Pension plans see room for improvement on their current scenario and risk modeling activities, according to an industry survey.
On one hand, the majority of pension funds surveyed report they will increase their budget for and focus on scenario modeling and stress-testing over the next two years. And on the other hand, just one in three reported that their fund is currently very effective on scenario modeling and stress testing, all according to a global online survey from Ortec Finance, a provider of risk and return management solutions for pension funds.
The survey targeted senior pension fund executives in the UK, US, the Netherlands, Canada and the Nordics whose plans collectively manage $1.451 trillion in assets.
Almost three quarters (73%) of those surveyed say the pension fund they work for will increase their budget for and focus on scenario modeling, asset-liability management, and stress testing over the next two years. That includes 20% planning to increase their budget and focus dramatically. A further one in five (21%) say their budget and focus in this area will stay the same as it is today, and only 6% say this will decrease over the next two years.
Moreover, around a third (32%) of pension fund managers surveyed say the fund they work for is already very effective at scenario modeling and stress-testing. Around two thirds (66%) say the fund they work for is quite effective and 2% say it’s not very effective. The majority of senior executives therefore see room for improvement.
Nearly half (44%) of pension funds outsource their asset-liability management (ALM) studies, and an additional 50% say they partially outsource this but do some of the work in-house. Only 4% say that they don’t outsource ALM studies. Part of the reason behind this is likely to be due to only around one in eight (12%) rating the quality of its inhouse ALM monitoring capabilities as excellent. Around two-thirds (64%) rate it as good, and around a quarter (24%) rate it as average.
Marnix Engels, Managing Director Global Pension Risk at Ortec Finance, says: “Our clients are confident that using scenario analysis as a part of their workflow allows them to uncover risks, find new opportunities, and navigate uncertainty. With increased market and geopolitical uncertainty, we believe scenario modeling is one of the best methods for supporting pension funds looking to navigate these unknown waters.
“It’s promising to see that the pension plan managers surveyed plan to increase their budget set aside for stress-testing and scenario modeling because we see those who do benefit as scenario modeling can leave managers better prepared to make decisions in light of increased uncertainty.”
Ortec Finance provides solutions for Defined Benefit and Defined Contribution pension funds to help address issues including liquidity concerns, low yields, complex liabilities, increasing investment performance analysis demands, and climate change related risks and opportunities.
