Getting Risk Governance Right

Pension industry veteran, Michelle Ostermann is back in Canada after having worked as Managing Director at Railpen Investments, the in-house investment manager for the UK railway pension plans, since 2019. This week, she stepped into her new role as Senior Vice-president and Global Head of Capital Markets for PSP Investments, in Montreal. Michelle is also a keynote speaker at our upcoming Challenge of Change Forum being held in Vancouver from October 13 to 15, 2021. She’ll be discussing the topic of Risk Governance and what it means for Canadian pension plans.

We chatted with Michelle recently and asked for her views on what she sees as the top governance challenges Canadian pension plans face today, and why it’s more important than ever to address them in a meaningful way.

CLC: Welcome back to Canada! Your new role sounds exciting. Can you tell us a bit about it?

Michelle Ostermann: PSP Investments is one of Canada’s largest pension investment managers, responsible for over $200 billion of net assets. It manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police, and the Reserve Force. It’s a real honour to be part of the national fabric of Canada and its public sector workers’ future.

I have the privilege of leading the public equities, public fixed income, fundamental research, hedge funds and external manager teams. Collectively, our Capital Markets team is currently responsible for about half of PSP’s assets under management, which is quite a responsibility.

CLC: You’ll be speaking about governance at the Challenge of Change Forum. In your view, what’s the top governance challenge Canadian pension plans face right now?

MO: Complexity. I say that because our businesses have changed at a breakneck pace over the last decade. The pension industry has evolved from asset management to asset ownership. It borrowed a lot of its best practices from the retail asset management industry, including our investment models, our people and even our governance models. In many cases pension plans copied best-in-class asset managers to ensure they were able to invest competitively, in place of them. Pension plans have effectively disintermediated the asset management industry to reduce fees and gain explicit control of very large pools of assets.

But over the last three to five years, many of us have come to realize we are not only asset managers – we are also asset owners. There’s a distinction. The management of pension assets is a fiduciary responsibility. We are investment managers with a mandate to invest to help the federal government fund a specific liability. So, our investments are for an explicit purpose, which is to help ensure there will be sufficient assets to fund the government’s promised pension liabilities. We also have an important role in promoting resilience by investing with an ESG lens, and by using our influence to encourage companies to put sustainability and inclusive growth at the centre of their operations.

At the same time, our business has become more complex, not just because of the global and broad nature of our investment portfolios, but because of the size and sophistication of our organizations. Many of the large Canadian pension plans and investment managers now employ thousands of people with much of their operations now internally managed. We are competing for assets in multiple asset classes around the world and we are making a ton of very large and complex decisions.

This rapidly growing level of complexity means our governance models need to keep up and be modernized to match the size and nature of our businesses.

CLC: At the conference, you’ll be discussing risk governance specifically. What does that mean and why is it important for asset owners today?

MO: Our raison d’être is to make investment decisions. And with every investment decision we’re effectively making a decision to incur several forms of risk. So, many of us have sophisticated risk teams measuring value at risk and quantifying credit, currency, liquidity risk, etc. However, one of the most material risks we face is the overall governance of our delegated authorities to make various investment decisions. If you think about the biggest failures in most investment firms, they often stem from a governance failure or a lack of awareness around authorities, limits, or exposure levels. This is what I’ve come to learn is called Risk Governance.

A thoughtful risk governance framework helps clarify each level of authority for making, approving, or overseeing all major investment decisions. That includes boards of directors, investment committees of the board, executives, management investment committees, and even individual portfolio managers. So, a risk governance framework simply outlines all major investment decisions and clarifies and coordinates the various levels of authority. It’s especially vital for complex asset owners with global investments and total fund performance objectives who are managing multiple asset classes for several clients.

CLC: Why is risk governance so important right now?

MO: Two reasons. As our organizations grow and mature, we are taking on new and different types of risk – and our governance frameworks need to keep up. And because market events like COVID test our governance models. In retrospect, such events provide a fantastic learning opportunity to reconsider our investment mandates, theses, operations, and governance models.

CLC: Speaking of risk, what are the top two you see right now?

MO: In my opinion, funding risk is number one. I’m often most concerned about the mismatch between the level of returns we will make from our assets and the returns we are required to earn to meet our mandate. That’s funding risk: the risk that we can’t earn the return the government needs for the pensioners, in the long-term. This balance is vital for any asset owner. It’s the heart of our obligation.

Secondly, if inflation takes off post-COVID, our real returns could be hampered. This, too, can affect funding levels. Canada’s largest pension funds can afford to be underfunded for a year or two during a market cycle. But, because many more Boomers should be retiring in the next decade, our industry will experience a much faster pace of drawdowns, which could more easily exacerbate any negative funding positions.

For those interested in seeing Michelle speak, there are a few spaces available to attend the Challenge of Change Forum in Vancouver from October 13-15 in-person. Contact Joanne Boccia directly to secure your spot today