DB Advisors: Prosperous Pension Provisions - Nikolaus Schmidt-Narischkin and Martin Thiesen

The experiences of the second half of 2008 made it clear that the management of capital investments for pension provisions poses complex challenges. Nikolaus Schmidt-Narischkin, head of fiduciary management and Martin Thiesen, head of pension and investment solutions at DB Advisors, tell FDE why this highlights the necessity for a systematic approach and an efficient management process.

The core elements of a successful management process of plan assets are pension governance and risk management as well as the actual asset management. This division reveals an essential principle of risk management: the separation of functions. If, for example, the asset manager provides support in determining the possible risk budget and if as a result he is responsible for its efficient usage, an independent body should be responsible for the final setting of the risk budget.

The implementation of a strategy, the regular checking of the risk profile, as well as the drawing up and monitoring of rules for asset allocation, require some preparatory measures. Firstly, there is the harmonisation of data records and different reporting systems. The essential influencing factors on a capital investment must become just as transparent as the details of the individual commitments in relation to guarantees, options and the calculation of expected returns.

Once the specific details of the pension plans and the accounting and regulatory requirements have been determined, general principles should be defined for determining the assumptions in the capital investments such as the returns of individual asset classes and liabilities.

The qualitative determination of the risk in the pension plans and the definition of the principles are followed by the quantitative consideration of the risk. This function represents the first pillar of the risk management of pension plans: a flexible risk measurement system is required to meet the complex requirements of various investment universes, pension plan designs and regulators. The provision of such systems is not the norm, even among sponsors of large pension plans. In many cases, simple stress tests are used, which may indeed be sufficient for risk quantification for small companies. A trend towards in-house development, the procurement of a ready-made system or the corresponding implementation by an expert consultant is, however, not to be overlooked.

The second pillar of risk management for pension plans is asset management. Once the risk budget has been set for the individual plans, it must be used efficiently. Sufficient diversification and the risk-aware usage of the budget are essential components of the management of pension assets.

Ideally, the manager is already involved in determining the risk budget, for example, within the scope of a fiduciary mandate, and is therefore familiar with the influencing factors and the risk strategy. He can be assigned different objectives in this respect, depending on the risk strategy. If a global strategic asset allocation on the basis of the requirements from the liabilities and the accounting as well as regulatory restrictions has already been defined, then the asset manager has, on the one hand, the objective of exceeding his individual traditional benchmark.

On the other hand, he should take the out-performance of the liabilities and ultimately the improvement of the level of full financing as the benchmark, which places a greater requirement on the management and the investment process of the asset manager.

If, in addition to risk budgeting, allocation consulting, asset management and risk overlays, the asset manager offers manager selection, administration platforms and customised reporting structures, he can make a significant positive contribution to the successful risk management of pension assets within the framework of a fiduciary mandate.

Nikolaus Schmidt-Narischkin, head of fiduciary management at DB Advisors.
Martin Thiesen, head of pension and investment solutions at DB Advisors.