NEW YORK Retirement plans will always be with us. What they will look like in the future is another question.
Three experts addressed the CFA Institutes annual conference in New York and came up with markedly different answers.
Don Ezra, New York-based director, investment strategy, for the Russell Investment Group, said defined benefit and defined contribution plans will need to borrow features from each other. M. Barton Waring, chief investment officer for investment policy and strategy, emeritus, for Barclays Global Investors, San Francisco, said defined benefit plans still can be saved. And Keith P. Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto and president of KPA Advisory Services Ltd., Toronto, said a new model must be created.
Other highlights from the April 29-May 2 conference were:
cYale CIO David Swensen said picking the right manager now is all about people, people and people.
cFormer short-seller David Rocker explained how independent analysts were at risk from frivolous lawsuits.
cLeading investment consultant Richard Ennis advocated finding the managers with the best skill, regardless of style, and then porting beta to get the right asset mix.
cNobel Laureate Robert Merton discussed how pension plans should be integrated into corporate finance and how that affects the cost of capital.
cEconomic historian Peter L. Bernstein said the story of the last 20 years in finance is how academia has moved into the market, and how the much-beleaguered Capital Asset Pricing Model remains relevant.
Future of retirement plans
Russells Mr. Ezra said next-generation defined benefit plans will include greater transparency before retirement, portability of assets and annual updates on what payouts will look like after retirement.
He also said those defined benefit plans will have to be fully funded at all times. If assets are not matched to liabilities, then a reserve will be required, as now required by Dutch regulators. In addition, he said, the present value of those retirement benefits will be calculated using bond yields.
Mr. Ezra said plan sponsors are going to be shocked at the cost of providing retirement benefits, but thats OK. If this makes it more expensive, that is reality, he said.
Mr. Ezras proposals for defined contribution plans were less radical. He said participants should be enrolled automatically and should be signed up to automatically increase their contributions, unless they opt out.
He added that target-date funds should be the initial default, and participants could pick higher or lower risk levels. Individual fund selection should be available only through brokerage windows, he said.
BGIs Mr. Waring beseeched plan sponsors to save their defined benefit plans. He said liabilities must be valued realistically, and assets should be invested in line with liabilities.
Mr. Waring argued for a two fund approach: one fund would consist of a liability-matching, or hedging, portfolio, while the second would be a risky asset portfolio. Alpha could be added through active management.
Holding equities increases the expected returns, but it also increases the odds of earning very bad returns over long periods, he said. Overall, he expects that equity allocations will come down.
Mr. Ambachtsheer said he took an unreasonable approach. As he discusses in his new book, Pension Revolution, any new pension system must be transparent and sustainable, must cover the entire work force and must deliver benefits through expert systems that can operate on a large scale.
We have to get out of the defined benefit vs. defined contribution debate mode, he said. I think its a dead-end debate.
Mr. Ambachtsheer said Australia and the Netherlands come closest to making his ideal system work in the real world, though they are approaching it from opposite ends of the spectrum: Australia is converting its defined contribution system to include annuity payouts instead of lump sums, while the Dutch are shifting from a defined benefit model.
Focusing on people
Yales Mr. Swensen said pension plan executives should use active managers only in inefficient asset classes, allocating more of their traditional U.S. equity allocations to index funds. Focus on the opportunities in the least efficient asset classes. In the most efficient asset classes, let the market do the work, said Mr. Swensen, who oversees the $18 billion Yale University endowment fund, New Haven, Conn.
For Mr. Swensen, his focus on management firms in alternatives markets is turning more to the people and less on the process than it did a decade ago. The most important thing in evaluating managers is people, he said. Were looking for people with a screw loose who dont define winning as accruing as many assets as they can, but more by performing as best as they can.
Mr. Swensen said his selection process has more to do with the intelligence, work ethic and integrity of the people were looking to be partners with.
While focusing more on people, Mr. Swensen said, transparency is also important in selecting managers. He requires full transparency of the hedge funds in which he invests. I cant imagine going before Yales investment committee and saying, we dont know whats in the portfolio, they wont tell us.
David Rocker, former general partner of Rocker Partners LP, Millburn, N.J. now Copper River Management LLC discussed how the threat of litigation is forcing analysts to shy away from negative reporting.
His firm and equity research firm Gradient Analytics Inc., Scottsdale, Ariz., were sued by Overstock.com. The suit, which is not yet resolved, accuses Rocker Partners, a short-selling hedge fund, of pressuring Gradient Analytics to write negative reports about Overstock.
Mr. Rocker pointed out that Gradient was writing negative reports on Overstock a full year before Rocker Partners used its research and that Gradient had already given Overstock its lowest possible rating months before Rocker Partners shorted Overstock securities.
After the lawsuit, the Securities and Exchange Commission began an investigation of Gradient Analytics. The SEC issued a no-action letter to Gradient in February, a year later.
The fear of spending a lot of time and money in what Mr. Rocker called frivolous lawsuits is causing analysts to drop their negative coverage or at the very least soften their negative views, he said.
He encouraged the analysts to work to find a way to restrict such lawsuits and create strong disincentives for people who bring those lawsuits against analysts.