The National Association of Pension Funds has recently launched Derivatives and Risk Management Made Simple, the latest in its series of Made Simple guides to help pension fund managers, trustees and anyone involved in pensions understand technical subjects.
J.P. Morgan helped create the new guide, which has been designed for UK pension funds to understand more clearly and be able to use derivatives and risk management. Specifically, the guide covers: the use and relative benefits of exchange-traded and over-the-counter derivative instruments; market and counterparty credit risks; and how to calculate, interpret and apply risk methodologies.
Over the last 10 years, UK pension funds have increased their use of derivatives as they focus on managing the risks associated with their liabilities – the 2012 NAPF Annual Survey shows that 57% of members’ schemes are using derivatives. Derivative and portfolio structuring are becoming more complex, requiring more sophisticated risk management and reporting.
Joanne Segars, NAPF Chief Executive, said: “With the use of derivatives becoming more common, it’s vital that pension trustees are fully aware of their responsibility to properly understand, monitor and manage the derivative risk exposure for their pension schemes. This guide is very welcome and will help schemes branch out more confidently into derivatives.”
Jemma Broadgate, Executive Director, Investor Services, J. P. Morgan, added: “We are proud to have assisted in creating this NAPF guide for pension funds looking to invest in derivatives products. It is vital that our clients fully understand how their portfolios are invested, and we hope this will introduce trustees to the fundamental aspects of derivatives market.”
The guide also sets out the key considerations associated with applying derivatives: identifying the right overlay strategy to define the objectives of risk reduction or efficient portfolio management; establishing robust operational procedures for managing the overlay strategy; and identifying risk limitations.
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