As pension funds add moderate risks to their portfolios and venture into foreign markets to address their asset-liability management, effective portfolio risk management is a growing initiative. 73% of Asia ex-Japan pension plans believe that effective risk management is a key tool in achieving optimal portfolio returns. While larger pension funds have risk management policies and target asset allocations, smaller pension plans are likely to employ external managers’ expertise and experience in managing their risk.

Risk management, however, covers many areas, and is not just limited to investment or market risks, but also includes addressing risks in operations, technological systems, and non-financial events such as climate change, as well as asset-liability mismatch risks. Changing the features of pension plans (such as raising the retirement age or increasing contribution limits, which could be sensitive issues), is one of the ways of addressing asset-liability mismatch (ALM) risk and ensuring enough funding is available for payouts. That said, asset allocation plays a paramount role in ALM and effective portfolio risk management. Japan’s Government Pension Investment Fund (GPIF), for instance, said in its 2019 annual report that, “The most important aspect of portfolio risk management is a proper management of asset allocation based on a policy asset mix.”

We believe that asset managers that can demonstrate prudent management of ALM risk and meet the demands funding payout amid an increasingly aging population will be well poised to win mandates from pension funds.

For more on this trend and for complete coverage of the retirement landscape in Australia, Japan, and North Asian and Southeast Asian markets, access our latest research.