Northern Trust Asset Management has $885 billion in assets under management. With defined benefit (DB) pension plans facing increased complexity and constrained resources, Northern Trust Asset Management offers deep expertise in the design and implementation of sophisticated investment programs and a fiduciary approach to the oversight of those programs through their Outsourced Chief Investment Officer (OCIO) services.

The firm’s investment philosophy centers around a purposeful employment of risk, making PFaroe a natural fit. As such, in December 2014, Northern Trust Asset Management adopted RiskFirst’s technology to enhance its suite of asset-liability reporting solutions, enabling their OCIO pension clients to gain deeper insights into their risk exposure.

Dan Kutliroff, Head of OCIO Business Strategy at Northern Trust Asset Management, explains:

The Northern Trust Asset Management team highlights the equity market volatility in Q3/Q4 2018 as a clear example of the value of structuring holistic risk management solutions built around the asset-liability framework. With market averages dropping as much as 10%, the real-time reporting available through PFaroe allowed the team to ascertain that the funded status for clients focused on matching their assets with their liabilities had fallen less than market averages. The real-time information provided by PFaroe helped ensure that those clients continued to stay on the right course for their plans.

Kutliroff adds that many of Northern Trust Asset Managements OCIO clients outsource their CIO function due to a lack of internal resources to be able to manage the daily operational functions of the plan. They therefore expect the OCIO to provide this real-time analysis and make appropriate investment recommendations.

Kutliroff explains:

PFaroe’s unique ability to drill down into funded status volatility is even more important for clients further along their glide paths, which are likely to already have well-hedged portfolios. Blunt investment in long-dated fixed income works in the early stages of a de-risking journey, but items like interest rate convexity and credit spread mismatch risk – especially for plans with complex benefit structures like cash balance plans – become much more prevalent in the “end game”.

He adds:

Clearly, risk management is crucial to Northern Trust Asset Management – but this doesn’t stop at the financial risk of its clients’ pension plans. It also relates to the operational risk of investment management.

As well as removing operational risk, PFaroe has aided the efficiency of Northern Trust Asset Management’s OCIO business. One example: previously, the firm had certain manual processes in place to calculate daily liability values. PFaroe, with its automated provision of market data – including yield curve data – allows Northern Trust Asset Management to entirely bypass these manual processes in pursuit of more value-added activity.

Kutliroff also explains that PFaroe has helped drive efficiencies in respect of regular asset-liability reporting. Rather than having to manually calculate certain elements such as funded status attribution, the team can now simply download that data from the platform and provide it as part of its regular client reporting cycle.

When speaking to prospective OCIO clients, Northern Trust Asset Management emphasizes the importance of mitigating unintended investment and operational risks and explains the variety of tools, people, and processes it has in place to ensure strong governance and oversight.

He concludes: