In a recent global survey of 200 buy-side operations leaders, the majority of pension executives indicated that the top priority for 2023 is to reduce operational risks.
The increasing portfolio complexity amid global economic headwinds has prompted many to rethink how to manage risks more effectively and prepare for the next crisis.
But how do you mitigate risks if you don‘t know your exposures?
The challenge is that most public pensions don’t have timely access to information on their investments.
The impact of delayed data can be significant amid volatile market conditions. First, this leads to increased risk exposures without the agility to react to changes and ultimately suboptimal investment decisions. Importantly, the lack of transparency—the inability to report accurate financial information to regulators and the public—can erode trust in the pension system.
We asked Alan Copping, our senior market strategist, three questions to help public pensions challenge the status quo and address the current data challenges to gain full control of their risks.
Q1: What is keeping public pensions from acquiring timely, accurate data?Pulling data together is a complex task for any investment organization. Ensuring a timely capture of all position and market data to provide exposure and risk analysis across all asset classes is something that many firms struggle with. For pension funds this can be exacerbated by three major components of the operating model: people, processes, and technology.
Let’s talk about the people
We all know that attracting and retaining qualified staff is an issue for public funds. 58% of respondents of the Top1000funds.com and CaseyQuirk 2023 CIO Sentiment Survey said understaffed internal teams and a shortage of talent were top concerns.
Why do we see these staffing issues?
Firstly, pension funds are not always seen as the primary choice in the investment industry; the asset managers and investment banks are often seen as “sexier” and more lucrative options.
Secondly, the availability of the qualified resource pool can be limited. The complexity of the portfolio structures, the investment breadth and the processes make securing the right skillset an expensive task.
Finally, attracting new talent among a generation of digital natives is difficult when all they can be offered is complex, manually driven data collection, spreadsheets and legacy systems.
Having a holistic, automated platform that removes the drudgery of manual processing ensures not only a more robust operating environment allowing the fund to concentrate on its core goal of managing the money, but also an attractive operating model where resources can be allocated to the value-add tasks which give the individual a more purposeful and fulfilling career.
Processes are clunky
Many public pensions outsource all or part of their portfolio management to external fund managers, and then need to consolidate data from these into their own dataset. Now if you are also investing in alternative assets you have data that is generally not readily available in a timely manner and manually intensive to capture.
So now you may outsource the data collection and operational processes to the banks as well. They already hold the assets so why not let them do the heavy lifting? However, many of the issues discussed above still prevail for the external administrators. They need to gather data from the external fund managers, manually process the alternative investments data and present this back in a timely manner. By the time the data gets back to you it’s several days old. Not a major issue for a long-term investor, however not ideal for understanding the entire fund’s exposure to sectors, currencies, issuers, etc. The recent issues with Silicon Valley Bank and Credit Suisse illustrate how critical it is to understand where the fund is invested at any time.
Leave the technology to the experts
While you may not have set out to become a technology specialist, you often end up becoming one because you need to manage multiple systems and spreadsheets to understand your fund’s exposures across all asset types. By the time you combine data from internal portfolios, external fund managers, custodians and various risk and performance systems how many systems have you touched? And have you even gotten the underlying exposures at a granular level?
This also holds true for many of the banks’ services. They use multiple systems per asset class often designed originally for custody business, adding spreadsheets to consolidate, and ending up providing a manually-driven slow and sluggish service.
Pension Funds require a system that combines all asset types to give a holistic overview of the fund’s positions, exposures, and performance. And this system has to be cost-efficient so you can ensure best value for fund members. One way to achieve this is to look at a cloud-based muti-asset system that allows you to see all asset classes in one place and add on business services as needed.
Q2: What are the market trends that will continue to make pension funds heavily reliant on accurate, timely data?
The first thing we see is that many funds continue to have a larger allocation to alternatives. This, as discussed earlier, means that efficient data collection from the managers is needed. There is also a demand for greater transparency into the underlying holdings of the managers. Gone are the days of writing a check to the manager, getting periodic valuations and the occasional call for more money as the investment is drawn down. Now funds need to understand the full exposure and breakdown of the investment in terms of value, capital calls, fees, etc. This means that the demand for data and the knowledge to capture and process it correctly is paramount.
With the persistent inflation, continued market volatility, geopolitical risks and the fear of a possible banking crisis on the horizon, having clarity and ownership of your exposures is the only way to truly manage the risks in the fund. The overall estimated funding ratio of the 100 largest U.S. public pension plans fell to 73.6% as of Feb. 2023 from a month earlier, according to the Milliman 100 Public Pension Funding index. This is why relying on outdated data collated from multiple systems and spreadsheets is no longer an option.
To fulfil your basic mandate to provide payments to retirees, you need to ensure the asset vs. liability ratios provide the required liquidity in the fund. You need a granular understanding of the investment cashflow, maturities and expected future portfolio and data is at the core of this.
Q3: Where should you start in building a total portfolio view for better risk management?
The starting point for a total portfolio view is to reframe how you look at your data. Consider your data holistically rather than as individual sets of data for equities, fixed income, private holdings, risk, performance, etc. Then the next step is to ensure the data is collected, stored, and presented back in an efficient and consistent manner so you can gain a total view of your entire book of business.
Here I encourage you to consider a data management service. A service, not just for market data and prices, but also custodian and external fund manager data, to collect, verify, and reconcile with the custodian data, gives you reconciled start of day positions every day.
Technology can help you extract, verify, and process the more esoteric data, such as alternatives into a consumable format. For example, our platform integrates with fintech innovators like Colmore, who provide dedicated data management and fee validation services for private market investments.
Collecting all this data is the first step. But then you need to ensure it is stored and accessible in a system that recognizes the differences between public equities, bonds, cash, derivatives and alternatives and that natively provides position keeping cashflows and accurate exposures, risk and performance analytics. This can only be achieved with a single, end to end, multi-asset platform.
Last but not least, is what you do with the data once you have captured it. Providing value add analysis such as combined risk across both public and private assets and stress testing across the total holistic portfolio in a transparent manner, working from a single set of data ensures greater accuracy, insight and efficiency that pension funds need.