UK - The National Association of Pension Funds (NAPF) is working on developing information which could form the basis of a set of guidelines to help pension funds gauge the risks they run using counterparties.

The NAPF says the credit crisis has made it clear pension funds need to better understand where money is being held and what collateral requirements are needed on stock lending.

NAPF chairman Chris Hitchen commented in a statement: "Now the financial landscape has changed, it is right that pensions funds look again at the investments they hold including taking appropriate professional advice and carrying out due diligence."

He added: "It is important that pension funds continue doing all they can to identify key risks. The NAPF will be looking, over the coming months, to see if we can help."

Following the recent demise of some of the world's largest banks, consultants and industry figures have already warned pension funds of the need to be more aware of the counter party risk they run.

Mercer thinks pension fund executives needs to improve their diligence and monitoring of corporate sponsors' covenants and counterparty risks in the current economic climate. (See earlier IPE story: ‘Insolvency diligence needed over pensions threat - Mercer')

Earlier this month, Gerald Santing, former director of the Netherlands Authority of the Financial Markets (AFM), told IPE new techniques to measure and hedge risks as part of quantitative risk management - through interest swaps and swaptions, currency overlays, CDS and CDOs - work well in ‘normal times'.

That said, he added pension funds should take heed of the counterparty risk as these instruments are constructed by banks and insurance companies. (See earlier IPE story: ‘Beware of negative hedging impact - ex-AFM director')

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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