- Managing RiskTaking a Proactive Approach
A Culture of Risk Management
Our approach to risk management integrates guiding principles and market trends into our operations and investments, enabling us to anticipate, manage, and capitalize on risks and opportunities. Risk management is ingrained in our culture, encompassing strategic planning, investment decisions, monitoring, and other crucial operational and investment controls and activities.
Our clients expect to be compensated for taking on additional investment risk. Effective risk management at BCI requires knowledge of capital markets and legislation, investment products, business practices, and internal controls.
BCI has two risk committees: the Enterprise Risk Management Committee (ERMC) and the Investment Risk Committee (IRC), which are part of BCI’s Integrated Risk Governance Framework. These two committees support the CEO/CIO in managing all risks, assist the Board in its risk oversight, recommend risk policies for Board approval, and approve risk directives. This framework strengthens the Board’s ability to oversee risk management and fulfill its responsibilities under the Public Sector Pension Plans Act, while ensuring that risk-taking decisions are in alignment with BCI’s and our clients’ related governance documentation.
We have dynamic, global investment strategies that constantly adapt to changes in the market. By managing the majority of assets in-house, we constantly discover new methods to identify and evaluate potential investment risks and take appropriate action to either mitigate or capitalize on them.
BCI’s Investment Risk Management Framework plays a dual role: it offers support and advice and provides independent oversight of investment risk. This framework is designed to ensure that the CEO/CIO and Board meet their governance and oversight duties. The investment risk team works with clients, our Board, and the asset class teams to help inform key investment decisions. Our primary mandate is to create long-term financial sustainability for our clients.
Our investment risk management framework addresses the following risks:
Concentration Risk
This is the risk of loss arising from exposure, either directly or indirectly, within or across different risk types such as region, issuer, sector, investment partner, or investment type. BCI employs a strategy of diversification across various areas, including sectors, countries/regions, currencies, individual companies and assets, investment types, counterparties, investment partners, and funding sources. By diversifying our holdings across these different categories, we aim to minimize the risk of losses that could result from over-reliance on a single area of investment.
Counterparty Risk
Counterparty risk is the potential for loss from a counterparty not honouring its contractual obligations. BCI only works with reputable counterparties and ensures that we have strong legal agreements in place, such as International Swaps and Derivatives Association master agreements, global master repurchase agreements, and credit support annexes. We continuously monitor the quality of these counterparties to promptly identify any signs of potential decline.
Credit Risk
BCI employs dependable methods to monitor credit risk, such as assessing credit ratings from both internal and external agencies, tracking the amount of distressed securities in our portfolio, analyzing historical and projected default and recovery rates, and monitoring credit outlooks for various sectors and geographic regions. We also stay alert to potential changes in the credit cycle. To manage credit risk at the pooled fund level, we establish sound investment criteria, which include minimum acceptable credit ratings and limits on single name concentration. We regularly review and monitor these criteria and immediately notify our Board and clients of any significant breaches.
ESG Risk
BCI measures and manages material ESG risks for individual investments and for the total portfolio using a variety of tools and practices appropriate for each investment. BCI’s in-house ESG Risk and Opportunity Framework measures and monitors the potential risks and opportunities that result from systemic ESG issues such as climate change. This analysis is now integrated into total portfolio investment risk measurement processes that support investment decisions across the corporation and for clients.
Funding and Contribution Risk
BCI collaborates with clients to perform an asset-liability review that determines a policy asset mix that maximizes the chances of achieving the plan’s primary investment goals while staying within the predetermined risk tolerance levels. For pension clients, these goals mainly include maintaining a funded status over 100 per cent and managing the volatility of the contribution rate. After the asset-liability review, BCI closely monitors the funding risk, which is the risk of a reduction in the funded status (when expected liability growth surpasses asset growth), and the contribution risk, which is the risk of an increase in the required contribution rate. This monitoring process helps us ensure that an investment strategy remains appropriate for each client’s unique circumstances.
Leverage
BCI considers various classifications of leverage such as financial and synthetic. Depending on the source of leverage, additional market, counterparty, and/or liquidity risk may also be taken on. Multiple leverage metrics are used in conjunction with the current frameworks for measuring and monitoring market, counterparty, and liquidity risks.
Liquidity Risk
BCI ensures sufficient liquid assets are available to meet potential financial obligations under stressed market conditions. BCI’s liquidity is managed on a continuous basis to allow for opportunistic deployment of capital during adverse market conditions. Liquidity management relies partly on maintaining a sufficient level of highly liquid assets to meet obligations over various time periods.
Market Risk
BCI uses a variety of tools to measure, monitor, and manage market risks, such as Value at Risk (VaR), duration and convexity for interest-rate-sensitive instruments, and sensitivity analysis. BCI considers the historical VaR to measure exposure to market risk.
