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.

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

Should I pay off the mortgage or top up my superannuation?

Demographic destiny: a snapshot of Australia in 40 years

The equity of government support for retirement income

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 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.