new edition, 3D rendering, triple flags

During the last several months, I’ve been working with the terrific team at Lex Blog to consolidate my two business blogs – Pension Risk Matters® and Good Risk Governance Pays®. Now I’m back, raring to post commentaries and research updates about investment risk governance and fiduciary practices. I’ll plan to toss in a few essays about living the good life along the way.

Eleven years ago, I created Pension Risk Matters® with the objective of providing insights and information about investment governance and fiduciary best practices as relates to the management of retirement plans. A few years later, I created Good Risk Governance Pays® to address investment risk governance issues for the broader industry. Traffic to both websites has been robust and always much appreciated. However, in the interest of time and because of continued content overlap, I decided to consolidate the two websites.

Join me as Pension Risk Matters® rebrands as Investment Best Practices® and Good Risk Governance Pays® is phased out. Suggestions and guest posts are welcome. Simply email contact@fiduciaryleadership.com. For a complimentary subscription, visit www.investmentbestpractices.com and type your email address in the “Subscribe” box in the upper right hand corner of the home page. You can also add this blog to your RSS feed via www.investmentbestpractices.com/feed/.

Let’s keep the conversation going! There is a lot to discuss.

Last year, I celebrated a decade of posting investment governance insights to Pension Risk Matters. This year, I have two reasons to say "hooray." March 23 marks the eleventh year of posting analyses, research updates and essays about managing money, retirement planning and mitigating uncertainty. In addition, it is the debut of National Fiduciary Day. Sponsored by Fi360, the goal is to encourage individuals to be good stewards of other people’s money. 

Given our shared commitment to investment fiduciary best practices and the fact that I am certified by Fi360 as an Accredited Investment Fiduciary Analyst, I asked the organization’s top officers for their thoughts on this special day. They were kind enough to oblige.

Executive Chairman Blaine Aikin says "Happy Anniversary, Susan! Congratulations on having achieved 11 highly productive years of blogging. It’s only fitting that this comes on Fi360’s National Fiduciary Day. Keep up the great work and thank you for your valuable contributions to the profession!" Fi360 Director J. Richard Lynch adds "We have appreciated our long standing relationship with Susan as an AIFA designee and in particular, her contributions to the fiduciary discussion through her blog and as a past speaker at our annual conference."

There are lots of us who long ago recognized the importance of perturbing the conversation about investment governance. This includes the roughly 1.2 million visitors to Pension Risk Matters, many of whom have not been shy about offering their views. I am grateful to them all and look forward to a continued exchange of ideas.

The issue of excess has been on my mind lately, mostly focused on my fragrance collection but now expanding to the topic of investment risk management. More specifically, as I continue to lead workshops about retirement plan risk management for the Professional Risk Managers’ International Association ("PRMIA"), I am pondering whether too much of a so-called "good thing" makes sense. 

By way of background, friends and family know I am a perfume aficionado. Yes, the ubiquitous "free" gift with purchase is a plus but I do truly enjoy trying new scents. I’m not alone. According to a February 23, 2016 article on the Beauty Stat website, 2015 sales of "prestige beauty" products grew more than seven percent to $16 billion and "mass beauty" product sales climbed two percent to nearly $22 billion in the United States.

Colleagues know that I have spent several decades in the risk management industry with positions that include trading, compliance and expert testimony, depending on the year. I am the author of an entire book and dozens of articles about investment risk governance. I strongly believe in the importance of establishing an appropriate risk management protocol, following said policies and procedures and regularly reviewing whether risk management actions are effective or need to be tweaked. I likewise believe there are lots of retirement plans that should be doing much more when it comes to identifying, measuring, managing and monitoring relevant risks.

Coming back to this issue of "too much" risk management, the critical question is whether investment fiduciaries can be too cautious. Most reasonable people would likely say "yes." Regardless of plan design, if an investment portfolio is overly skewed to seemingly safe assets or funds of "safe" assets, expected return could be insufficient to meet long-term needs. A discussion about what constitutes "safe" assets is left for another day except to say that every investment has some risk. Even putting one’s money under the bed could be risky if the house burns down. Another consideration is the cost of hedging. There is no free lunch. All fees and expenses associated with risk management, including the cost of putting a good technology system in place, should be part of any risk-adjusted performance assessment.

Retirement plan fiduciaries and their advisors are well served by identifying primary goals, major obstacles and both short-term and long-term nightmares that would generate serious pain for participants. Said differently, risk management, like perfume, is a good thing unless it prevents someone from achieving important milestones. As for me, I just bought a new bottle of perfume but resisted buying the other two I wanted. This should help me with my goals of decluttering and save more money.

