At the first Risk Management Conference, 20 years ago, there were many things plan sponsors probably weren’t thinking about. Currency, for example, says Marlene Puffer, president and CEO, CN Investment Division. Before the elimination of the Foreign Property Rule, plans were mostly invested in Canadian bonds and equities.

Instead, the chief concern would have been benchmark risk.

But beating an index is no guarantee that a plan will meet its pension promise, notes Anca Drexler, managing director, risk management, OMERS Capital Markets.

And there are new risks, Drexler adds, such as ESG and cyber risk, and whether big data can deliver. In turn, these require a more comprehensive risk framework.

At OMERS, her team has fleshed out policies but also sits with the capital markets team, not to be “the cop there standing with a stop sign,” but to provide insight and analysis with the whole portfolio in mind.

However, there’s still some thinking required around the purpose of investing. People can get lulled into a “6 per cent plus-ish” return framework, explains Puffer. “It somehow gets ingrained that what we’re supposed to do is earn some number like that, and it’s going to be the number that makes our pension plan sustainable.”

Tough measures

But it doesn’t address the liabilities. “We have people who like working at CN,” she notes. “They work well past their expected retirement date. We keep paying for them and we keep accruing liabilities for them, and it’s very difficult to measure that.”

At HOOPP, where Puffer was chair of the asset-liability committee, the plan followed a two-step process: “hedge the liabilities and then figure out how many return-seeking assets you need to meet your required rate of return.”

But that approach may not translate easily for mature plans. “There’s a difference between worrying just about being a going concern in a net-inflow plan versus worrying about being a going concern and having solvency in a net-cash outflow plan,” she points out.

Volatility, of course, is still a concern — even as plans redefine the risk space.

The major worry for Puffer is equity market valuation. And Drexler shares the concern, highlighting the impact of low interest rates.

“For pension plans looking to meet their liabilities, bonds don’t necessarily offer the required rate of return, so investors have gone up the risk spectrum in terms of buying other asset classes, which, in turn, has pushed up asset prices.”

These challenges continue to expand the risk management space and require plan sponsors to rethink the role risk plays in their plans.