Dick Kamp: Risk management and context

Dick Kamp: Risk management and context

December 17, 2024

Risk Management
Dick Kamp

This column was originally written in Dutch. This is an English translation.

By Dick Kamp, Director of Pension, Investment & Risk at Milliman Pension

In policymaking, context is an important concept that plays a role on multiple fronts. I would like to take you through how understanding the context of any given issue is important to anyone involved in policy making.

Policy-making involves three phases: perception, judgment and decision-making. All of these phases are dealt with in board meetings. The latter is particularly relevant, as I explain in this column. Finally, in this introduction to context, I would like to make the somewhat more open-door remark that policy-making is not a mathematical formula. By this I mean that multiple outcomes are possible. The final outcome depends on consciously or unconsciously perceived context.

In going through the image formation phase and the judgment phase, a picture of the situation is painted as completely as possible. The problem is outlined as completely as possible. The conditions that solutions must meet are also outlined as completely as possible. If the issue is one that requires special expertise, an expert is called in.

First, it is good to realize that experts and other experts always have a certain coloring when assessing the problem, the inventory of possible solutions and the choice that fits best given the specific situation. The coloring is dictated by previous experience, the given briefing and the expectation in how a solution direction will be received.

Another and second aspect of context is whether a solution is intended for the short term or just the longer term. After all, the solution to a short-term problem may typically be of a more wood-burning nature, whereas a longer-term solution will need to be more robust in nature and there will be a greater focus on formal aspects, cost and governance.

A third aspect of context is the messenger. In other words, who does the story or who comes up with an initial line of thinking? Depending on the status of the advisor, board member or member of a board office, his or her opinion will be weighed in the overall deliberations in image and judgment formation.

A fourth aspect of context is whether there is disruption. Disruption involves disruption. Examples include the Covid epidemic, a stock market crash or a war. But certainly not unmentioned is the implementation of the new pension contract. In the event of disruption, existing patterns of thinking or solutions may no longer be valid. The challenge then mainly concerns their realization.

It is expected that judgment and decision-making will improve if the context is consciously experienced and taken into account. There are at least four aspects of context that need to be considered. Dear board member, are you aware that your decision-making depends on context? And do you expressly take this into account?

This is the thirty-fourth column in a series on risk management. The series aims to encourage readers to consider risk management as an integral part of running a pension fund.

 

 

 

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