As a follow-up to my January 12, 2017 announcement about retirement plan risk management education with the Professional Risk Managers’ International Association ("PRMIA"), I am delighted to announce a co-presenter for the March 2, 2017 learning event. Distinguished economist Dr. Lee Heavner will join me to talk about hedging techniques, the valuation of derivatives and structured products and the monitoring of investment-related risk as part of "Use of Derivatives in Pension Plans." Click here to read Lee Heavner’s impressive bio as a managing principal and financial expert with Analysis Group, Inc. Dr. Heavner and Dr. Mangiero have worked on multiple investment disputes and are the authors of "Economic Analysis in Fiduciary Monitoring Disputes Following the Supreme Court’s ‘Tibble’ Ruling" (Bloomberg BNA Pension & Benefits Daily, June 24, 2015).

Session Two will convene from 10:00 am EST to 11:15 am EST live this Thursday. If you cannot make it in real time, the event can be downloaded for later viewing. It is the second event of four CPE-qualified events. Speakers will examine risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

  • Current usage of derivatives by retirement plans for hedging purposes;
  • Financially engineered investment products and governance implications;
  • Fiduciary duties relating to monitoring risks and values of derivatives and structured products; and
  • Suggested elements of a Risk Management Policy Statement.

Join us for this talk about an important issue – risk management for retirement plans!

As a follow-up to my January 12, 2017 announcement about retirement plan risk management education with the Professional Risk Managers’ International Association ("PRMIA"), I am delighted to announce a co-presenter for the February 23, 2017 learning event. Distinguished attorney Meaghan VerGow will talk about ERISA litigation and fiduciary risk management as part of "Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans." Click here to read Meaghan VerGow’s impressive bio as law firm partner and ERISA expert with O’Melveny & Myers LLP.

Session One will convene from 10:00 am EST to 11:15 am EST live this Thursday. If you cannot make it in real time, the event can be downloaded for later viewing. It is the debut event of four CPE-qualified events. Speakers will examine risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

  • Procedural prudence and the costs of ignoring fiduciary risk;
  • Risk management differences by type of retirement plan;
  • Industry norms and pitfalls to avoid;
  • Role of Chief Risk Officer, investment committee members and in-house staff; and
  • Suggested elements of a Risk Management Policy Statement.

Visit the PRMIA website to register for Session One and read about course content for Sessions Two through Four. Our exciting roster of co-speakers for these future events will be posted shortly on this blog at www.pensionriskmatters.com

For those who are unaware, I created an investment compliance and risk management blog a few years ago called Good Risk Governance Pays®. Although I mostly provide insights that are unique to each website, from time to time I do repeat an entry if it makes sense. In the spirit of providing educational write-ups about topics that are important to all types of institutional investors, I invite readers of Pension Risk Matters® to check out "Trading Ahead of Investment Policies and Procedures" and to sign up for email notices when new items have been added to the Good Risk Governance Pays® blog. This February 1, 2017 entry addresses the advantages of having guidelines such as an Investment Policy Statement. Otherwise, it could be challenging to detect rogue trading.

I’m delighted to work with the Professional Risk Managers’ International Association ("PRMIA") in delivering four (4) educational webinars about retirement plan risk management. According to its website, PRMIA is a "non-profit professional association" with forty-five chapters in various countries around the world. Click to download the PRMIA brochure for more information about membership. I hope you will join us in February and March for what should be an exciting and timely quartet of live events. If you cannot attend in real time, the webinars will be archived for later use. See below for details.

           Lead Instructor: Dr. Susan Mangiero, AIFA®, CFA®, CFE, FRM®, PPC™

                               Thursdays from 10:00 – 11:15 am EST / 3:00-4:15 GMT
                                       February 23 | March 2 | March 9 | March 16

                                                     A Virtual Training Series

This series consists of four webinar lectures, each one delivered with the goal of providing actionable information that can be used by the audience right away.

With approximately $100 trillion in global assets under management, retirement plan fiduciaries and their attorneys and advisors face numerous challenges in the aftermath of the worldwide credit crisis that began in 2008. Market volatility, investment complexity and compliance with new accounting standards and government mandates, alongside a strident call for better accountability and transparency, are a few of the pain points that keep pension executives up at night. Litigation and regulatory investigations are on the rise. As a result, enlightened pension decision-makers are turning their attention to risk management technology and techniques as a way to mitigate economic, legal and operating trouble uncertainties. Those who ignore the adverse impact of longer life spans, statutory capital requirements, binding financial statement reporting rules and broader fiduciary duties are destined for trouble. In some countries, trustees may be personally responsible for poor plan governance and may have to pay participants from their own pockets.

