When Connecticut Treasurer Shawn Wooden took office in January, he knew he was confronting a public pension funding gap of at least $35 billion. He also had a hole to fill in his organization.
Wooden needed someone focused on the investment risks embedded in the state employees’ and teachers’ pensions which own thousands of holdings in companies, government bonds, real estate and infrastructure across the globe. He turned to Kevin Cullinan, a former senior risk officer at General Electric Co.’s pension who oversaw the company’s $27 billion of externally managed investments from 2013 to 2016 and was the risk manager for alternative assets like private equity from 2005 through 2012.
“Mission number one is seeing the risk,” Wooden said in an interview. “Having a chief risk officer that is not a portfolio manager creates some distance and some independence. I think that’s better governance, better monitoring and better accountability.”
Connecticut is joining a growing number of major public pension funds that have appointed chief risk officers since last decade’s financial crisis to evaluate volatility, liquidity, leverage, the impact of rock-bottom interest rates and new risks like global warming. While the California Public Employees’ Retirement System, the largest U.S. pension, appointed a CRO in 2010, New York state’s $210 billion pension, the third-largest in the U.S., didn’t do so until 2017. Some of the biggest U.S. public pensions, including Virginia’s, Michigan’s and Georgia’s teachers’ fund, don’t have a chief risk officer.
Natural Progression
The appointment of such officials by public pensions is a natural progression, said Richard Bookstaber, the chief risk officer for the University of California’s investment division and a former head of risk management at Morgan Stanley, Salomon Brothers and hedge funds including Moore Capital Management.
Banks adopted chief risk officers in the 1990s to monitor and coordinate the positions of trading desks that moved in and out of securities and derivatives over periods of days. Hedge funds, which held investments for weeks or months, added the position in the 2000s, with institutional asset managers following, Bookstaber said.
“The risk manager role is moving to consider risks that occur over longer and longer time frames,” Bookstaber said. “Pension funds and sovereign wealth funds have positions that move very, very slowly.”
They may move slowly, but their holdings are often complex. Squeezed by unfunded liabilities of at least $1.6 trillion and median return assumptions of 7.3% annually, pensions have increased allocations to more opaque and illiquid “alternative” investments like private equity and debt, real estate and infrastructure which are harder to assess.
“Understanding the type of risks that you have in these illiquid portfolios is very difficult,” Bookstaber said.