Does look-through actually provide added transparency in the assets and risks of pension funds? Or is it just another administrative burden the costs of which do not outweigh the envisioned goals?
One of the findings at our Round Tables on the Financial Assessment Framework and look-through was crystal clear: Look-through data are indispensable when it comes to assessing the risk concentration.
30 Jun 2016
The general conclusion was that look-through certainly helps to improve the decision making process at pension funds and puts directors (even) more in control. The look-through reporting for the financial assessment framework is therefore a step in the right direction. The path to complete and reliable data is still a long one, however, which requires commitment from all the parties involved. The greater the quantity of relevant data that becomes available, the better substantiated the decisions taken by pension fund directors can be.
Other recommendations are:
- Pension funds could contractually require their asset managers to submit their look-through data on time and in full.
- Conversely, pension funds must give their asset managers clear guidelines, which the data must satisfy, preferably in a fixed format.
- Custodians could work together to develop a single standardised format for look-through data. After all, asset managers are asked for look-through data by more than one custodian.
The Dutch Financial Assessment Framework (FTK) devotes a great deal of attention to the risks faced by pension funds. In this respect, the underlying assets and risks of investments in investment funds must be reported via a mandatory ‘look-through’ report. Unfortunately, there is no form that would allow investment funds and asset managers to automatically supply the look-through data in a standardised manner. Furthermore, it is unclear what exactly regulator De Nederlandsche Bank (DNB) wants to know. What is a "meaningful tightening of the investment risks", as requested in the explanatory letter? The result: a confusion of tongues and an ocean of data that can be interpreted in many ways.
Satisfied with look-through
The above picture was a very familiar one for the participants in the two round tables on look through at KAS BANK. Nonetheless, they expressed general satisfaction with look-through. Asset managers supply the requested data increasingly quickly and with far fewer errors. However, there is still ample room for improvement. Pension funds could, for instance, contractually require their asset managers to submit their look-through data on time and in full. Conversely, pension funds must give their asset managers clear guidelines, which the data must satisfy, preferably in a fixed format. Custodians could work together to develop a single standardised format for look-through data. After all, asset managers are asked for look-through data by more than one custodian. The financial assessment framework is, however, a specifically Dutch matter with which many foreign asset managers – 80 to 90% of pension funds’ investments take place outside of the Netherlands – are unfamiliar. KAS BANK is, in the meantime, working on an Operational Guide for asset managers explaining how they must submit the required look-through data to KAS BANK.
How far must/can you go?
As far as DNB is concerned, directors are always responsible for the initiation and implementation of investment policy and determination of a risk profile that is consistent with the fund’s objectives and principles. Look-through data is indispensable in this, especially when it comes to assessing the risk concentration.
DNB therefore also describes look through as ‘knowing the underlying exposures with the corresponding returns and risks’. Detailed knowledge and an accurate valuation of all assets in which the pension fund invests can help the management better estimate the overt and underlying risks. It is up to the pension funds themselves, however, to determine to what level of detail data are collected, analysed and shared internally. The danger of information overload is always lurking. Too much information can be blinding and cause paralysis in decision-making. Therefore, pension funds would do well to clearly indicate which fund bodies must be informed and to what level of detail.
Generating added value
Look-through is certainly not only an obligation, however, but above all also an opportunity. The added value lies in the constant testing (and, if necessary, recalibration) of the investment beliefs and the identification of risks in the investment portfolio that have not yet been addressed. It makes the exposure, return and risks visible for pension funds. Unknown positions with risks that have not yet been recognised are identified. This provides the pension fund with the right tools to steer the risk management policy so that the risks remain within the agreed frameworks.
An independently compiled report of all available look-through data helps the fund to determine whether the risk positions are material. This not only gives it more control of its investment portfolio, it also enables it to take well-substantiated policy and investment decisions.
For DNB as well, look through is still a quest to explore the possibilities of what can be done with ‘big data’ flowing in, admits Arnoud Vossen (head of supervision on Large Pension Funds at DNB). Not only as a result of look through, but also because of the mandatory registration of derivatives transactions under EMIR. What is mainly important at the moment for the further development of look-through is to develop a standard format for requesting and supplying look-through data. This prevents a confusion of tongues and multiple interpretations of the data requested and submitted. Asset managers can interpret data on the value of assets and the risks differently from the pension fund itself, for instance.