Who Should Attend

This series should be of interest to a broad range of financial and legal professionals since poor governance and/or too few resources being devoted to pension risk management within a fiduciary framework can (a) force benefit cutbacks for participants (b) lead to a ratings downgrade which increases a sponsor’s cost of capital (c) force a plan sponsor to come up with millions of dollars (pounds, euros, etc.) in cash for contributions (d) result in a costly lawsuit and/or regulatory enforcement (e) thwart a merger, acquisition or spin-off and/or (f) cause a sponsor to be out of compliance with financial and statutory reporting requirements.

Both senior-level decision makers and staff members can benefit from viewing this series of webinar lectures. Representative titles of likely audience members include: • Directors of the board • CFOs, treasurers, controllers and VPs of finance • Members of a sponsor’s pension investment committee • Pension consultants • Pension advisors • Pension and securities attorneys • Pension and securities regulators • Rating analysts • Financial journalists • Derivatives traders • Executives with derivatives and securities exchanges • ERISA, municipal and sovereign bond and D&O liability insurance underwriters • International, U.S. federal and state lawmakers • Think tank researchers • Industry associations • Chambers of Commerce in various countries • Economists who cover demographic patterns and • Risk management students.

Session One (February 23, 2017): Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans

Session One examines risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

  • Procedural prudence and the costs of ignoring fiduciary risk;
  • Risk management differences by type of retirement plan;
  • Industry norms and pitfalls to avoid;
  • Role of Chief Risk Officer, investment committee members and in-house staff; and
  • Suggested elements of an Investment Policy Statement.

Session  Two (March 2, 2017): Use of Derivatives in Pension Plans

​Session Two looks at how derivatives are used by retirement plans, whether directly or indirectly. Topics to be discussed include the following:

  • Current usage of derivatives by retirement plans for hedging purposes;
  • Financially engineered investment products and governance implications:
  • Fiduciary duties relating to monitoring risks and values of derivatives; and
  • Suggested elements of a Risk Management Policy Statement.

Session Three (March 9, 2017): Liability-Driven Investing and Other Types of Pension Risk Transfer Strategies

Session Three examines the reasons why the number of pension restructuring deals is on the rise, especially in the United States and the United Kingdom, and the type of transactions being done. Topics to be discussed include the following:

  • Nature of the pension risk transfer market and various approaches being utilized;
  • Regulatory considerations for fiduciaries in selecting an annuity provider;
  • Action steps associated with implementing a pension risk transfer; and
  • Case study lessons learned.

Session Four (March 16, 2017): Service Provider Due Diligence

Session Four looks at the growth in the Outsourced Chief Investment Officer (“OCIO”) and Fiduciary Management markets and explains service provider risk. Topics to be discussed include the following:

  • Fiduciary considerations of delegating investment responsibilities to third parties;
  • Risk mitigation practices for selecting and monitoring vendors such as asset managers and advisors;
  • Types of lawsuits that allege fiduciary breach on the part of third parties and related regulatory imperatives; and
  • Identifying warning signs of possible vendor fraud.

Fee: Fee includes access to all four live sessions (75 minutes each), access to the recorded session for 60 days, and digital program materials.

  • Sustaining Members: $355.00
  • Contributing Members: $395.00
  • Free/Non-Members: $465.00

Registration: You may register for this course by clicking on Register at the bottom of the page. For questions regarding registration please contact PRMIA at training@prmia.org.

Cancellation: A refund (less a 15% administration fee) will be made if formal notice of cancelation is received at least 48-hours prior to the date of the first session. We regret that no refunds will be made after that date. Substitutions may be made at no extra charge.

Important Notice: All courses are subject to demand. PRMIA reserves the right to cancel or postpone courses at short notice at no loss or liability where, in its absolute discretion, it deems this necessary. PRMIA reserves the right to changes or cancel the program. PRMIA will issue 100% of registration refund should cancelation be necessary.

CPE Credits: This webinar series qualifies for 6 CPE credits subject to certain rules about required attendance. Email webinars@prmia.org for more information about obtaining continuing education credits.

About the Presenter:

Dr. Susan Mangiero is a forensic economist, researcher and author. With a background in finance, modeling and investment risk governance, Susan has served as an expert on numerous civil, criminal and regulatory enforcement actions involving corporate retirement plans, government retirement plans, hedge funds, private equity funds, foundations and high net worth individuals. She has been engaged by various financial service organizations to provide business intelligence insights about what institutional investors want from their vendors. As founder of an educational start-up company, Susan raised capital from outside investors, created a fiduciary-focused content library and developed a governance curriculum for institutional investors and their advisors. Prior to her doctoral studies, Susan worked at multiple bank trading desks in the areas of fixed income, foreign exchange, interest and currency swaps, financial futures, listed options and over-the-counter options.

