How OMERS is Redefining Risk Management
Last year, the Ontario Municipal Employees’ Retirement System embarked on a journey to redefine its risk management strategy, with the process pushing the organization to separate its views on risk into three categories.
After becoming the OMERS’ chief risk officer in June 2023, Deb Barnes asked the organization’s board for a mandate to refresh the risk framework and risk appetite statement. “A big part of my role is to help the organization see the risks that matter, not get distracted, focus our attention on the right place and then have the right conversations in the right forums to make sure that we’re dealing with them appropriately.”
The first new category is uncompensated risks, meaning operational challenges, such as fraud, conduct, trading or processing errors. The second risk bucket relates to necessary investment risks, which carry a strategic benefit but require optimization. And the third risk section is all about external threats that are less manageable from within the investment organization.
“My role is about safeguarding and making sure we’re taking the right type of risk,” says Barnes. “We’re seeing the risk, we’re being intentional about it and then we’re not blindsided by it.”
The OMERS’ risk framework was redeveloped alongside its new 2030 strategy, which was led by Jonathan Simmons, chief financial and strategy officer, and Anton Blagov, senior vice-president of strategy and actuarial services. The projects’ aligned timing helped ensure a shared vision, says Barnes.
The organization recognizes climate change as a significant risk for the next generation of plan members, she says, noting it thinks beyond calendar quarters by evaluating progress and risk years in advance, including an evolving climate outlook. Indeed, the organization is targeting net-zero for its portfolio and operations by 2050. In its latest annual report, the OMERS confirmed a 58 per cent reduction in its portfolio’s weighted average carbon intensity compared to a 2019 baseline.
Barnes says her role involves being an independent thought partner at the OMERS, with an objective perspective that will deliver additional information for any decision to be taken. “People often think about risk as being about numbers and analytics. Those are foundational and very important, but I believe at the heart of it, risk is a relationship business and it’s about people.”
With the current volatility in pension funds’ traditional investment avenues, liquidity management is a top priority for Barnes’ team. “We have a lot of comfort with [our] liquidity position, but we are really mindful of where it sits and where we can be opportunistic [with our deployment].”
As large Canadian pension funds reconsider geographic allocations, many investors are signaling a stronger focus on Canadian-based assets. This dialogue reached the federal government, which appointed a working group to look for solutions to incentivize domestic investments without creating a mandate. Ultimately, the feds scrapped a rule preventing pension funds from owning more than 30 per cent of the voting shares of a Canadian entity.The OMERS is enthusiastic about investing in Canada when all of the right elements come together, says Barnes. According to its 2024 annual results, more than $28 billion of its total $138.2 billion portfolio — or about 20 per cent — is domiciled in Canada. “Canadian assets are always attractive. We know the rule of law, we know the currency, we know the regions, we are invested in a number of assets across the country.”
Excellent comment on how OMERS Chief Risk Officer Deb Barnes is working with her team and other departments to redefine risk management at OMERS.
Here is what Deb posted on LinkedIn:
Since taking on the role of OMERS Chief Risk Officer, the Risk team and I have been focused on one key question: How do we help our organization see the risks that truly matter?
We've redesigned our risk framework around three categories:
🔍 Uncompensated risks: operational challenges we must minimize
⚖️ Investment risks: strategic risks that require optimization
🌍 External threats: factors beyond our direct control
Let me quickly delve into each of these.
First, uncompensated risks or operational risks which include fraud, conduct, trading or processing errors. This touches both internal employees and external managers across all asset classes.
Having allocated to top hedge funds all over the world years ago, I can assure you operational risks are real and when it hits the fan, it can cost you serious basis points or worse still, reputational risk.
These are risks that people rarely think about a priori until something goes wrong which is why smart organizations have their risk and finance teams working together with investment teams to minimize these risks (and if you think sending out an operational risk due diligence questionnaire and flying your ops due diligence team from the finance departments to kick the tires is enough, you're going to get a nasty surprise when you least expect it).
Second, investment risks, these are risks that can be calculated on public markets where traders are trading liquid instruments, but on private markets, it takes a little more to really make sure valuation and liquidity risks are accounted for properly.
Since more than 50% of OMERS assets are in private markets, the risk optimization here is really to make sure they are properly diversified by geography and sectors and to buy assets which are top assets or transform them into top assets so valuation risk is minimized.
But you have a whole host of risks here that cross across public and private markets like currency and interest rate risk as well as climate risks.
The third risk, external threats or factors beyond their control, well, stuff happens and sometimes in a large portfolio of assets, things out of your control happen forcing you to take a serious writedown.
It happened to OMERS during the pandemic where they took a significant writedown on two assets and it happened with Thames Water where they couldn't agree with regulators and their partners so they took a writedown there.
This happens to every single large pension fund in Canada without exception.
I think the most important thing to understand about risk is what it can and cannot measure.
Here, let me go back to my history of economics courses and the great economist Hicks:
John Hicks, a prominent economist, approached the measurement of risk by differentiating between "risk" and "uncertainty," a distinction that significantly influenced his work and the broader field of economics. He defined risk as quantifiable uncertainty, where probabilities can be assigned to potential outcomes, while uncertainty referred to situations where probabilities are not readily determinable. This distinction is crucial for understanding how agents make decisions under conditions of imperfect information
That distinction between risk and uncertainty is critical for any investment organization.
Risks are measurable to a certain extent, you can assign a probability to an outcome whereas uncertainty is by definition impossible to measure.
Why do I include this discussion? Because in my mind, great risk managers aren't just people with FRMs and PhDs, they're people who think and can analyze things quantitatively and qualitatively and have enough humility to recognize there are always things that can happen which risk models cannot capture.
I like what Deb stated in the article above: “People often think about risk as being about numbers and analytics. Those are foundational and very important, but I believe at the heart of it, risk is a relationship business and it’s about people.”
Risk is always about people, period.
Her team is working closely with CFO & CSO Jonathan Simmons and SVP of Strategy and Actuarial Services Anton Blagov on their Strategy 2030 to ensure a shared vision.
Lastly, there was a lot of talk about liquidity risk, that's because members get a bit nervous when a large portion of their assets are invested in illiquid asset classes but they manage liquidity very carefully to make sure they will always pay out benefits and stand ready to seize opportunities as they arise.
Anyway, I'm glad Bryan McGovern did this profile on Deb Barnes as risk professionals play an integral role at all of Canada's large and small pension funds and they deserve their recognition.
Below, OMERS CEO Blake Hutcheson on leading and investing in these challenging times (from 2 months ago at Canadian Club Toronto).
Take the time to listen to Blake, he really connects the dots well at a higher level.
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