Drill Down

Essential to the job of chief risk officer is being able to drill down into the pension’s holdings to see exposure to sector, country, and strategy, Cullinan said. Asset managers like BlackRock Inc. and Bank of New York Mellon Corp. have developed software that can model how investments, including private equity, perform under different scenarios.

BNY Mellon’s Risk View allows clients like pensions and endowments to see how their current portfolio would have performed during periods like the Asian ‘flu’ in 1997, the Russian debt crisis in 1998, the bursting of the dot-com bubble in the early 2000s and the 2008 financial crisis.

While the software can help officials identify risks in broad strokes, pension funds should understand their limitations, said Steve Foresti, chief investment officer at Wilshire Consulting.

“You will never have full visibility into what all the risks are,” he said. “They are incredibly valuable insights into potential risks but they’re still just a flashlight in the dark.”

Connecticut is among U.S. pensions that are lowering their assumed rate of investment return to better reflect a long-term decline in interest rates. Connecticut lowered the rate on the teachers’ pension to 6.9% from 8% while extending the amortization period for its unfunded liabilities to 30 years.

At the same time, the state reduced its allocation to stocks, which carry more risk, to 40% of the portfolio from 48%, while increasing its allocation to fixed income to 32% from 20%. The state employee pension also has a 6.9% assumed rate of return.

“What we’re in the process of doing is ‘de-risking’ the portfolio,” Wooden said. “We’ve had a great 9 or 10 year run. I don’t think most observers believe the next 10 year run will look like that.”

This article was provided by Bloomberg News.

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