Institutional Investment - May 22, 2012

Re-regulation will bring both opportunities and risks for investors - an interview with Dominique Carrel-Billiard

In this month's interview, we talk to Dominique Carrel-Billiard, CEO of AXA Investment Managers about the latest EDHEC-Risk study on pension plan design from the "Regulation and Institutional Investment" research chair at EDHEC-Risk Institute supported by AXA IM, the issue of risk management for institutional clients, the current regulatory climate, the future research to be conducted as part of the AXA IM research chair, and the health of the European institutional investment management industry.

Dominique Carrel-Billiard

EDHEC-Risk Institute has just released the latest publication from the AXA IM research chair, entitled “Shifting Towards Hybrid Pension Systems – a European Perspective.” The study highlights the need to reform retirement systems and pension funds, as well as the need to adopt professional management structures and to considerably improve the product offering of defined-contribution funds. What are the key takeaways from this research for AXA IM?

Dominique Carrel-Billiard: First of all, what’s very important, and has been going on for quite a while now, is the tectonic shift in the pension sector; the move away from the traditional DB model. This has been a key issue for plan sponsors, administrators, trustees and participants for many years. According to the study, there will be greater risk-sharing in pensions, and that most likely means hybrid pension structures will gain importance in many countries. Today, AXA IM’s goal is to accompany our pension fund clientele through these changes, and bring to bear our know-how in order to provide them with the best possible solutions and support.

Second, the study points out the insufficient product offer available to many defined-contribution plans. Plan design, and the default investment option in particular, are very important in the DC space. Asset managers must be prepared to step up and offer ready-made solutions that help meet investors’ needs for retirement savings.

AXA IM participated in a roundtable discussion at the recent EDHEC-Risk Days Europe conference in London on the subject of protecting investors from pension fund risk, with a particular focus on the default risk of a pension fund or its sponsors. Broadly speaking, how does AXA IM handle the question of risk management with its institutional clients?

Dominique Carrel-Billiard: At AXA IM, actively monitoring and managing risk throughout the investment process is key to satisfying our clients’ investment objectives. Institutional investors face risk on two different levels. First, they each have their own unique set of objectives and constraints, based on their size, structure, regulatory framework, funding or solvency level, and investment goals. Our experience working with institutional clients helps us conduct in-depth discussions that can open the door to tailor-made investment solutions with a specific risk management dimension focusing on their liabilities—typically through the use of LDI or asset-liability management techniques, including overlays and complex hedge accounting.

Second, when investors make allocation decisions, they then want reassurance that the strategies are carried out correctly. Our 3 tier risk management system relies on: first-level day-to-day controls performed by investment teams; independent, systematic second-level controls performed by operations controllers and risk managers; and third level controls performed by our internal audit team.

The current period is a particularly challenging one for pension funds with tighter accounting, funding and prudential rules. How is AXA IM accompanying its clients in such a difficult regulatory context?

Dominique Carrel-Billiard: Institutional investors, particularly insurers and pension funds, must take into account regulatory and accounting constraints when trying to meet or even outperform their long-term liabilities. Faced with mounting pressure brought by new rules, amendments, and requirements to disclose information, investors can quickly be overwhelmed. That is, in part, why we developed a fiduciary management offer, which leverages our structuring and solutions engineering capabilities, as well as our LDI and derivatives expertise. It allows pension schemes to focus on strategic issues that matter most.

Also, it’s important to communicate extensively with our clients. We recently conducted a full-day client event for a variety of institutional investors where we examined the upcoming wave of re-regulation and its impacts. During those sessions, we uncovered both opportunities and risks for investors. At the end of the day, each investor will likely choose a solution that meets their specific needs, so not all investors will position their portfolios in the same way. Having that discussion can help determine the right approach.

The next research work from the "Regulation and Institutional Investment" research chair will be on the regulatory, socio-economic and demographic context of pension funds in Asia. What are your hopes for this new research?

Dominique Carrel-Billiard: We hope that this research brings valuable insights not only to our institutional investor clients but to society as a whole. Each country faces its own unique circumstances in providing some degree of retirement security to current and future pensioners. Corporate and government pension sponsors have a crucial role to play. It will be fascinating to be able to compare and contrast the European with the Asian situation as a result of this new study.

Our support of the research is part of a larger initiative, at both the AXA IM and the AXA Group levels, to support academic research initiatives focused on risk. Protecting our clients and our community from risks is at the core of AXA's business and expertise.

How do you view the overall health of the European institutional investment management industry in the wake of the financial crisis?

Dominique Carrel-Billiard: While the long-term fundamentals of the asset management industry are broadly favourable, it faces many challenges in the short term, including: slower growth, compressed margins, a greater focus on costs, and consolidation among players.

Regulatory changes will have differing impacts for asset managers and for clients.

In the current climate, markets are quite volatile and systemic risk continues to play a role. From this, new needs and constraints will emerge. Clients faced with this uncertainty look for solutions that offer sufficient liquidity and/or capital protection. We seek to provide them with solutions that meet these objectives in order to navigate through the uncertainty.

About Dominique Carrel-Billiard

Dominique Carrel-Billiard is the CEO of AXA Investment Managers.

From 2004 to 2006 he was senior vice-president of business support and development for AXA Group, in charge of US Insurance, asset management and reinsurance. Prior to this, Mr. Carrel-Billiard was a partner at McKinsey, where he specialised in the financial services industry. He joined the mergers and acquisitions department at Crédit Commercial de France in 1987. Mr. Carrel-Billiard graduated from HEC, Paris, and has an MBA from Harvard Business School.

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