In 1950, a now-legendary French mountaineering expedition spent weeks breaking through inhospitable terrain in search of a Himalayan peak known as Annapurna. Seeking to become the first expedition to climb an 8,000-meter summit — the highest class of peaks in the world — they wasted weeks trying to follow the path laid out in maps, encountering impassable ridges and dangerous cul-de-sacs. They discovered the official maps they relied on were useless.
In another world, longtime pension consultant Keith P. Ambachtsheer finds that pension plans urgently need to find a new approach to their objective of providing retirement security.
His quest to find "a solution to the pension crisis" (the subtitle of his new book, "Pension Revolution," published by John Wiley & Sons Inc.) has, over many years, confronted a landscape where familiar financial management, regulatory and governance models aren't working well.
As he asserts in his book, "(I)n the circumstances of today, fully guaranteed, final earnings-based, inflation-index pension promises have become too expensive for the guarantors. Once this reality is understood and accepted, the search for a fairer, more sustainable alternative becomes a logical next step."
In the book, he begins to map a new approach to the problem.
Mr. Ambachtsheer, founder of KPA Advisory Services Ltd., Toronto — a consultant to pension sponsors, governments and others on governance, investment and finance — tackles issues that have made pension plans vulnerable to adversity, and costly, conflicted mechanisms for funding retirement income.
His ideas include an integrative investment theory — one that embraces governance, risk taking and risk sharing, financial engineering and other facets of pension management. He addresses agency issues, suggesting ways to better manage conflicts.
The centerpiece of his new pension paradigm is strong leadership through good governance and transparency. Management of the pension fund should be delegated to a "competent CEO (for the plan), thus recognizing that it is foolhardy for an oversight body to try and manage a complex financial institution," he writes. "The CEO becomes accountable for developing a strategic plan … "
Mr. Ambachtsheer's provocative book suggests scrapping ERISA's hallowed mandate that pension and investment fiduciaries operate in the "sole interest" of plan participants, which he says is an impossible ideal and hence impractical to manage. Instead, he recommends an "evenhandedness."
His ultimate solution for an optimal pension system draws on elements of defined benefit plans and defined contribution plans, creating a structure overseen by experts and tempered by a transparent sharing of risk among all stakeholders. Even in the absence of his optimal structure, pension sponsors would do well to incorporate many of his ideas into their current pension framework.
Mr. Ambachtsheer and his book deserve attention. The breadth of research he cites in his book is immense. Probably no one has devoted more intellectual and practical thought to pension structure than Mr. Ambachtsheer. His book's scope is sweeping, encompassing investments in academic theory and real-world application, organizational issues and game theory to help design sustainable pension structures.
Like the French team, which regrouped and made its own path to reach Annapura's summit, Mr. Ambachtsheer, with his impressive command of issues, has begun to map, in his engaging 362-page book, a new path to lead the pension system out of its wilderness before its demise causes catastrophic damage to our financial and social fabric.