Susan Mangiero is a managing director with Fiduciary Leadership, LLC. She is a CFA® charterholder, Professional Risk Manager™, certified Financial Risk Manager®, Accredited Investment Fiduciary Analyst®, Certified Fraud Examiner and Professional Plan Consultant™. Her award-winning blog, Pension Risk Matters®, includes nearly 1,000 essays about investment risk governance and has well over a million views. She is the creator and primary contributor to a second blog about investment compliance at www.goodriskgovernancepays.com. Susan is the author of Risk Management for Pensions, Endowments and Foundations. Her articles have appeared in multiple publications such as RISK Magazine, Bloomberg BNA Pension & Benefits Daily, Corporate Counsel, American Bankruptcy Institute Journal, Mergers & Acquisitions, Business Valuation Update, CFO Magazine and the Journal of Corporate Treasury Management.

Susan has testified before the ERISA Advisory Council and a joint meeting of the Organisation for Economic Co-operation and Development (“OECD”) and the International Organisation of Pension Supervisors (“IOPS”). She lectured at the Harvard Law School and addressed groups such as the American Institute of CPAs (“AICPA”) – Employee Benefits Section, Financial Executives International, and the National Association of Corporate Directors. She can be reached at contact@fiduciaryleadership.com or followed on Twitter @SusanMangiero.
 

Kudos to Chris Carosa for his continued efforts as publisher of Fiduciary News. I share his mission to educate and provide independent insights. That is why I was delighted to be one of the contributors to his recent article, "These Five Developments Dramatically Changed the Retirement Fiduciary World in 2016."

My view is that it is hard to pinpoint standalone issues. So many areas overlap. For example, a discussion about fiduciary litigation frequently involves questions about the reasonableness of fees. A conversation about fees often means talking about asset allocation as well. An analysis of asset allocation trends is commonly linked to investment performance realizations. When one talks about returns, it is usually in the context of economic forecasts. Overlay regulatory mandates, including the imminent U.S. Department of Labor Fiduciary Rule, and it becomes apparent that retirement plan governance is complex territory. Nevertheless, Chris did a noble job of listing significant and distinct trends with his readers. His list includes the following:

  • Capital Markets – Low interest rates continue to challenge both institutional and individual investors. The pension risk transfer market is experiencing unprecedented growth as sponsors seek to focus less on retirement plan management and more on operating their core businesses. Post-election, the U.S. market seems poised for better returns in 2017 although it is thought that low-cost index funds will remain popular.
  • Excessive Fee Litigation – The attention paid to fee levels and the process of assessing reasonableness continues to grow. Some believe that the proliferation of lawsuits has resulted in improved governance regarding the selection and review of various funds. I am quoted as saying that "…investors in search of turbo-charged performance struggled with the reality that the costs of alternatives, derivatives and structured products are generally higher than passive funds."
  • Fiduciary Rule – Uncertainty is the watchword with multiple plan sponsors unsure about what they might want to delegate to a third party. Consulting firms that offer independent fiduciary services have an opportunity to help their clients solve real compliance problems.
  • State Sponsored Private Employee Retirement Plans – Deemed controversial by some, these arrangements to help small business employees are being rolled out by states throughout the nation. The goal is to encourage savings over the long-term although I have doubts about accountability and redress for disgruntled participants. Click to read "State Retirement Arrangements for Small Business Employees" (June 9, 2016) and "Public-Private Retirement Plans and Possible Fiduciary Gaps" (June 5, 2016).
  • Presidential Race – Carosa writes "Of all the events of 2016, nothing will have had more of an impact than the presidential election." Perhaps he is correct. Already the yearend markets have been chugging upward and optimism is on the rise. Yet there are questions about whether regulations such as the Fiduciary Rule will be weakened or perhaps eliminated altogether. Should that occur, financial service industry executives will need to respond.

The article lists other developments including restructuring deals. I am quoted as saying "Restructuring deals have made 2016 a notable year in terms of the number of pension risk transfers and the outsourcing of the responsibilities of a Chief Investment Officer to a third party. Bankruptcy has catalyzed the restructuring of multiple plans, much to the dismay of the savers who have been asked to accept lower benefits. Service providers who have been ordered by the courts to take less favorable terms as swap counterparties or consultants are correspondingly glum."

President John F. Kennedy declared "Change is the law of life. And those who look only to the past or present are certain to miss the future." I concur. Where there is disruption, there is always the opportunity to address a problem and win the hearts and wallets of investors.

Here’s to a terrific 2017. Happy holidays!

