Peter Drucker's 1976 book, "The Unseen Revolution: How Pension Fund Socialism Came to America," was remarkably prescient. Decades ahead of his time, Mr. Drucker identified four factors that would determine the outcome of the "dramatic and far-reaching change" facing global pensions: (1) politico-agency issues, (2) pension contract and risk issues, (3) investment beliefs issues and (4) pension governance issues.
Although Mr. Drucker cautioned that his book was precautionary rather than prescriptive, he offered wise advice in each of these four dimensions nevertheless.
Specifically, he suggested:
c Pension plans should operate as single-purpose, arms-length agencies, not tied to any special interest group.
c Risk-bearing should be made transparent, both with respect to magnitude and with respect to who is actually bearing the risk.
c Collective risk-bearing is a highly complex concept, both in theory and in practice, and is not essential to good pension contract design.
c Pension investing should engage the real world through direct investing in such areas as venture capital, as well as play the role of knowledgeable, assertive "owners" of publicly traded corporations.
c Pension funds themselves need knowledgeable, assertive governance mechanisms. Without such mechanisms, pension funds will not acquire the internal management and investment expertise necessary to properly run pension funds as cost-effective financial "businesses." In short, without good governance, pension funds will not achieve "legitimacy" in the eyes of the stakeholder groups they are meant to serve.
With the benefit of having watched the pension revolution's actual 30-year unfolding, what can we say today about these five pieces of Mr. Drucker's advice? The short answer is five-for-five. In other words, we now know that Mr. Drucker's five pieces of advice, taken together, did indeed define the winning conditions for the coming pension revolution.
How well has the world heeded Mr. Drucker's advice on winning the pension revolution?
Generally speaking, Mr. Drucker was far better at identifying the critical pension issues we would be facing and how they should be addressed than we have been at heeding his advice. Having said that, I offer the opinion that the Dutch currently come closest to meeting Mr. Drucker's winning conditions, and as a result, the Netherlands currently is the No. 1 pensions country in the world.
I offer four pieces of evidence to support this opinion:
c Pension plan membership is compulsory, and all Dutch pension funds are separate legal entities by law. Just as important, the leading Dutch funds have increasingly become arms-length, single-purpose agencies in action, too. This has increased their "legitimacy" in the eyes of the employer-employee-pensioner stakeholder groups they serve.
c Dutch pension contracts are in the process of being clarified and re-engineered. Contract clarification has centered on the nature of the pension promise, and who the pension promise underwriters are. Re-engineering efforts have focused on introducing modern financial economics principles into the definition and valuation of contingent pension claims. These developments in turn enhance the prospects that the redefined pension arrangements will be transparent, fair and sustainable. While many of the new pension arrangements continue to contain elements of collective risk-sharing, they can no longer be described as traditional DB plans. Pre-determined policy protocols now automatically adjust benefits, contributions and even investment policy to changing circumstances.
c Dutch pension funds are leaders in the global hunt for new investment opportunities and in raising global corporate governance standards. Dutch investors are now seen as "smart money" in such divergent fields as infrastructure investing, "green" investing, shareholder activism and absolute-return strategies.
c The once-taboo subject of pension fund governance itself is beginning to get significant airtime. While there is no consensus yet on the ideal organization design of a Dutch pension fund, the debate is on.
Thirty years ago, Mr. Drucker saw organization effectiveness as a "sine qua non" for winning the pension revolution. Organization effectiveness in pension funds starts with good governance practices, which in turn lead to these funds being effectively managed as "financial businesses" in the sole interest of the stakeholder groups they were created to serve.
