Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 151

The future of pension management

A lot of things have happened in the pensions world since I wrote Pension Revolution in 2007, some foreseen, some not. I decided last April that the time was right for an update that would thoroughly review and recalibrate the challenges facing the global pensions sector, viewed through the triple lenses of plan design, governance, and investing. And so the idea of The Future of Pension Management: Integrating Design, Governance, and Investing was born. As the subtitle indicates, the new book calls for action on three fronts.

Pension design

On the pension design front, the traditional DB (defined benefit) and DC (defined contribution) formulas are converging into hybrids with names such a ‘Defined Ambition’ (DA) and ‘Target Benefit’ (TB). The Netherlands and Australia offer good examples. The former country is transforming its traditional DB plans into DA plans, while the latter is transforming its traditional DC plans into TB plans. At the same time, workplace pension coverage is expanding. The United Kingdom is leading the way with its National Employment Savings Trust (NEST) initiative, while the United States and Canada are now busy designing their own expansion initiatives.

Pension governance

On the pension governance front, the process of reconciling the opposable needs for boards of trustees to be both representative and strategic continues to slowly move in the right direction. There is a growing understanding that it is not a question of ‘either-or’, but of how to get both ingredients into board composition. Why both? Because pension boards need ‘legitimacy’ to be trusted, and at the same time, need to be strategic to produce ‘value for money’ outcomes for their stakeholders. This strategic mindset addresses tough issues such as organization design and culture, investment beliefs, incentives, and stakeholder communication and relations. Behind these governance imperatives lies the broader question of organizational autonomy. Unnecessary legal and regulatory constraints are increasingly seen as ‘value for money’ destroyers in pension organisations.

Pension investing

Pension investing has been changing for the better too, starting with serious re-examinations of investment beliefs. There is growing evidence the leadership of the global pensions sector is beginning to see their job as transforming retirement savings into wealth-producing capital. There are a number of factors at play here. One is the simple reality that good investment returns are increasingly difficult to come by. Another is a growing understanding of the zero-sum nature of short-horizon active management. Yet another is that both logic and empirical evidence support the idea that long-horizon active management should, and actually does, produce higher long-term returns than either short-horizon active, or passive management. However, saying is one thing, doing another. For many pension organizations, there is still a sizable aspiration and implementation gap to be closed.

Taken together, these developments add up to significant advances in the ‘pension revolution’ since 2007, and are worthy of being chronicled in a coherent, integrated manner. I took comfort in knowing that I would not be doing this alone. Much of the necessary insight and inspiration to write this book would come from five ‘unreasonable’ men as defined by the Anglo-Irish playwright George Bernard Shaw in his 1903 play Man and Superman:

The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Thus all progress depends on the unreasonable man …”

Jan Tinbergen established the principle that the number of economic policy goals has to be matched by an equal number of instruments designed to achieve them. In pensions, this offers a solution to the ‘affordability vs. safety’ dilemma in pension design. Achieving two goals requires two instruments: one that focuses on affordability through long-term return compounding, and another that focuses providing payment safety for life. Yet, ‘reasonable’ people persist in beating their heads against the wall trying to achieve these two goals with one instrument. Some ‘reasonable’ people say that the ‘right’ instrument is a DB plan; others say it is a DC plan. Both are equally wrong.

Peter Drucker asserted that pension organizations are not exempt from universal governance effectiveness dictates. Ineffective governance will produce poor outcomes for the pension organization’s stakeholders. Effective pension organizations have clear missions, inspired governance, and great execution capabilities.

John Maynard Keynes makes a clear distinction between the dysfunctional short-term ‘beauty contest’ investing practices of most institutional investors, and long-term investment processes that convert savings into wealth-producing capital. ‘Beauty contest’ investing is a zero-sum game played for the enjoyment of professional investors, funded by the fees paid by their clients. It has little to do with ‘real world’ wealth-creation.

George Akerlof’s ‘asymmetric information’ insight figures prominently in my thinking about the design of pensions systems and organizations. Fair pricing and efficient resource allocation require that all market participants have the same information when they buy or sell goods or services. This is not the case in the market for pension management services. As a result, unless steps are taken to level the informational playing field, buyers will pay too much for too little value.

Roger Martin’s work on integrative thinking and the creative resolution of opposable ideas also played an integral role in the structure and tone of the book. Logic tells us we lose a lot by being ‘silo’ rather than integrative thinkers. Connecting the dots between pension design, governance, and investing leads to more holistic thinking and more thoughtful solutions. On resolving apparently opposable ideas, three direct applications in the pensions space are: 1. The ‘DB vs. DC’ debate in pension design, 2. The ‘lay vs. expert’ debate in pension governance, and 3. The ‘active vs. passive’ debate in pension investing.

Launching in Australia

Many more people (and not just men!) have contributed to the book. Its first official launch just occurred at the University of Toronto, and launch action now moves on to Cambridge University, London, Amsterdam, Washington, Ottawa, Montreal, Boston, Hong Kong, Singapore, Sydney, and Gold Coast over the course of the rest of the year. For more about the about the book and the launch schedule, go to http://kpa-advisory.com/books/the-future-of-pension-management/

 

Keith Ambachtsheer is among the world’s leading pension authorities and was named as one of the ’10 Most Influential Academics in Institutional Investing’. He is Adjunct Professor and Founder at the International Centre for Pension Management based at the Rotman School of Management at the University of Toronto.

RELATED ARTICLES

Demographic destiny: a snapshot of Australia in 40 years

The equity of government support for retirement income

Housing cost is biggest threat to a comfortable retirement

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

“Trust your instinct” Hamish Douglass in conversation with Sir Frank Lowy AC

Sir Frank shares his story, including his journey from war-torn Europe, identifying opportunities, key character traits necessary for business success, and the importance of remaining paranoid yet optimistic.

Latest Updates

Investment strategies

Charlie Munger and stock picks at the Sohn Conference

The Sohn Australia Conference brings together leading fund managers to chose their highest conviction stock in a 10-minute pitch. Here are their 2021 selections with Charlie Munger's wisdom as the star feature.

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.