1. Understand risk exposures in real time
Terri Troy does her best work when she’s 100 percent focused on the matter at hand, so for the Halifax Regional Municipality Pension Plan (HRMPP), she is arguably doing her best work. “I lead a single-purpose organization,” says the CEO and CIO. “I deal with pension-plan matters all day long.” Troy says risk management is at the core of managing a pension plan, and in order to implement a successful risk-management platform, she and her team needed to understand risk exposures in real time.
“Because of significant volatility in the market, there is the need for a strong risk-management platform,” she explains. “Risk exposures are not static. They change all the time. Through automation of data, we can at any time know our asset mix, whether we are in compliance with our overall investment policies, and whether our investment managers are compliant with the investment constraints we have given them.”
This also means that Troy can be made aware of any sector, geographic, currency, credit, and interest-rate exposure in real time.
2. Program tests to improve analysis
Because risk isn’t always something you can predict, stress-test scenarios are incredibly helpful. They enable Troy to see the impact on HRMPP’s portfolio if, for example, interest rates were to rise or oil were at $40 a barrel.
“There really wasn’t a previous system per se,” Troy says. “Asset-allocation studies were done periodically, and risk management was based on long-term strategic-asset diversification and assumptions about how each asset class would perform. This still occurs, but we’ve added a much-needed interim measurement capability in order to understand our risk exposures at all times. This allows us to rebalance more frequently if required, and it helps us decide on future investments.”
3. Evaluate surplus at risk
A main component of HRMPP’s system is its evaluation of its own surplus at risk. Because the organization’s entire portfolio is accessible in real time, Troy and her team can evaluate how both their assets and liabilities react to any given macroevent based on various assumptions. If they find they are overexposed to a certain event, the asset allocation can be adjusted to be better prepared. “Success is driven by our ability to earn attractive, risk-adjusted returns … while not exceeding our surplus-at-risk targets,” Troy says. “If we didn’t monitor risk exposures frequently, we would be operating without knowing and understanding changes in our risk exposures. We have moved to a more proactive risk-management system versus a reactive one. Also, real-time access allows us to monitor information, including risk positions, whenever we want. For example, we don’t have to wait for monthly reports from a third-party provider. This allows us to be aware of any changes in risk positions early, which allows us to make changes in our investments earlier than if we had to wait for end-of-period reporting.”
4. Create a separate pension office
HRMPP’s committee felt strongly that the pension office should be a distinct entity differentiated from the overall Halifax Regional Municipality (HRM) organization, the idea being that those charged with managing the pension plan could then devote 100 percent of their time to the endeavour. Troy reports to the pension-plan committee because if she reported to one particular stakeholder—for example, HRM’s management or a certain union—the other stakeholders might question her motivations. With the pension office operating as a separate entity, Troy is totally aligned with doing the best thing for the pension committee and all plan members at all times.
5. Develop a solid governance model
Troy says the benefits of the pension office are really a result of the strong governance model that the pension committee put in place, allowing the CEO to manage risk in real time within approved limits. “This has allowed me to take advantage of extreme dislocations in the market to improve our investment returns without going back to the pension committee each time,” Troy says.
Because of the separate pension office, in 2009, when credit spreads were extremely wide, Troy and her team were able to tactically invest 10 percent of HRMPP’s assets in investment-grade credit. In 2012, the organization’s allocation to private investment was 20 percent of its overall fund, and it also earned approximately 20 percent on its private-investment portfolio.