Since I started this blog a decade ago, I’ve repeatedly lamented the unfortunate situations when investment decisions are determined by politics rather than based on prudent process. As I read "Teachers Union and Hedge Funds War Over Pension Billions" by Brody Mullins (Wall Street Journal, June 28, 2016), I can’t help wonder if pensions are once again being used as political ping pong balls.

Mind you, I am not advocating a particular strategy or asset class for any of the teacher funds mentioned in the article. One would have to examine relevant facts and circumstances, investment goals and risk tolerance, at a minimum. However, as a taxpayer and fiduciary expert, I am disturbed by the possibility that asset managers are being lopped off an approval list (or added as the case may be) on the basis of whether they disagree (or agree) with the views of the American Federation of Teachers ("AFT").

In 2015, multiple organizations (including the AFT) published "All That Glitters Is Not Gold," a thirty-nine page analysis of eleven U.S. public pension plans that invested in hedge funds. Authors of the study urge decision-makers to:

  • Carry out "an asset allocation review to examine less costly and more effective diversification approaches" and
  • Mandate "full and public fee disclosure from hedge fund managers and consultants" to include information about performance.

These recommendations seem to make sense and should be applied to all asset classes with two qualifiers. First, cost is not necessarily the sole determinant. Selection and monitoring should consider numerous factors such as how an asset manager mitigates risks, safeguards against rogue traders and ensures operational excellence. Second, performance numbers should be consistently measured across asset managers, go beyond historical numbers, be adjusted for risk-taking and much more.

My prediction is that we’ll have lots more news about politics and pensions. This could be a good thing if actions by lawmakers and public pension trustees evidence improved oversight and good governance. Otherwise, questions asked about dubious practices may get answers too late to effect meaningful change.

Note: In terms of full disclosure, I was part of the team that reviewed New York City Employee Retirement System ("NYCERS") operations. I was not involved with any discussions about changing asset allocations.

When it comes to strategy games, count me in. Bridge and Scrabble are two of my favorites except when it looks like I have little chance for victory. It’s one thing to lose a hand or two but feel confident in a possible win. It’s altogether depressing to know that recovery is unlikely. This happened a few days ago when my husband added an E, U, A and L to create a cluster of words that scored him sixty-seven points. Ouch. Even with lots of high point letters, I knew that besting his bonanza move was improbable. Each time we play, I begin on an optimistic note and hope for a favorable outcome until that moment when I know it’s time to recast my calculations.

It’s good to wish upon a star yet just as important to distinguish fantasy from fiction. That’s why I was surprised to learn the results of a recent study of 400 institutional investors about their performance predictions. Carried out by State Street Global Advisors ("SSGA"), in conjunction with the research arm of the Financial Times, main takeaways from the "Building Bridges" study include the following:

  • Traditional asset allocation models may be unable to generate a long-term average rate of return of eleven percent, certainly without forcing buyers to take on more risk.
  • Forty-one percent of survey-takers expressed a preference for "traditional" classifications of asset exposures versus factor or objective-driven identifiers.
  • Eleven percent of those in search of closing "performance gaps" rank smart beta strategies as most important and 38 percent of institutional investors will employ this approach alongside other activities. "Significantly, three-quarters of those respondents who have introduced smart beta approaches found moderate to significant improvement in portfolio performance."
  • Enlightened decision-makers are finding it hard to get board approval of "better ways to meet long-term performance goals" and peer groups are slow to follow suit.
  • Eighty-four percent of pension funds, sovereign wealth funds and other asset owners believe that underperformance is likely to continue for one year.

As Market Watch journalist Chuck Jaffe somewhat indelicately points out in "An overlooked investment risk: wishful thinking" (May 18, 2016), long-term investors are daydreaming if they believe they can regularly generate eleven percent per annum. He quotes Lori Heinel, chief portfolio strategist at SSGA, as acknowledging the difficulty of achieving this number, given "a really challenging growth outlook, inflation environment, and a really challenging investment return environment." Notably, it was only a few weeks ago when the special mediator for the U.S. Treasury Department sent a letter to Central States Pension Fund trustees, denying a rescue plan in part because its 7.5 percent annual investment return assumptions were not viewed as "reasonable."

As I described in an earlier blog post entitled "A Pension Rock and a Hard Place," public pension funds, union leaders, taxpayer groups and policy-makers are navigating choppy asset-liability management waters. They are not alone. Corporate plans, endowments, foundations and other types of institutional investors are likewise challenged with getting to their destination and not crashing on the rocks. My unrealistic expectations might lose me a game. For long-term investors, there is serious money at stake and model inputs are being scrutinized accordingly.