When communicating risk management posturing to executive boards, it’s important for pension plan sponsors to tell a cohesive and fulsome story, said Danny Ip, director of investment risk and analytics for the Toronto Transit Commission Pension Plan, during the Canadian Investment Review‘s 2024 Risk Management Conference.
The TTC plan, which has $8.7 billion in assets under management, has a diverse mix of board members with investment expertise, including some who are union members and who don’t have a financial background. As such, Ip said it’s critical that he breaks down risk assessments in a way that everyone can easily understand.
Turnover is one of the reasons it’s crucial to implement a communications plan for executive boards — a member may be educated on risk assessment analyses but after three years, their term is up. In some cases, Ip arranges a two-day education session for new board members. “We’re always prepared . . . to communicate to members. . . . I [check in with the] chief investment officer and the chief executive officer, either pre-meeting or post-meeting [to find out] what they need [to know].”
Read: TTC Pension Plan on track to remove surprises from risk assessment
Ip recommended the use of storytelling when communicating pension plan funding risks and investment strategies to members with limited knowledge, noting the technique is informative and keeps people engaged. For example, when trying to communicate how the plan is prepared to handle a potential risk, such as a U.S. recession, he uses comparisons to historical events that have affected the markets over the last 100 years. This helps provide the board with an estimate of how long the event could last, which tends to be roughly six to 18 months.
“After the recession, usually you see the economy start coming back so . . . I should also build [that] into my scenario to make the story more complete [to show] that the economy eventually will come back up [and] markets will rebound.”
Ip also reviews U.S. treasury yields before, during and after a transaction to find hidden patterns — data that he uses to back up his theories. He noted the U.S. federal government tends to deploy monetary policy ahead of market events. For instance, prior to the 2001 technology bubble, the feds began using quantitative easing policy to reduce interest rates so the technology sector could improve over time.
Read: Are investor portfolios structured to withstand a market correction?
“After recessions, in some cases, yields continue to go down, but in some cases they also go up. So you would have to ask yourself, . . . ‘In this case, if I have to test a recession, should I assume the treasury yield will go up or down and by how much?'”
During market events, board members often want to know what’s going to happen, noted Ip, so it’s important to be clear there’s no crystal ball to predict outcomes. However, a key to board communications is the ability to demonstrate how the plan is building its risk analysis to determine the impacts of the event or how to ensure the plan is resilient and prepared to weather the challenge.
It’s important to have the full historical picture before meeting with the board, he said, noting that providing the full story enables members to trust the risk analysis provided because they see the due diligence.
Read more coverage of the 2024 Risk Management Conference.