The Pension Investment Association of Canada is urging the Office of the Superintendent of Financial Institutions to ensure its guidance on pension investment risk management is flexible enough to be appropriate for plans of all sizes.

In an open letter, PIAC chair Sean Hewitt addressed 15 points posed by the OSFI to the pension investment sector related to proposed changes to its risk management guidelines.

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“The most important feedback we can provide is that given the varying degrees of inherent risk in pension plans, the ultimate guidance from OSFI and other regulators needs to be principles-based and flexible enough to [be] cost-effectively implemented by smaller plans [with less than $500 million in assets under management] and yet still relevant to the very large plans [with more than $40 billion in AUM].”

Hewitt went into further detail on the differences between the risk management considerations facing small, medium and large defined benefit pension plans. He explained while smaller plans tended to use external consultants to provide risk management consultations, medium-sized plans, which tended to utilize more complex investment portfolios, often have dedicated risk management staff who use sophisticated risk models for surplus risk, active risk and liquidity risks.

“For larger plans, there will typically be a [chief risk officer] equivalent and a team of risk management professionals. The risk team still typically has a dual mandate of supporting investment decision making with risk analytics and also a risk oversight function. The CRO typically reports to the [chief executive officer] and independence achieved in similar methods as the mid-sized plans.”

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Hewitt noted plan administrators often struggle to deal with limitations related to data on investment funds, noting various methods — including the use of proxies to measure the risks of illiquid and limited transparency investments, or the use of third party software that provides risk exposures relating to underlying constituents — were the most commonly used strategies.

He also addressed how plan administrators can effectively evaluate third-party valuation processes and procedures, noting consultants are often brought in due to their broad exposure to multiple pension plan clients and third-party providers, leaving most pension plan sponsors comfortable with information provided in their annual financial statement audits.

During periods of financial stress, he said plan administrators ensure third-party valuations reflect fair market values by using subscriptions to various databases where performances of funds can be compared with public markets.

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“Sometimes, comparisons with public market proxies may prove beneficial from a reasonability standpoint. Note that in periods of market stress more frequent valuations are typically needed and a clear understanding that the valuations of private assets will typically lag public markets.”