Risk appetite is a very important discussion for defined benefit pensions plans like LAPP, especially in a low interest rate environment like the one we live in today.
Pension plans are discovering that low-risk investments like bonds do not generate enough investment revenue on their own to cover the growing cost of providing pensions. This makes it important to carefully take on more risk by also investing in higher-risk assets like public stocks and private equity (real estate and infrastructure). Yet taking on higher risk investments, which can be good for paying pensions over the long term, means LAPP has to manage the shorter-term impact of holding those riskier assets.
It is critical to find the right balance of risk and reward to fund the pension plan in a prudent and responsible way. The Boards have specific responsibilities in terms of valuing the Plan, setting contribution rates and establishing investment policy. At the heart of it all is a comprehensive plan for managing risk.
One of our key risk management practices is to conduct an actuarial valuation every year, even though we are only required to file a valuation once every three years. This allows us to constantly monitor the financial health of the Plan and respond quickly, when needed, to make adjustments and hedge against possible future risks.
You can read more about this under the section called Funding.