We take calculated risks every day, simply by living our lives. Reaching into the toaster to pull out a piece of burning bread. Crossing the intersection while the red hand is flashing in order to catch a bus. Driving over the speed limit to get to the airport on time for a flight.
Whether or not we’re consciously aware of it, we’re continually assessing and reassessing the risks around us—weighing the pros and cons, and evaluating the likely outcomes of our decisions. Most often, the risks we choose to take are minor and don’t result in dire consequences. Other times, the stakes are higher. And sometimes, inevitably, we get burned.
That was a harsh realization for many pension plan sponsors last year: if you take on undue risk, or risks that you don’t fully understand, the consequences can be severe. And there are many different sources of risk for plan sponsors to assess. Market risk is clearly a concern, but it’s one hazard among many. There are also legal, fiduciary, reputational and even operational risks to consider, to name just a few.
However, it’s important to keep in mind that while you can mitigate risk, you can’t eliminate it. To maintain an appropriate pension plan funding level—and to keep the plan sustainable over the long term—a certain level of return is needed, which can’t be achieved through money market funds alone. Those responsible for pension investment must take risks, as we all do on a daily basis, in order to be successful. In other words, a degree of carefully calculated risk is both necessary and healthy for a pension plan.
Managing risk has become a major priority for plan sponsors today, and that’s to be encouraged: only by understanding the risks can you take action to address them. Yet much of the dialogue today around risk is driven by fear—in particular, the fear of having to survive another year like 2008. That’s a rational and understandable fear to entertain, but let’s not demonize the concept of risk-taking in the process.
You can’t avoid risk. But you can minimize unjustified risks—especially those created through laziness, greed or lack of understanding—and take risks that make sense for the plan and sponsoring organization. Now that’s risk management..
Alyssa Hodder is Editor of Benefits Canada.
alyssa.hodder@rci.rogers.com
> click here for a PDF version of this article
© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the November 2009 edition of BENEFITS CANADA magazine.