from the Netherlands, six from other European countries, and a total of three from Australia and New Zealand.

According to the research, pensions worldwide have an average of five full-time risk management employees, ranging from one person for funds with less than $5 billion to 11 or more for larger funds.

The study’s authors from CEM Benchmarking, Sandy Halim, David Dupont, and Terrie Miller, claimed that state pensions may be receiving less funding for staff compared to funds worldwide due to the financial strains faced by American states. “Many American states are facing major financial difficulties and they’re required to keep costs low,” Miller, one of the study’s authors, told aiCIO. She added that compared to global funds, US state plans are not legislated to measure marked-to-market surplus risk, which could result in smaller risk staff size.

The study revealed that almost all large funds (over $25 billion) use some form of risk budgeting, whereas smaller funds are less likely to do so. Of the funds that measure active risk, 88% use volatility of value added, while 43% measure value at risk and 57% use risk budgeting. Meanwhile, of the funds that use risk budgeting, 62% allocate the risk budget to the portfolio manager level and 71% measure risk at least monthly.

“The market upheaval of 2008 was the catalyst for this study by CEM Benchmarking Inc. (CEM) of risk management practices across its client base of global pension funds,” the research stated. “After this difficult period, a number of clients expressed an interest in benchmarking their risk measurement and management practices beyond the information provided through CEM’s standard survey- based databases. In particular, this required understanding how funds measure their risks in order to benchmark them going forward.”