Two books caught my attention just before and during my August vacation that anyone in the pension industry ought to read. One is descriptive, the other prescriptive.
One you can read immediately. It is "The Promise of Private Pensions: The First Hundred Years," by Steven A. Sass, published by Harvard University Press, Cambridge, Mass. The other - "The Excellent Pension Fund: Creating Value for Stakeholders," by Keith P. Ambachtsheer and D. Don Ezra - I read in manuscript form and will be published sometime next year by John Wiley & Sons Inc., New York.
"The Promise of Private Pensions" is a history - probably the first - of the development of pension plans in the United States, showing the various forces, social, economic and political, that led to the introduction of pension plans just more than 100 years ago and that have shaped them since.
Mr. Sass, editor of the Regional Review of the Federal Reserve Bank of Boston, answers the question: What prompted corporations, for-profit enterprises, to voluntarily offer pensions to aged employees who no longer were able to work before federal or state governments offered them (except to Civil War veterans)?
Welfare capitalism, not self interest, was the motive for American Express Co. to start the first U.S. corporate pension program, and that motivated a number of other railroad companies in the remainder of the 19th century.
Mr. Sass traces the evolution of the motives as more companies started plans. Some companies wanted to tie valued employees to them. Others wanted to facilitate the hiring of a young, energetic work force by encouraging older employees to leave.
He also outlines the struggle with the funding issue as costs ballooned just before the Great Depression hit. He describes the awakening of government and union interest in pension plans, bringing the discussion through ERISA and almost up to the present.
Mr. Sass has provided a valuable record of the development of the private pension system.
The forthcoming book by Messrs. Ambachtsheer and Ezra, two pension consultants, looks at how pension funds, particularly defined benefit pension funds, can be effectively and efficiently managed. The authors argue that pension fund managers should aim to produce value for their stakeholders net of operating costs and adequate compensation for risk bearing, noting: "The bad news of this book is that many pension funds today do not produce enough of this kind of value."
This is not just another book of theory about how pension funds should be managed, or about how one expert thinks an appropriate asset allocation should be determined.
It is a book based in part on cost-effectiveness studies of pension funds Mr. Ambachtsheer's firm, K.P.A. Advisory Services Ltd., has been conducting over the past four years. The firm has received detailed information from more than 100 large funds for each of those years and has been able to calculate which funds were producing risk-adjusted net value added. It has also been able to determine what practices led to that positive value added.
The observations based on the cost effectiveness study are backed up by qualitative research to understand organizational design and its impact on the investment results of funds. There is keen analysis by Messrs. Ambachtsheer and Ezra, both of whom are veteran pension consultants noted for thinking outside the box; Mr. Ezra recently was appointed head of European consulting for Frank Russell Co.
The book leads the reader step-by-step through the process of structuring the investment process of a pension fund to achieve net value added. Despite the subject matter, it is an easy read - easier than Mr. Sass's history.
If you want to know where pension plans have come from, and where they ought to go, read both of these important books, Mr. Sass's now and the other book next year when it is published.
