With all eyes turned to the current crisis and financial fluctuations, it’s enough to make one wonder if pension risk management is really worth the risk. A recent joint pension risk research project by Dr. Susan Mangiero for the Society of Actuaries and Pension Governance, LCC, entitled Pension Risk Management: Derivatives, Fiduciary Duty and Process, highlights this confusion in a clear, straight-forward and simple manner, going a great distance to shed some much-needed light on the topic, and to work out the areas for improvement and methods of preserving financial integrity.

Since the 1998 publication of Survey of Derivatives and Risk Management Practices by U.S. Institutional Investors by Levich et al, there has not been such a unique large-scale assessment of risk practises for pension risk or enterprise risk. The research project presents the results of a study of 162 retirement plan decision-makers throughout the United States and Canada. These survey-takers were categorised as either USERS who have plans that trade derivatives directly or NON-USERS with plans that do not trade derivatives directly.

Echoing well-known economist Milton Friedman, the report reminds readers that there is no such thing as a free lunch. Higher returns come with a greater risk factor, yet when it comes to pension plans, the diligence of external managers is an essential factor. While most respondents indicated that they were doing all the right things in terms of managing investment and liability risks, subsequent questions regarding to risk budgeting, procedures and policies in detail were not answered comprehensively or certainly. The report author concludes that this does ‘not support the notion that pension risk management is being addressed on a comprehensive basis by all plans represented in the survey sample.’ With this in mind, the project aims to provoke a lively debate on existing practises and hedge funds rather than address all the elements of pension risk management.