Case Study

A risk management philosophy and framework

A risk management philosophy and framework

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:

“Using PFaroe to understand how assets and liabilities are moving in real-time – and the drivers behind this – is a critical part of us developing and monitoring a comprehensive investment program. PFaroe increases the probability of achieving investment objectives, while seeking to minimize risk and volatility.”

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.

“PFaroe was essential in helping us to quickly analyze our clients’ performance in order to make sure that the strategies we had put in place were working from a hedging perspective,” says Kutliroff.

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:

“Many of our clients are on de-risking glide paths – by tracking their funded status on a daily basis we have, in the past, been able to help clients that have crossed their trigger points mid-month to execute and lock in funded status gains before market movements or falling interest rates. If we assess funded status on a month-end-basis only, we may not even see the trigger being breached, and the opportunity may be missed completely.”

Helping clients approach the end game

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”.

“Key-rate duration analysis within PFaroe allows us to look at plans’ key hedge ratios to see how their interest rate and credit spread risks are being hedged along the curve and by credit rating,” says Kutliroff.

He adds:

“As a plan’s funded status increases – and they put more capital into long bonds – the mismatch across the yield curve becomes more critical, and these plans can often be overhedged in the long-end, and severely underhedged at the short-end. This creates material convexity risk. Additionally, investment in broad long government-credit funds often creates credit spread mismatch risk as the credit quality of these funds is often lower than that implied by the liability measurement. By proactively looking at the maturity and credit composition of our clients’ investments, we have the opportunity to design a better hedged portfolio and potentially minimize these risk factors.”

Driving operational efficiency and managing risk

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.

“Investment management requires multiple processes – many of them manual – to be conducted by numerous individuals, which naturally introduces its own risk,” describes Kutliroff. “Clients outsource to us because, again, this risk related to their investment pools is too material for them to manage themselves without the internal resources and effective tools. It is therefore critical that we have the tools to deal with this effectively and efficiently – and that requires one robust risk management platform, rather than multiple different systems.”

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.

Using PFaroe in prospective client conversations

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.

“When we are speaking to potential clients, especially in the latter stages of the process, we definitely make sure that they are aware of PFaroe, and how robust it is,” says Kutliroff.

He concludes: “Once we win the business, having market-leading technology underpinning our analysis and advice gives clients a huge amount of confidence. Many of our clients prefer to have direct access to the platform and are provided that as part of our service offering.”


At the point when clients come first, awards follow

Additional Honors

Risk Market Technology Awards - 2022

Buy-side ALM Product of the year Moody’s Analytics


Risk Market Technology Awards - 2021

Buy-side ALM Product of the year Moody’s Analytics​


InsuranceERM Annual Awards 2021​

Economics Scenario Generator Software of the year​


Risk Market Technology Awards - 2020​

Buy-side ALM Product
of the year


InsuranceERM Annual Awards 2020 - Americas

Economics Scenario Generator Software of the year​