Following the government’s announcement of drastic reforms to pensions last year, pension providers will be looking to reassess their risk models to reflect changes in investment strategies. To ease this transition, it’s important for professionals to be aware of model risk. Michel Maila, president and CEO of think tank, The Global Risk Institute in Financial Services (GRI), explains.

The Autumn Statement announced that pensioners will have wider freedoms in how they claim and assign beneficiaries to their pensions. The changes will make it easier to opt out of annuities. Now pensioners will have the choice to keep their pension invested, draw on it when needed or cash it in entirely.

Pension funds are now reassessing their investment strategies in light of these reform measures.

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To inform these judgements, it is critical that pension funds adapt the risk models they use to reflect the complexities of the new landscape. To manage this transition, it’s important for practitioners to develop a greater understanding of model risk.

Risk models are designed to make certain assumptions of the world and as a result, have limitations. As these models evolve to reflect the new reform conditions, understanding how models function will be critical to how their outputs are interpreted and used to inform business decisions.

This is particularly important when there are so many changes happening to pension policies in the UK. Pension fund practitioners from all levels need to understand the nuances of the models they are using, to be able to identify the warning signs and make sound investment calls.

Pension fund practitioners from all levels need to understand the nuances of the models they are using”

The best way to help navigate these times of transition is through education. Pension fund professionals must have a firm grasp of risk models, their management and governance. It’s also important for professionals to be able to access this knowledge quickly and easily.

In an increasingly digital world, e-learning is one solution that can help organisations strengthen their lines of defense. To help people prepare for the changes occurring on  April 6th, tools such as our new e-learning programme can provide financial services professionals of all levels with a greater understanding of risk models, their management and governance.

Expanding pension fund professionals’ knowledge of model risk needs to be moved up the priority list – quickly.”

Model risk is a complex area of risk management. Education on this subject should be accessible to professionals of all levels and explained in plain, practical terms. 

Everyone from executives, analysts and fund managers should take the time to enhance their knowledge, especially in times of change.

It’s important to invest in the right resources to help inform strategy changes during times of transition. With April 6th just around the corner expanding pension fund professionals’ knowledge of model risk needs to be moved up the priority list – quickly.