Counterparty risk The long-term nature of retirement, combined with the fiduciary responsibilities of fund trustees, complicates the development of many traditional insurance-based solutions. Problems involving a third party can damage a fund’s reputation— not to mention the financial interests of its members. Other ways of managing counterparty risk include: • Short-term commitments: adopting approaches that rely on shorter commitments or instruments, or that eventually eliminate or reduce reliance on third parties. • Collateralisation: ensuring that third-party obligations are funded—something that is critical to protecting the fund and maintaining the ability to migrate from one provider to the next should a significant event make it necessary. • Risk pooling: spreading risk across multiple counterparties. • Internal or independent administration of solutions. • Administrative burden: sufficient expertise in administration over very long time periods.

Putting it all together A number of potential models for developing risk-management strategies appear to be evolving: • Outsourcing: This option is mostly limited to small funds that wish to retain an administrative role but do not have the necessary in-house staff resources and are comfortable outsourcing to a third-party institution. Selecting the correct partner and carefully monitoring performance will be critical. • Partnership: Some funds may elect to work with a third party that assists by independently administering collateralised or pooled structures to ensure that the fund’s fiduciary duties are met, as well as to provide independent advice as appropriate. • Internal operations: Some large funds will elect to develop their own risk-management solutions, with the option of outsourcing certain operations to others who have the appropriate expertise. In summary, there is a wide range of alternative structures available to assist in the management of risk. These ultimately need to be considered in the context of the fund and its members. Full paper is at www.milliman.com/retire Andrew Fisher is a consultant with the Australian Financial Risk Management practice in Milliman’s Sydney office, and Wade Matterson is a senior consultant and leader of the practice.

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