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Pension Funds Facing New Risks

Pension funds are facing some new risks, according to one market analysis.

Changing market conditions are placing an increased emphasis on the importance of risk management for pension funds, according to a recent analysis at Advanced Trading.

One of the main factors affecting pensions today isn't accounting standards - it's longevity. According to AT, the lifetime draw on pension funds is increasing, and current contributions are struggling to keep up with obligations. Risk managers on the sell side of pensions are also focusing heavily on the overall risk of the fund, not just the core remit, as the world's capital markets continue their tumultuous recovery. As AT indicated, this has resulted in some new approaches to pension risk management, including VaR-based RM, active RM and counterparty credit RM.

"This is a major change within the pension fund industry which in turn means that it is a major change to the financial industry, given that public and large corporate pension funds' assets under management are routinely above $100 billion, and can run close to $300 billion for the very large funds," the article stated.

Despite the air of uncertainty surrounding pensions, wealth management expert Graham Gordon, writing for Money Observer, said pensions are still one of the most tax-efficient investments a business can make. He noted that current low rates of return would be a factor whether money has been invested in a pension or not, making these products a valuable long-term investment.